A Classification Of Incidental, Relevant And Business Expenses (Case Study Sample)
Advise an employer as to the FBT and income tax consequences of giving a loan at a low rate of interest to his or her employee. to Classify expenses that are ‘incidental and relevant', and ‘business' as opposed to ‘living' expenses.source..
Date of Submission:
The Cost Base of the Property
The cost base of the property is given as follows.
Purchase price $500,000
Add: Stamp duty and legal costs on acquisition $25,000
Upstairs extension cost $250,000
Legal costs to defend title $5,000
Cost base of the property $780,000
Rates and taxes worth $25,000 was tax deductible but Louisa could not claim a deduction for the rest of the expenses because the property was not used to generate any income until it was sold.
The Type of CGT Event that the Sale of this Property is
The sale of this property is under the CGT Event A1 - Disposal of a CGT asset.
The Capital Gain that Louisa Made that is Liable to Capital Gains Tax
Capital gain is given as follows.
Capital income from the disposal $1,500,000
Less: The properties cost base $780,000
Prior year’s capital loss $40,000
Capital gain liable to capital gains tax $680,000
Question 2: Expenses that would be ‘Incidental and Relevant’ and have an Essential Character that Stamps them as ‘Business’ as Opposed to ‘Living’ Expenses
Hairdressing costs by a model are incidental and relevant and the models do them for business purposes because they are paid for hair-modelling. My answer would not be different if the model had 3 hair dressing appointments per week on average to meet requirements of her clients/employers.
Sunscreen worn by a bricklayer is an incidental and relevant expense because the bricklayer is likely to get skin cancer if he or she does not cover up and use the sunscreen. Therefore, the sunscreen in this case is used for business purposes because the bricklayer will continue making the bricks if his or her health is good, hence, earn from that.
In addition, an alarm clock owned by a night-shift worker is an incidental and relevant expense because it wakes the employee up to get to work in time, hence, earn from the job instead of getting late to the place of work, which might lead to layoff and lack of income. Therefore, the alarm clock in this case is used for business purposes because the night-shift worker will continue going to work in time, hence, maintain his or her job and earn from that.
The relevant law here is the Income Tax Assessment Act 1997 (ITAA 1997) Section 8-1, which permits a deduction for all the losses that a firm incurs in creating assessable income but excludes the expenses that are capital or private in nature or relate to th