Deductibility of Legal Expenses †Free Samples to Students

Question: Discuss about the Deductibility of Legal Expenses. Answer: Introduction: ITAA 1997 is an important act of Parliament of Australia. It is a main statute under which the income tax is being calculated. ITAA 1997 is a rewrite of prior Income Tax Assessment Act 1936. ITAA 1997 can be known as the updated model of ITAA 1936. It formulated the norms for tax calculation in Australia. Under section 8-1, it gives provision to allow some deductions. (Australian Government, 1997). Here, the given questions explain some of these deductions their status in ITAA these are as follows: The cost of moving such fixed assets like machinery from one site to another site would be a capital expense no deduction is available under section 8-1 of ITAA 1997. This expense increases the cost for depreciation purpose so; it counted as the capital expenditure. Due to its capital nature, the given provision under section 8-1 does not allow to provide any tax exemption limit. The cost of revaluation of assets considered as the expenses related to fixed assets. During the calculation of deductibility, it is considered as relevant because these expenses enhance the income earning capacity and it also incurred to protect the assets. It is the part of operations in business so, it will considered as revenue in nature and if this cost helps to generate benefit and this expense is likely to recurred then it will considered as deductible under section 8-1 in ITAA 1997. Legal Expenses incurred by a company opposing a petition for winding up: These legal expenses are considered as expenditure related to income earning capacity and structure operations of the company. It appears, if outcome of such expenditure gives profit yielding capacity then this expenditure will considered as capital in nature. If this expenditure gives more impact on the process of operations in business then it will considered as revenue in nature. On the basis of its nature, allowable deduction has decided under section 8-1 in ITAA 1997. Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyancing, discharge of a mortgage, and general legal advice relating to a clients business operations. Under section 8-1 of ITAA 1997, legal expenses are allowable deductions if these expenses arise due to daily basis activities of tax payers business. On the basis of the provisions of section 8-1 in ITAA 1997, any loss or outgoing from assessable income which is incurred in generating the assessable income will be allowed to deduct during the tax calculation. It is necessary that these expenses are incurred in carrying out for the purpose of producing assessable income. Then Solicitor can claim for the tax benefit for his expense. Solution: To claim input tax credit, it is required that an organization should be registered for GST purpose. Input tax credit can be claimed when an organization buy any service as their input to sell their product. So, at the time of tax payment, organization can reduce its tax liability because it has already paid during the purchase of this service (Australian Government, 2017) Here, Big Bank is providing services related to finance and it is also registered for GST purpose in Australia. As Big Bank launched its new product and due to this reason bank need to do some changes in its accounting system due to the application of GST on new product. Big Bank prepared its budget for expenditure on advertising campaign for $1,650,000 in which it spend $550,000 on television advertising campaign $1,100,000 on general campaign like radio print media etc. According to the norms of taxation, acquisitions to make input tax supplies like loan deposit facilities will not be creditable acqui sitions. If acquisitions are related to make tax supplies like home content insurance will be creditable acquisitions. In relation to advertising expenditure, TV ads for home contents insurance will be fully creditable. Here, input tax credit will be available for $50,000. In relation to general advertising sources, it becomes necessary to apportion by specific method which must be fair reasonable. One of these types of method will be attribute 2% of expenditure to make tax supplies 98% to input tax supplies, which shows reflection of actual forecasted business line split. References Australian Government, 1997. Income Tax Assessment Act 1997. [Online] Available at: https://www.legislation.gov.au/Series/C2004A05138 [Accessed 03 October 2017]. Australian Government, 2017. Claiming GST credits. [Online] Available at: https://www.ato.gov.au/business/gst/claiming-gst-credits/ [Accessed 03 October 2017]. Clough, M. Jaques, M.S., 2006. The Deductibility of Legal Expenses. [Online] Available at: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfmPaperDisplay=https://www.tved.net.au/PublicPapers/August_2006,_Sound_Education_in_Taxation,_The_Deductibility_of_Legal_Expenses.html [Accessed 03 October 2017].