Law and Deductions

 

 

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Case Studies | Topic 4 | Deductions
Case Study 1
Are the following self-education expenses deductible under section 8-1? Provide reasons for your
answer.
a. Barry, a trainee accountant, is studying commerce part-time at university. Barry enrolled
after he started his employment with his firm.
b. Brianna, a company director, was having difficulty coping with work due to stress brought
about by difficulties with her family situation. She decided to attend a four-week course in
stress management to help her deal with the situation. Brianna attended the course after
hours and paid for it herself.
c. Kieran, a computer salesman, takes six months leave without pay to undertake a business
administration course at a private provider not registered as a higher education institution.
He has an agreement with his employer that, upon successful completion of the course, he
will be promoted to an assistant manager position with his current employer.
d. After finishing her final year of school, Sarah enrols in a full-time fashion photography course
at a TAFE college. She is supported by her parents during her studies and does not receive
any government assistance. She works as a casual sales assistant on weekends.
e. Stuart wants to be the manager of a hotel. He enrols in a hotel management course at a
TAFE college, one semester of which involves an industry placement to gain work
experience. Stuart is placed with a major hotel where he gains experience in all facets of
hotel management, including catering, housekeeping and bar work.
f. Shannon is undertaking a 4 year university degree in mining engineering. She takes on a job
as a casual employee with a mining company during the end of year holiday. It is the
company’s policy to take only students who are pursuing relevant studies.
Case Study 1 | Answer
a. Yes. Because the course enables Barry to maintain or increase the specific knowledge
required in his current position and to carry out his duties more effectively. As Barry has
enrolled in a prescribed course at an educational institution, the amount which may be
deductible could be limited by section 82A ITAA36.
b. No. the course was not designed to maintain or increase the skill or specific knowledge
required of her position. The expenses are more correctly characterised as related to a
private matter and consequently fall within the negative limbs of section 8-1.
c. Yes. Even though Kieran does not earn income from his employer while studying, he is
allowed a deduction for the costs of the course because it will lead to an increase in income
from his current employment as he will be promoted.
d. No. Sarah cannot claim the costs associated with the course against her casual work income
because the study costs were incurred at a point too soon to be regarded as incurred in
gaining or producing income from her (future) employment in the fashion photography
industry.
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e. No. A deduction is not allowable because the study is designed to get Stuart employment as
a hotel manager, not to derive income from work experience. It is incurred at a point too
soon to be regarded as incurred in gaining or producing assessable income.
f. No. Shannon is not entitled to a deduction for the cost of the course because the study is
designed to get future employment in the mining field. It is incurred at a point too soon.
Case Study 2
[Source: Administrative Appeals Tribunal (AAT) decision, 9 September 2015, Re Thomas and FCT.]
A taxpayer was employed by a bank when he enrolled in a business administration course which
would take him away from Australia for a period of months. His employer was apparently supportive
of his desire to undertake the course full time. The course fees were paid in three instalments, an
initial non-refundable payment followed by two more payments at intervals. The taxpayer
committed himself to the course and the payment schedule, and paid the first instalment while still
employed by the bank. However, before the course began, the taxpayer was made redundant by his
employer. Nonetheless, he undertook the course and paid the remaining fees when required. Are
the fees deductible under section 8-1?
Case Study 2 | Answer
The Commissioner accepted that the first instalment of fees, paid while the taxpayer was still
employed by the bank was deductible, but denied that the remaining instalments were deductible. It
was held that the remaining instalments were not incurred by the taxpayer while he was still in
employment. Further, the nexus with any income-generating activity was lost once the taxpayer’s
employment with the bank ceased. It did not matter that the taxpayer accepted the position in the
course while he was still employed. What mattered was that he did not incur the expenditure while
he was still employed. Accordingly, he did not incur the expenditure ‘in gaining and producing’
assessable income.
Case Study 3
Jo is enrolled at the University of Queensland in a Masters of Business degree while he is employed
by a firm of chartered accountants as trainee accountant, working towards obtaining his chartered
accountancy qualification. He incurs the following expenses related to self-education in the current
income year:
 Course fees | $6,500.
 Textbooks, stationary | $1,500.
 Car expenses worked out under the cents per kilometre method using Division 28 | $250.
 Child care cost for his child while he is at university, $100.
Explain whether Jo would be able to deduct any of the expenses against his salary and how the
amount would be calculated?
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Case Study 3 | Answer
As Jo has embarked on his studies to qualify as a chartered accountant, he will be able to deduct the
expenses related to the self-education under section 8-1 because it enables Jo to maintain or
increase the specific knowledge required in his current position.
As Jo has enrolled in a course of formal education that leads to a qualification from a university, he is
enrolled in a prescribed course of education. Therefore, section 82A may limit the deduction
available to him as the first $250 will not be deductible.
To work out how to reduce self-education expenses by the first $250 it is necessary to divide the
expenses incurred related to the course into 5 categories as per the practice of the ATO:-
 Category A | Textbooks, stationery, course fees, student union fees, transport or travel costs
or car expenses worked out under the Log book method (excluding depreciation).
 Category B | Depreciation on assets used for self education (e.g. laptop).
 Category C | Repairs to any assets used for self education.
 Category D | Car expenses claimed under the cents per kilometre method.
 Category E | Self education expenses incurred that are not allowable:
 Travel expenses in respect of the last leg of travel.
 Child care costs related to attending lectures etc.
 Capital cost of items acquired in the relevant tax year for self-education purposes for
example a computer or desk.
Section 82A then requires that you (following the ATO’s practice):
 Apply the following formula to work out the Total Deduction.
 Total Deduction = A – [$250 – (C+D+E)] + B + C + D
 Note: The sum of (C + D + E) can only reduce the $250 to zero. It cannot create a negative
amount.
 Therefore, consider whether you have any category A expenses. In Jo’s case, this would be
$8,000 ($6,500 + $1,500).
 Then add the expenses from category C, D and E together. In Jo’s case, this would be $0 +
$250 + $100 = $350.
 Then subtract the total of $350 in the previous step from the $250, but limit the answer to
$0. Therefore in Jo’s case, the $250 will be reduced to zero, not to negative $100.
 Then add the remaining expenses in category A, B, C and D together to determine the
deduction under section 82A.
 In Jo’s case this is $8,000 + $250 = $8,250.
Case Study 4
[Source: TR 98/9.]
Glenn, a qualified architect, attends an eight day work related conference in Hawaii on trends in
modern architecture. One day of the conference involves a sight-seeing tour of the island and a
game of golf is held on the final afternoon of the conference. Which portion, if any, will he be able to
deduct as an expense under section 8-1?
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Case Study 4 | Answer
 As the main purpose for attending the conference is related to gaining or producing
assessable income, the total cost of the conference (air fares, accommodation and meals) is
allowable as a deduction under s 8-1. No apportionment is required for the costs associated
with the sigh-seeing tour or golf game.
 Note that the cost of this work related conference is not self-education for the purposes of
the s82A, as this is not a prescribed course of education.
Case Study 5
[Source: TR 98/9.]
Francesca, a pediatrician employed by Queensland Health, has two equal purposes when she
decides to attend a five-day international conference on pediatrics in Singapore followed by a
seven-day holiday in Thailand. The conference package is $2,500 ($1,000 for the return air fares,
$500 for the cost of the conference and $1,000 for the accommodation and meals at the conference
venue). Francesca paid another $2,000 for accommodation, meals and car hire in Thailand. Which
portion, if any, will she be able to deduct as an expense under section 8-1?
Case Study 5 | Answer
Francesca, is allowed a deductions for:
 $500, conferences costs, section 8-1.
 $1,000, meals and accommodation at conference venue, section 8-1.
 $500, one half of the return air fare, as this expense was incurred for two equal purposes
(one income producing and one private), section 8-1.
Francesca is not allowed a deduction for the other $2,000 relating to the holiday in Thailand as this is
of a private nature and falls within the negative limbs.
Case Study 6
[Source: Taxation Ruling TR 97/23.]
Explain whether the following expenses incurred by the taxpayers will be deductible.
a. Mr Fermier and Mr Agricola are neighbouring farmers affected by a severe bushfire. Mr
Fermier restores his existing fencing to good condition by mending it and replacing damaged
sections, e.g., the fence on the northern boundary of the property. Mr Agricola replaces the
entire fencing surrounding his property.
b. Gurgler Pty Ltd needs to replace the impellor in a pump it has used for five years. A new
impellor made from stainless steel would cost $8,000. If the original cast iron impellor is
replaced with another cast iron one, it would cost about $4,000. The stainless steel impellor
is chosen because it will provide improved functional efficiency for the pump. It will perform
more efficiently than an impellor and will last three to four times longer than the cast iron
type.
c. William Infelix purchases a house that was ostensibly in good repair. To make it more
attractive to prospective tenants, minor repairs and renovations are undertaken. During the
course of these repairs and renovations, William discovers that the woodwork is seriously
affected by the ravages of white ants. Substantial expenditure is incurred to remedy the
problems caused by the white ant infestation to restore the property to a state in which it is
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suitable for occupation by tenants.
d. Elle Bashful uses her truck for income producing purposes. She replaces the truck’s worn out
petrol engine with a diesel engine with a much greater economy of operation.
e. Sam Tabernarius, a shopkeeper, decides to replace the awning of his shop with a more
modern and aesthetic equivalent.
Case Study 6 | Answer
a. Mr Fermier is entitled to claim a deduction for the cost of repairing his fencing under section
25-10. The entirety is the total fencing, so replacing the fencing on the northern boundary is
a replacement of a subsidiary part of the whole fencing.
Mr Agricola’s expenditure is not deductible under section 25-10 because the whole fencing
was replaced, making it a reconstruction of the entirety. The total fencing is not a subsidiary
part of the rural property or of anything else. To replace the entire fencing with new fencing
is to replace one capital asset with another capital asset. The cost is therefore of a capital
nature. Mr Agricola’s fences are depreciating assets and appropriate deductions can be
claimed under Division 40 to represent the decline in value of the new fence.
b. The cost of the stainless steel impellor is not deductible under section 25-10 because:
 there is a substantial improvement in the functional efficiency of both the impellor
and the pump;
 the impellor is a major and important structural part of the pump;
 the impellor is new and better than the original impellor; and
 the stainless steel impellor has considerable advantages over the old cast iron one,
including the advantage that it reduces the likelihood of repair bills in the future.
 but, capital allowances under Division 40 may be available for the cost of the
impellor over the useful life of the impellor.
c. The minor repairs and renovations are initial repairs. Their cost is of a capital nature and not
deductible as repairs under s 25-10, but may attract Division 43 capital works deductions.
Substantial expenditure is incurred to remedy the problems caused by the white ant
infestation to restore the property to a state in which it is suitable for occupation by tenants.
The expenditure incurred in these circumstances to fix the white ant problem existing at the
date of purchase is also of a capital nature. It is therefore not deductible under s 25-10. The
fact that William was unaware of the problem when he purchased the house and the fact
that he would have paid a lower purchase price if he had known of the need for repairs, do
not alter the capital nature of the expense. Therefore, a capital works deduction under
Division 43 may be available at a rate of 2.5%.
d. The engine is a separately identifiable part of the truck; a subsidiary part of truck. The diesel
engine is new and a better engine with considerable advantages over the old one, including
the advantage that it reduces the likelihood of future repair bills. Therefore the costs are of a
capital nature and not deductible under s 25-10. A deduction for capital allowances under
Division 40 may be allowable.
e. There is nothing to be restored, nor decayed or worn out parts to be renewed and nothing
loose or detached which requires fixing. The expenditure involved is not for repairs, the
awning being in good repair before the work was done. No deduction is allowable under s
25-10. Sam may be able to get capital allowances under Division 40 for the new awning if it
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is a separately identifiable asset. If it is an integral part of the construction of the building,
the expense would qualify for a capital works allowances under Division 43 at a rate of 2.5%.
Case Study 7
The taxpayer has owned and rented out a residential property for many years. While the property
was tenanted, the taxpayer replaced the old kitchen fittings, including the cupboards. The old
cupboards had deteriorated through water damage and wear and tear.
The new fittings are of a similar size, design and quality as the originals. The new cupboards are of
the same type and standard of material (or the modern equivalent of that material) as the old ones.
The layout and design of the kitchen did not alter substantially from that of the original.
The differences are:
 the old sink was replaced with a smaller sink and, as a consequence, provided more bench
top space; and
 a removable cupboard replaced the space previously available for a dishwasher.
Is the expenditure on the replacement of kitchen cupboards installed in the rental property
deductible as repairs under Section 25-10?
Case Study 7 | Answer
[Source: ATO ID 2003/223 which was withdrawn on 24 October 2014.]
 The taxpayer cannot deduct the expenditure as repairs under s 25-10 because it is capital in
nature. The cupboards are a separately identifiable thing representing an entirety in
themselves and the expenditure on replacing the kitchen cupboards results in an
improvement or a renewal or reconstruction of an entirety.
 PoTL Example 14.2 | Indicates that new kitchen cupboards are not eligible for capital
allowances under Division 40 as they form part of the premises.
 The ATO Guide entitled ‘Rental properties 2017’ indicates that kitchen cupboards are
included in the capital works deduction under Division 43 at a rate of 2.5%. This Guide is
available on Learn.UQ.
 The costs incurred would therefore be added to cost base of the premises for CGT purposes
and are reduced by the capital works allowances granted over time | Refer to Topic 6.
Case Study 8
A taxpayer is receiving worker’s compensation and must provide a medical certificate at six-monthly
intervals to the paying authority as a condition of receiving payment. He incurs costs (travel and or
accommodation) to attend to medical appointments to obtain the relevant medical certificate.
Would his travel costs be deductible?
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Case Study 8 | Answer
Yes, the costs are deductible under s 8-1 as it is incurred to produce assessable income | ATO ID
2012/73.
Case Study 9
Paul purchases a depreciating asset on 1 July 2011 for $60,000 (GST exclusive) and commences to
use it in his business on that day. Paul’s business does not qualify as an SBE. The effective life of the
asset is 6.25 years and he has chosen the prime cost method to depreciate this asset. What
deductions are Paul entitled to over the life of the asset? Show all calculations.
Case Study 9 | Answer
Paul is entitled to a deduction for the decline in value of the asset based on the formula in s 40-75.
The 2011-2012 and 2015-2016 income years are leap years, so the days held are 366, not 365 in the
formula.
= Asset’s cost x

x

 

In Year 1 (2011-2012) the decline will be $9,626.
 $60,000 x (366 ÷ 365) x (1.00 ÷ 6.25).
Ongoing deductions would be:
 Year 2: 2012-2013 $9,600 = $60,000 x (365 ÷ 365) x (1.00 ÷ 6.25)
 Year 3: 2013-2014 $9,600 = $60,000 x (365 ÷ 365) x (1.00 ÷ 6.25)
 Year 4: 2014-2015 $9,600 $60,000 x (365 ÷ 365) x (1.00 ÷ 6.25)
 Year 5 :2015-2016 $9,626 (Based on 366 days held) = $60,000 x (366 ÷ 365) x (1.00 ÷
6.25)
 Year 6: 2016 -2017 $9,600 = $60,000 x (365 ÷ 365) x (1.00 ÷ 6.25)
 Year 7: 2017-2018 Deduct the balance of the purchase price of the asset, being $2,348.
Case Study 10
Paul purchases a manufacturing asset on 1 June 2015 for $60,000 (GST exclusive) and commences to
use it on that day. Paul uses the asset 60% of the time for business purposes. Paul’s business is not
an SBE. The effective life of the asset is 6.25 years. He has chosen the diminishing value method to
depreciate this asset. What deductions are Paul entitled to for the income years ending 30 June
2015, 30 June 2016 and 30 June 2017?
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Case Study 10 | Answer
o Paul is entitled to a deduction for the decline in value of the asset based on the formula in s
40-72.
o = Base value x

x

 

o In Year 1 (2014-2015):
o The decline in value will be = $60,000 x (30 ÷ 365) x (2.00 ÷ 6.25) = $1,578.
o The Div 40 capital allowance that may be claimed as a deduction = $1,578 x 60% = $947.
o Adjustable value at 30 June 2015 = $60,000 – $1,578 = $58,422.
o In Year 2 (2015-2016):
o The decline in value will be = $58,422 x (366 ÷ 365) x (2.00 ÷ 6.25) = $18,746.
o The Div 40 capital allowance that may be claimed as a deduction = $18,746 x 60% =
$11,248.
o Adjustable value at 30 June 2016 = $58,422 – $18,746 = $39,676
o In Year 3 (2016-2017):
o The decline will be = $39,676 x (365 ÷ 365) x (2.00 ÷ 6.25) = $12,696.
o The Div 40 capital allowance that may be claimed as a deduction = $12,696 x 60% =
$7,618.
o Adjustable value at 30 June 2017 = $39,676 – $12,696 = $26,980
Case Study 11
Before doing this case study, read PoTL [10.290]. Also consider the wording of section 20-20(3),
presented below.
What is an assessable recoupment?
20-20 Assessable recoupments
Other recoupment
(3) An amount you have received as *recoupment of a loss or outgoing (except by way of
insurance or indemnity) is an assessable recoupment if:
(a) you can deduct an amount for the loss or outgoing for the *current year; or
(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier
income year;
under a provision listed in section 20-30.
Note that section 20-30 references to Division 40. Therefore, a recoupment will apply if you receive
and amount against costs that you incur to purchase a capital asset that qualifies for a deduction
under Division 40.
Further, note that when a taxpayer purchases a capital asset and gets a normal trade discount, the
purchase price or acquisition cost will be the original cost less the discount as reflected on the invoice,
when you work out the value of the capital allowances on the asset. There is one notable exception in
the case of a car when the taxpayer purchasing the car gives an existing car as a trade-in for the new
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car. The value of the trade-in is disregarded when the capital allowances on the new car is
calculated.
This situation is completely different to the scenario where the taxpayer gets other rewards for
purchasing the asset that effectively reduces the cost price of the asset, taking into account all
factors. One such reward is discounts given for assigning renewable energy certificates back to the
seller of solar panels, as the solar panels generate electricity from a renewable energy source.
Renewable energy certificates are related to a Government scheme to encourage the generation of
renewable energy. Under the scheme, energy companies must hold a set percentage of renewable
energy certificates as evidence that they either generate that percentage of renewable energy
themselves, or have procured it. If they don’t hold the percentage of renewable energy certificates,
they are fined by Government. If a customer of an energy company sells their renewable energy
certificates to the energy company, they usually get cash back on their purchase of renewable energy
generation equipment such as solar panels. The cash-back triggers a recoupment as set out in section
20-20.
The provision that includes benefits such as discounts for assigning renewable energy certificates
back to the seller in the cost of the asset is section 40-185. Section 40-185(1) Item 4 includes the
market value of the non-cash benefits in the cost of the asset. Therefore, the cost of the asset is the
cash price paid plus the cash back value. Based on this information, you should now review this Case
Study.
A taxpayer owns a rental property. He purchases and installs a large capacity solar system on the
roof of the rental property. The solar system is an eligible small generation unit (SGU) for the
purposes of the Renewable Energy (Electricity) Act 2000. This solar system is a depreciating asset for
purposes of the Income Tax Assessment Act 1997, with a useful life of 20 years. The original cost of
the solar system was $24,000. By agreeing to assign the renewable energy certificates (RECs)
associated with this unit to the company from which the taxpayer purchases the unit, the taxpayer
receives an effective discount of $6,000, resulting in the final installed priced paid being $18,000.
Division 40 allowances are based on the purchase price of $24,000 and are calculated as follows on
the diminishing balance method:
 Year 1 of $2,400;
 Year 2 of $2,160;
 Year 3 of $1,944.
Since the solar system’s installation, the taxpayer has received $950 in the form of quarterly feed-in
tariff payments from his electricity retailer in respect of the electricity he generated and fed back
into the electricity grid from the solar system on the rental property.
You are required to:
Discuss the tax consequences of the information above for the taxpayer.
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Case Study 11 | Answer
 The taxpayer is not carrying on a business. Renting a property does not lead to a conclusion
that the taxpayer is carrying on a business.
 Nevertheless, any rent received is assessable income, being income from property that
meets the pre-requisites for income: cash and a real gain.
 The $950 Quarterly Feed-in Tariff payments are assessable income. The reason being that
the taxpayer receives a real gain and the feed-in is convertible into cash as it is applied
directly against a loss or outgoing. The income has a nexus to property |TD ID 2010/218.
 As the solar system was installed at a rental property, the taxpayer can claim Division 40
allowances against the solar system as the property is used to produce assessable income.
The values of the Division 40 allowances are given in the question and are based on the
purchase price of $24,000.
 But, section 20-20 applies to recoup the capital allowances under Division 40 up to the value
of the RECs. Therefore, the maximum value of the recoupment is $6,000 and is applied as
follows:
Year 1
| Division 40 allowance on the solar unit = $2,400  Deduction.
| Section 20-20 recoupment = $2,400 → Assessable income
Year 2
| Division 40 allowance on the solar unit = $2,160  Deduction.
| Section 20-20 recoupment = $2,160 → Assessable income
Year 3
| Division 40 allowance on the solar unit = $1,944  Deduction.
| Section 20-20 recoupment = $1,440 → Assessable income
For academic enrichment only: As determined in ID 2011/26, there is no capital gains tax (CGT) that
arises on the scenario set out above.

 

 

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