QUESTION 1

Paul Lambert has a full-time job as a butcher and a part-time job playing the piano in a
band. His part time job requires him to attend many venues and transport heavy
equipment. Sometimes he travels straight from his full-time job (as a butcher) to his
part-time job (musician) and sometimes he travels from home to each of these jobs.
Required: Advise Paul whether he can claim any of the travel expenses related to his
jobs. Support your answer with legislation and cases. (4 marks)

As outlined in s 8-1 ITAA97, travel between 2 distinct places of work is not deductible. The
travel expense is only claimable when there is a nexus in producing assessable income.
Expenses incurred for travel from two distinct workplaces are not deductible under s. 8-1
ITAA97 because they are unrelated work.

In this case, Paul’s full time job (butcher) to part time job (musician) are unrelated. The travel
expense merely puts the taxpayer in a position to produce assessable income rather than travel
between 2 connected places of work. Since it is unrelated, there is not sufficient connection and
it is not deductible as in Payne case.

However, Paul’s part time job requires him to attend many venues and transport heavy
equipment such as instruments which is a travel expense of bulky tools. When he travels from
home to the place where it was required to perform the expense incurred in those travels, so it
is deductible as in the Vogt case.

In conclusion, the travel expense from Paul’s full time job (butcher) to part time job (musician) is
likely to be not deductible but the travel expense for performing music is deductible.
QUESTION 2

Ted is an employee of a large accounting firm in the city. On weekends, he runs a small
business selling handicrafts at the local market. In the first year of operating his
business, he makes a loss of $10,000.
Required: Can he use this loss as a deduction against his salary income of $80,000?
Cite relevant legislation to support your answer. (3 marks)

Under Div 35, losses are quarantined unless the taxpayer’s taxable income is less than
$250,000 and one of the exemptions is satisfied in relation to the business:

In this case, Ted’s salary income is $80000 which is less than $250000 so he meets the first
requirement. However, there is inadequate information about the second requirement. The
question did not provide whether the assessable income of selling handicrafts is at least $20000
or not. The business only operates for one year so we cannot assess whether the business
produced less deductions than assessable income in at least 3 out of 5 income years.
Moreover, there is insufficient information to determine whether the total value of real property
used on a continuing basis in carrying on the business in the income year has a value of at least
$500,000 or not. Neither the total value of other assets used is at least $100,000.

In conclusion, since Ted only fulfilled one requirement and does not have enough information to
determine the exemption so we cannot make any decision.

QUESTION 3

Joanne Longman has been offered a job with Cheshire Ltd which requires her to move from
Sydney to Melbourne. Longman’s employment package includes salary of $120,000 per annum
and reimbursement of her removal expenses of $5,000 from Sydney to Melbourne plus a
settling-in allowance of $1,500 and a laptop computer valued at $3,000 for work purposes.

Required: Citing all relevant legislation, advise both Joanne Longman and Cheshire Ltd on the
tax consequences of the employment package. (5 marks)
Salary: $120000 per annum

 An ordinary income for Joanne (employee) (s.6-5 ITAA97)

 A general deduction for Cheshire Ltd (s.8-1 ITAA97) because necessary incurred in
carrying on business and not caught by any negative limb

Reimbursement of her removal expenses of $5,000

 for Joanne, it is a fringe benefit (s.136(1) FBTAA) and NANE (s.23 ITAA36)
 For Cheshire, the taxable value will equal the cost
 Cheshire will pay FBT and can claim the cost of providing the benefit
  Since this is a travel expense and puts Joanne in a position to produce assessable
income, therefore it is not deductible under s8-1 as in Fullerton case.
 The Otherwise deductible rule would not apply to the employer

Setting in Allowance of $1,500

 It is not a fringe benefit (s.136(1) FBTAA)

 Joanne must include the allowance of $1500 in her assessable income (it will be
ordinary income s.6-5 ITAA97)
 Cheshire on the other side can claim s.8-1 deduction for the expense of setting in
expense since that have sufficient nexus to its income producing process i.e. meet the
first positive limb and are not excluded by any of the negative limb

Laptop computer valued at $3,000 (s.58X FBTAA86)

 It is Property Fringe Benefits and exempt as a work related item
 For Cheshire, the taxable value will equal the cost
 Cheshire will pay FBT and can claim the cost of providing the benefit

QUESTION 4

Why is it important to determine when income is derived and when an outgoing is

incurred? Support your explanation with relevant legislation and case law.
(3 marks)

To determine when income is derived (Accrual v cash based accounting as in Henderson case)
and when an outgoing is incurred (as in RACV case) is important because it affects the timing of
recognition income and expenses for tax purposes. It helps to tax them in the right and relevant
year. Timing for calculation of taxable income is important to taxpayers and ATO. They need
that information to determine which financial year the income needs to be declared.

QUESTION 5

Truckers Pty Ltd (Truckers) operates as a trucking business. Its assessable income is calculated
on an accruals basis. In July 2022 it performed work for a customer and invoiced the customer
for $5,000. In June 2023 the $5,000 had still not been paid. Can Truckers claim the $5,000 as a
tax deduction in the 2022-23 year? Explain

(3 marks)
A deduction for bad debts under s. 25-35 ITAA97 is available when the following criteria is met:
1. There is an existing debt
In this case, since the $5000 receivable still has not been paid, it has a legal equitable
right to claim since the invoice was issued to the customer so it is an existing debt.

2. The debt is bad

There is not enough information to determine whether the debt is bad or not since a bad
debt must need a bona fide assessment based on commercial judgement ATO (TR
92/18), so we do not know whether the debt is bad.
 3. The debt is actually written off
Truckers did not actually write off the debt, the fact did not mention any actions that
Truckers take such as writing the debt off from the journal. Therefore, we can assume
that Trucker still hopes to collect the debt.

4. It was included in the taxpayer’s assessable income

In this case, it was included in Trucker’s assessable income since they calculated on an
accrual basis and they issued the invoice which indicates that the $5000 is in their
assessable income.

In conclusion, since not all the requirements of bad debt are met so it is not deductible.

QUESTION 6
If the amount of an outgoing cannot be precisely determined at the end of a particular
income year, does this necessarily preclude a taxpayer from being able to claim a
deduction in that year?
Required: Explain using relevant legislation and case law. (3 marks)
This is related to the timing issue. If the expense amount is not precisely determinable which
means it is not incurred yet so it could only be estimated and estimation is not deductible under
s8-1. The only exception is the insurance industry when the estimate expenses can be
deducted as in RACV case.

QUESTION 7
Ellie works for the Victorian Police Department. She recently took a loan with the Police
Credit Union for $500,000 to purchase a residential property. The interest rate is 2% per
annum.
Required: Is the loan a fringe benefit? Explain using relevant legislation. No
calculations required. (3 marks)
A loan fringe benefit arises where the employer makes a loan to another person (employee or
employees associate) as in s. 16(1) FBTAA. In this case, Police Credit Union offers a lower
interest loan to the employee. The benefit here is essentially the interest “saved” by the
employee from a loan with a low interest rate.
QUESTION 8

The Matsushima Motor Co Ltd (“MM”) is the Australian subsidiary of a Japanese car
manufacturing company. It imports cars from its Japanese parent and sells them in
Australia. MM is registered for the GST. MM has been enjoying considerable sales
success in Australia. Due to the threat to local employment, the Australian government
announced its intention to impose a quota/limit on the annual number of cars which
could be imported from Japan and sold in Australia, given that such a system did not
previously exist.

In 2020-21, MM spent $950,000 on advertising- 5 times the usual amount spent by MM

on advertising. The advertisements attacked the quota system and demanded it be
removed. The advertisement asked the Australian public to petition Parliament to
preserve their freedom of choice in obtaining the quality, low-cost car which MM had
been importing and selling.

Required: Advise MM whether the $950,000 can be deducted under s. 8-1 ITAA97.
Support your answer with cases. (6 marks)

Under s 8-1 of the Income Tax Assessment Act 1997 (ITAA97), expenses are deductible if they
are incurred in gaining or producing assessable income or are necessarily incurred in carrying
on a business for the purpose of gaining or producing assessable income and it is not caught by
any negative limb.

In this case, MM spent $950,000 on advertising attacking the quota system, and demanded it be
removed. Since the Australian government announced its intention to impose a quota/limit on
the annual number of cars that could be imported from Japan and sold in Australia. It affects the
sales of MM which are related to MM’s income-producing structure rather than its income-
producing process as in the Sun Newspaper case.
It is also caught by the 1st negative limb since it is capital or capital in nature.

1. The character of the advantage sought

MM tried to demand the government remove this policy which is a lasting benefit for MM.
If the Australian government does not impose a limit on the annual number of cars, it will
be an enduring benefit for MM since they will have no limit on importing or selling. As a
result, it is more likely to be capital in nature, unlike the BP Australia Ltd case.

2. The manner in which it is used, relied upon, or enjoyed

Second, MM spent $950000 which is 5 times the usual amount spent on advertising.
This is not a recurrent and unusual expense for MM. If MM asked the Australian public to
petition Parliament to preserve their freedom of choice successfully, the benefit is used
one-off since they will have no limit on importing and selling their products which
indicates that this expense is more likely to be capital in nature.

3. Means adopted to obtain the benefit

Last, in this case, the benefit is obtained through a one-off payment. MM tried to
advocate public to petition Parliament to preserve their freedom of choice. If the
government does not impose the policy, the public will have the right to choose the
quality and low-cost cars and it will increase the revenue of MM since they have no limit
 or quota on importing from Japan and selling in Australia. It indicates that the benefit is
obtained through a one-off payment ($950000 advertising expense) so it is capital in
nature.

In conclusion, since the advertisement expense of $950000 of MM is caught by 1st Negative

limb so it is more likely to be not deductible.

QUESTION 9

In December 2022, John borrowed $5,000 from his employer (on a no interest payable basis)
because his home was destroyed in a bush fire and his insurance claim had not yet been
processed. In February 2023 John’s employer informed John that he did not have to repay the
loan and said that John should consider the $5,000 as a gift.

Required: Advise John and his employer of the tax consequences of the $5,000.

(4 marks)
The receipt of $5000 from John will more likely be considered as an ordinary income since it is
cash and real gain to John.

The $5000 payment is an unexpected or voluntary payment from his employer; however, there
is a sufficient nexus from his employment as in Dixon case. It is not a true gift because the
payment is made and there is an employment and commercial connection. Additionally, there is
no personal connection between John and the employer unlike in Scott's case. Therefore,
$5000 is more likely to be an ordinary income.

His employer cannot claim the $5000 as a deduction since it did not satisfy the positive limb as
in s.8-1. The expense is for John since his home got destroyed and there is not sufficient nexus
on producing assessable income or in carrying on a business. It is just putting John into the
position of producing his assessable income.

Since it does not meet the positive limb so the expense is likely to be not deductible and John
need to include the $5000 into his assessable income.
QUESTION 10

On 1 January 1984, Joshua purchased a vacant block of land in Clayton at a cost of

$80,000. On 1 October 2015, when the land was valued at $1,220,000, Joshua built a
house on the land. The construction costs for the house were $425,000. The
construction was funded by a bank loan and since completion, the property has been
rented out and Joshua has paid $87,000 in bank interest.

The owner of the next-door property, Sam Cousins, discovered that the fence dividing
the two properties favoured Joshua’s land. Specifically, the fence dividing the properties
was not situated according to the land measurements stated by the Land Office. This
caused lengthy disputes between Joshua and Sam, resulting in Joshua paying $22,000
in legal fees. Joshua sold the property on 30 June 2023.

Required: Advise Joshua on his tax treatment of the construction costs, the interest
charges and the legal fees. No calculations are required but cite relevant legislation and
case law. (6 marks)

For eligible construction cost (s.43-10)

Cost of building

His house is used for income producing purposes since he rented out to generate income.
Eventually, Joshua can claim a deduction under Div43 for the construction expense of his
house, therefore, Joshua has a Div s. 43-25 claim for construction for 4% over 25 years.

Bank interest of $87000

It is likely to be claimable as a general deduction under s.8-1 as in Munro case since it satisfies
the first positive limb and is not caught by any of the negative limbs. The bank interest to pay
loan is income producing purpose and Joshua rented out the building so it is income producing
purpose. She also cannot include the interest in the cost base for the CGT calculation.

Legal fee of $22000

It is likely to be claimable under s.40-880 Black Hole Capital Expenditure. Joshua paid the legal
fee because of the lengthy dispute with the owner of next-door property. Legal fee is capital in
nature and an expense related to the business expenditure unlike in the Sun Newspaper case.
Therefore, it is likely to be claimable under s.40-880 Black Hole Capital Expenditure.
QUESTION 11
Michael is a Chief Financial Officer, earning a salary of $200,000 per annum. His
brother George is a successful cattle farmer. Seeking to follow in his brother’s footsteps,
Michael purchased a property near his brother’s farm on 1 July 2022 for $1,000,000 and
paid stamp duty of $55,000 and legal fees of $2,000. The property was partially funded
by a loan of $800,000 from the Commonwealth Bank at an interest rate of 6.5% per
annum. The interest charges amounted to $52,000 for the 2022-23 income year.
During July 2022, Michael had the farmhouse repainted and carried out minor repairs at
a cost of $3,300 (incl GST) then the property was tenanted (from 1 August 2021), with
monthly rent being $1,800.
Michael purchased the following assets during the 2022-23 income year:

Asset Date Purchased Cost (incl GST) Effective

Life

Tracto 10 Mar 2023 $66,000 15 years

r

Tools 15 Mar 2023 $35,000 5 years

In April 2023, Michael spent $10,000 on seeds and fertilizer and commenced planting.
Michael realised that buying the property was a mistake because he didn’t have
sufficient time to commit to it. After lengthy discussions with his brother (George),
Michael decided to sell the property to George for $800,000. At the time of the sale, the
property was valued at $1,000,000.
The contract for the sale was entered into on 30 May and settlement occurred on 1
August 2023. The tenant continued to rent the farmhouse until 30 June 2022. The
tractor and tools were also sold to George on 30 May 2023 for $60,000 and $30,000
respectively (market rates).
Required:
Assume where relevant, the diminishing value method is used for depreciation. Also
assume that Michael is not registered for GST.
Using relevant legislation and case law to support your answer, calculate:
a. Michael’s taxable income for the relevant financial years based on the above
information. Michael can substantiate his costs. (13 marks); and

Identify ordinary income

Salary of $200,000 per annum. It is an ordinary income under s.6-5 ITAA97
Rental income: 1800 per month for 11 months (1 Aug 2021 to 30 June 2022)
 Total ordinary income: 200000 + 1800 x 11 = 219800

Identify statutory income

Capital Cost Base Capital Gain/ Discountible?

Event Proceed Loss

Sales of 1000000 + 55000 + 800000 (257000) No - CGT discount does

Property 2000 = 1057000 not apply to a loss
Net capital loss are carried forward to reduce net capital gain in future years, therefore,
$257000 capital loss is carried forward to reduce net capital gain in the future.

Deduction
1. Deduction for depreciating assets
 Tractor depreciation: 66000 x 81/365 x 200%/15 = 1953
 Tool depreciation: 35000 x 76/365 x 200%/5 = 2915

Balancing Adjustment Events for depreciating assets

 Tractor:
The adjustable value: 66000 - 1953 = 64047
The termination value: 60000
Termination value < adjustable value → $4047 is included in deduction (s.40-
285(2))
 Tool:
The adjustable value: 35000 - 2915 = 32085
The termination value: 30000
Termination value < adjustable value → $2085 is included in deduction (s.40-
285(2))

2. Seeds and fertilizer expense costing $10000 (s.8-1)

Total deduction: 1953 + 2915 + 4047 + 2085 + 10000 = 21000

Taxable income: $219800 - 21000 = 198800

b. Michael’s income tax payable. (2 marks)

Income Tax Payable = (Taxable income x Tax Rate) - tax offsets
There is no tax offsets for Michael
51667 + (198800 - 180000) x 1 =$ 70467