Discuss whether, for the current income year, the following amounts would be as an allowable deduction

Question 1 - ABC Co (a resident private company) owns 20% of the shares in XYX Co (a resident public company). Both companies have a corporate tax rate of 30% and a corporate tax rate for imputation purposes of 30%. XYX Co pays ABC Co a $70,000 dividend which has $12,000 of franking credits allocated to it (i.e. the franking percentage of the dividend is 40%). What are the relevant franking account entries for ABC Co and XYX Co? Assuming this is the only receipt of ABC Co, how much tax will it be required to pay? How would your answer be different if ABC Co was a non-resident company?

Answer -

Relevant franking entries include:

ABC co.

Dr Franked distribution 70,000

Cr Franked dividend 70,000

XYX co.

Dr Franking credits 12000

Cr Franked distribution 12000

Firstly, the applicable rate of tax is 30% henceABC needs to pay 30%*70000 = 21000

However, if it was for resident base rate entity then the applicable rate would have been 26% and hence =$70000×26% = 18200

The corporate tax isnot the last one, it will be exposed to a 5% profit WHT rate that applies to dividends to pay to an organization that straightforwardly holds basically 10% of the voting power in the organization paying the dividends. In any case, the maximum WHT rate on dividends is 15%.

Question 2 - Referring to relevant statutory provisions and common law, discuss whether, for the current income year, the following amounts would be as an allowable deduction against assessable income.

a) Provision for the estimated amount of trade debtors' accounts, which might not be collected.

b) An amount of $9,000 paid to a solicitor for preparing a partnership deed.

c) Newspapers purchased by an accountant who advises clients on financial and investment matters.

d) Travel cost of a business executive to attend a trade fair in London paid by the employer.

e) Speeding fines of $ 500 paid by an owner to a driver.

Answer

a) For a business that faces intense competition, it has to sell goods on credit to consumers and it is often seen that some customers do not repay the amount. The amount unpaid by the debtors is considered as a bad debt and is allowed as deductions under section 25-25(1) of ITAA 1997 as this is a business activity. It should be noted that provisions cannot be used for tax deductions.

b) In the given case context under Section 8-1 of ITAA 1997,a payment made to a solicitor for preparation of a deed is deemed as a legal expense and is not allowed as a deduction. On the other hand as per section 40-880,blackhole expenditure qualifies for a deduction over 5 years time period.

c) An accountant who provides financial advises to his clients regarding investments, he needs to be updated with the news and it has a direct link to his earning potential and under (section8 of ITAA1997) it is allowed as a deduction.

d) As per the rules of section8-1 of ITAA1997, the travel cost incurred to attend a fair in London is allowed as a deduction. The reason being that this expenditure holds a direct link to the earning potential of the employer. It should be noted that written evidence detailing the history of travel should be provided to claim a deduction, however if the travel expenditure is lower than $10 and the total expense for travel during the year is $200then it is not necessary to produce a written record to claim deductions.

e) A speeding ticket is Illegal , thus such illegal activities cannot be allowed the liberty to be claimed as deductions . Under sections 26-5,26-52 and 26-53 of ITAA97, any amount paid towards a fine isn't a legal expense and thus, cannot be allowed to claim tax deductions and cannot be used as a tax deduction even by the employer.

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