Businesses care about their market reputation and sustainability in the long run and thus, they need to follow the taxation policies and laws of the country in which they are operating. The government department of the respective country tends to have some laws and legislations related to the payment of tax. There are different laws and legislations provided in the Australian Taxation system which applied differently to the different levels of investments and incomes (Cheung, et al., 2018). There are different slab rates followed by the different laws related to the individuals from different income groups. The main objective of this report to analyse and evaluate the application of different tax laws in the different types of revenue expenditure and capital expenditure. This report also includes an analysis of the different types of expenses based on their nature and situation of occurrence. Such analysis and evaluation have been done with the help of examples of case studies provided. In the end, a conclusion is provided summarising the main findings of the report.
John is the owner of the casino and bars Australia. He has got a license to run the business from the government. The license has will expire in the next 10 years from the date of obtain. John has paid 180 million dollars to the government for the next 10 years. He has also taken a building on rent at lease agreement for the next 90 years. He had paid rent for the next 10 years for such a building in advance (Murphy, 2019). On the completion of 10 years, he would need to pay 0.40 million dollars on a yearly basis against the rented building.
The analysis of the case study indicates how businesses should treat their different type of business expenditures. As per the legislation and rules of the taxation laws, the business expenditures can be categorised in mainly two types named revenue expenditures and capital expenditures. Capital expenditures can be identified on the basis of their period. These are also known as one-time investment expenditure. The expenses which are done or in which, investment is made, that can benefit for more than 2 years, are considered as the capital expenditure. The revenue expenditures are recurring in nature as these are not done at a single point of time (Murphy, 2019). These are paid different dates when they occurred. Thus, it is clear that that capital expenditure is done in advance and the revenue expenditure is paid at different times normally paid on a yearly basis. The analysis has been implemented with a view to strengthen the taxation allowance and determine the overall tax implication.
Taxation law implication
. The rent paid on a yearly basis after completion of 10 years is termed revenue in nature. As per ITAA 1997, He has made an investment for a long term of 180 million dollars paid the license and 80 million dollars for the lease of the rented building. As per the act and legislations of ITAA 1997, the expenditure of 0.40 million dollars is considered revenue in nature that is to be paid from the 11th year. However, There are different laws and legislations provided in the Australian Taxation system which applied differently to the different levels of investments and incomes (Cheung, et al., 2018). There are different slab rates followed by the different laws related to the individuals from different income groups
Expenditure and tax treatment
As provided by tax regulations, the expenditures made by John can be defined mainly by two types. At first, expenditures that occurred by him on purchasing license can be termed as capital expenditure. The advance rent paid by him will also be treated as capital expenditure (Hobson, 2019). As provided under ITAA 1997, the expenditures are required to be charged for the overall profit statement. The license obtained for the next 10 years will be charged against the profit. The cost of the leased building will be amortised in the profit and loss statement. It is found that the all the expenditure which is considered to be revenue in nature would be determined as deduction if it is used for the business purpose and if these expenses made on the machinery and used for the long term then would be same considered as capital expenditure. Thus, the overall amount of 0.40 million dollars will be deducted every year. The advancement payment of rent is to be treated as the capital expenditure but the same will not be charged in the statement of a single year. It will facilitate the business by tax advantages for the next 10 years. The tax treatment for both types of expenditures can be defined as follows:
Obtaining license- It is the total amount of 180 million considered as depreciation over the period and sorted as capital in nature.
Prepaid rent for the 10 years- It is the total amount to 80 million which is amortise during the year and determined as capital in nature.
The lease rend after 10 year- It is the total amount to 40 million which is amortise during the year and determined as revenue in nature.
Therefore, it could be inferred that all the expenses which are not allowed for the tax purpose. The taxation liability of the company arise when there is implication of the tax requirements of the company. In case when the expenses made are of the revenue nature would be followed as deductions and those expenses which are of the capital nature would be adjusted while computing the capital gain.
Alex work as a mechanical engineer in Melbourne. He is also providing catering services to individuals and schools. He is also operating his own business. To make money, he works 15 days in his catering business. He travels his workshop to the place of his work by taxi (Braithwaite, et al., 2019). He had paid rent for such a taxi in advance. Thus, he had claimed such expenses are business expenses as per the taxation rule.
Legal case law
As followed by the legal taxation rules, the business may or may not be able to charge such expenses against the income statement. The expenses made by Alex has also created confusion in this situation. The expenses include partial business expenses. His expenses made on the traveling from home to office would be allowed as deduction if it is used for the business purpose. Thus, it cannot be ensured whether these are personal expenditures or business expenditure (Berg and Davidson, 2016). As provided under ITAA 1997, if any expense is incurred which is partially related to business and partially related to personal benefits, the individual will have to provide proof for the same. As followed by ITAA 1997, a few travel expenditures should be included and charged in the business. Some expenses can be defined as follows:
- If an individual is employed at two places at the same time and traveling between the same.
- The expenses will be allowed if an individual resides at his place and traveling to another place for the business purpose (Braithwaite and Reinhart, 2019).
The working expenses can be deducted by law for any type of equipment. This equipment can be used by an individual in the form of a car, taxi, airplane, train, or bus. Following expenses would not be allowed as deduction.
- Expenses did in the place where public transport is presented.
- If an individual is not capable provide proof of his traveling.
The expenses incurred by Alex cannot be deducted under the category of business travel expenses. He will not be able to claim the traveling expenses incurred by him. As provided under ITAA 1997. These expenses are strictly not allowed to be claimed (Hanrahan, 2018). However, he can claim these expenses only if he can provide proof for the same. If he is able to provide documents and vouchers related to the traveling period, he can claim such expenses under his business expenditure.
Treatment undertaken in taxation
As held in ITAA, 1977, He would also not be able to treat such expenses as a business travel expense. Thus, if he is able to show that expenditure incurred in traveling was done for going one business place to another for official purposes, the expenses can be charged. All the expenses made for the business purpose would be used for the deduction and would be adjusted from the taxable income of the individual however, all the expense would be determine for the deductions. However, if any expenses made by Alex as minor expenses on the job while traveling from his house to the office then the same would not be allowed as deduction. Nonetheless, expenses which is made by Alex for his personal purpose would also not be allowed for the tax purpose. However, while determining the overall tax allowance for the income determination the nature of the type of the expenses made would be considered. Those expenses which are having the direct relation with the tax. There is need to set up proper compliance program to mitigate the taxation issues and manage the taxation requirement to lower down the tax liabilities.
Thus, it can be concluded that an individual earning an amount has to pay tax over his income if he/she falls under the respective categories. Every earning is subject to provide tax depending upon its nature and time of occurring. In this report, the main difference between the capital and revenue expenditure as per ITAA 1997 are defined in brief. The application of related laws and legislations is also provided with the help of a case study. Further, the classification of the business and personal expense is also provided as defined in ITAA 1997. The main objective of this report is to provide an understanding of the different type of tax legislation and their implications in different situations. After assessing all the details, it could be inferred that proper deductions and allowance would be made to adjust the expenses made for the business purpose. The expenses which are of the capital nature would be used while deciding the capital gain and would not be used for the tax purpose while determining the income.