Chapter 10 Specific Deductions National Core Accounting Publications

Chapter 10 Specific Deductions © National Core Accounting Publications 1

Overview Under s. 8 -5 a specific deduction is a loss or outgoing for which the ITAA specifically allows a deduction. These include: • • • s. 25 -5 s. 25 -10 s. 25 -25 s. 25 -35 s. 25 -45 Tax related expenses Repairs Lease document expenses Borrowing expenses Bad Debts Loss due to theft or embezzlement by employees © National Core Accounting Publications 2

Overview • s. 25 -55 • s. 25 -60 • • • Subscriptions to associations Election expenses – state and federal government s. 25 -65 Election expenses – local government s. 26 -35 Excessive payments to relatives Division 30 Gifts, donations s. 40 -25 Decline in value Subdivision 290 -B and 290 -C - superannuation contributions © National Core Accounting Publications 3

Tax-related expenses s. 25 -5 allows a deduction for any expenditure incurred in connection with the administration or management of a taxpayer’s income tax affairs. e. g. tax agent’s fees, payment of interest in relation to late/under payments of tax, fees for advice on tax matters, costs of providing information to the ATO. © National Core Accounting Publications 4

Repairs s. 25 -10 allows a deduction for repairs, not being of a capital nature, to any premises, plant, tools, machinery, etc. used or held to produce assessable income. e. g. repairs to restore an asset to its modern equivalent, minor or incidental improvements to part of an asset. © National Core Accounting Publications 5

Repairs Capital repairs are not deductible. • involve replacing the entire asset, or • involve substantial improvements by addition, remodeling, extending or altering the character of the asset. © National Core Accounting Publications 6

Borrowing Expenses s. 25 -25 allows a deduction for expenses incurred in borrowing money to be used for producing assessable income as follows: Expenses ≤ $100 - immediate deduction. Expenses > $100 - must be apportioned over the life of the loan but a maximum 5 year life. © National Core Accounting Publications 7

Illustration: Deductibility of Borrowing Expenses An 8 year business loan was taken out commencing 1 January 2014. The loan establishment fee was $1, 000. Required: Calculate the deduction available in the current income year. Solution: The deduction is: 1, 000 x 5 181 365 = © National Core Accounting Publications $ 99 8

Bad Debts s. 25 -35 allows a deduction for actual bad debts written off. Bad debts expense arising from a provision account entry have not been incurred and are, therefore, not a deduction. © National Core Accounting Publications 9

Losses through theft or embezzlement s. 25 -45 allows a deduction where such losses are due to an employee A loss due to theft or robbery by a nonemployee is deductible under s. 8 -1(1) © National Core Accounting Publications 10

Subscriptions s. 25 -55 allows a deduction for payments for membership of trade, business or professional associations up to a maximum of $42 for each association. Any amount in excess of $42 is deductible under s. 8 -1(1). © National Core Accounting Publications 11

Parliamentary election expenses s. 25 -60 allows a deduction regardless of the candidate’s success or failure in seeking election to State or Federal government. © National Core Accounting Publications 12

Local government election expenses s. 25 -65 allows a maximum deduction of $1, 000 for expenses in seeking election to local government. © National Core Accounting Publications 13

Excessive Payments to Related Entities s. 26 -35 restricts the amount deductible for payments made to associated persons to an amount that the ATO considers reasonable. Examples of a related entity are a relative of the taxpayer, or a director or shareholder of a private company. This is based on type of work, hours worked, award rates. © National Core Accounting Publications 14

Gifts and Donations To be tax deductible a gift must: • be made to a deductible gift recipient (DGR) • really be a gift • be a gift or money or a certain type of property, and • comply with any relevant gift conditions © National Core Accounting Publications 15

Gifts and Donations Division 30 -A allows a deduction for gifts of: • money of $2 or more • trading stock • property valued at >$5, 000 • Property purchased within 12 months of the gift being made • Listed shares valued at ≤ $5, 000 and acquired at least 12 months before the gift was made © National Core Accounting Publications 16

Gifts and Donations Deductible Gift Recipients Examples include: health promotion charities school building funds overseas aid funds registered cultural and environmental organisations, and • public libraries, museums and art galleries • • © National Core Accounting Publications 17

Illustration: Deductibility of donations Kumar has assessable income of $10, 000 and deductions of $7, 800 excluding gifts. Also, the taxpayer donated $3, 000 to Australian Red Cross during the current income year. Required: Calculate taxable income. Solution: Assessable income less Deductions (excluding Donation) $ 10, 000 7, 800 2, 200 less Donation $1, 000 but limited by s. 26 -55 2, 200 Taxable income Nil © National Core Accounting Publications 18

Superannuation Self-employed • Self-employed taxpayers under age 75 can claim a full deduction for contributions made to complying superannuation funds. • To be eligible, less than 10% of their total assessable income must be derived from employment as an employee. • Total assessable income includes assessable income plus reportable fringe benefits. © National Core Accounting Publications 19

Superannuation Employers can claim a full deduction for all superannuation contributions made to complying superannuation funds on behalf of eligible employees (i. e. employees aged under 75 years). © National Core Accounting Publications 20

Superannuation Employees can only deduct contributions they make in respect of themselves if less than 10% of their total assessable income (plus reportable fringe benefits) is attributable to employment or similar activities. © National Core Accounting Publications 21

Payments of taxes Payments of income tax - not deductible. e. g. PAYG withheld, PAYG instalments paid. Payments of other taxes Where a taxpayer carries on a business, the following tax payments are deductions under s. 8 -1(1): • Payroll tax • Fringe Benefits tax • Land tax © National Core Accounting Publications 22

Decline in Value expense Formerly depreciation expense • Covered in Chapter 11 © National Core Accounting Publications 23