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Question 1: Mr Ed Sheeran runs a number of music businesses in Victoria as a sole trader.

Question 1:

Mr Ed Sheeran runs a number of music businesses in Victoria as a sole trader. He has been running a karaoke lounge at leased premises in Echuca, a country town in northern Victoria for six years. This is the only karaoke lounge in the vicinity and business has been good. On three occasions during the last six years, three other potential karaoke operators have tried to open karaoke lounges near Ed's lounge. On each occasion, Ed has managed to dissuade them by paying them each a lump sum of $25,000 in exchange for their agreement not to operate karaoke lounges within 20 kilometres of Echuca for 3 years.

 

Ed purchased a second-hand karaoke machine for use in his karaoke lounge from Taiwan for $11,000. When he first tried to use the machine he discovered that it needed repairs. He spent $2,000 on a new screen for the machine.

He also spent $45,000 renovating and altering the karaoke lounge that included repainting the lounge's walls and replacing roof tiles with new tiles with better acoustic quality.  

As Ed is a busy man, he employed a manager in his karaoke lounge. Unfortunately, the manager had a drinking problem and on one occasion the manager attacked a member of the public at a football game for which he was charged and fined. Because of the bad publicity that the attack and court case received, Ed decided to terminate the manager's services. The manager had a three year employment contract with Ed and had only completed one year's service. Ed agreed to pay the manager a sum of $50,000 in consideration for his voluntary resignation.  

After several years operating his karaoke lounge the business had grown to such an extent that Ed decided to shift the lounge from the current leased premises to larger premises that he had bought nearby. He had to pay the current lessor of the premises $15,000 for the cancellation of the lease which had five more years to run. 

 

Required:

 

Advise Ed whether the following are allowable deductions against his income from his

businesses:

a)   The payments of $25,000 made to the three potential karaoke operators to dissuade them from opening their own karaoke businesses.

b)   The cost of the second hand karaoke machine of $11,000

c)   The cost of repairing the second-hand karaoke machine of $2,000.

d)   The $45,000 cost of renovations

e)   The $50,000 paid to the manager.

f)    The $15,000 lease cancellation

 

Refer to the relevant case law and legislation in answering this question.

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