Deductibility / Non-Deductibility Implications & Calculation Of Taxable Income And Net Tax Payable

Question 1: Deductibility / Non-Deductibility Implications

There are two options that occur in front of successful businessmen that is Francis that is repairing which acquire costs $4900 and the second option includes replacement acquire cost of $23000. The replacement option is costly for Francis but it is the best option because it increases the life of the restaurant and also appliances. However, on the other side, the kitchen appliances are old and some parts may not available in the market. That is why the replacement option is effective instead of repair.  

Some material facts include if assets resulted in replacement and repair are included in the capital expenditure, and then it depends on nature whether it is capital or revenue. If the expenditure is being identified as capital in nature, then the deduction associated with expenditure will deny but the same will allowed by way of depreciation over its useful life. If the expenditure is identified as revenue in nature, a deduction will allow if the same satisfies the legislative requirements (Kluwer, 2020).

According to 25.10 section, the expenditure made for repair by Individual then it is deductible for the purpose of occurring the taxable income. If individuals use to purchase assets as taxable income then the proportionate amount calculates and deducts accordingly. Therefore, the expense amount for repair is not deductible under section 25.10, if the nature of that expense is capital. Further, taxation rule TR97/25 demonstrate that if individual purchase the asset for commercial use and condition of that asset is not good then the expenditure made on that asset records as an acquisition cost and describe as a capital nature (Australian Taxation Office, 2020).

According to section 8-1 of ITA act 1977, deductibility of expense based on incurred expense, which depends on generating taxable income, and the actual amount spent to carry out business includes taxable income. However, on the other side, an expense not to be deductible when the expense is a loss or expense acquired used for personal reasons (AustLII, 2010).

Segment 40 of ITA act 1977 relates to capital expenditure as it expresses that the deducted value is equal to the amount of asset, which depreciates the value according to useful life. Section 40.15 offers permission to deduct the amount of depreciating asset and deterioration reflect the time, which may attain maximum benefits. It cannot be deducible because it offers extraction for capital expenditure (AustLII, 2010).

While applying section 25.10 in a given case study of an old commercial kitchen, which purchased by Francis for income purpose and made the final decision to replace kitchen appliances as it enhances the durability and suitability (Australian Taxation Office 2020). Further, this section also defines the cost of replacing appliances instead of repair for income purpose then it includes as a capital expense and cannot be deductible.

Conclusion

After examining the material facts or tax laws along with the implementation of laws related to the material facts, which denotes the deductibility of Francis in the case of the old restaurant kitchen. There are different sections that are included from ITA 1977 in the above answer as it helps Francis in making the decision to select the correct method. In addition to this, it also includes the rule TR97/23 as it denotes the values and amount related to repair of appliances which need to capitalize because the old restaurant kitchen is not in working condition. Therefore, computation associated with value needs to decrease by selecting the appropriate depreciation method.

A) Income from Business of Tom

Income from Business of Tom for the year 2019-20
Income from Music instruments Sales (Refer working a)	220,700.00

Working Note:

Working (a):
Particulars	Amount
Income from Music instruments Sales	220,000.00
Less: Sales receipt from musical instruments last year	(2,500.00)
Add: Sales of April of the current year but not received	3,200.00
Income from Music instruments Sales	220,700.00

B) Calculation of income offered for tax

Income offered for tax in 2019-20
Income from Music instruments Sales	220,700.00
Salary Guitar school of Sydney (Refer working 2)	48,800.00
Bank Interest (Refer working 3)	1,050.00
Fully franked dividends (Refer working 4)	17,143.00
Unfranked dividends	4,000.00
Income offered for tax	291,693.00

Working Note:

Working 2:
Particulars	Amount
Salary from the Sydney Guitar school	53,000.00
Less: Long service leave	(4,200.00)
Taxable salary proceeds	48,800.00
Working 3:
Particulars	Amount
Withdrawal is done from Bank	22,050.00
Less: Last year original deposits	(20,000.00)
Less: Interest on the Last year original deposits	(1,000.00)
Taxable interest received from Bank	1,050.00
Working 4:
Particulars	Amount
Fully franked dividends received	12,000.00
Add: Franking credits	5,143.00
Taxable income received via Franked dividends	17,143.00

C) Calculation of Tax payable

Calculation of Tax payable of Tom for the year 2019-20
Income offered for tax in 2019-20	291,693.00
Tax payable on income of 18200 (Refer working 5)	–
Tax payable on income from 18201 to 37000 (Refer working 5)	3,572.00
Tax payable on income from 37001 to 90000 (Refer working 5)	17,225.00
Tax payable on income from 90001 to 180000 (Refer working 5)	33,300.00
Tax payable on income above 180000 (Refer working 5)	50,261.85
Tax on income of Tom for the Financial year 2019-20	104,358.85
Medicare Levy @2%	2,087.18
Total Tax on income of Tom for the Financial year 2019-20	106,446.03

Working Note:

Working 5:
Total Taxable Income of Tom for the Financial year 2019-20	291,693.00
Tax payable on the income of 18200
Income – 18200 @ 0%	–
Tax payable on income from 18201 to 37000
Income – 18800( 37000-18201) @ 19%	3572.00
Tax payable on income from 37001 to 90000
Income – 53000( 90000-37001) @ 32.5%	17225.00
Tax payable on income from 90001 to 180000
Income – 90000(180000-90001) @ 37%	33300.00
Tax payable on income above 180000
Income – 111693(291693-180000) @ 45%	50261.85

D) Calculation of net tax payable of Tom

Net Tax payable computation of Tom for the Financial year 2019-20
Total Tax on income of Tom for the Financial year 2019-20	106,446.03
Less: Franking credits	5,143.00
Net Tax payable of Tom for the Financial year 2019-20	101,303.03

Conclusion

From the above calculation, it concludes that the taxable income of Tom is 106446.03 along with the net tax payable is 101303.03.

References

AustLII 2010, ‘INCOME TAX ASSESSMENT ACT 1997 – SECT 40.1’, viewed < https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.1.html>

AustLII 2010, ‘INCOME TAX ASSESSMENT ACT 1997 – SECT 40.15’, viewed < https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.15.html>

AustLII 2010, ‘INCOME TAX ASSESSMENT ACT 1997 – SECT 8.10, viewed < https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.10.html>

Australian Taxation Office 2020, ‘Taxation Ruling’, viewed < https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/ato/00001>

Kluwer, W 2020, ‘IS 12/03 INCOME TAX — DEDUCTIBILITY OF REPAIRS AND MAINTENANCE EXPENDITURE — GENERAL PRINCIPLES Interpretation Statement — IS 12/03’, viewed < https://iknow.cch.co.nz/document/iknzUio2042505sl363374375/is-12-03-income-tax-deductibility-of-repairs-and-maintenance-expenditure-general-principles-interpretation-statement-is-12-03>