Question

Jing is an accountant at Barrier Reef Tours Australia and has included the following in the company’s Profit and Loss account.

1. accrued wages;
2. advertising;
3. bad debts provision;
4. hire–purchase payments;
5. interest;
6. insurance of plant and equipment;
7. printing and stationery;
8. provision for long-service leave;
9. repairs;
10. tax-related expenses.

Required: (10x2 marks = 20 marks)

For each of these items of expenditure: state whether the item is an allowable deduction and for those items which are allowable deductions, state the relevant statutory provision under which the deduction will be claimed (i.e. whether the item satisfies the requirements of s8-1, or whether a specific provision applies).

In your response give reasons and refer to sections of legislation and cases, where relevant.

Answer 1

According to section 8-1 of Income tax assessment act, 1997

8-1: General deductions -

1. You can deduct from your assessable income any loss or outgoing to the extent that:

• It is incurred in gaining or producing your assessable income; or
• It is necessary incurred in carrying on a "business for the purpose of gaining or producing your assessable income.

2. However, you cannot deduct a loss or outgoing under this section to the extent that:

• it is a loss or outgoing of capital, or of a capital nature; or
• It is a loss or outgoing of private or domestic nature; or
• It is incurred in relation to gaining or producing your "exempt income or your " non-assessable non-exempt income; or
• a provision of this act prevents you from deducting it

3. A loss or outgoing that you can deduct under this section is called a general deduction.

Hence, in the given scenario the following type of expenses will be allowed for deduction under section 8-1 of income tax assessment act, 1997, provided if it is incurred for the assessable income

1. accrued wages
2. interest;
3. insurance of plant and equipment;
4. printing and stationery;
5. repairs

Reference of section for the remaining type of expenses is as follows:

Advertising:

Ref: Section 32-5 No deduction for entertainment expenses read with 32-45 Promotion and advertising expenses

Act does not stop you to deduct the advertising expenses if the outgoing is for producing assessable income.

Bad debt provision:

Ref: Section 8-1 you can deduct any loss or outgoing to the extent for producing assessable income.

Provision is an amount providing for the loss going to be incurred in future, it's not an actual loss. As per the section 8-1, any provision cannot be allowed as deduction untill and unless you incurred any loss (actual). Hence, provision for bad debt will not be allowed as deduction.

Hire purchase payments:

Ref: Section 40-40 Meaning of hold a depreciating asset.

A buyer who purchase the asset under hire purchase agreement cam claim the depreciation as deduction for the tax purposes though he is not the legal owner.

Hire purchase payments will not be allowed as deduction. However, depreciation on the purchased asset will be allowed as deduction.

Procision for long service leave:

Ref: section 26-10 Leave payments

1. You cannot deduct under this act a loss or outgoing for long service leave, annual leave, sick leave or other leave except:

• an amount paid in the income year to the individual to whom the leave relates (or, if that individual has died, to that individual's dependant or legal personal representative); or
• an accrued leave transfer payment that is made in the income year

As per the above said provision, provision for long service leave will not be allowed as deduction. Only actual payment of leave will be allowed as deduction.

Tax-related expenses:

Ref: section 25-5 Tax related expenses.

Any tax related expenses will be allowed as deduction to the extent for the

1. managing tax affairs, or
2. compliance with an obligation imposed on you by a common wealth law, in so far as that obligation relates to the tax affairs of an entity; or
3. general interest charge or the short fall interest charge
4. penalty under sub division of 162-D of the GST act or
5. obtaining a valuation in accordance with section 30-212 or 31-15.