Tutorial 5 (wk6) BFA714 solution.pdf - BFA714 Tutorial 4 GENERAL DEDUCTIONS-Question 1 Tom runs his own public relations business During the year he

Tutorial 5 (wk6) BFA714 solution.pdf - BFA714 Tutorial 4...

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BFA714 Tutorial 4 GENERAL DEDUCTIONS ------------------------------------------------------------------------------------------------------------------ Question 1 Tom runs his own public relations business. During the year he incurred the following expenses: (a) salary costs of $500,000; Salary expenses → Deductible under s 8 -1 of ITAA97 as they are necessarily incurred in carrying on a business to gain or produce assessable income and do not fall within any of the negative limbs of s 8-1: see [12.20] . (b) salary costs of $5,000 for his daughter who worked with him for one week as part of her university training; Daughter’s salary → Satisfies the positive limbs of s 8 -1 of ITAA97 as it is necessarily incurred in carrying on a business to gain or produce assessable income. However, it also falls within the last negative limb of s 8-1 regarding denied deductions. In this case, the payment is to his daughter who is a “related entity” per s 26 -35(2). As such, the amount of the deduction is limited to the amount of the expense that the Commissioner considers reasonable: s 26-35 of ITAA97. $5,000 salary for one week of work to a university student is unlikely to be reasonable and therefore any excess will be a non-deductible expense and is effectively treated as a gift as it is non-assessable non-exempt income for his daughter: s 26-35(4). See [12.240] . (c) travel expenses of $7,000 for travel between home and work; Travel expenses between home and work → As the expenses are incurred on travel between home and work, these expenses are not deductible as they are incurred to put him in a position to gain or produce assessable income rather being incurred in gaining or producing assessable income ( Lunney ). Further, they would be considered a private expense. None of the exceptions to the general rule appear to apply here: see [12.390] . (d) travel expenses of $3,000 for travel from a client's premises to his home; Travel expenses to client’s premises → These expenses would constitute travel between an alternative workplace and home and are considered to be incurred in gaining or producing assessable income rather than putting the taxpayer in a position to gain or produce assessable income. As such, they would satisfy the requirements of s 8-1 of ITAA97: see [12.430] . (e) $1,500 on a new suit to impress his clients; Expenses on new suit → This expense would not be deductible under s 8 -1 as it is not incurred in gaining or producing assessable income (rather it is incurred to put the taxpayer in a position to gain or produce assessable income). Further, it would constitute a private or domestic expense and fall within the negative limbs of s 8-1 of ITAA97: see [12.750] .
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