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Specific Deductions (Wk 9 & 10), Must use the most appropriate…
Specific Deductions (Wk 9 & 10)
Repairs
s 25-10
Meaning of repair
Must be in need of restoration: Case J47
Pure maintenance work not generally a repair
Work to meet regulatory requirements not repair TR 97/23
Guidance from Lurcott v Wakely and Wheeler
Income-producing purposes
Apportionment when necessary
Not capital in nature
Initial repairs
Considered capital in nature
If the defect existed at time of acquisition, Law Shipping Co Ltd v Inland Revenue Commissioners
Even if unaware of the defect at acquisition, W Thomas & Co Pty Ltd v FCT
Improvements
Changes the character of the original item, hence capital in nature
Deduction for notional amount not allowed, see FCT v Western Suburbs Cinemas Ltd
Replacements
Part of an asset (deductible repair)
Whole of an asset (capital replacement)
An asset in itself when it is separately identifiable and is capable of independent use, see Samuel Jones & Co Ltd v IRC
Deductions for capital expenditure
Depreciation deductions
Div 40
Definition of a depreciating asset
s 40-30(1)
Claiming a deduction
Held
Holder is described in
s 40-40
Jointly held - reflect holders interest
s 40-35
Decline in value
Less than $300 can be claimed immediately
s 40-80(2)
Two methods
Prime cost (equal deductions)
Diminishing value (greater deductions in earlier years)
Choice of method made on an asset-by-asset basis
Acquired from an associate - use the same method
s 40-65(2)
May claim a deduction equal to the "decline in value" of a "depreciating asset" that is "held"
s 40-25
Balancing adjustments
Termination value > Adjustable value = Difference included in assessable income
Termination value < Adjustable value = Difference is included in deductions
Balancing adjustment amount is reduced when asset is used partly for non-taxable purposes
s 40-290
Special rules for cars
Capital works deductions
Div 43
Black hole expenses
Div 40-880
Project pools
Business-related costs
Provides a deduction for expenditure that is capital in nature that are not deductible under other legislation
s 40-880
Deducted in equal proportions over five years
s 40-880(2)
Other deductions
Tax-related expenses
s 25-5
Bad debts
s 25-35
4 criteria
Loss recoupment test
s 25-35(5)
Prior year losses
Tax Loss = Deductions (excluding prior year losses) - assessable income - net exempt income
Can be carried forward indefinitely to future income years
Gifts
Div 30
greater than $2
true gift v deductible gift recipient
may be possible to be deductible under
s 8-1
if there a nexus
Specific anti-avoidance provisions
Non-arms lengths prices between associated parties
Excessive deductions limited
s 26-35
Trading stock deduction limited to market value
s 70-20
CGT Market Value Substitution Rules
ss 112-20; 115-30
Depreciating Assets at market value
ss 40-180; 40-300
Non-commercial losses Div 35
Quarantines losses
Losses are trapped in the business until they make assessable income, unless exemption applies
Substantiation of deductions
By maintaining and keeping proper documentation as outlined in
Div 900
for 5 years
s 900-165
Excludes work expenses up to $300 and laundry expenses up to $150 and reasonable travel or overtime meal allowance
Must use the most appropriate provision
s 8-10