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Chapter 10
Specific Deductions
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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 Tax related expenses
s Repairs
s Lease document expenses
s Borrowing expenses
s Bad Debts
s Loss due to theft or embezzlement by employees
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Overview
s Subscriptions to associations
s Election expenses – state and federal government
s Election expenses – local government
s Excessive payments to relatives
Division 30 Gifts, donations
s Decline in value
Subdivision 290-B and 290-C
- superannuation contributions
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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.
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Repairs
s 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.
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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.
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Borrowing Expenses
s 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.
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8. Illustration: Deductibility of Borrowing Expenses
An 8 year business loan was taken out commencing 1 January The loan establishment fee was $1,000. Required: Calculate the deduction available in the current income year. Solution: The deduction is: 1,000 x 181 = $
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Bad Debts
s 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.
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10. Losses through theft or embezzlement
s allows a deduction where such losses are due to an employee
A loss due to theft or robbery by a non-employee is deductible under s.8-1(1)
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Subscriptions
s 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).
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12. Parliamentary election expenses
s allows a deduction regardless of the candidate’s success or failure in seeking election to State or Federal government.
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13. Local government election expenses
s allows a maximum deduction of $1,000 for expenses in seeking election to local government.
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14. Excessive Payments to Related Entities
s 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.
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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
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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
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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
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18. 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 $ 10,000
less Deductions (excluding Donation) 7,800
2,200
less Donation $1,000 but limited by s ,200
Taxable income Nil
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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.
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Superannuation
Employers
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).
Employees
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.
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Payments of taxes
Payments of income tax
- not deductible.
e.g. PAYG tax withheld, PAYG tax 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
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