LAWS7012 | Case Studies

Topic 5

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.

[Last Updated | 19 February 2016]

LAWS7012 | Case Studies | Topic 5 | Deductions

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.
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.

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LAWS7012 | Case Studies | Topic 5 | Deductions

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?

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: o Travel expenses in respect of the last leg of travel. o Child care costs related to attending lectures etc. o Capital cost of items acquired in the relevant tax year for self-education purposes for example a computer or desk.

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LAWS7012 | Case Studies | Topic 5 | Deductions

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. o Then add the remaining expenses in category A, B, C and D together to determine the deduction under section 82A. o 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?

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.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Case Study 5
[Source: TR 98/9.]
Francesca, a pediatrician, 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 deduction for:
1. $500 =
Conferences costs.
2. $1,000 =
Meals and accommodation at conference venue.
3. $500 =
One half of the return air fare, as this expense was incurred for two equal purposes (one income producing and one private).
Francesca is not allowed a deduction for the other $2,000 relating to the holiday in Thailand as this is of a private nature.

Case Study 6
[Source: Taxation Ruling TR 97/23.] - Repairs

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
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LAWS7012 | Case Studies | Topic 5 | Deductions

the property to a state in which it is 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

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LAWS7012 | Case Studies | Topic 5 | Deductions

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 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?

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LAWS7012 | Case Studies | Topic 5 | Deductions

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 2014’ indicates that kitchen cupboards are included in the capital works deduction under Division 43 at a rate of 2.5%.
 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 4.

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?

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.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Case Study 9
Paul purchases a depreciating asset on 1 July 2010 for $60,000 and commences to use it in his business on that day. Paul’s business is not registered as a GST enterprise and is not 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?

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 include leap years, so the days held are 366, not 365 in the formula.
= Asset’s cost x

ℎ
365

x

100% ′

In Year 1 (2010-2011) the decline will be $9,600.
 $60,000 x (365 ÷ 365) x (1.00 ÷ 6.25).
Ongoing deductions would be:
 Year 2: 2011-2012 | $9,626 (Based on 366 days held)
 Year 3: 2012-2013 | $9,600
 Year 4: 2013-2014 | $9,600
 Year 5 :2014-2015 | $9,600
 Year 6: 2015 -2016 | $9,626 (Based on 366 days held)
 Year 7: 2016-2017 | deduct the balance of $2,348.

Case Study 10
Paul purchases a depreciating asset on 1 June 2013 for $60,000 and commences to use it on that day. Paul uses the asset 60% of the time for business purposes. Paul’s business is not registered as a GST enterprise and 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?

Case Study 10 | Answer
 Paul is entitled to a deduction for the decline in value of the asset based on the formula in s 40-72.
 = Base value x

ℎ
365

x

200% ′

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LAWS7012 | Case Studies | Topic 5 | Deductions

In Year 1 (2012-2013): 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 2013 = $60,000 - $1,578 = $58,422.
In Year 2 (2013-2014): o The decline in value will be = $58,422 x (365 ÷ 365) x (2.00 ÷ 6.25) = $18,695. o The Div 40 capital allowance that may be claimed as a deduction = $18,695 x 60% =
$11,217.
o Adjustable value at 30 June 2014 = $58,422 - $18,695 = $39,727
In Year 3 (2014-2015): o The decline will be = $39,727 x (365 ÷ 365) x (2.00 ÷ 6.25) = $12,713. o The Div 40 capital allowance that may be claimed as a deduction = $12,713 x 60% =
$7,628.
o Adjustable value at 30 June 2014 = $39,727 - $12,713 = $27,014
In Year 4 (2015-2016): o The decline will be = $27,014 x (366 ÷ 365) x (2.00 ÷ 6.25) = $8,668. o The Div 40 capital allowance that may be claimed as a deduction = $8,668 x 60% =
$5,201.
o Adjustable value at 30 June 2016 = $27,014 - $8,668 = $18,346 o Continue with the same formula each year until the adjustable value at 30 June is less than $1,000. When this occurs you transfer any remaining amount to the low-value pool.

Case Study 10A | Sale of a depreciating asset used partly for a taxable purpose. [Based on an ATO Example]

Paul sells a computer for $600. The computers cost is $1,000. It has been used 40% of the time for private purposes. At the time of the sale the computer’s adjustable value is $700.
The balancing adjustment at the time of sale (termination value – adjustable value) is a loss of $100 ($600 - $700). Paul can therefore claim a deduction of $60 [($100) x 60%] for the proportion of taxable use of the computer.
In addition, a capital loss of $160 arises. This is 40% (the non-taxable proportion) of the difference between the computer’s termination value and its original cost [($600 - $1000) x
40%]. See s 104-240(2)
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LAWS7012 | Case Studies | Topic 5 | Deductions

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 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. 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

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LAWS7012 | Case Studies | Topic 5 | Deductions

cost of the asset is the cash price paid plus the cash back value. Based on this information, you should now attempt 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, the final installed priced paid being $18,000. Division 40 allowances are based on the purchase price of $24,000 and using the Diminishing Value method, are calculated as follows:
 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 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.

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 |ATO 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:

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LAWS7012 | Case Studies | Topic 5 | Deductions

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
As determined in ID 2011/26, there is no capital gains tax (CGT) that arises on the scenario set out above.

Case Study 12
[Source: ATO press release on accelerated allowances.]
Owen is a sole proprietor of a Small Business Entity (SBE). He bought a new hydraulic press for $40,000 on 28 May 2016 which is used solely in his manufacturing business. The opening value of his small business pool was $30,000 on 1 July 2015. He sells the press on 30 June
2017 for $14,000.
What are the Income Tax consequences in the 2015-2016 and 2016-2017 income years?
Ignore GST.

Case Study 12 | Answer
2015-2016 income year:
The following is a good exam technique to use for SBEs with a small business pool:
As Owen has an existing SBE pool, it is worth considering whether the value of the pool is below $20,000 and would qualify for an immediate write off. To do this, the following calculation is performed:
 Opening balance
$30,000
 Plus taxable use % value of new assets added, $40,000 x 100%
$40,000
 Less taxable use % value of termination value of assets sold
$0
=
$70,000
As the answer is >$20,000, the accelerated write off provisions for the entire pool will not apply. Page | 13

LAWS7012 | Case Studies | Topic 5 | Deductions

If the answer was $0, the answer to the calculation above would be equal to the Div 328 allowance.
In this Case Study, the full answer to the question starts at the next bullet point.






Owen qualifies for capital allowances on the opening balance of his SBE pool as follows under Div 328: $30,000 x 30% = $9,000. The $9,000 is a deduction | Div
328.
As the hydraulic press cost at least $20,000, Owen cannot claim an immediate deduction for this asset under Div 328. Owen will add the asset to his small business pool. He will be able to claim capital allowances of $40,000 x 15% =
$6,000 under Division 328 in his 2015-2016 income year.
The closing value of his pool at the end of the 2015-2016 income year is =
$30,000 - $9,000 + $40,000 - $6,000 = $55,000.

2016-2017 income year:
As Owen has an existing SBE pool, it is worth considering whether the value of the pool is below $20,000 and would qualify for an immediate write off. To do this, the following calculation is performed: o Opening balance
$55,000
o Plus taxable use % value of new assets added
$0
o Less taxable use % value of termination value of assets sold
$14,000
=
$41,000
 As the answer is >$20,000, the accelerated write off provisions for the entire pool will not be available.
 Therefore, Div 328 capital allowances for the 2016-2017 income is is based on the opening value of the pool and may be claimed as follows: $55,000 x 30% = $16,500.
 The closing value of the pool at the end of the 2016-2017 income year is = $55,000 $16,500 - $14,000 = $24,500.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Case Study 13
Tim Jones runs his own business as a psychiatrist. He does not qualify as an SBE. He owns a
Ford Falcon car which was purchased on 1 July 2015 at a cost of $30,000. In the past year, he has travelled 18,000 km, of which 12,000 km is estimated by his log book to be for business purposes. The running costs for the car and the capital allowances calculated on the basis of +Division 40, are $8,000 for the 2015-2016 income year. What would the value of Tim’s Division 28 car expense be for the 2015-2016 income year? Ignore GST.

Case Study 13 | Answer
 Division 28 outlines the two different methods available to Tim to determine the value of his deduction for car expenses deductible under section 8-1, being the log book method and cents per kilometres.
 Cents per km method. Section 28-25. o Limited to a claim based on a maximum of 5,000 km of business travel. o Loses the benefit of the remaining business kilometres. o Deduction = $5,000 × $0.66 cents per kilometre. o Deduction = $3,300.
 Log book Method. Section 28-90. o Percentage business use is 12,000 km ÷ 18,000 km = 66.6%. o Deduction = $8,000 x 66.6%. o Deduction = $5,333.
 The maximum deduction that Tim Jones could claim would be $5,333 on the basis that he used a log book and kept appropriate odometer records. Tim would therefore elect to use the log book method to calculate his car expenses.

Case Study 14
Eric operates his own computer repair business and he is a Small Business Entity for tax purposes. On 1 January 2016 he purchased a new car, a station wagon, to carry all his equipment and spare parts. The purchase cost was $55,000 and for the 2015-2016 income year the incurred running costs were:
 Registration
$889
 Insurance
$540
 Repairs
$1,500
 Maintenance
$1,000
 Fuel
$6,000
Eric maintained a log book and it indicated that the station wagon travelled 15,000 kilometres in the 2015-2016 income year and that his business use of the motor vehicle was
40%.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Assume the effective life of the car is 8 years and that Eric has all the necessary documentation to substantiate his car expenses and he usually uses the diminishing value to depreciate assets, if applicable.
What is the value of Eric’s deduction for using this vehicle in his business? Ignore GST and assume this is Eric’s only asset.

Case Study 14 | Answer
 A station wagon is a car as defined in s 995-1.
 The 2016 Car Limit of $57,466 in s 40-230 does not apply here.
 The value of the car expenses that Eric can claim under section 8-1 is determined by applying the provisions in Division 28 that caters for two methods, being the cents per kilometre and log book method.
Log book Method | Section 28-90
 Log book must be maintained s28-100. 
 Business usage percentage = 40%
 Step 1 | Calculate the capital allowances on the car for the current income year. o Eric’s business is an SBE. Therefore, Eric can choose to apply the accelerated depreciation as set out in Div 328 if it returns a better outcome than Div 40.
The accelerated allowances under Div 328 are more beneficial to Eric to apply as the car was acquired on 1 January 2016, there is no apportionment of the number of days in the income year that the asset was owned if he uses Div
328, which would be the case had Div 40 been applied. o As the cost of the car is not less than $20,000, the car does not qualify for an immediate write off. Therefore, in the 2015-2016 income year when the car was acquired, it will be added to the small business pool. o The taxable (business) use % of the vehicle is added to the pool. The business use % is based on the log book method, therefore $55,000 x 40% = $22,000 is added to the small business pool. o In the 2015-2016 income year, the Div 328 allowance for the car is therefore
= $22,000 x 15% = $3,300.
 Step 2 | Calculate the running costs for the car for the current income year based on the log book percentage. o = ($889 + $540 + $1,500 + $1,000 + $6,000) x 40% o = $3,972 o Step 3 | Add the capital allowance and running costs together to determine the deduction on the log book method: $3,300 + $3,972 = $7,272.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Cents per kilometer | Section 28-25
 Maximum limit of 5,000 kms o Business kilometres = 15,000 x 40% = 6,000 o Above limit, so reduce to 5,000 kms
 Deduction = 5,000 x 66 c.p.km = $2,970
Therefore, the maximum deduction in the 2015-2016 income for Eric using his car is $7,272.

Note: Eric won’t get any other deductions in relation to the car. Running expenses and capital allowances related to the business use of the car are all incorporated in the Div 28 deduction. Case Study 15
Following on from Case Study 14, assume that Eric continues to use the log book method and running costs for the car in the 2016-2017 income year is $5,000. Eric then sells the car on 30 June 2017 for $48,000.
What are the Income Tax consequences in the 2016-2017 income year? Ignore GST. Assume that the car is the only asset in the SBE pool.

Case Study 15 | Answer
 The opening value of the small business asset pool is: o = $22,000 - $3,300 = $18,700.
 As Eric has an existing SBE pool, it is worth considering whether the value of the pool is below $20,000 and would qualify for an immediate write off. To do this, the following calculation is performed: o Opening balance
$18,700
o Plus | Taxable use % value of new assets added, $0
$0
o Less | Taxable use % value of termination value of assets sold
 = $48,000 x 40%
$19,200
($500) o As the answer to the calculation set out in section 328-210 is less than zero, section 328-215 applies and there is no Div 328 capital allowance for the
2016-2017 income year. o Rather, Eric has to include in his assessable income $500. o As there are no capital allowances available for the car for the 2016-2017 income year, it is only the running costs of the car that would be included in the Div 28 calculation.

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LAWS7012 | Case Studies | Topic 5 | Deductions

o Therefore, the value of the Div 28 deduction for the business use of the car =
40% x $5,000 = $2,000
CGT Issue | As Eric did not use the car 100% of the time for business purposes, CGT consequences arise due to the private use of the car. However, any capital gain or loss that arises from the disposal of cars are disregarded | Section 118-5.

Case Study 16
Following on from Case Study 15, what would the answer be if Eric sold the car for $40,000?

Case Study 16 | Answer









The opening value of the small business asset pool is:
= $22,000 - $3,300 = $18,700.
As Eric has an existing SBE pool, it is worth considering whether the value of the pool is below $20,000 and would qualify for an immediate write off. To do this, the following calculation is performed: o Opening balance
$18,700
o Plus | Taxable use % value of new assets added, $0
$0
o Less | Taxable use % value of termination value of assets sold
= $40,000 x 40%
$16,000
$2,700
As the answer to the calculation set out in section 328-210 is less than $20,000, but more than zero, section 328-210 applies and the value of the Div 328 capital allowance for the car for the 2016-2017 income year is $2,700. This amount will form part of the
Div 28 deduction.
The business use value of the running costs will be added thereto: = 40% x $5,000 =
$2,000
Therefore, the value of Eric’s Div 28 deduction is = $2,700 + $2,000 = $4,700.
The balance of his small business pool will be zero at the end of the income year.

Case Study 17
[Source: ATO press release for Class Ruling CR 2001/38 – The deductibility for Queensland school employees of the cost of obtaining a suitability notice for working with children.]
Freda derives most of her income in the child-related employment field. For a number of years she has worked at a number of schools as a teacher, employed under a series of temporary contracts. Her last contract ended in March 2016 and she is offered another contract at a different school in May 2016. In order for Freda to start this new contract, the principal of the school is now required to apply for a suitability notice for Freda in accordance with new legislation applicable to that State. Freda pays the application fee.

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LAWS7012 | Case Studies | Topic 5 | Deductions

Will the fee be deductible?

Case Study 17 | Answer
The cost of the notice will be deductible to Freda under s 8-1. Although she is a new employee at this particular school, it is considered that she is continuously employed in the child-related employment field and the expense is necessary to secure the continuity of this income stream.

Case Study 18
Adam is working as a head of a middle school when his suitability notice expires. The principal applies for a renewal of the notice and Adam pays the application fee. Is Adam entitled to the deduction?

Case Study 18 | Answer
Adam is entitled to the deduction under s 8-1 as the expense is necessary to preserve his existing income stream.

Case Study 19
Catriona was once employed as a cleaner in a school. However, for an extended period of time she has not worked in child-related employment. In June 2016 she is offered another position as a cleaner with a new school and the principal of the school applies for a suitability notice for her. Catriona pays the application fee. Is she entitled to a deduction?

Case Study 19 | Answer
Catriona is not entitled to a deduction. Although she has previously been employed in the field of child-related employment, the time elapsed since her last position and the fact that she has since had several jobs in other fields of employment severs the nexus between the expense and her income. The notice is required to allow her to re-enter the field of child-related employment as a new employee, rather than to preserve the continuity of an existing income stream. The expense precedes the earning of assessable income from that field. Page | 19