Taxation Law Question

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A tax deduction refers to an amount that the revenue authority of a particular jurisdiction will allow the taxpayers to subtract from their taxable income to lower their taxable income as at the income year-end (IRS, 2017). Usually, these deductions represent expenses that the taxpayer incurs to finance the operating costs that have a direct relation to the income that the taxpayer receives during that year. Tax deductions reduce the amount of income for an individual or a business that is subject to tax, thereby reducing the amount that this taxpayer remits to the tax authority in their jurisdiction inform of tax. Typically, tax authorities allow their taxpayers to deduct taxable income for a particular year and also to claim tax for past year for which they did not make the proper deductions. However, to claim a tax deduction relating to a past income year, the taxpayer must satisfy to the commissioner of domestic taxes of their tax jurisdiction that the deduction relates to an expense incurred in the normal running of business during the income year of claim (Australian Taxation Office, 2017). Also, the taxpayer must provide evidence of having included the expenses in the tax paid, and the claim must be made within the time allowed by their revenue authorities.

Under the Income Tax Assessment Act 1997 (ITAA 1997) provisions, Tom may claim tax deductions on some expenditures incurred in the production and sale of vegetables and truffles business. Some of the tax deductions that Tom may be able to claim are outlined below.

Tom may claim the $14,000 in every income years 2017 through 2021 being interest repayment on the 7% $200,000 loan. The loan having been taken to facilitate the setting up of the property thereby satisfies the conditions necessary for deductibility of common expenses provided under s 8-1. Therefore Tom will be allowed to deduct the $14,000 interest during each income year starting from 2017 to 2021 since the loan funded the setting up of the property and thus contributes to the assessable income for the income years aforementioned.

On the contrary, Tom might not claim a deduction for the $500 paid as loan establishment fees to Agri Bank. The $500 loan establishment fee was spent as a requirement for qualifying for the $200,000 loan. Therefore the deduction will not be claimable since the related expense fails to meet the conditions for a “true” gift provided under Div 30.

Similarly, Tom may not claim a tax deduction for legal expenses amounting to $2,000 paid. The legal expense passes the Nexus test – positive limbs of s 8-1 in that it is paid to defend against charges for the improper conduct of polluting water in the ordinary course of the farming business.

Tom may also claim tax deductions on travel expenses incurred amounting to $2,500 during the current income year ending 30 June 2017. These traveling expenses qualify to be tax deductible since they were incurred during the participation of a workshop for organic vegetable growing and thus the amount contributes to the assessable income for the 2016/2017 income year. Tom may, therefore, subtract the $2,500 being compensation and travel expense from the taxable income during the income 2016/2017 income year.

Lastly, Tom might not be able to claim the $25,000 spent on rectifying the defects of the farmhouse on the settlement during the 2016/2017 the initial income year. Expenses incurred to remedy the defects of the farmhouse at settlement qualify to be capital expenses incurred relating to initial repairs and are not thus not deductible under the ITAA 1997 since the defects existed at the at the time of acquisition of the property.

In conclusion, while Tom might be able to claim deductions on the $14,000 loan interest and the $2,500 travel expenses, he will not be able to claim the $500 loan establishment fee, the $2,000 legal expenses and on the $25,000 spent in rectification of farmhouse defects.

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