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ACC3TAXS12018Week9Otherallowabledeductionsandsubstantiation2.pptxACC3TAX – 2018/1 Week 9 OTHER SPECIFIC DEDUCTIONS SUBSTANTIATION PROVISIONS
Livia Gonzaga & Mark Morris
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Week 9 Contents
Final Exam Orientations
Other Specific Deductions
Substantiation
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Livia Gonzaga & Mark Morris
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Final exam orientations
Part 1
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Final Exam Orientations
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| How to Prepare for the ACC3TAX Final Exam |
| Note: The orientations below DO NOT constitute assessment criteria for the final exam. They are suggestions/recommendations on how you should prepare for the final exam. PRACTICE is key. Writing answers to the workshop questions is the best practice. Write your own answers then compare them with the solutions provided. Review internal assessments. TIME MANAGEMENT! Set your phone on stop-watch mode and check how long you take to answer each question. The higher the mark allocation for the question, the more time you should dedicate to it. Questions will assess multiple topics/issues (i.e. more than one week will be covered in the same question) You MUST answer all questions, however answer first the questions you know best. If you get stuck at a question, leave some space, move on and answer the other questions. You may still have time at the end to come back and finish any stuck questions. |
| The final exam will comprise a total of 4 questions, being: One Long Essay question; One Calculation question; Two Short-answer questions which may include minor calculations. Note: questions may have sub-items. |
Practice: prepare answers beforehand
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Final Exam Orientations
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| Type of question | Most common topics (non-exhaustive list) |
| Long essay To be answered in essay format (see next slide). | Business v Hobby, Isolated Transactions (may include CGT), Compensation, General Deductions |
| Short answer + calculations Short explanations (anything from 1-line to 1-paragraph) accompanied by appropriate calculations where required Application of legislation (always) and case law (where required) | Repairs, Specific Deductions, Depreciation, Capital Works, Tax avoidance, Tax admin, Trusts, Partnerships |
| Calculation State calculations and highlight results State legislation in brackets | Assessable income, CGT, FBT, Corporate Tax, Imputation (dividends) |
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Practice: prepare answers beforehand
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How to Answer Exam Questions
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| Long-essay Questions – Recommendations |
| Carefully read the question and identify all relevant information. If you have time, draft a brief roadmap outlining the issues you will analyse (this will help to organise your essay in a clear manner) Your essay must be structured as follows: Introduction: This will be your first paragraph. State the main problem(s) you will be analysing in the question, outline any underlying issues to be addressed in order to solve the main problem. Body of text: Analyse all necessary elements (write as many paragraphs as needed), develop arguments, APPLY legislation and case law to the question facts. DO NOT simply repeat theory/legislation/case law (this doesn’t add any value to your answer). Most importantly, DO NOT BLINDLY TRANSCRIBE WORKSHOP SOLUTIONS into the final exam (this demonstrates you don’t know the contents and don’t know how to write an essay). Conclusion: This should be a short paragraph at the end where you briefly recap the problem and indicate how it is solved based on the arguments you presented in your analysis. Your conclusion must be a logical derivation of the arguments in the body of your text. Your writing must be clear, objective, logically organised and coherent (imagine your examiner as a client who knows nothing about Tax. It is your responsibility to make your client understand your advice). |
How to Answer Exam Questions
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| Calculation Questions |
| Use a calculator, but STATE every step of your calculations AND the results (highlight the results if you wish) If you need to explain any assumptions/requirements which would affect the calculation, be concise and objective, DO NOT write essays on calculation questions! E.g. If you include an individual’s salary into his assessable income, you don’t have to write 10 lines to explain everything about assessable income. Just include the amount and mention the applicable section (6-5 ITAA97). |
| Short-Essay Questions |
| Typically can be answered in one short paragraph (or one paragraph per item). Anything between 3-10 lines is considered a short paragraph. Short-essay questions may include minor calculations. E.g. Depreciation question – explain why you choose the method, calculate depreciation according to that method. |
General Info & Allowable Materials
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| General Info |
| Final Exam is closed book, and all topics are examinable. Reading time: 15 mins; writing time: 120 mins Exam questions are similar (but not identical) to workshop questions. Do not leave your preparation for the last weeks. You will not have time to review everything at the end. |
| Allowable Materials |
| Programmable or non-programmable calculator. Core Tax legislation (or full set of ITAA): highlighted and tabbed (see examples of allowed tabbing on week 1 slides), NO notes (in whatever forms). “Cheat-sheets”: 2 A4 paper sheets double sided (total of 4 pages) of handwritten notes, not photocopied, not printed, not typed. Prepare your cheat-sheets in advance. It is suggested you write one A4 page of notes per week, then filter the notes and condense all 12 pages into the 2 double sided paper sheets. Not allowed: Dictionaries, Foundations in Tax, Casebook, Master Tax Guide or ATSM. |
Other SPECIFIC deductions
Part 2
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Entertainment Expenses
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| Entertainment Expenses (Div 32) |
| General rule: A loss or outgoing in respect of providing entertainment is generally not deductible under s 8-1 ITAA97 by virtue of the prohibition of s 32-5. “Entertainment” includes: food, drinks, recreation; accommodation or travel to do with providing entertainment by way of food, drink or recreation (s 32-10). Examples of non-deductible entertainment expenses: business lunches – s 32-10(2). social functions such as a cocktail party, reception or other social function tickets to an event (when not a FB) |
| Exceptions: (when entertainment expenses are an allowable deduction – see tables at s 32-30 to 32-50 ITAA97): When entertainment is a fringe benefit (s 32-20 ITAA97 and TR 97/17); When entertainment is a result of advertising; When recreation is provided in facilities that the taxpayer occupies and are mainly operated for the taxpayer’s employee to use (e.g. company gym, company restaurant) When paid to an employee as an entertainment allowance (that is included into the employee’s assessable income s 15-2) Food in seminar lasting at least 4 hours Food provided in an “in-house” dining facility (company restaurant) |
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Bad Debts and Theft/Misappropriation
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| Bad Debts (s 25-35 ITAA97) |
| A debt is written off as bad if formal records indicate the amount will not be collected. Thus, provisions for doubtful debts (debts which may be recoverable) are not deductible. Conditions for deducting bad debts: The debt must be written off as bad in the current income year; and the amount: is included in assessable income; or it is in respect of money lent in the ordinary course of a money lending business – s 25-35. The deduction of bad debts only applies for taxpayers accounting under accruals method. Inclusion of the amount as assessable income excludes taxpayers who use cash basis from claiming a deduction for bad debts. S 25-35 does not apply to debts extinguished or released. |
| Theft or Misappropriation (s 25-45 ITAA97) |
| A deduction may be claimed if a loss – s 25-45: is discovered in the current income year; it is in respect of theft, stealing, embezzlement or misappropriation by an employee or agent of the business; and it is included in assessable income for that or an earlier income year. An agent of the business: includes a solicitor or accountant. does NOT include an owner or director. S 25-45 does overlap with s 8-1 – see Charles Moore (1956). |
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Borrowing Expenses
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| Borrowing Expenses (s 25-25 ITAA97) |
| A deduction may be claimed for borrowing expenses to the extent the loan is used for income producing purposes. E.g.: Establishment fees paid to a bank to get a loan for an income producing purpose (would normally fail s 8-1 for being capital, but can be deductible as borrowing s 25-25), also includes stamp duty; valuation and survey fees; broker’s commission and legal fees. Deduction is over period of loan or 5 years, whichever is the shorter – s 25-25(5). Apportionment applies if loan is only partly for income producing purposes – s 25-25(3). Borrowing expenses of < $100 are fully deductible in the year incurred – s 25-25(6). |
| Example: Nicole borrows $250,000 on a 3-year loan starting on 01/01/2018. The loan is used to invest in shares which paid dividends in the year. Borrowing expenses of $5,000 are incurred. How much can she claim as a deduction in 2017/18 (year 1)? Step 1: Determine remaining expenditure $5,000 Step 2: Work out loan period in days 1,095 (3 years) Step 3: Divide remaining expenditure by number of days in remaining loan period $5,000/1,095 = $4.56 Step 4: Multiply result in Step 3 by number of days in remaining loan period that are in the income year (1/1/2018 to 30/6/2018) 181 x $4.56 = $825 deductible in year 1 How much will Nicole be able to deduct in 2018/19 (year 2)? Step 1: Determine remaining expenditure $5,000 - $825 = $4,175 Step 2: Work out remaining loan period in days 1,095 - 181 = 914 Step 3: Divide remaining expenditure by number of days in remaining loan period $4,175/914 = $4.56 Step 4: Multiply result in Step 3 by number of days in remaining loan period in the income year 365 x $4.56 = $1,664 deductible in year 2 |
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Tax Expenses / Legal Expenses
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| Tax Expenses (s 25-5 ITAA97) |
| Expenses incurred in managing tax affairs are deductible under s 25-5 (1), including: the costs of preparing an income tax return if prepared by a recognised tax adviser; costs associated with preparing such an income tax return; costs of professional tax advice if provided by a recognised tax adviser; including the cost of objecting or appealing against an assessment. A recognised tax adviser includes a registered tax agent or a registered barrister or solicitor. HOWEVER, a taxpayer CANNOT claim a deduction for the following tax expenses: payment of tax itself (income tax and PAYG amounts); interest payments or borrowing costs incurred to finance tax payments; and tax expenses of a capital nature – ss 25-5(2) and (4). E.g. cost of computer that was bought just to deal with tax affairs is not deductible under s 25-5 but taxpayer may claim depreciation under Div 40 to the extent such computer is used to store tax information. |
| Legal Expenses (s 8-1 ITAA97) |
| Generally considered under s 8-1. Reference cases: Herald and Weekly Times (1932); Snowden & Wilson (1958); Magna Alloys; Broken Hill Theatres (1952); Hallstroms (1946) (check week 7) Legal expenses incurred to defend a capital asset (or ownership rights related to a capital asset) are not deductible under s 8-1 but usually are deductible under Black Hole Expenditure (s 40-880). However, certain legal expenses are specifically made deductible under specific provisions. Examples: legal fees that form part of borrowing expenses are deductible under s 25-25; and legal fees that form part of tax expenses are deductible under s 25-5. |
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Black Hole / Gifts (Donations)
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| Black Hole Capital Expenditure (s 40-880 ITAA97) |
| Provision of last resort: S 40-880 (see week 8) provides that capital expenditure which is not otherwise deductible and relates to a business may be deducted over 5 years (as long as it is not denied by another provision). Examples: Legal expenses incurred in defending fixed capital assets Damages (compensation paid) for breach of contract of a capital nature Payment to remove competition Payment to terminate an uneconomic lease Prospection, feasibility study related to establishment of business Expenses incurred to liquidate a business |
| Gifts (Donations) (s 30-15 ITAA97) |
| Definition: A gift/donation corresponds to a personal deduction that does not relate to the production of assessable income. A gift to the value of $2 or more is deductible to the giver if the recipient is an approved body (s 30-15). An approved recipient may come within a general approved category or be specifically identified as approved. General categories of approved recipients include: public or non-profit hospitals; public benevolent institutions; public universities; public libraries, museums and art galleries; and registered political parties (max. deduction of $100). A list of each recipient specifically identified as coming within a general category is outlined in ss 30-15 to 30-100. |
Prior Year Losses
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| Prior Year Losses (s 36-10) |
| Tax loss: A tax loss exists if the total of eligible allowable deductions exceed total assessable income. Eligible allowable deductions: a taxpayer’s total allowable deductions, excluding: any tax loss arising in a prior income year – s 36-10; and an amount constituting a gift to the extent it produces or increases a tax loss in the current income year – s 26-55. Total assessable income: assessable income plus net exempt income – s 36-10. Taxpayers may carry forward tax losses arising in a prior income year and claim this amount as a deduction in the current income year – s 36-10. A tax loss may be carried forward indefinitely until it is absorbed. Where a loss is brought forward it must be first offset against net exempt income and then against any assessable income remaining after all current year deductions are allowed (refer to example on Week 3) |
| Example: Mark derives $20,000 assessable income and $5,000 net exempt income. Mark incurs allowable deductions of $31,000, $1,000 of which relates to a deductible gift. Mark also incurred a tax loss last income year of $2,000. What is the current year tax loss? Eligible allowable deduction$30,000 (this amount excludes: any prior year tax loss ($0) and any gift ($1,000) that, if included, would increase the current year tax loss. Total Assessable Income $25,000 (= assessable income $20,000 + net exempt income $5,000). Thus: $25,000 - $30,000 = $5,000 current year tax loss |
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Superannuation Contributions
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| Employer Superannuation Contributions (Div 290 ITAA97) |
| Employer contributions made to a complying superannuation fund on behalf of an eligible employee are deductible - Div 290. An eligible employee is an employee of the taxpayer who is a resident and is engaged in producing assess income. Deductions are specifically allowable under s 290-60, but note conditions in ss 290-70 to 290-80: S 290-70: an employee, producing assessable income and a resident. s 290-75: complying fund conditions. S 290-80: age up to 75 years of age. |
| Personal Superannuation Contributions (Subdiv 290-C ITAA97) |
| From 1 July 2017 individuals (self-employed AND employees) may also claim a deduction for personal superannuation contributions up to the cap of $25,000 per year (which includes the employer superannuation contributions) - see week 4 slides for more details. Conditions for deductibility - Subdiv 290-C: To a complying fund – s 290-155. Up to the annual cap of $25,000 Age limits: 18 (income from employment or carrying on a business) & 75 – s 290-165 |
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LIMITATIONS TO DEDUCTIONS / Substantiation provisions
Part 3
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Substantiation Rules
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| What is substantiation? |
| Substantiation = evidence, documentation. Certain expenditures may satisfy s 8-1, but are not deductible unless the taxpayer has documentary evidence to substantiate the expenditure. Substantiation requirements (provisions) only apply to individuals (s 900-5 ITAA97) and partnerships where at least one of the partners is an individual. Substantiation requirements only apply to the following expenditures: Work expenses; Car expenses; and Business travel expenses |
| Complying with Substantiation Rules – Useful videos |
| Get your deductions right: https://youtu.be/6Mld8q8vmHI How to use My Deductions app: https://youtu.be/_zezFZq_Lg4 Claim a computer, phone or electronic device: https://youtu.be/Ez6yXRWYf-0 Home Office Expenses: https://youtu.be/sOP0_OtE1aY |
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Work Expenses
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| Claiming work-related expenses (s 8-1 and s 900-30 ITAA97) |
| A work expense is a loss or outgoing incurred in producing a taxpayer’s salary or wages – s 900-30. Examples: Tools of trade; Professional subscriptions; Washing, drying and ironing clothes; Repairs and depreciation of equipment used to produce salary or wages; and Food, drink and accommodation while away from home, if undertaken as part of a taxpayer’s employment duties (as long as not reimbursed by employer) |
| Substantiation is required in the form of a document issued by the supplier of the goods or services, specifying: Name of the supplier; Amount of the expenditure; Date expenditure was incurred; date of the document – ss 900-115 and 900-120. Substantiation requirements do not apply to work expenses totaling $300 or less for the income year – s 900-35. Substantiation requirements do not apply to laundry expenses totaling $150 or less for the income year even if work expenses exceed $300 – s 900-40 |
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Car Expenses
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| Overview |
| How to claim a car expense using My Deductions: https://youtu.be/o24dwTj6qu8 A car expense is a loss or outgoing associated with the operating and depreciation of a car used to derive assessable income – s 28-13. A deduction for work-related car expenses is available if you use your own car (includes cars owned, leased, or hired under a hire-purchase agreement) in the course of performing your job as an employee. Therefore, the methods to calculate car expenses only apply to individuals who are employees. Car expenses may include repairs, maintenance, registration, insurance, fuel, oil, depreciation and interest on a car loan. |
| Methods Cents per km method (with some changes since July 2015) Logbook method (unchanged) Where an individual uses their own car (or personally rented) for work or business purposes they may use either of the above methods. A taxpayer must choose only one method for all car expenses for a car – s 28-20(1). Different methods may be chosen for different cars within an income year. Obviously the method chosen will be the one which provides the greatest deduction. A taxpayer may switch from one method to another year by year – s 28-20(2). |
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Since July 2015 the “1/3 of actual expenses” and the “12% of original value” methods have been abolished.
Car Expenses: Log Book Method
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| Log Book Method |
| Deduction for car expenses is determined by the formula A x B, where: A is the amount of each car expense for a particular car B is the percentage of km travelled for business purposes. Note depreciation cost limit $57,581 (TD 2017/18). Substantiation of each car expense is required in the form of a document, from the supplier of the goods or services, with: name of the supplier; amount of the expenditure; date expenditure was incurred; date of the document - s 900-115 and 900-120 |
| Business use percentage is determined by a log book, which records each journey made in the car in the course of producing assessable income, for a minimum continuous period of 12 weeks – s 28-110. It is necessary to maintain a log book in the first income year the log book method is used for a particular car. Business use percentage determined using a log book applies for the current income year and the next four income years – s 28-115. If, however, business use percentage increases during this period a new log book should be maintained. |
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Car Expenses: Log Book Method
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| Keeping a log book |
| To record a journey in the log book the following information must be provided: Date the journey began and ended; Odometer readings at the start and end of the journey; Km travelled on journey; and Purpose of the journey – s 28-125(2) The log book must also record details of: Start and end of the 12 week period; Odometer readings at the start and end of the period; Total km travelled during the period; Number of km travelled for business purposes in the period; and Percentage of business km to total km – s 28-125(4). |
| Example: Robert maintains a log book for 12 weeks in accordance with ITAA97. The log book states the total km travelled during the period is 8,000. 5,000 km are business related. Robert incurs $3,000 in car expenses. Robert has the appropriate written documentation of such expenses. What deduction can Robert claim? $3,000 x (5,000km/8,000km) = $1,875 Allowable deduction |
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Car Expenses: Cents per Km Method
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| Cents per Km Method |
| 2017/18 rate is 66 cents per km for all motor vehicles (rate adjusted annually). Calculate deduction by multiplying the number of business km x ‘cents per km’ rate (up to max 5000 business kms per car) If using the cents per km method cannot claim depreciation separately. Written evidence not required but you need to be able to show how you worked out your business kms (e.g. diary records of work-related trips). Where you and another joint owner use the car for separate income-producing purposes, each of you can claim up to a max of 5,000 kms. No substantiation is required to claim a deduction under this method. Determining business km travelled does not require a log book, but rather a reasonable estimate. |
| Car expenses and FBT |
| Where a car is provided by an employer to an employee as fringe benefit the methods above are not used, because the provision of a vehicle to an employee is subject to the FBT provisions and the employer obtains a 100% deduction for the cost of providing the car to the employee and for the FBT paid. Therefore, if an employee uses a car provided by his employer as an FBT, the employee will NOT be able to claim any deduction in relation to that car, because (i) it is not his own car (or he did not rent it personally) and (ii) it is the employer who is entitled to a deduction under FBT provisions. |
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Work-Related Self-Education
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| Conditions to claim work-related self-education expenses |
| Self-education expenses are the costs you incur to maintain a course of study at a school, college (including TAFE), university or other recognised place of education. You can claim a deduction for self-education expenses if, in doing the course, you are satisfying study requirements to maintain your right to a taxable bonded scholarship, or if your education is strictly related to your current employment. See TR 98/9 |
| Work-related self-education expenses are deductible if you work and study at the same time, and you meet any of these conditions: you are upgrading your qualifications for your current employment you are improving your skills or knowledge for your current employment you are employed as a trainee and you are undertaking a course that forms part of that traineeship you can show that at the time you were working and studying, your study led, or was very likely to lead to an increase in employment income. |
| For work related self-education, you are not eligible under any of the following circumstances: your study is not related to your current employment or is only generally related to your current employment you are employed in a field related to your studies but the skills you are obtaining are not used or only partially used in your employment duties (general nexus) the course is opening up a new field of employment (Hatchett). |
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Work-Related Self-Education
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| Conditions to claim work-related self-education expenses |
| Examples of expenses you can claim: course fees textbooks, stationery, photocopying and professional and trade journals cost of repairing a computer you use for study purposes interest on borrowings to purchase a computer decline in value (depreciation) of a computer student union fees, student services and amenities fees meal costs if participating in your course means you must be away from home for one or more nights Allowable travel (fares, etc.) |
| Limitations on work-related self-education expenses |
| Specific expenses you CANNOT claim: self-education expenses such as tuition fees paid to an education provider by you or the Australian Government under HECS-HELP cost of accommodation and meals associated with day-to-day living expenses (they are private) repayments you make (whether compulsory or voluntary) on debts you may have under the following loan schemes: HECS-HELP; FEE-HELP; OS-HELP; VET FEE-HELP; SA-HELP; SFSS |
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End of Week 9
Thank you!
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