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CA Program Core 4: Tax (Australia) study materials
CA Program Core 4: Tax (Australia) study resources

CA Program Core 4: Tax (Australia) practice questions

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Question 1Australian tax system, tax policy and administration

Which body is responsible for administering the federal tax system, including the assessment and collection of income tax?

  1. The Australian Taxation Office Correct answer.
  2. The Productivity Commission
  3. The Australian Securities and Investments Commission
  4. The Reserve Bank of Australia

Explanation

The Australian Taxation Office is the statutory agency that administers federal tax laws, issues assessments and collects revenue under legislation such as the Taxation Administration Act 1953. The other bodies have regulatory or advisory roles in monetary policy, corporate conduct or economic research rather than tax administration.

Question 2Australian tax system, tax policy and administration

What is the principal Commonwealth statute that imposes income tax on taxpayers?

  1. The Taxation Administration Act 1953
  2. The Income Tax Assessment Act 1997 Correct answer.
  3. The Income Tax Act 1986
  4. The Corporations Act 2001

Explanation

The Income Tax Assessment Act 1997 contains the core rules for working out taxable income and tax payable, supported by the Income Tax Assessment Act 1936. The Taxation Administration Act deals with procedure and collection, while the Corporations Act governs companies generally.

Question 3Australian tax system, tax policy and administration

Under the Australian tax system, which statement best describes how the Commissioner of Taxation's rulings operate?

  1. Public rulings bind taxpayers but not the Commissioner
  2. Public rulings apply only to the specific taxpayer who requested them
  3. Public rulings are advisory only and create no legal consequences for the Commissioner
  4. Public rulings bind the Commissioner and provide taxpayers with protection if they rely on them Correct answer.

Explanation

A public ruling is a legally binding statement of the Commissioner's view, and taxpayers who rely on it are protected from penalty and shortfall interest if the ruling turns out to be wrong. The binding effect also constrains the Commissioner in relation to taxpayers who rely on the ruling.

Question 4Australian tax system, tax policy and administration

A taxpayer lodges an objection against an amended assessment and is dissatisfied with the objection decision. Which avenue is available to have the matter independently reviewed?

  1. Appeal directly to the Governor-General
  2. Lodge a fresh income tax return for the same year
  3. Apply to the Administrative Review Tribunal for review of the objection decision Correct answer.
  4. Request the Commissioner to reconsider the objection a second time

Explanation

After an objection decision, a taxpayer may generally seek review by the Administrative Review Tribunal or appeal to the Federal Court, depending on the choice made under the review provisions. The tribunal provides merits review of the Commissioner's decision.

Question 5Australian tax system, tax policy and administration

Which of the following best describes the purpose of the tax-free threshold for resident individual taxpayers?

  1. It exempts a band of ordinary income from income tax Correct answer.
  2. It applies to capital gains only
  3. It reduces the Medicare levy surcharge
  4. It removes the obligation to lodge a return

Explanation

The tax-free threshold means the first portion of a resident individual's taxable income is taxed at a zero rate, effectively exempting that band from income tax. It does not remove lodgment obligations or alter the Medicare levy surcharge.

Question 6Australian tax system, tax policy and administration

The Medicare levy is best characterised as which type of charge?

  1. A levy imposed only on employers' payrolls
  2. A levy imposed on taxable income to help fund the public health system Correct answer.
  3. A surcharge applied to capital gains
  4. A flat charge payable by every resident regardless of income

Explanation

The Medicare levy is calculated as a percentage of taxable income and is collected with income tax to help fund Medicare. It is subject to low-income reduction thresholds rather than being a flat charge on all residents.

Question 7Australian tax system, tax policy and administration

Which statement correctly describes the goods and services tax (GST) in Australia?

  1. It is a customs duty applied only to imported goods
  2. It is a state tax levied on land transfers
  3. It is a progressive tax applied to personal income
  4. It is a broad-based consumption tax of 10 per cent collected by businesses and remitted to the ATO Correct answer.

Explanation

The GST is a broad-based indirect tax of 10 per cent on most goods and services, with registered businesses collecting it and remitting net amounts to the ATO. It is not an income tax, a land transfer duty or a customs duty.

Question 8Australian tax system, tax policy and administration

A registered business makes a taxable supply of goods to a customer. Who is legally liable to pay the GST on that supply?

  1. The recipient of the supply, who pays it as part of the price Correct answer.
  2. The ATO, which remits it to the states
  3. The supplier, who must absorb it as a cost
  4. The supplier's employees, through payroll deductions

Explanation

GST is a tax on the recipient of the supply, although the supplier collects it as part of the price and remits it to the ATO. The economic burden therefore falls on the final consumer.

Question 9Australian tax system, tax policy and administration

Which of the following is the best example of a tax base?

  1. The value of taxable income on which income tax is calculated Correct answer.
  2. The rate of tax applied to a company's profits
  3. The date by which a return must be lodged
  4. The penalty imposed for late payment

Explanation

The tax base is the measure or amount on which tax is imposed, such as taxable income, the value of a supply or the value of land. Rates, deadlines and penalties are not tax bases.

Question 10Australian tax system, tax policy and administration

Which feature best distinguishes a progressive tax from a proportional tax?

  1. The tax is collected only at the point of importation
  2. The tax is levied at the same rate on all taxpayers
  3. The average tax rate rises as the tax base increases Correct answer.
  4. The tax applies only to consumption rather than income

Explanation

In a progressive tax, the average rate of tax increases as the tax base rises, typically through marginal rates that step up. A proportional tax applies a single rate to the base regardless of its size.

Question 11Australian tax system, tax policy and administration

A resident individual has taxable income of $45,000 and is entitled to the tax-free threshold. Which principle explains why only income above the threshold is taxed?

  1. An exemption that applies only to capital gains
  2. A rebate that refunds all tax paid
  3. Marginal rate structure applied to successive bands of income Correct answer.
  4. A flat rate applied to all income above zero

Explanation

Resident individual income tax uses marginal rates applied to successive bands, so income within the threshold band is taxed at zero and higher bands attract higher rates. This produces a rising average rate as income increases.

Question 12Australian tax system, tax policy and administration

A taxpayer disagrees with an assessment and wants to challenge it. What is the usual first formal step?

  1. Write to the Minister for Treasury
  2. Withhold payment and await contact from the ATO
  3. Lodge an objection with the Commissioner within the statutory time limit Correct answer.
  4. Commence proceedings in the High Court

Explanation

A taxpayer who is dissatisfied with an assessment must generally lodge a written objection with the Commissioner within the prescribed period, setting out the grounds. Only after an objection decision can the matter proceed to external review or appeal.

Question 13Australian tax system, tax policy and administration

Which statement best describes the role of private rulings?

  1. They bind the Commissioner in relation to a specific taxpayer and arrangement described in the application Correct answer.
  2. They are issued by the courts to resolve disputes
  3. They apply to all taxpayers who fall within the same class
  4. They replace the need to lodge an income tax return

Explanation

A private ruling is issued to a particular taxpayer about a specific arrangement, and the Commissioner is bound in relation to that taxpayer if the arrangement is carried out as described. Public rulings, by contrast, apply to classes of taxpayers.

Question 14Australian tax system, tax policy and administration

Which of the following best illustrates the concept of tax expenditure?

  1. The revenue raised from the GST
  2. The interest paid on government borrowings
  3. The cost of running the Australian Taxation Office
  4. A concession that forgoes revenue, such as an exemption for a particular activity Correct answer.

Explanation

Tax expenditures are concessions in the tax system, such as exemptions, deductions or preferential rates, that deliver benefits by forgoing revenue compared with a benchmark tax system. They are analysed as an alternative to direct spending.

Question 15Australian tax system, tax policy and administration

A small business registered for GST makes both taxable and input-taxed supplies. How is its entitlement to input tax credits generally affected?

  1. Credits are never available to small businesses
  2. Credits are available only to the extent acquisitions relate to making taxable or GST-free supplies Correct answer.
  3. Credits are replaced by a flat annual rebate
  4. Credits are available in full regardless of the type of supply made

Explanation

Input tax credits are available for acquisitions used in carrying on an enterprise to the extent they relate to making taxable or GST-free supplies. Acquisitions relating to input-taxed supplies do not generate credits.

Question 16Australian tax system, tax policy and administration

Which principle of tax policy is most directly concerned with the ease and cost of complying with a tax?

  1. Neutrality
  2. Horizontal equity
  3. Simplicity and compliance cost Correct answer.
  4. Fiscal adequacy

Explanation

Simplicity and compliance cost concern how easy and inexpensive it is for taxpayers to understand and meet their obligations. Horizontal equity concerns equal treatment of equals, while neutrality concerns minimising distortion of economic choices.

Question 17Australian tax system, tax policy and administration

Two employees with identical income and circumstances pay the same amount of income tax. Which principle does this best illustrate?

  1. Fiscal adequacy
  2. Vertical equity
  3. Horizontal equity Correct answer.
  4. Simplicity

Explanation

Horizontal equity holds that taxpayers in similar positions should bear similar tax burdens. Vertical equity instead concerns the appropriate differential treatment of taxpayers with different capacities to pay.

Question 18Australian tax system, tax policy and administration

A taxpayer who fails to lodge a return by the due date may face which administrative consequence?

  1. Immediate imprisonment without any hearing
  2. Automatic loss of Australian citizenship
  3. A failure to lodge penalty calculated per period of delay Correct answer.
  4. Cancellation of all prior year assessments

Explanation

The taxation administration provisions impose a failure to lodge penalty, generally calculated on a per-period basis using penalty units, where a return is not lodged by the due date. The penalty operates alongside general interest charges on unpaid tax.

Question 19Australian tax system, tax policy and administration

Which of the following best describes the general anti-avoidance rule in the income tax law?

  1. It permits taxpayers to choose whichever tax outcome they prefer
  2. It applies only to companies listed on the stock exchange
  3. It allows the Commissioner to cancel a tax benefit obtained from an arrangement whose dominant purpose is to obtain that benefit Correct answer.
  4. It imposes a fixed penalty on any taxpayer who claims a deduction

Explanation

The general anti-avoidance provision empowers the Commissioner to cancel a tax benefit arising from a scheme where, objectively, the dominant purpose of the scheme was to obtain that benefit. It operates alongside specific anti-avoidance rules.

Question 20Australian tax system, tax policy and administration

A taxpayer receives a notice of assessment showing tax payable. Which statement about the assessment is most accurate?

  1. The assessment can only be issued after a court order
  2. The assessment is prima facie evidence of the matters stated and remains valid unless amended or successfully challenged Correct answer.
  3. The assessment is merely a request for voluntary payment
  4. The assessment is void unless the taxpayer signs and returns it

Explanation

A notice of assessment is treated as prima facie evidence of the assessment and the amount payable, and it stands unless it is amended or successfully challenged through the objection and review process. It is not a mere request for payment.

Question 21Assessable income

Under Australian income tax law, which of the following is the core statement of what makes an amount ordinary income?

  1. It is any receipt that increases the taxpayer's bank balance during the year
  2. It is a gain that is regular, expected and comes from the use of capital
  3. It is income according to ordinary concepts, determined by its character in the hands of the recipient Correct answer.
  4. It is any amount that the Commissioner of Taxation has listed as taxable in a public ruling

Explanation

Assessable income comprises ordinary income and statutory income. Ordinary income is not defined in the legislation; its meaning is drawn from ordinary concepts developed by the courts, so the character of the receipt in the recipient's hands is decisive.

Question 22Assessable income

A taxpayer receives a cash prize of $2,000 from a television quiz show on which they appeared as an ordinary member of the public. How is the prize treated?

  1. Not assessable, but only because the amount is below the tax-free threshold
  2. Not assessable, because it is a windfall gain not earned by the taxpayer's income-producing activities Correct answer.
  3. Assessable as statutory income as a prize from a game of chance
  4. Assessable as ordinary income because it is a realised gain

Explanation

Windfall gains, including prizes won by chance, are generally not ordinary income because they are not the product of any income-producing activity or business of the recipient. The amount is also not statutory income because no provision brings such prizes into assessable income.

Question 23Assessable income

Which characteristic most strongly supports treating a receipt as ordinary income rather than capital?

  1. The receipt is periodic and replaces what would otherwise have been income Correct answer.
  2. The receipt is a one-off lump sum received on the sale of a business asset
  3. The receipt is received from a relative as a personal gift
  4. The receipt compensates for the permanent loss of a profit-making structure

Explanation

Periodicity and the nature of what the payment replaces are key indicators of income. A receipt that stands in place of income, such as compensation for lost profits, generally takes the character of income.

Question 24Assessable income

An employee receives a regular weekly travel allowance from their employer to cover estimated work-related travel costs and does not have to account for the actual expenditure. How is the allowance treated?

  1. Not assessable because it is a reimbursement of expenses
  2. Assessable as ordinary income, with any deduction limited to actual work-related expenditure incurred Correct answer.
  3. Not assessable because allowances are always capital receipts
  4. Assessable only to the extent the allowance exceeds the employee's salary

Explanation

An allowance paid as part of the employment relationship is a reward for services and is ordinary income. The employee may claim a deduction only for the amount actually spent on deductible work-related travel, which requires substantiation where applicable.

Question 25Assessable income

Which of the following is the leading Australian authority for the proposition that a gain from an isolated transaction can be income if the transaction was entered into with the intention of making a profit?

  1. Hayes v Federal Commissioner of Taxation
  2. Scott v Federal Commissioner of Taxation
  3. Sun Newspapers Ltd v Federal Commissioner of Taxation
  4. Federal Commissioner of Taxation v Myer Emporium Ltd Correct answer.

Explanation

Myer Emporium established that an amount may be income even if it arises from an isolated transaction, provided the transaction was entered into with a profit-making purpose and the profit was made in the course of the taxpayer's business or commercial activities.

Question 26Assessable income

A company grants an employee shares under an employee share scheme. Which statement best describes the assessability of the discount?

  1. The discount is assessable only if the employee later sells the shares at a profit
  2. The discount is assessable as statutory income, subject to the employee share scheme rules and any eligible concessions Correct answer.
  3. The discount is never assessable because shares are capital assets
  4. The discount is assessable only if the shares are listed on the ASX

Explanation

Employee share scheme discounts are brought into assessable income by specific statutory provisions rather than ordinary concepts. The timing and availability of concessions depend on whether the scheme is a taxed-upfront or deferred scheme and whether the employee meets eligibility conditions.

Question 27Assessable income

Which statement correctly describes the relationship between assessable income and exempt income?

  1. Exempt income is included in assessable income but taxed at a lower rate
  2. Exempt income must be included in assessable income and then offset by a rebate
  3. Exempt income is excluded from assessable income by a specific provision Correct answer.
  4. Exempt income is assessable income that the Commissioner chooses not to assess

Explanation

Assessable income excludes amounts that are expressly exempt under the legislation. Exempt income is therefore left out of the assessable income calculation altogether, rather than being included and then relieved by a rebate or lower rate.

Question 28Assessable income

A self-employed consultant receives $8,000 for services rendered. The client pays in cash and no invoice is issued. How is the amount treated?

  1. Assessable only if the consultant declares the cash to the ATO voluntarily
  2. Not assessable because cash receipts are capital in nature
  3. Not assessable because no invoice was issued
  4. Assessable as ordinary income because it is a reward for services Correct answer.

Explanation

Ordinary income includes rewards for personal services, and the legal character of the receipt does not depend on invoicing or payment method. Cash received for services is assessable in the year the income is derived.

Question 29Assessable income

A landlord receives a $15,000 lump sum from a tenant as an inducement to enter into a five-year lease. How is the amount treated for the landlord?

  1. Assessable as ordinary income because it is a premium connected with the lease of income-producing property Correct answer.
  2. Not assessable because it is a capital receipt for entering the lease
  3. Assessable only if the landlord refunds part of it to the tenant
  4. Not assessable because it is received before the lease begins

Explanation

Lease inducements and premiums received by a landlord are generally ordinary income because they arise from the use of the property in the landlord's income-producing activity. The amount is not capital merely because it is a lump sum.

Question 30Assessable income

An investor buys shares intending to hold them for long-term dividend income but sells them after three months at a substantial profit. Which factor is most relevant in determining whether the profit is assessable as ordinary income?

  1. Whether the sale was made through a broker
  2. The length of the holding period alone
  3. Whether the investor had a profit-making intention at the time of acquisition and the scale of the activity Correct answer.
  4. Whether the shares paid any dividends during the holding period

Explanation

The assessability of a profit on shares depends on the taxpayer's intention and the nature and scale of the activity, not simply on how long the shares were held. A profit-making intention at acquisition and the surrounding commercial activity are central considerations.

Question 31Assessable income

A taxpayer receives a non-transferable right to acquire shares in their employer at a discount. Which statement about the assessability of the discount is correct?

  1. The discount may be assessable at grant or at a later taxing point depending on the scheme's deferral status Correct answer.
  2. The discount is never assessable because the right is not transferable
  3. The discount is assessable only when the right is exercised and the shares are sold
  4. The discount is always assessable in the year the right is granted, with no exceptions

Explanation

The employee share scheme rules determine whether the discount is taxed upfront or deferred, with deferred taxation applying where certain conditions, including restrictions on disposal, are met. The precise taxing point depends on the scheme's characteristics.

Question 32Assessable income

A business receives a government grant to purchase new manufacturing equipment. How is the grant generally treated?

  1. Generally not assessable if it is a capital grant relating to the acquisition of a depreciating asset, subject to specific provisions Correct answer.
  2. Assessable only if the business is a company
  3. Always exempt because government grants are exempt income
  4. Always assessable as ordinary income regardless of its purpose

Explanation

Whether a grant is assessable depends on its character and any specific statutory treatment. A grant that is capital in nature and relates to acquiring a depreciating asset may be excluded from assessable income, with the amount instead reducing the asset's cost for depreciation purposes.

Question 33Assessable income

An employee takes long service leave and receives a lump-sum payment on termination of employment for unused long service leave. Which statement best describes the assessability of the amount?

  1. Not assessable because it is a capital payment on termination
  2. Assessable only to the extent it exceeds the employee's final salary
  3. Assessable as ordinary income, with concessional treatment potentially applying to certain leave payments Correct answer.
  4. Exempt because it compensates for past service

Explanation

Payments for unused leave on termination are generally ordinary income because they are a reward for past employment services. Specific provisions may provide concessional tax treatment for certain leave payments, but the amount remains assessable.

Question 34Assessable income

Which of the following receipts is most likely to be treated as capital rather than income?

  1. A payment received for the permanent disposal of a business's customer list Correct answer.
  2. Interest earned on a term deposit
  3. A commission earned by a real estate agent on a property sale
  4. A bonus paid to an employee for meeting sales targets

Explanation

A payment for the permanent disposal of a business asset, such as a customer list, is generally capital because it realises the profit-making structure. Commissions, bonuses and interest are all rewards or returns connected with income-producing activity and are ordinary income.

Question 35Assessable income

An artist sells a painting they created for $10,000. They are not in business as an artist and paint only as a hobby. How is the proceeds treated?

  1. Assessable as ordinary income because it is a reward for personal services
  2. Assessable only if the painting is sold to a gallery
  3. Not assessable as ordinary income because the sale is of a capital asset created outside a business, though CGT may apply Correct answer.
  4. Exempt income under the hobby provisions

Explanation

Where an asset is created and sold outside a business activity, the proceeds are generally capital in nature rather than ordinary income. The gain may instead be considered under the capital gains tax provisions, subject to any exemptions.

Question 36Assessable income

A taxpayer receives a scholarship of $12,000 to undertake full-time study. Under what circumstances would the scholarship be assessable?

  1. Never, because scholarships are always exempt
  2. Only if the scholarship exceeds the cost of tuition
  3. Only if the scholarship is paid by a government body
  4. Where the scholarship is a reward for services or is otherwise connected with the recipient's income-producing activities Correct answer.

Explanation

Scholarships are generally not assessable when they support study and are not a reward for services. However, an amount that is in substance remuneration for services, or is tied to the recipient's income-producing activities, may be ordinary income.

Question 37Assessable income

A company receives a payment from an insurer to compensate for lost profits after a fire temporarily closed its factory. How is the payment treated?

  1. Exempt, because insurance proceeds are not taxable
  2. Assessable only if the company rebuilds the factory
  3. Ordinary income, because it replaces income that would have been earned Correct answer.
  4. Capital, because it relates to a destroyed asset

Explanation

Compensation takes the character of what it replaces. A payment for lost profits replaces income and is therefore ordinary income, whereas compensation for the destruction of a capital asset is generally capital.

Question 38Assessable income

Which of the following is a statutory income item rather than ordinary income?

  1. Interest received on a savings account
  2. Rent received by a landlord from a tenant
  3. Salary and wages paid to an employee
  4. A net capital gain included in assessable income under the CGT provisions Correct answer.

Explanation

Statutory income is an amount made assessable by a specific provision rather than by ordinary concepts. A net capital gain is included in assessable income by the capital gains tax provisions, whereas salary, rent and interest are ordinary income.

Question 39Assessable income

A professional sportsperson receives a car worth $40,000 from a sponsor for wearing the sponsor's logo during matches. How is the benefit treated?

  1. Not assessable because it is a gift
  2. Assessable only if the car is sold within the same income year
  3. Assessable as ordinary income because it is a reward connected with the sportsperson's income-producing activities Correct answer.
  4. Exempt because sponsorship benefits are not cash

Explanation

Non-cash benefits received as a reward for services or in connection with income-producing activities can be ordinary income, and the value is included in assessable income. The form of the benefit does not determine its character.

Question 40Assessable income

A taxpayer sells a rental property and makes a profit. Which factor is most important in deciding whether the profit is ordinary income?

  1. Whether the sale price exceeded the original purchase price
  2. Whether the taxpayer acquired the property with the intention of reselling it at a profit and engaged in a profit-making undertaking Correct answer.
  3. Whether the property was rented to a relative
  4. Whether the taxpayer held the property for more than twelve months

Explanation

The profit on sale of real property is ordinary income where the taxpayer had a profit-making intention at acquisition or carried out a profit-making undertaking or scheme. The mere fact of a gain or the length of ownership does not by itself make the profit income.

Question 41Assessable income

A business receives a lump-sum payment from a competitor in settlement of a lawsuit for breach of contract that had caused the business to lose trading income. How is the settlement treated?

  1. Exempt, because damages are not taxable
  2. Assessable only if the business records the payment as income in its accounts
  3. Capital, because it arises from a legal claim
  4. Ordinary income, because it compensates for lost trading income Correct answer.

Explanation

The character of a settlement payment follows the nature of the loss it compensates. Where the claim relates to lost trading income, the settlement is ordinary income; where it relates to damage to capital assets, it is generally capital.

Question 42Assessable income

A taxpayer carries on a business of buying and selling vintage cars. In one year they buy a rare car for personal use and later sell it at a profit. How is the profit treated?

  1. Not ordinary income, because the car was acquired for personal use and not as trading stock of the business Correct answer.
  2. Ordinary income, because the taxpayer is in the business of trading cars
  3. Assessable only if the profit exceeds $10,000
  4. Exempt, because personal assets are not taxable

Explanation

Whether a profit is income depends on the character of the particular transaction. An asset acquired for personal enjoyment and not as part of the trading business is generally capital, even if the taxpayer carries on a similar business.

Question 43Assessable income

An employee is provided with a laptop by their employer for use in their employment. The laptop is also used for private purposes. Which statement is correct?

  1. The laptop is assessable only if its value exceeds $1,000
  2. The value of the laptop is always assessable income of the employee
  3. The provision of the laptop is generally not assessable income of the employee, though fringe benefits tax may apply to the employer Correct answer.
  4. The employee must include the full retail value of the laptop in assessable income

Explanation

Benefits provided by an employer to an employee are generally dealt with under the fringe benefits tax regime rather than being included in the employee's assessable income. The employer may be liable for fringe benefits tax on the private use component.

Question 44Assessable income

A taxpayer receives a payment for agreeing to vary a contract in a way that reduces future income. The payment compensates for the loss of future profits. How is the payment characterised?

  1. Exempt, because it is a one-off payment
  2. Assessable only if the taxpayer is a company
  3. Ordinary income, because it substitutes for income that would otherwise have been derived Correct answer.
  4. Capital, because it relates to a contract variation

Explanation

A payment that compensates for the loss of future income is generally ordinary income because it stands in place of the income it replaces. By contrast, a payment for the destruction or sterilisation of a capital asset or structure is generally capital.

Question 45Deductions and trading stock

Which of the following best describes the two positive limbs of the general deduction provision in section 8-1 of the ITAA 1997?

  1. Losses or outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for that purpose Correct answer.
  2. Losses or outgoings incurred in acquiring assets intended to be held indefinitely for rental yield
  3. Losses or outgoings incurred for private or domestic purposes that incidentally support income-earning activity
  4. Losses or outgoings incurred for the purpose of producing exempt income or gaining a capital benefit

Explanation

Section 8-1(1) allows a deduction for losses or outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. Both limbs require a connection to assessable income, and the second limb applies only in a business context.

Question 46Deductions and trading stock

A taxpayer incurs a loss or outgoing that is a capital expense. Under the general deduction provision, how is that expense treated?

  1. It is not deductible under section 8-1 Correct answer.
  2. It is deductible over five years regardless of the asset's effective life
  3. It is deductible only if it also produces exempt income
  4. It is deductible in full in the year incurred

Explanation

Section 8-1(2)(a) expressly denies a deduction for losses or outgoings of a capital nature. Such expenditure may be deductible under a specific capital allowance provision, but not under the general provision.

Question 47Deductions and trading stock

Which of the following outgoings is most clearly private or domestic in nature and therefore excluded by section 8-1(2)(b)?

  1. A real estate agent's commission on a rental property
  2. Accounting fees for preparing a business's tax return
  3. A taxpayer's personal grocery expenses Correct answer.
  4. Interest on a loan used to purchase a business vehicle

Explanation

Section 8-1(2)(b) excludes losses or outgoings of a private or domestic nature. Personal living expenses such as groceries are quintessentially private and are not incurred in gaining assessable income.

Question 48Deductions and trading stock

What is the statutory test for the deductibility of a repair under section 25-10 of the ITAA 1997?

  1. The repair must replace an entire unit of property
  2. The repair must increase the asset's value by at least 10%
  3. The repair restores the asset to its original condition or a condition substantially the same as the original Correct answer.
  4. The repair must be capital in nature and improve the asset

Explanation

Section 25-10 allows a deduction for repairs to premises or depreciating assets used for producing assessable income, where the repair restores the asset to its original condition or a condition substantially the same, without being a capital improvement.

Question 49Deductions and trading stock

A taxpayer uses the diminishing value method to depreciate a depreciating asset with a cost of $10,000 and an effective life of 5 years. What is the first-year decline in value, assuming the asset is used 100% for a taxable purpose and held for the full year?

  1. $4,000 Correct answer.
  2. $2,000
  3. $3,000
  4. $5,000

Explanation

Under the diminishing value method, the first-year decline is calculated as cost multiplied by 200% divided by the effective life, i.e. $10,000 × 2 ÷ 5 = $4,000. The prime cost method would instead give $2,000.

Question 50Deductions and trading stock

A taxpayer purchases a depreciating asset and uses it 60% for a taxable purpose. How is the decline in value treated?

  1. No decline in value is deductible because use is not exclusively for a taxable purpose
  2. The full decline in value is deductible regardless of use
  3. The decline in value is deductible only in the year the asset is disposed of
  4. Only the business-use proportion of the decline in value is deductible Correct answer.

Explanation

Division 40 limits the deduction for decline in value to the asset's taxable purpose proportion. For a mixed-use asset, only 60% of the calculated decline is deductible.