Question

PART B                                                                                                           

Required: Briefly advise Dan as to the deductibility of the $10 000, $4000, $20 000, and $3000 amounts.

Where appropriate, support your answer with legislative and case authority, as well as calculations.

Dan works as a junior pharmacist in Melbourne. He was caught inappropriately taking some prescription drugs to use for recreational purposes. As a punishment, he had to pay a $10,000 fine. Further, he had to, as part of his punishment, undertake community service (unpaid) in a health centre in Ballarat, about 2 hours from Melbourne. He would undertake this for 3 nights a week and go there straight from his pharmacy work. There were travel costs from the pharmacy to the work centre for the tax year in the amount of $4,000.

Dan also owned a rental property. To increase his rental income, he spent $20,000 installing a wall into one of the large bedrooms, to split it into 2 smaller bedrooms. He also paid $3,000 to have the carpets in the living room removed, and the floorboards previously underneath the carpet polished.

Briefly advise Dan as to the deductibility of the $10 000, $4000, $20 000, and $3000 amounts.

Where appropriate, support your answer with legislative and case authority, as well as calculations.

subject principles of income tax

Answer 1

The federal government prohibits the manufacturing, distribution, and possession of many intoxicating substances that are solely intended for recreational use though federal government also allows for and controls the medical use of many intoxicants.

Use or possession of prescription drugs for personal use do not lead to incarceration if it is the only crime, but it is still illegal due to which court or prosecutor will impose a fine.

In United States, the penalty for illegal drug possession and sale varies from fine to sentence in the prison.

Under the Harrison Act $10,000 fine as a punishment is regulated and controlled under taxation.

Any fine or penalty paid to a government for the violation of any law from the general rule allow business to deduct their expenses. Hence local fines and penalties are deductible up to the extent of they do not violate any law.

Business-related foreign travel expenses are tax deductible which is $4,000.

Rental income is a tax deductible income for tax saving purpose as a shield which is $20,000 but repairs done may not be considered as tax deductible income. Though there is an exception to the rule where you can still write off operating expenses for rental properties like utilities, depreciation, repairs and maintenance, yard work, etc.

Total $37000 is tax deductible expense in this case which can be subtracted from adjusted gross income while completing a tax form. The deduction decreased the detailed income and therefore the amount of income taxes you owe to the government.