Taxation Law

Question 1

Topic 2 - Deductions

Answers

exclusions

ANSWER PART (a)

Examples of outgoings which are of a capital nature - purchase of plant and equipment,
preliminary expenses, initial purchase of loose tools, crockery etc.
ANSWER PART (b)
Examples of outgoings which are private or domestic - living expenses, travelling to and
from work, drycleaning, haircuts, child minding, rates on home etc.

Question 2

deductible/non-deductible expenses

ANSWER PART (a)

This is deductible under s.8-1, however only the business percentage is deductible i.e. $200
ANSWER PART (b)
This is capital expenditure and is not deductible. Depreciation is allowable. Depreciation covered in Topic 3.
ANSWER PART (c)
The beach holiday home is for private purposes. Therefore any expenditure is also private
in nature and not deductible under s.8-1.
This will be part of the cost base - see Topic 2.
ANSWER PART (d)
Water bill paid by owner but run up by the tenant deductible s.8-1 as long as
not reimbursed by tenant.
ANSWER PART (e)
Repairs to a boundary fence on acquisition of a rental property - s.25-10 allows deductions for
repairs as long as not capital expenditure. Expenses incurred in remedying defects in existence
at acquisition generally not deductible. (Note, this will form part of the Cost Base (Topic 3))
ANSWER PART (f)
Yes, damage occasioned by tenancy and therefore expenditure to repair will be in the course
of producing assessable income. Deductible under s.25-10.
ANSWER PART (g)
Expenses incurred in remedying defects in existence at acquisition generally not deductible.
These are capital expenses and may be part of the Cost Base - see Topic 3.
ANSWER PART (h)
No, capital expenditure. Depreciation allowable. Depreciation covered in Topic 4.

Question 3
ANSWER PART (a)
As the dividend will be assessable, the cost of earning the income will be deductible under s.8-1.
In this case the interest on the money borrowed.
ANSWER PART (b)
As the rental income is assessable, the cost of earning the income will be deductible.
In this case the interest on the money borrowed.
ANSWER PART (c)
No, this is a private expense and will not be deductible.
ANSWER PART (d)
Allowable "to the extent" of producing assessable income - i.e. 80%.
ANSWER PART (e)
Private expenditure, not deductible.
ANSWER PART (f)
Allowable "to the extent" that computer is used for work-related purposes.
ANSWER PART (g)
s.8-1 fully deductible. As this is fully deductible under s.8-1 it is not necessary to consider
s.25-55
ANSWER PART (h)
s.8-1 fully deductible. These calls relate to the income-earning activities of the taxpayer.
ANSWER PART (i)
s.8-1 fully deductible as insurance payment would be assessable income.

Question 4

clothing

ANSWER PART (a)

s.8-1 fully deductible as protective clothing

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Taxation Law

Topic 2 - Deductions

Answers

ANSWER PART (b)

If ordinary skirt then private expense. If part of a compulsory uniform then deductible under s.8-1.
ANSWER PART (c)
As the clothing is conventional, dry cleaning is of a private nature.
ANSWER PART (d)
The riding hat is protective and allowable s.8-1.
The other items are conventional and not allowable.
ANSWER PART (e)
No, it is private expenditure
ANSWER PART (f)
As the clothing is embossed with the business name it constitutes a uniform and the cost
is deductible.

Question 5

Private expenses, donations, subscriptions and capital expenses.

ANSWER PART (a)

No, private expense: Martin Case; Jayatilake.
ANSWER PART (b)
$720 paid by a practising accountant to a coaching college to to obtain membership to an
accounting body - deductible s.8-1 subject to s.82A i.e. the excess over $250 = $470

ANSWER PART (c)

$1,000 lent to a friend as a personal loan at 12% p a . The friend went bankrupt This is a capital loss and is not deductible s.8-1 or s.25-35.
If the friend had paid any interest on the loan it would have been assessable under s.6-5.

ANSWER PART (d)

$5,000 invested in shares - not deductible under s.8-1 (on capital account).
The capital - $5,000 - has been lost. This is a capital loss and will be offset against
a capital gain.
(More in Topic 3)
ANSWER PART (e)
$5 donation to the association for the blind which mails out a pen in return s.30-15 gift must be voluntary and no benefit received by the taxpayer. No deduction allowable.
The receipt of the pen means it is not a donation.

Question 6 - Janet
ANSWER PART (a)
capital/deductible expenses
Amounts which should be capitalised:
Computer
10,500
Installation
1,050
Delivery
440
11,990
ANSWER PART (b)
Amounts which are allowable deductions
s.8-1 Paper
s.8-1 Maintenance

Question 7 - Sze Chai

s.6-5
s.6-5

s.8-1
s.8-1
s.8-1
s.8-1
s.25-10
s.8-1
s.30-15
s.8-1
s.8-1

800
4,800
5,600
expenses of a rental property

Salary
Rent
Assessable income
Expenses
Agent commission
Bank fees
Loan repayments
New hot water system - capital
Repairs
Rates & taxes
Donation to Red Cross
Gardening
New roof - capital
Taxable income

60,000
25,000
85,000
1,500
125
12,063
600
2,400
100
1,040
-

Gross tax
Low income tax offset
Net tax payable
Remember, give a reason for excluding items from your calculations.

Revised: 17.11.11

Page 2 of 11

17,828
67,172
13,701.60
13.12
13,688

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Taxation Law

Topic 2 - Deductions

Answers

Question 8 - Self-education expenses

(a) HECS-HELP fees paid by an undergraduate student
These are specifically excluded from being self-education expenses by s.82A(2) and also s.26-20.
(b) Fees paid by in international student to an Australian university
As these are not HECS-HELP fees they would be expenses of self-education, however, in order to be deductible
the student would need to establish a link to earning income.
(c) Fees paid to CPA (Australia) for a one-day taxation update course
The one-day taxation update course is not a "prescribed course of education" as defined in s.82A(2).
Accordingly, the full cost of this course would be deductible as would the cost of travelling to and from the course.
(d) Fees paid to the Institute of Chartered Accountants for professional year studies
The Institute of Chartered Accountants is not a "place of education" as defined in s.82A(2).
Accordingly, the full cost of this course would be deductible as would the cost of travelling to and from the course.

Question 9 - June

Self-education expenses

s.6-5
s.6-5
s.44
s.207-20(1)

Salary
Interest
Franked dividend
Franking credit

s.8-1
s.8-1
s.8-1
s.8-1
s.8-1
s.82A

Travel - to/from work private

Teachers' Association
Small items
Stationery
New computer - capital
Self-education
Non-deductible
FEE- HELP is an expense of self-education.
Student Association fees
Travel
Home to uni
Uni - work private
90*
Work - uni
Uni-home private
65*
Stationery
Books
155

s.8-1
s.8-1
s.8-1
s.8-1
s.8-1
s.8-1
s.8-1
s.8-1
s.8-1

s.82A

35,000
1,500
3,000
1,286 *
40,786
180
250
95
250
Deductible

155
95

Reduce deductible expenses 250 - 155

Taxable income
Gross tax
LITO

900
60
200
85
70
10
350
1675
95

1580

2,105
38,681
5,154.30
1,152.76
4,001.54
1,286.00 *
2,715.54

$1500 - (38,681-30,000)*.04

s.207-20(2)
Net tax
Question 9(b)
s.6-5
s.6-5
s.44
s.207-20(1)

Salary
Interest
Franked dividend
Franking credit

35,000
1,500
3,000
1,286 *
40,786

s.8-1
Travel - to/from work private
s.8-1
Teachers' Association
s.8-1
Small items
s.8-1
Stationery
s.8-1
New computer - capital
Course expense - this is not a course of self-education so s.82A will not apply
s.8-1
Course fees
s.8-1
Parking costs
s.8-1
Travel
s.8-1
Stationery
s.8-1
Books
Taxable income

Gross tax
LITO

900
60
200
10
350

2,045
38,741

5,172.30
1,150.36
4,021.94
1,286.00 *
2,735.94

$1,500 - (38,741-30,000)*.04

s.207-20(2)
Net tax

Revised: 17.11.11

180
250
95
-

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Taxation Law

Topic 2 - Deductions

Answers

Question 10(a) - self-education expenses

Occasional courses at Horticultural Society
The Society is not a place of education so these expenses will not be covered by s.82A. Only s.8-1 will apply.
Courses
Travel

2300
420
2,720

B Commerce at Curtin
As Curtin is a place of education s.82A will apply.
Non-deductible expenses can be used to make up the $250 threshold.
250
HECS is not deemed to be an expense of self-education
Travel
Home - uni
Uni to work - private
Work to uni and return
Books
Stationery

400

200
0
600
890
330
2020
4,740

Total deduction
10(b) change uni to work travel

Occasional courses at Horticultural Society

The Society is not a place of education so these expenses will not be covered by s.82A. Only s.8-1 will apply.
Courses
Travel

2,300
420
2,720
250

HECS is not deemed to be an expense of self-education

Travel
Home - uni
Uni to work - private
Work to uni and return
Books
Stationery

185

65
Remaining threshold to offset
Total deduction

200
0
600
890
330
2,020
65

1,955
4,675

10(c) MBA
Occasional courses at Horticultural Society
The Society is not a place of education so these expenses will not be covered by s.82A. Only s.8-1 will apply.
Courses
Travel

2,300
420
2,720

MBA
As Curtin is a place of education s.82A will apply.
Non-deductible expenses can be used to make up the $250 threshold.
250
Fees
Travel
Home - uni
Uni to work - private
Work to uni and return
Books
Stationery

2,000

400

200
0
600
890
330
4,020
6,740

Total deduction

Question 11 - Shirley
s.6-5
s.6-5
s.51-5

s.8-1

derivation of income, apportionment of expenses, capital assets.

Salary (including backdated pay rise)

Sickness Benefit
Army reserve income - exempt
Assessable income
Less: allowable deductions
Government Officers' Association
Computer - capital, though depreciation
may be allowed - see Topic 4.
Discs
$60 x 33.3%
Mortgage interest - occupancy expenses

Revised: 17.11.11

15,000
1,000
0
16,000
100
0
20

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Taxation Law

Topic 2 - Deductions
not allowable for home office
Taxable income

Answers
0

120
15,880

Gross tax
Less: Low income tax offset
Net tax payable
Students should note that brief reasons are required for items excluded from calculations.
In the examples above, these reasons are shown in bold lettering and have been highlighted.
Question 12 - Dougal
(a)
s.15-2
s.44
s.205-20
s.44
s.205-20
s.44

s.82KZMD

s.25-25

1,482.00
1,500.00
-

Prepayments

Salary
Tool Allowance
80% franked dividend
Franking credits
Fully franked dividend
Franking credits
Unfranked dividend
Naval reserve

50,000
500
3,900
1,337 *
10,000
4,286 *
1,000
71,023

exempt

Expenses
Tools
Travel to/from work
Travel to Naval Reserve
Interest July to January
Interest prepaid
prior year
600/ 1,825 =
CY remaining expenditure
CY remaining loan period
Borrowing
560/ 1,703 =
Taxable income

private
travel to earn exempt income
7 x 200
150 /730 x
4,800
0.33
x 122
=40
600 - 40 = 560
1825 - 122 days = 1,703
0.33
x 365

320
1,400
986
Note: correct methodology
120

Gross tax
s.207-20(2)
Net tax
(b)

14,009.10
5,623.00 *
8,386.10

Assessable income
Tool expenses
Travel to/from work

71,023
320
3,800
120

private

Travel to naval reserve

incurred in gaining exempt income

Interest
Borrowing
Taxable income

7 x 200 + 12 x 200
as previous

Gross tax
LITO
(1,500 - (66,783 - 30,000) x 0.04)
s.207-20(2)
Net tax
(c)

Assessable income
Tool expenses
Travel to/from work
Travel to naval reserve

2,826
68,197

4,240
66,783
13,584.90

28.68
5,623.00

5,651.68
7,933.22
71,023
320
1,400
986

private
incurred in gaining exempt income
7 x 200
150 /730 x
4,800

Interest July to January

Interest prepaid
Borrowing expenses
prior year
600/ 1,460 =
Borrowing
550/ 1,338 =
Taxable income

0.41
0.41

x 122
x 365

Gross tax
s.207-20(2)
Net tax

Question 13

miscellaneous expenses

ANSWER PART (a)

Yes, s.8-1

necessarily incurred in carrying on a business

=50
150

2,856
68,167
14,000.10
5,623.00
8,377.10

ANSWER PART (b)

Yes, s.8-1
necessarily incurred in carrying on a business
ANSWER PART (c)
No, s.32-5 does not allow a deduction for entertainment expenses.
ANSWER PART (d)
Yes, s.8-1 this would be treated as an advertising expense.

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Taxation Law
ANSWER PART (e)
Yes, s.8-1

Topic 2 - Deductions

Answers

necessarily incurred in carrying on a business

ANSWER PART (f)

No, as it is capital in nature, it is not deductible [Lister Blackstone Pty. Ltd. v FCT 76 ATC 4285]
ANSWER PART (g)
Yes, s.8-1
necessarily incurred in carrying on a business
ANSWER PART (h)
No, s.8-1 (capital expenditure)
ANSWER PART (i)
Yes, Div 290
ANSWER PART (j)
s.25-25 deduct over 5 years or term of the loan, whichever is shorter
ANSWER PART (k)
No, s.26-45 unless it was paid by an employer on behalf of an employee and would therefore be deductible under s.26-45(3)
but the employer would have to pay Fringe Benefits Tax on the amount.
ANSWER PART (l)
Allowable at the Commissioner' s discretion under s.26-35 to the extent he considers reasonable.
Income of nephew reduced to amount allowed.
ANSWER PART (m)
Allowable at the Commissioner' s discretion under s.26-35 to the extent he considers reasonable.
ie $750. Income of defacto spouse reduced to amount allowed.
ANSWER PART (n)
No, not deductible under s.8-1 as it does not relate to the earning of assessable income in the current year, however,
if it meets the requirements of s.25-50 it may be deductible under that section.
ANSWER PART (o)
Yes, s.25-30
ANSWER PART (p)
Yes, s.8-1
necessarily incurred in carrying on a business
ANSWER PART (q)
Yes, s.8-1 or s.25-45.
ANSWER PART (r)
Under s.8-1 this is capital expenditure, however, 20% can be claimed over 5 years under .s40-880.
ANSWER PART (s)
s.25-25 applies.

(1)
(2)

1,080/1,825 = 0.59 x 242 = 143

937/1,583 = 0.59 x 365 = 215

ANSWER PART (t)

No, s.8-1 incurred after cessation of business but can use s.40-880
ANSWER PART (u)
No, s.8-1 capital, but 20% allowable under s.40-880.
ANSWER PART (v)
Incurred expense
Private benefit received
Allowable deduction

s.51AK

20,000
1,800
18,200

ANSWER PART (v)

As no private benefit has been received the full amount of $20,000 will be deductible.

Question 14 - Shonky Pty. Ltd.

borrowing expenses and miscellaneous

s.25-25
Application fee + legal expenses re mortgage
Borrowing exp
500 + 200 =
700/ 1,825 =
0.38
x 150
s.8-1 & s.82KZM interest
- prepayment
1,350
x 150 /454
s.25-30
mortgage discharge
s.25-5
objection expenses allowable
s.8-1
articles 320. not allowable - capital. Deductible under s.40-880 $320*20% = $64
Note different calculation methods for s.25-25 and s.82KZM

Question 15 - Rex

Prepayments

Only the interest which relates to earning assessable income will be allowed as a deduction ie 75%.
For the current year the amount of interest incurred is
20,000 x 12.6% =

Revised: 17.11.11

57
446
175
150
64

Page 6 of 11

2,520

Printed: 11/19/2015

Taxation Law

Topic 2 - Deductions

ANSWER PART (a)

The amount deductible is

Answers

2,520 x 75%

ANSWER PART (b)

July to April = 10 months
Prepayment is 4 months which is $840.
The prepayment of 4 months in advance made in May will mean that Rex can claim
a deduction for 14 months (because the prepayment is less than $1,000.)
i.e. $2,520/12 months = $210/month x 14 months x 75% = $2,205.

2,205

ANSWER PART (c)

The prepayment paid in advance for 8 months is deductible as Rex is not in business.
$210/month x 6 months x 75%
to January CY
8 months x $210 x 75%

945
1,260
2,205

ANSWER PART (d)

The prepayment of 16 months in advance made in May means that Rex must
apply s.82KZM(2)(a) to apportion the deduction allowed and the
calculation must be in days for the prepayment:
CY
$210/month x 10 months x 75%
to May CY
488 days
May CY - Aug (CY+2)
61 days
May - June CY
16 months x $210 x 75% x 61/488
315

CY + 1
CY + 2

2,520
2,520

x 365 /488
x 62 /488

1,890

1,575

315
1,890

1,885
320
2,520

s.82KZL(2)(a) eligible service period is period of prepayment, not period of loan

Calculation of 488 days - prepayment - 18 months on 1 May.
I year from 1 May CY to 30 April CY + 1
365
6 months from 1 May CY + 1 to 31 October
123
488
Alternate situations:
1. Rex is a non-SBE business taxpayer
A and (b) remain the same. For (b) the expenditure is excluded expenditure,
(c) The prepayment of 8 months in advance made in January will mean that Rex can still claim the deduction
in the current year but s.82KZM(2)(a) applies to apportion the deduction allowed and the
calculation must be in days for the prepayment:
CY
$210/month x 6 months x 75%
to January CY
243 days
Jan CY - Aug (CY+1)
181 days
Jan - June CY
8 months x $210 x 75% x 181/243

945

939
1,884

(d) remains the same

2. Rex is an SBE taxpayer
SBE and individual taxpayers can deduct prepaid expenses in full under the '12-month rule' where the
ESP relating to a payment is no longer than 12 months and ends in the income year after which the
prepayment was incurred. This rule would be n/a in part (a); would result in the same answer as above
for part (b) and (c), and would not be applicable in part (d), as the prepayment exceeds 12 months. The
answers remain the same as for Rex as an employee.

Question 16 - Malcolm Woodchip

loan expenses

1 April

Premium, capital expense

Loan fees s.25-25
600/ 1,825 =
0.33
Interest s.8-1
Business set-up costs s.40-880 - $620 x 20% = 124
1 May
Interest s.8-1
30 May
Wages s.8-1, appears reasonable s.26-35
1 June
Interest all incurred (even though not all paid).s.8-1
Remember: as the loan was for more than 5 years we use 5 years @ $365 days = 1,825.

Question 17
(a)
(b)
(c)
(d)

Question 18
(a)

x 91

0
30
225
124
225
1,000
225

interest
Yes, s.8-1
necessarily incurred in carrying on a business
source of the security for the loan is irrelevant
Yes, s.8-1 but business percentage only
Yes, s.8-1
necessarily incurred in carrying on a business
No, s.26-80

motor vehicle expenses

No, s.8-1 private

Revised: 17.11.11

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Taxation Law
(b)
(c)
(d)

Topic 2 - Deductions

Answers

Yes, s.8-1
Yes, s.8-1
deductible as he has no fixed place of work.
Yes, s.8-1 but 30% only if the taxpayer is a self-employed business owner and the car is his/her car
If the car is provided by an employer and the private use is by the employee then the employer
can get a full tax deduction and will pay FBT on the private element

Question 19

loans and leases

(a) and (b)

These are all borrowing expense - s.25-25, deductible over the term of the loan or 5 years,
whichever is the lesser.
$14,220/1,825 = $7.79 per day x 61 days = $475
Remember, the loan period is the shortest of (1) the actual loan period, (2) the period from the time
the loan was taken out until it was repaid and (3) 5 years.

(c)

Interest is fully deductible under s.8-1 as the loan is used totally for income earning
purposes.

(d)

The payment of the lease premium is a capital expense and cannot be deducted under s.8-1.
Legal expenses in reviewing the lease documents can be deducted under s.25-20.

(e)

Legal expenses to set up the business are capital and cannot be deducted under s.8-1.
S.40-880, however, allows a deduction for 20% of the expenditure in setting up a business
in each of 5 years.
Deduction is $12,000 x 20% = $2,400
(Remember, this is just 20% per year, it doesn't work on the basis of days or remaining expenditure)

(f)

The Entertainment Allowance is fully deductible to the taxpayer. Note, it is not entertainment expenses which
would not be deductible under s.32-5.
The employee would include the allowance in his/her assessable income under s.15-2. No deduction would
be available to this employee under s.32-5/

(g)

The taxpayer would be able to deduct the full cost of providing the motor vehicle to the Sales Manager (providing
they are deductible and are not capital expenses). FBT would be payable by the employer for the 25% private use
of the car.

(h)

The taxpayer would only be able to deduct 90% of his personal motor vehicle expenses.
As he is self-employed he is not his own employee, there FBT will not apply to this expense.

Question 20 - Arabella
(a)
Income
Expenses
Loss
(b)
Income
Expenses
Less: exempt income
Loss

losses
100,000
150,000
(50,000)
100,000
150,000
(50,000)
20,000
(30,000)

(c)
The answer remains the same as for (b) above. As Arabella is already in a loss position, the superannuation and donation
cannot increse the loss.

Question 21 - Tom
(a)
Income
Expenses
Carry forward loss
Taxable income

Carryforward losses
200,000
150,000
50,000
(10,000)
40,000

Remember - account for the current year income and expenses first, then offset the carryforward loss.
(b)
Income
200,000
Expenses
150,000
50,000
Exempt income
2,000
Carry forward loss
(2,000)
(8,000)
Taxable income
42,000
When you offset a carryforward loss, offset it first against the exempt income - $2,000
then offset any remaining carry forward loss against the assessable income.
(c)
Income
Expenses

Revised: 17.11.11

200,000
150,000
50,000

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Taxation Law

Topic 2 - Deductions

Carry forward loss

Superannuation cannot increase loss
Taxable income

(10,000)
3,000

(7,000)
43,000

(d)
Income
Expenses

200,000
150,000
50,000

Carry forward loss

Superannuation cannot increase loss

-10000
3000
(7,000)
2,000

Exempt income
Taxable income

Question 22 - Minnie Muss

Yr 1

Answers

Income
s.8-1
Div 290

(5,000)
45,000

losses
15,000
27,000
2,000

s.26-55(s.30-15 N/A)
s.36-10 loss C/F

29,000
(14,000)
2,000
(12,000)

As the taxpayer is in a loss situation - personal superannuation cannot

be deducted.
PY

Income
s.8-1
Div 290

23,000
22,500
2,000

s.26-55(s.30-15 N/A)
TAXABLE INCOME

CY

Income
s.8-1
Div 290

24,500
(1,500)
1,500
0

35,000
24,000
2,000

s.36-15 loss B/F

TAXABLE INCOME

26,000
9,000
9,000
0

Question 23 - Derek Goldfinger

losses

Yr 1

Loss
Exempt
s.36-10 loss C/F

8,000
2,500
5,500

Yr 2

CY loss
Exempt income

(1,000)
1,000
0

Yr 3

C/f Loss
Exempt
TAXABLE INCOME

1,500
1,500
0

Business
Gift

1,200
400
800

Loss B/F
4,000
Exempt
2,500
TAXABLE INCOME
PY

Business
Gift
Loss B/F
700
Exempt
2,500
TAXABLE INCOME

CY

Question 24

Business
Gift
TAXABLE INCOME

(3,000) C/F

800
0

s.26-55 300 gift, no deduction

s.26-55 350 gift, no deduction

balance of1,500 exempt income
reduces s.36-15 loss (4,000)
C/f loss 5,500 - 1,500 = 4,000

s.36-15 loss (700) C/F

1,000
400
600
0
600
2,200
420
1,780

Trading Stock

ANSWER PART (a)

Revised: 17.11.11

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Printed: 11/19/2015

Taxation Law

Topic 2 - Deductions

Answers

Loaves of bread - trading stock.

ANSWER PART (b)
Shop oranges - trading stock.
ANSWER PART (c)
Car spare parts - not used for resale, manufacture etc. - Not trading stock
ANSWER PART (d)
Family hens - technically livestock, but s.70-35 requires a business to be carried on.
ANSWER PART (e)
Cake ingredients - acquired for purpose of manufacture - trading stock.
ANSWER PART (f)
Draught horses - excluded from "livestock" - plant s.42-18. Also see definition of livestock s.995-1
ANSWER PART (g)
Growing wheat - not trading stock until harvested, not trading stock if delivered to a pool,
only trading stock if held for resale. IT 147.

Question 25
(a)
(b)
(c)
(d)
(e)
(f)

repairs and superannuation

showcases: capital expenditure - depreciable
guttering: capital, incurred too close to purchase, defects existed at time purchased
demolish shed: capital
painting store: depends on the circumstances, deductible if relates to period owned
window replaced: deductible s.25-10
superannuation contributions: deductible Div 290

Question 26

trading stock

(a) FIFO
accepted for s.70-45 purposes.
(b) LIFO
not accepted.
(c) Weighted average
accepted (where actual cannot be ascertained IT 2,289)
(d) Standard cost
accepted if regularly updated
(e) Retail inventory
accepted subject to qualifications
(f) Base stock
not accepted
NOTE cost of manufacturing must be on an absorption basis (direct and indirect costs)
IT 2012, AAS2, AASB1019

Question 27 - Lira & Yen

trading stock

(a)

CL/S - Cost Price

O/S
s.70-35

6,000
10,000
(4,000)

(b)

Opening stock
Selling Price

20,000
12,000
(8,000)

CL/S - Market Value

O/S
s.70-35

18,000
10,000
8,000

Question 28 - SBE Trading stock

As the trading stock has not changed by more than $5,000 the taxpayer has the option of
ignoring the change in value of the trading stock.

Question 29 - Division 43
Holiday house - as it is not used for income-earning purposes there is no deduction available.
Residential rental - income-earning property.
250,000
x 4% x 273/365 =

7479

Residential rental property

120,000
x 2.5% x 228/365

1874

Factory
470,000

x 4.0% 117/365

6026

890,000

x 2.5% x 92/365

5608

Office building
350,000

x 2.5% x 16/365

384

Office building
300,000

x 4.0% x 16/365

526

Factory

Question 30 - Julian - non-commercial losses

Revised: 17.11.11

Page 10 of 11

Printed: 11/19/2015

Taxation Law

Topic 2 - Deductions

Answers

(a) the taxable income is $120,000. The loss from the business cannot be taken into account as the business
is considered to be non-commercial
(b) the taxable income is $110,000. The loss can be taken into account as he used the property for the
entire year and it was worth $500,000.

Question 31 Jeb
Invoiced income
Sales
Opening stock
Purchases

75,000 - 6,000 = 69,000 + 7,900

Less: closing stock - use market selling value

COGS
Gross profit
Compensation payment - capital
Dancing classes
34,000 - 12,000 = 22,000 + 11,000
Interest

88,000
120,000
208,000
115,000

Expenses
Bank fees
Electricity
14,600 - (1,100 - 110) private element excluded
New counter - capital
Rates and taxes
Rent
Superannuation
Wages - payment to brother $2,000 too much
C/f losses
PY
45,000 - 15,000 =
Taxable income

76,900
280,000
356,900

93,000
263,900
33,000
3,500
300,400
870
13,610
5,500
16,300
76,000
128,000
30,000

270,280
30,120

Notes:
Compensation - must state capital, not just one off payment.
Non-cash business benefit must have been done this way. Cannot deduct expense, because there was no expense incurred.

Revised: 17.11.11

Page 11 of 11

Printed: 11/19/2015