Description

LAW 2499 TAXATION LAW

SECOND HAND IN QUESTION

MUST BE SUBMITTED VIA TURNITIN BY FRIDAY 20 JANUARY 2017 5 PM AEST

MAXIMUM WORDS 1,000 PLUS OR MINUS 10%

QUESTION:

Autosales Ltd is in the business of selling second hand cars. For some time it had

been experiencing a downturn in profits. Accordingly, the directors of Autosales Ltd decided

upon a new strategy to improve the company’s performance. At that time, Autosales Ltd had

been using the services of another company for the remodeling or repair of its cars. The

directors of Autosales Ltd believed it would be more profitable for the company to expand its

business whereby it would remodel and repair its second hand cars itself.

In April 2016 Autosales Ltd engaged the services of an accountant, a market analyst and an

advertising firm. The accountant and the market analyst were hired for the purpose of

determining whether the company’s plan to build a factory for the purpose of remodeling or

repairing second hand cars would be a success. Their advice was that the plan would be

successful in the long run. The cost of hiring the accountant and the market analyst

amounted to $90,000. The advertising firm ran several large advertising campaigns relating

to the existing business of selling second hand cars. The cost of hiring the advertising firm

and the advertising campaign amounted to $200,000.

Unfortunately, in June 2016, as a result of all the publicity, Jet, the sales manager

was robbed of the week's sales proceeds while he was on his way to the Easy Bank. The

amount stolen was $150,000.

As a result of the various studies and advice given, the directors of Autosales Ltd borrowed

$4 million from Easy Bank, repayable over a 5-year period, which was used to buy a block of

land in and to build a factory which was completed in February 2016. Interest on the money

borrowed from Easy Bank to buy the land amounted to $200,000 per year.

By May 2016 the operations of the factory had not yet yielded a profit but were at

least covering their costs. The directors of Autosales Ltd remain optimistic that the factory

would be very successful in the future.

Refer to relevant case law and legislation.

REQUIRED:

(1) Advise Autosales Ltd as to the deductibility of:

(a) the $90,000 in respect of the services of the accountant and the market analyst;

(b) the $200,000 in respect of the services of the advertising firm and the

(c) the $150,000 sales proceeds stolen on the way to the bank;

(d) the cost of buying the land and building the factory;

(e) the interest payment in respect of the money borrowed from Easy Bank.

Answers

a) While market research does not qualify for the research and development concession,

part of the expenditure could be deductible under s 8-1(1) if it is not of a capital

nature. Because the market research was undertaken to change the structure it is of a

capital nature (see Sun Newspapers Ltd v FC of T (1938) 61 CLR 337 ) and is therefore

not deductible.

b) Advertising expenses that have a direct link with income and are clearly deductible

includes advertising incurred for the purpose of selling trading stock which is the case

here. Therefore, it is deductible under the positive limbs of s8-1(1).

c) Although s25-45 of ITAA 1997 refers to a “loss was caused by theft, stealing,

embezzlement, larceny, defalcation or misappropriation by your employee or * agent”

and the theft was committed by neither it could be deductible under s 8-1(1) (see

Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 11 ATD 147). This is because the loss

“is necessarily incurred in carrying on a * business”. Depositing takings is necessary

part of operations for many businesses. The connection to the publicity would draw a

further connection to the business’ operations and the loss incurred. Any recovery of

the loss from insurance would be assessable.

d) Under s8-1(2)(a), a loss or outgoing that is capital or capital in nature will not be

deductible under s 8-1. This is further illustrated by Dixon J’s three factors established

in Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337:

a. Character of the advantage sought.

i. The land and factory provides a long-lasting benefit and is therefore

more likely to be a capital expense.

b. Manner in which the benefit is to be used or enjoyed

i. The land and factory will provide a benefit that can be relied upon once

and for all and is therefore more likely to be a capital expense.

c. Means adopted to obtain the benefit

i. Although a loan was obtained from the bank, the payment to the seller

was presumably a lump sum, further indicating that the expense is

capital.

e) The interest expense must have a sufficient connection with the operations or

activities which more directly gain or produce the taxpayer's assessable income and

not be of a capital, private or domestic nature. Given the loan relates to the land and

factory, which as established above is of a capital nature, the loan interest is not tax

deductible.