Topic 2: Deductions 145

1. Give examples of outgoings which are:

(a) of a capital nature;

(b) private or domestic.

2. Explain briefly whether and to what extent the following are allowable
deductions:

(a) $400 city rates paid on a property used half for business and half as a
residence by the owner.

(b) $800 cost of a security alarm system in a shop.

(c) Local government rates paid on a beach holiday house.

(d) Water bill paid by the owner but incurred by the tenant.

(e) Repairs to a boundary fence on acquisition of a rental property.

(f) Repairs to a boundary fence 3 years after acquisition. Tenants damaged the
fence during a party.

(g) Repairs to a rental property. The repairs were carried out after acquisition to
remedy defects, which were in existence at acquisition. The owner was able
to get an unemployed person to live in the house while the renovations were
carried out. The tenant paid a lower rent during the period the renovations
were being carried out.

(h) New dishwasher bought for rental property. The dishwasher that was in the
property at acquisition was considered to be too old so it was traded in on the
new model.

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3. Explain briefly whether and to what extent the following are allowable
deductions:
(a) Interest paid on money borrowed to purchase shares for investment
purposes.
(b) Interest on a mortgage over rental property.
(c) Interest on borrowed money used to purchase a residence by a chartered
accountant. He is employed by a large firm in Perth but often has to take work
home for completion in his study.
(d) Interest on loan used 80% to buy an interest in a business and 20% on home
renovations.

(e) Interest on loan to buy computer. The taxpayer’s children use the computer
to complete homework and play computer games.

(f) Interest on loan to buy computer. The taxpayer uses the computer to do work
at home. Her employer provides her with a computer to use at work but she
does additional work at home.

(g) An accountant’s annual subscription to the Institute of Chartered Accountants

of $600.

(h) Cost of overseas calls by an employee on his home telephone to discuss

sales results with his boss.

(i) Sickness insurance premium.

(j) Interest on a loan to buy a block of land on which the taxpayer intends to build
a rental property

4. Explain briefly whether and to what extent the following are allowable
deductions:
(a) $10 safety goggles purchased by a welder.
(b) $50 skirt purchased by a flight attendant.
(c) $5 dry-cleaning expenses incurred by a salesman in a clothing store. His
employer insisted that the appearance of his suit be improved.
(d) Jeans ($20), jogging shoes ($30) and riding hat ($60) for apprentice jockey.
(e) A green striped skirt and white blouse that a taxpayer wore to work every day.
(f) A pair of blue shorts and a colourful shirt worn by the employees of a pool
maintenance company. The business name was embossed on both the shirt
and the shorts.

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5. Explain briefly whether and to what extent the following are allowable
deductions:

(a) A payment of $100 per week for child minding. Without this arrangement the
taxpayer would have to remain home with the child and could not work.

(b) $720 paid by a practising accountant to a coaching college relevant to

obtaining membership of an accounting body.

(c) An amount of $5,000 invested in shares by Robert who speculates on the

Stock Exchange. During the course of the year he lost all his capital.

(d) $5 donation to an Association for the Blind which mails out a pen in return.

6. On 1 July of the current income year Janet bought a computer for work purposes.
The costs were:
$
Computer including software 10,500
Paper 800
Maintenance 4,800
Installation 1,050
Delivery 440
Total costs 17,590

Determine the amounts which:

(a) should be capitalised;

(b) are allowable as deductions.

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7. Sze Chai owns a number of rental properties. His income and expenses for his
properties are as follows:

Income $
Rent 25,000

Expenses
Agent’s commission 1,500
Bank fees and charges 125
Loan repayments - of these repayments $12,063 was
interest and the remainder was repayment of capital 18,000
Repairs to hot water system 600
Purchase of new hot water system to replace worn out system 1,200
Rates and Taxes 2,400
Gardening 1,040
New roof for one of the properties which has been
owned for six months. The roof needed repair at the
time of purchase, even though Sze Chai didn’t know it. 6,000
Travel costs to inspect a property in Bunbury 250

Calculate Sze Chai’s taxable income and net tax payable including Medicare
levy, in addition to the above, he earned a salary of $60,000 and made a donation
of $100 to the Red Cross.

8. Which of the following expenses are deductible expenses of self-education?

(a) HECS-HELP fees paid by an undergraduate student;

(b) Fees paid by in international student to an Australian university;

(c) Fees paid to CPA (Australia) for a one-day taxation update course; and,

(d) Fees paid to the Institute of Chartered Accountants for “professional year”
studies.

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9. June is a primary school teacher whose income and deductions are as follows:

Income $

Salary 35,000
Interest 1,500
Dividends franked to 100% 3,000
Franking credits attached to dividend $1,286

Expenses

Travel to and from work 3,500

Subscription to Teachers’ Association 180
Cost of small items to give as rewards to students
e.g. gold stars etc. 250
Miscellaneous stationery – coloured paper etc. 95
New computer 2,800

June commenced a Master’s degree in Education in February and incurred the

following expenses:
$
Course fees which June used FEE-HELP to pay 900
Student Association fees 60
Travel expenses -
Home to university and return 200
Home to university 85
University to work after class having
travelled to university from home 90
Work to university 70
University to home after class (after work) 65 510
Stationery 10
Books 350

(a) Calculate June’s taxable income and net tax payable including
Medicare levy.

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10. Shirley worked as a data entry operator in a government department and received
a salary of $15,000 during the current income year, $2,000 of which was a
backdated pay rise relating to the previous year. In addition, she received Sickness
Benefit of $1,000 and Army Reserve Income of $3,500.
Shirley contributed $100 to the Government Officers’ Association. She also bought
a computer for use at home to improve her skills. The computer cost $1,000 and
she also bought computer disks for $60. Shirley monitored her use of the computer
and she used it one third of the time for work related use. She uses 10% of her
home as a study where the computer is located and paid $10,000 in mortgage
interest during the year in respect of her home.
Calculate Shirley’s taxable income and net tax payable including Medicare
levy
11. Dougal's income and expenses for the current year were as follows:
Income $
Salary 50,000
Tool allowance 500
Dividends - franked to 80% 3,900
Franking credits attached to the dividend were $1,337
Dividends – franked to 100% 10,000
Franking credits attached to the dividend were $4,286
Dividends - unfranked 1,000
Naval Reserve salary 3,000
Expenses
Travel to and from employment 5,600
Travel from employment to Naval Reserve training 500
Interest-only repayments on loan used to buy dividend-
producing shares. The interest was $200 per month paid
on the first day of each month. Dougal paid monthly until
February when he prepaid 24 months' interest. 6,200
Dougal had taken out the loan on 1st March of the
previous year. He had paid stamp duty and loan
application costs totalling $600. The loan was to be
repaid at the end of 8 years.
Tools purchased – small items used in the course of work
320
(a) Calculate Dougal's taxable income and net tax payable including
Medicare levy.
(b) Re-calculate taxable income and net tax payable if interest was prepaid
for 12 months.
(c) Re-calculate taxable income and net tax payable if the term of the loan
was 4 years but the prepayment remains as in Part (a).

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12. Are the following expenses allowable deductions? Give reasons.

(a) Local Government rates, water charges and land tax on a taxpayer’s place
of business.
(b) Cost of hiring of telephone answering machine for business use.
(c) Cost of entertaining an acquaintance with a view to persuading him to join
the taxpayer’s business staff.
(d) A sponsorship of $1 million to the local football team by a casino.
(e) $500 insurance premium against loss of stock, cash and plant.
(f) Cost of removing plant to a new factory.
(g) $100 prize to the best-dressed salesman by a department store owner.
(h) A premium paid for a two-year lease on shop premises.
(i) Superannuation contributions made by a self-employed carpenter.
(j) Legal expenses incurred in arranging an overdraft, which is reviewed
annually, for business purposes.
(k) Annual membership of a yachting club paid by a canvas goods
manufacturer.
(l) Wages paid to the taxpayer’s nephew of $100 per week for two hours work
involving filing business correspondence in a two-man business.
(m) Employee wages $6,500 paid to a de-facto spouse. The Commissioner
would consider $750 reasonable.
(n) A gratuity of $2,000 to a former employee who is in financial difficulties.
(o) Legal expenses of $160 incurred in the discharge of a mortgage over a
private residence. The mortgage was obtained to expand business
premises.
(p) $380 incurred by a company in connection with an appeal to have the
valuation of a company’s land reduced for assessment purposes under a
State Land Tax Act.
(q) Loss of cash by burglary of business premises.
(r) Legal expenses of $300 for future incorporation of the business.
(s) $1,080 paid to the Bank for borrowing expenses in connection with a loan to
buy a new manufacturing machine. The loan is for 6 years, commencing on
1 November of the current income year. How would your answer differ if the
loan had commenced on 1 November of the previous financial year?
(t) A discount allowed on the sale of book debts in the course of disposing of a
business.
(u) Costs incurred by a commission agent in unsuccessfully negotiating for new
agencies to expand his business.
(v) Mia operates a childcare business. She buys the vacant block of land next
door to her current premises to expand her business. She has had plans
drawn up for a new building and is waiting council approval. In the current
year she has paid $25,000 in holding costs on the vacant land.

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13. During the year SHONKY Pty. Ltd. incurred the following legal and financial
expenses:

(a) $1,850 paid to a bank in connection with a loan to buy new manufacturing
plant. The loan was for 6 years commencing on 1 February of the current
income year, and the payment consisted of $500 application fee and $1,350
interest for 15 months in advance.

(b) $200 legal expenses for mortgage required by bank in respect of the above
loan.

(c) $175 legal expenses for discharge of previous mortgage in connection with
a loan, now repaid, which had also been used to purchase plant.

(d) $150 legal expenses for lodging an objection to the company’s income tax
assessment for the prior year.

(e) $320 legal expenses for altering the company’s constitution.

Calculate the deductions which may be claimed by the company.

14. Rex borrowed $20,000 @ 12.6% (flat rate) p.a. for 5 years to buy a car.
Repayments are for interest only. His records show the car is used 75% in the
course of his employment.

Calculate the allowable deduction in each of the following situations where

the loan was taken out on 1 July of the current income year and the first
repayment was made on the same day in the following situations:

(a) Rex pays monthly for the whole year.

(b) Rex pays monthly, and then on 1 May CY pays for 4 months.

(c) Rex pays monthly and then on 1 January CY pays for 8 months.

(d) Rex pays monthly, and then on 1 May CY pays for 16 months.

Calculate your answer if Rex was a non-SBE business owner and a SBE
taxpayer who had elected to use the prepayment option.

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15. Malcolm Woodchip, a furniture salesman, commences business on his own on

1 April of the current income year. He purchases an existing business and is granted
a lease of showrooms. Explain whether, and to what extent, the following
outgoings are allowable deductions.

1 April Paid $15,000 premium for a 6-year lease.

Paid $600 to a mortgage broker to obtain a loan of the $15,000 at
18% for the 6-year period.
Paid $225, one month’s interest in advance.
Paid $620 to his lawyer to help him set up his business.
1 May Paid $225, one month’s interest in advance.
30 May Paid $1,000 to his daughter Mary, age 24 for assisting him in
opening the business.
15 June Paid $100 towards June interest and promised to pay the remaining
$125 plus July interest on 1st July.

16. Are the following amounts of interest deductible?

(a) Interest paid on mortgage of home to enable taxpayer to acquire additional

machinery to use in his business.

(b) Interest on money borrowed from the bank to purchase a house in which the
taxpayer resides and from which he conducts a real estate agency business.

(c) $3,000 loan interest. The loan was used to purchase manufacturing
equipment.

(d) Interest on a loan taken out to pay personal superannuation.

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17. Are the following car expenses deductible?

(a) Incurred by self-employed businessman in travelling from home to place of

business.

(b) Incurred by sales representative in travelling from employer’s place of

business to see client and return.

(c) By self-employed tradesman (who works from home) from home to a customer
and return.

(d) Lease payments on a motor vehicle used 30% for business purposes.

(e) Travel costs to visit the taxpayer’s residential rental property and meet with
the managing real estate agent.

18. Calculate the deduction and specify the section which applies in each
instance. The taxpayer is self-employed, and all the expenses relate to the
business.

(a) An application fee of $820 to a bank to arrange a loan. The loan is eventually
negotiated and is for a term of 18 years and commenced on 1 May CY.

(b) Stamp duty of $4,900, valuation fees of $3,400 and legal expenses of $5,100
are paid in respect of the above loan.

(c) Interest of $8,800 is paid during the current year in respect of the above loan.

(d) The taxpayer also leases a property during the current year and pays a lease
premium of $25,000 and legal expenses in reviewing the lease documents of
$2,300.

(e) The taxpayer also paid legal expenses of $12,000 in setting up the business
which commenced on 1 July CY.

(f) The taxpayer paid an Entertainment Allowance of $1,500 to the Sales Manager

(g) The taxpayer provided the Sales Manager with a motor vehicle – the cost of
providing the car and running costs were $10,000.

(h) The taxpayer’s personal motor vehicle cost also amounted to $10,000
although his work-related use was 90%.

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19. Arabella operated a business and had the following income and expenses during the
current year.
$
Business income 100,000
Business expenses deductible under s.8-1 150,000

(a) What is her loss for the current year?

(b) Arabella also has exempt income of $20,000. What is her loss for the current
year?

(c) In addition to the exempt income at (b) above, Arabella also had paid
superannuation of $10,000 for herself and made a tax-deductible contribution
to the Red Cross of $2,000. What is her loss for the current year?

20. Tom operated a business and in the previous year he made a loss of $10,000. In
the current year he had income of $200,000 and expenses of $150,000.

(a) What is his taxable income for the current year?

(b) What is his taxable income for the current year if he also had exempt income
of $2,000?

(c) What is his taxable income for the current year if in the previous year the loss
arose after payment of personal superannuation of $3,000? He has no exempt
income in the current year.

(d) Use all the information in part (c) above but he also has exempt income in the
current year of $2,000.

21. Minnie Muss owns and operates a haberdashery shop. Her details for the past three
years are:
Year ended 30.6 Yr 1 PY CY
$ $ $

Gross income from shop 15,000 23,000 35,000

Deductions
A) allowable under:
1) s.8-1 27,000 22,500 24,000
2) Division 290 2,000 2,000 2,000

Prepare a statement setting out the taxable income for each of the three years.

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22. Derek Goldfinger, a resident taxpayer of Australia, commences business operations

on 1 July Year 1 and the table of his operations is as follows:
Yr 1 Yr 2 Yr 3 PY CY
$ $ $ $ $

Exempt pension 2,500 2,500 2,500 2,500 500

Net Income/Loss loss loss profit profit profit

from Business 8,000 1,000 1,200 1,000 2,200

Gifts to charities
listed in Division 30 300 350 400 400 420

Prepare a statement setting out Goldfinger’s taxable income for the years
shown.

23. Which of the following meets the definition of trading stock?

(a) loaves of bread in a bakery;

(b) buckets of oranges at the green grocer;

(c) spare parts held by a hire car firm for maintenance and repair of its own
vehicles;

(d) Mum’s backyard hens kept for their eggs which feed the family;

(e) sugar, flour, milk, butter and eggs which are used in the production of a well-
known brand of cakes;

(f) draught horses used to pull beer wagons for advertising purposes;

(g) wheat growing in the field.

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24. Smith conducts a retail grocery store which he purchased together with a freehold
property on 1 August of the current income year. Mr Smith has extracted the
following information from the cashbook of the business and requests your advice
as to how the items should be treated in his income tax return for the current income
year.

Indicate briefly which items are allowable deductions, with reasons.

$
(a) Show cases 320
(b) Replacement of guttering and down pipes from roof 140
(c) Demolish and remove old shed from the rear of shop 78
(d) Painting and redecorating store 180
(e) Replace window broken by vandals on 15 May of the current income year 45
(f) Contribution to a superannuation fund conducted by a trading bank. 2,400

25. For taxation purposes which of the following methods is not acceptable to the
Commissioner of Taxation for determining the value of trading stock?

(a) First-in-First-Out (FIFO)

(b) Last-in-First-Out (LIFO)
(c) weighted average cost
(d) standard costs which are regularly updated
(e) retail inventory
(f) base stock

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26. Lira and Yen are competitors in the shoe retailing business. On 30 June of the
previous year both valued their closing stock at market selling value, $10,000
and $20,000 respectively. At 30 June of the current income year, closing stock
valued at cost is $6,000 for Lira and $15,000 for Yen; if valued at market selling
value it would be $18,000 and $12,000 respectively.

If Lira wishes to show a high gross profit for the current income year which
basis of valuation should he use? Support your answer with calculations.

If Yen disposed of his business and his trading stock on 30 June of the current
income year, what would be the effect on his assessable income?

27. An SBE taxpayer had opening stock valued at $58,000 and closing stock
valued at $55,000.

What options does the taxpayer have in relation to trading stock for the
year?

28. Julian operated a business selling wooden hand-made toys for children. The
business has been operating for 4 years but has never made a profit in that
time. In the current year he has made a loss of $10,000 but his turnover from
this business is less than $20,000 and the value of the real property and other
assets were under the required thresholds for Division 35. He also has a
salary of $120,000 from his full-time job.

(a) What is his taxable income for the current year?

(b) How does your answer change if, on 1 July CY he moved into
leased premises worth $670,000?

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29. Jeb (49 years old) operates 2 news agencies in the centre of Perth. He allows
regular clients to run accounts for newspapers and magazines. He issues
outstanding accounts on the last day of each month and they must be paid by the
15th of the following month.

During the current year Jeb has received payments from these accounts of
$75,000. $6,000 of this amount was received for invoices issued on 30 June PY.
On 30 June CY he issued invoices for $7,900 for June CY accounts. Of these
invoices only $7,580 were paid by 15th July FY.

He received $380,000 from the sale of other items from the news agencies during
the year.

In addition to this business Jeb also ran dancing classes 3 nights a week and on
Sunday afternoons. He was a very successful dancing teacher, and his classes
were always sold out. Students were required to pay for their classes in advance
and he ran 3 series of classes a year.

During the current year he had received $34,000 for classes. $12,000 of this was
for the term starting in July FY. Jeb’s classes were so popular that he always
refunded fees for people who could not complete the course because he had a
waiting list of people waiting to join. Courses commencing in July CY were paid in
the prior year and fees for these totaled $11,000.

Jeb fell last year when he was walking through the shopping centre in which his
news agency was located. The insurance company paid him $1,800 in July CY
for permanent damage to his finger which was injured in the fall.

Jeb lent a friend of his $85,000 to use to buy his home. During the year the friend
repaid $10,000 of the loan and $3,500 in interest.

Details of stock movements were as follows:

30 June PY 30 June CY
$ $
Stock on hand (cost) 88,000 120,000
Stock on hand (replacement) 122,000
Stock on hand (market selling value) 115,000

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Expenses of the news agency are as follows:

$
Bank fees and charges 870
Electricity – this included Jeb’s personal electricity bill of
$1,100. Jeb thought he could claim this because he did
his paperwork for both his businesses in his home office
which occupied 10% of his house. 14,600

Purchase of stock 120,000

Purchase of new counter for shop 24,500

Rates and taxes 5,500

Rent for one news agency and the hall for

dancing classes 16,300

Superannuation for himself 25,000

Wages – Jeb paid his brother $15,000 to work on Saturdays.

This was $2,000 more than is paid to another worker who
worked the same hours on Saturdays 130,000

Jeb’s business had made a loss of $45,000 in the prior year. This included Jeb’s
personal superannuation contribution of $15,000.

Required:

Calculate Jeb’s taxable income assuming he wished to minimize his taxable

income and is a SBE taxpayer.

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