Case Study Two
The following separate scenarios require your advice as indicated:
Part A
Regional Aussie Bank Ltd (RAB) is an Australian resident company that has been making good profits in recent years.
Due to its success it became a target for a takeover by one of the larger banks. During the year ended 30 June 2015, RAB incurred $75,000 in legal, accounting, public relations and printing costs in an attempt to defend itself against the takeover.
One of the services RAB provides is investment advice for high wealth customers. RAB was sued for damages by some of its customers for negligent investment advice that resulted in these customers losing significant amounts of money. The Court awarded the customers $200,000 which RAB paid on 31 May 2015. RAB spent $45,000 on legal fees when the matter went to Court, receiving an invoice from the law firm on 25 June 2015. The legal fees were paid on 10 July 2015.
After successfully defending itself against the takeover attempt, RAB wanted to expand its home lending business. On 1 January 2015 it paid $1,000,000 to a large mining company to be the sole provider of home loans to the company's employees in regional mining towns for five (5) years.
Required: Based on this information what amount can RAB claim as an allowable deduction under s 8-1 Income Tax Assessment Act 1997 for the year ended 30 June 2015? Support your discussion with reference to appropriate authority.
Part B
In July 2014 Barry decided to buy a boat for $32,000 to take tourists on fishing trips in Moreton Bay. Barry commences his business on 28 August 2014, charging each passenger $150 per trip. The boat Barry purchased was five years old and had damage to its hull due to the previous owner hitting a submerged rock. Barry had to spend $5,000 to repair the hull in order to make it safe to commence fishing trips. On 1 August 2014 Barry purchased 12 life jackets costing $149 each to comply with safety regulations.
In December 2014 a passenger damaged one of the fishing rod holders on the boat. Barry had to pay $700 to have the rod holder replaced. A storm in January caused damage to the canvas canopy under which passengers sit while the boat is travelling out to fishing locations. Barry decided to replace the canvas canopy with a fibreglass canopy which would not be damaged as easily in future bad weather. The replacement canopy cost $2,000.
Required: Discuss with reference to appropriate (and most relevant) legislation, case law and/or rulings whether the expenses described above are deductible for Barry in the year ended 30 June 2015. You should discuss deductibility and timing issues, but DO NOT need to calculate any capital allowances.
Part C
Stella is an accountant employed with an accounting firm in Toowoomba. Stella regularly travels to client's premises I Toowoomba and the surrounding area during her working day using her own car. On 1 August 2014 Stella purchased a new car for $67,000 which she used both for personal and work-related travel. The effective life of the car is eight (8) years.
The total kilometres travelled to 30 June 2015 was 40,000, with 7,500kms being work-related use.
Stella incurred the following expenses:
Registration $670
Insurance $850
Petrol $2,250
Replacement windscreen $250
The windscreen was badly chipped when Stella was driving to a client along a gravel road, and her insurance did not provide any compensation.
Required: Advise Stella whether she is entitled to claim an allowable deduction for the use of her car. Calculate the maximum allowable deduction, if any, Stella will be able to claim for the year ended 30 June 2015. Show all workings.