Deck 6: General Deductions

Question 1

Which of the following statements is true?

A) A taxpayer is free to choose whether a deduction is a general or a specific deduction
B) If a deduction is both a general and a specific deduction then the most appropriate provision will be relied upon and that will usually be the specific deduction provision
C) If an expense is only partly for work or business purposes then the whole amount of the expense can be claimed as a deduction
D) If an expense is of a capital nature then it is fully deductible under s8-1

Answer 1

If a deduction is both a general and a specific deduction then the most appropriate provision will be relied upon and that will usually be the specific deduction provision

Question 2

A business taxpayer has incurred an interest expense in respect to a loan for use in that business. Which of the following statements is true?

A) A taxpayer carrying on a business is free to use whichever positive limb of section 8-1 ITAA97 they wish in applying the rules for a deduction but as the second positive limb is much broader in its operation, a taxpayer carrying on a business will nearly always apply the second positive limb
B) A taxpayer carrying on a business can only apply the second positive limb of section 8-1 ITAA97
C) A taxpayer carrying on a business can only apply the first positive limb of section 8-1 ITAA97
D) A taxpayer carrying on a business cannot apply section 8-1 ITAA97

Answer 2

A taxpayer carrying on a business is free to use whichever positive limb of section 8-1 ITAA97 they wish in applying the rules for a deduction but as the second positive limb is much broader in its operation, a taxpayer carrying on a business will nearly always apply the second positive limb

Question 3

Which of the following statements is incorrect?

A) A mobile phone expense involving 100% of calls for private purposes is not deductible under section 8-1 ITAA97
B) The purchase costs of new machinery to a taxpayer carrying on a business is not deductible under section 8-1 ITAA97
C) The payment of speeding fines would be deductible under section 8-1 ITAA97
D) Expenses relating to the derivation of exempt income are not allowable as a deduction under section 8-1 ITAA97

Answer 3

The payment of speeding fines would be deductible under section 8-1 ITAA97

Question 4

If the payment date or nature of the services is missing from a receipt, which of the following statements is correct?

A) The taxpayer is denied the deduction for that expense
B) The taxpayer is free to change the amount of the expense to maximise their claim
C) The taxpayer should make something up about the date and the nature of the services
D) The taxpayer may use bank statements or other reasonable evidence to show when the expense was paid, or they may write the nature of the goods or services onto the document.

Question 5

Cedric uses his mobile phone for work. He has kept a diary for one month itemising his calls and has determined that his work use of his mobile phone is 40%. If his total mobile expenses are $1,200 for the year, what amount is Cedric entitled to claim?

A) $480
B) $720
C) $1,200
D) $0

Question 6

Sam is an accountant and has paid his annual membership fees of $850 with CPA Australia. Is the payment of this $850 fee likely to be incidental and relevant to Sam's work as an accountant?

A) No, the payment of such fees would not be incidental and relevant
B) Yes the payment of such fees would be incidental and relevant
C) Only part of the membership fee will be deductible
D) No amount of the fees would be deductible as it would be an expense that is capital in nature

Question 7

Top Quality Printers Pty Ltd purchased a new printing machine for $20,000 in May 2020. Is the purchase of this new printing machine deductible under section 8-1 ITAA97?

A) Yes, as it would be an appropriate business expense as the machine will be used in carrying on a business
B) Yes but apportionment would apply and so only some of the expense would be deductible under section 8-1 ITAA97
C) No as it would be a capital expense
D) No as the expense would be private in nature

Question 8

Edward is required to travel for work. Which one of the following statements is correct regarding his claiming of his travel expenses?

A) Edward is required to keep a travel diary for any travel, away from his usual residence, that is for more than 6 nights in a row
B) Edward does not need to keep any records regarding his travel as his employer will write a letter confirming that Edward was required to travel for work purposes and this will be sufficient evidence
C) Edward can jot some basic notes in his diary about when he left his usual residence and when he returned and this will be sufficient even for travel for more than 6 nights in a row
D) Edward does not need to keep any records and can deal with his record keeping whenever he is subject to an audit

Question 9

A former taxation officer incurred and claimed legal expenses to defend against allegations of misconduct under thePublic Services Act 1922. Are these legal expenses allowable to claim as a deduction under section 8-1 ITAA97?

A) No, as the legal expenses would be seen to be private in nature
B) No, as the legal expenses would be denied a deduction due to section 26-5 ITAA97
C) Yes as the legal expenses would satisfy the essential character test
D) Yes as the legal expenses would satisfy the occasion of the expense test

Question 10

Helen likes to have her husband, Louis, accompany her on her work trips interstate. In the 2020 tax year, Helen incurred $14000 in expenses relating to Louis' air fares for him to accompany her at various work conferences and meetings. In light of these facts, which one of the following statements would be true?

A) Helen can claim a portion of the expenses for Louis as she can argue that it is incidental and relevant for Louis to accompany her
B) Helen cannot claim any expenses for Louis
C) Helen can claim the expenses in full as she can argue that the expenses were 'necessarily incurred'
D) Helen can claim the expenses in full as she can argue that the expenses had the essential character of a work expense as she cannot travel interstate without Louis by her side

Question 11

Stuart is a self employed architect and during the school holidays each year he has his 14 year old son come into his offices to empty the rubbish bins and do some general tidying. For this work the son was paid $20,000. The ATO has recently reviewed Stuart's business claims and determined that the reasonable amount for Stuart's son's services should only have been $2,000. Based on these facts, which of the following statements is true?

A) Stuart can still claim the full $20,000 as a deduction under section 8-1 ITAA97
B) Stuart cannot claim any amount of the $20,000 paid to his son as a tax deduction due to section 8-1
C) The amount that is excessive is not deductible due to section 26-35 ITAA97
D) Section 26-35 allows the full amount paid as deductible

Question 12

Larry Stupida was involved in heroin dealing and after being arrested and convicted of his criminal activity and as a tax return was being prepared by the ATO on his behalf, he claimed that he was robbed by one of his 'associates' of an amount of $10,000 during the year ended 30 June 2020. Which one of the following statements is correct regarding Larry Stupida?

A) He cannot claim any deduction for his 'business losses' as he is involved in a criminal activity
B) He can claim a deduction in full for his business losses as they are 'necessarily incurred' in carrying on a business
C) He can claim a deduction in full for his business losses as they are 'incidental and relevant' to his income earning activities as a drug dealer
D) Larry would need a witness to be able to prove his loss and if he could obtain a witness statement confirming his loss, then he would be entitled to claim a deduction for his loss of $10,000

Question 13

Hari is currently working as a security guard and he works at various venues ensuring that patrons are able to enjoy a safe environment. His employer has advised him to eat more steaks and bread each week to 'beef up' so that he can have a more muscular body to help carry out his security duties even better. Is Hari likely to be able to be able to claim the extra cost of his food he is now required to spend each week because if his employer's direction?

A) The expenses on food would be capital in nature and so no deduction would be allowed
B) The essential character of a food expense denies a deduction for food in these circumstances
C) The essential character of a food expense allows a deduction for food in these circumstances
D) Hari is not entitled to a deduction on food expenses as there is a specific provision in Division 26 that denies a deduction

Question 14

The meaning of the term 'necessarily incurred' most closely means what?

A) required by legal necessity
B) whatever the Commissioner thinks is best for the business
C) No more than clearly appropriate or adapted for
D) only expenses that a business is forced to make are deductible

Question 15

Which one of the following statements best describes the treatment under section 8-1 ITAA97 of expenses incurred before the business has started?

A) Expenses incurred before a business has commenced are deductible
B) Expenses incurred before a business has commenced can be apportioned, under section 8-1, over 5 years
C) Only certain expenses incurred before a business has commenced are deductible
D) Expenses that are incurred before a business has commenced are not deductible

Question 16

Which one of the following statements best describes the treatment under section 8-1 ITAA97 of expenses incurred after a business has ceased?

A) Expenses incurred after a business has ceased can remain deductible as long as they relate to the time when the business was operating
B) Expenses incurred after a business has ceased cannot be deductible as they cannot be 'incurred' in carrying on a business
C) Only some expenses, such as interest on a business loan taken out whilst the business was operating, could remain deductible after a business has ceased
D) Expenses incurred after a business has ceased are specifically denied deductibility under Division 26 of ITAA97

Question 17

What is the current tax treatment under section 8-1 ITAA97 of an expense involving the purchase of goodwill in relation to a business?

A) Deductible as it is 'necessarily incurred' in carrying on a business
B) Deductible as it is 'incurred' in gaining income
C) Not deductible as a goodwill expense is capital in nature
D) Not deductible as a goodwill expense is private in nature

Question 18

Rina lives in an outer suburb of Perth and she is required to travel by car to work everyday to her employer's premises, which are located in the middle of the Perth CBD. She is adamant that she should be allowed to claim this travel expense as she has to travel by car as there is currently no suitable bus or train link available. Can Rina claim her home to work travel costs?

A) Yes as unless she can get to work, she cannot earn any assessable income
B) Home to work travel costs are always deductible but only if all the relevant receipts are kept
C) No as home to work travel is a capital expense
D) No as home to work travel is a private expense

Question 19

Ann Stis is a student studying psychology at university and she is has paid this semester's HELP payments upfront. Ann thinks that she is entitled to claim the course fees for her psychology degree (Bachelor of Arts) as she has paid her HELP fees upfront. Is Ann correct that she can claim her study fees in this situation?

A) No, Ann is incorrect as a deduction is not allowable for HELP payments
B) No, Ann is incorrect as HELP fees are only deductible if paid for certain course and a Bachelor of Arts is not one of those courses
C) Yes, as Ann has paid the HELP fees upfront she is entitled to a deduction under section 8-1 ITAA97
D) Yes, Ann is correct as only the payment of some HELP fees for some courses are allowable as a deduction and fees for a Bachelor of Arts course fall within this category

Question 20

A financial planner takes out a prospective new client to lunch. Is the financial planner allowed to claim the costs of the lunch (for both himself and his client) under section 8-1?

A) No as the costs of the lunch would be seen to be private and so not deductible
B) No as the costs of the lunch would be an entertainment cost and entertainment costs are not deductible
C) Yes as the costs of the lunch are for a business purpose
D) Yes but only the client's lunch costs

Question 21

Which of the following expenses are deductible under section 8-1 ITAA97?
· The purchase of a new car for use in a business;
· Membership fees to a local golf club;
· Professional liability insurance paid by a self-employed accountant
· A penalty imposed by the ATO for lodging last year's tax return late

Question 22

Brian leases a computer for his accounting practice but he also uses this computer for private purposes. Brian has estimated that the computer is used 60% for business purposes and 40% for private purposes. If Brian's lease costs amount to $1,400 per annum, how much can Brain claim for his computer lease expenses?

Question 23

The Sombreros ran a small retail shop for a number of years from 2006. In 2012 they took out a loan from Eastpac for the business of $300,000 to help with ongoing costs and for some business renovations that they undertook. This business was later sold in 2016 and there were not sufficient proceeds to pay out in full the $300,000 loan and that $120,000 of this loan has remained. The Sombreros advise you that, for the year ended 30 June 2020, they paid $6,000 in interest on the loan to Eastpac Bank. Can the Sombreros claim any or all of this $6,000 interest payment in the 2020 tax year?

Question 24

Don, who is not carrying on a business, contributed $2,500 to a local candidate in the SA elections in the last election campaign, which took place in the 2020 year. Don's friend, Alvin, contributed $3,000 to his local candidate in the same election as he was under the impression that his business would be able to claim the deduction in full. Advise both Don and Alvin as to whether they each can claim a deduction for their political contributions?

Question 25

Diego is an employee and he recently spent $5,000 on various work related expenses, for which has kept all the relevant receipts and which would all be deductible under section 8-1. However, Diego's employer offered to reimburse Diego for $3,000 of these costs and Diego accepted that generous offer. How much of the expenses incurred by Diego is he permitted to claim under section 8-1 ITAA97?