- Facts of the scenario
The scenario shows that John has purchased the theatre hall which was not in its best conditions. Because starting any operations in the hall, it is very necessary to repair some of the portion of the ceiling in order to start any operations in the hall. John has decided to replace total ceiling instead of repairing one portion as he has thought of replacing the ceiling with the raw materials that is better in comparison of the old one so that the operations can be better. The addition of the new ceiling, erecting the ceiling as well as cost of the raw materials will together cost in 210,000. It is estimated that is that one portion repairing will consists of the expense of 150,000. But John is concentrated on changing the entire ceiling that will help in improving the acoustics as well as the appearance of the hall. The scenario revolves around the income tax assessment act 1997 and needs detailed description of the allowable deductions for the purposes of income tax.
Relevant laws and cases
The determination of the deductions in terms of the income tax can be explained with the help of case law FCT v Western Suburbs Cinemas Ltd(1952) 5 AITR 300. This case law is helpful in making this clear as whether the expenses have incurred or they can be seen in capital character. As per the section 25-10 of the ITAA 1997 if a person has restored the ceiling or repaired, he/she is entitled to get deduction as per this section. Section 25-10 states that is the thing is completed changed or improved then that cannot be explained as repairs as the matter has gone beyond that. The case law W Thomas & Co Pty Ltd v FCT(1965) 9 AITR 710 states the scenario as restoring the effectiveness of the operations rather than creation of the exact thing in that form or material is imperative (Arnold, et al., 2019).
Application of laws and cases
According to the case laws and sections that have been applied it explains that the evaluation of the repairing of the ceiling can be done with the help of determination of the whether the ceiling consists of pieces that are worn out or replacing the flawed parts and correction of the same has been done is entitled of the deductions as per income tax act. Moreover, is the repaired and the improvement done is seen going beyond the matter of just repairs and the changes have been done completely, so in that case the deduction cannot be provided on the whole amount as it does not mean repairs, it means the complete change and installation of the ceiling in the hall (Zoepf, et al., 2018).
As per the income tax reasons, the allowable deduction will be on the following amount:
Repair cost that is estimated = 150,000
Total cost of repairs (actual) = 240,000
Deductions allowable on the amount = Total cost of repairs (actual) – Repair cost that is estimated
= 240,000 – 150,000
The amount that is liable to be deducted is 90,000 as it shows the costs that are in excess in comparison of costs that were expected for the repair. This amount of deduction is permitted as it is an additional expense. The owner of the hall will get the allowable deduction amount (Sachs, et al., 2012).
It can be seen that for improving the acoustics of the hall, 240,000 amount has been occurred. It is considered as capital amount. The estimated costs of repairs were 150,000. The deduction of the income tax will be entitled on the amount 90,000 as these are the additional expense. The taxable income of the owner will be decreased because of the deductions that are allowable as per the Income Tax Assessment Act 1997.
- If the car is utilized for the business purpose, the total costs is deducted on the operations and the ownership. But the utilization of the car is happening for personal and business purposes both, then the deduction is done only of the utilization of the business cost. It is generally the amount of figure that is deductible on the expense of the car with the help of different methods that are actual expense method and mileage rate method. If both the methods qualify. The deduction figure can be chosen with the help of the method that provides with the larger deduction.
Actual expense method : For utilization of the actual expense method, determination of the operating costs related to the portion of the car in comparison of overall utilization of the car that is used for the use of business. It certainly consists of the Depreciation, lease, registration fees, insurance, repairs, oil, tire, gas and many attributable portions related to driving the car for business purposes.
Depreciation: This can be calculated with the help of the MACRS method that is utilized by the car owners for the depreciation of the car that is seen to be in service since the time.
Recordkeeping: The substantiate of the expenditure must be recorded with the help of the adequate record required by the law. The deduction of the car expenses that is self-employed is done as per the Schedule C (Form 1040) if the organization is a sole proprietorship company.
Standard Mileage Rate: It can be understood as a method that can help in deriving the expenses on the car used for business purposes. For this method:
The operations of the car cannot go up to 5 cars at the same time as it will lead to fleet operations.
The depreciation must not be claimed.
The deductions on car must not be claimed as per Section 179.
The special depreciation must not be claimed on the car allowance.
The actual expenses must not be claimed after the year 1997 related to the lease of the car.
There are other ways by which the deductions are availed as per the expenses of the car. That can be seen as follows:
- With the help of charity contributions
- If the car is hybrid of electric
- Conversion of the automobile
- Deduction of the business use expenses
- Deduction of the fleets of small business
- No reimbursement of the expenses of the business.
With the help of the analyzation of the case study, it can be observed that the total assessable income, tax liability, taxable income, Medicare levy surcharge and Medicare levy is needed to be calculated.
Total assessable income can be described and explained as the sum of passive income and taxable wages.
Calculation of the Total assessable income:
Taxable income+ Passive income
= $ 109,000 + $ 7,000
= $ 116, 000
Taxable income can be described as the gross income portion on which the taxes will be applied. It includes unearned and earned income. It consists of certain deductions so it ultimately decreases. The calculation of the taxable income can be derived as subtracting the deductions from Total assessable income.
Calculation of the Taxable income:
= Total Taxable income – Deductions
= $ 116, 000 – $ 11,000
= $ 105, 000
Tax liability can be described the sum that is due on the income that is taxable. It is the sum that is needed to be paid to the authorities that are related to the particular department. It is the accountable income tax liability owed to the government.
Calculation of the Tax liability:
= (0.1* $ 105,000) + (0.2 * ( $ 105,000 – $ 37,000)
= (0.1* $ 105,000 + (0.2 * ( $ 105,000 – $ 37,000)
= $ 10,500 * $ 16,600
= 27, 100
Medicare levy can be understood as the levy or a tax that is paid on the taxable income. It reduces or decreases if the taxable income is less than the slab amount. So, situations do not even need levy to be paid. It is equals to almost 2% of the taxable income.
Calculation of the Medicare levy:
= 2% of Taxable income
= 2% of $ 105, 000
= 2/ 100 * $ 105, 000
= $ 2,100.
In Australia, Medicare Levy Surcharge can be observed as 1% of the taxable income.
Medicare levy surcharge can be explained as an additional tax that is deducted on the income that as it is not needed to be paid after a certain level of income.
Calculation of the Medicare levy surcharge:
= $ 105,000 * 1%
= $ 1,050.
According to the outcome, the due tax of Julia in the financial year 2021 – 2022 is as $ 27,000 as well as the Medicare Levy Surcharge is $1,050 and Medicare Levy is $ 2,100.
Note: The Medicare Levy Surcharge is only applied when taxpayer doesn’t consist of the coverage related to health insurance (Sammut, 2017).
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a structural analysis. Kluwer Law International BV. https://books.google.co.in/books?hl=en&lr=&id=WGfIDwAAQBAJ&oi=fnd&pg=PT20&dq=Income+Tax+Assessment+Act+1997+allowable+as+a+deduction+for+income+tax+purposes.&ots=cwYdrCPMDe&sig=f_UoJ2WjKb0WwuKQNKPR4tseQNU&redir_esc=y#v=onepage&q=Income%20Tax%20Assessment%20Act%201997%20allowable%20as%20a%20deduction%20for%20income%20tax%20purposes.&f=false
Sachs, H.M., Russell, C., Rogers, E. and Nadel, S., 2012. Depreciation: Impacts of Tax Policy. An ACEEE Working Paper, American Council for an Energy-‐Efficient Economy, Washington. https://www.aceee.org/sites/default/files/pdf/white-paper/depreciation-tax-paper.pdf
Sammut, J., 2017. Fiscal Fiction: The Real Medicare Levy. Centre for Independent Studies. https://www.cis.org.au/wp-content/uploads/2017/05/rr27.pdf
Zoepf, S.M., Chen, S., Adu, P. and Pozo, G., 2018. The economics of ride-hailing: Driver revenue, expenses and taxes. CEEPR WP, 5, pp.1-38. http://fuelandtiresaver.com/wp-content/uploads/2020/03/Zoepf_The-Economics-of-RideHialing_OriginalPdfFeb2018.pdf