Kate is a singing sensation who has signed a contract with a large Australian company who will promote and market her songs. The contract was signed on 1 July of the current tax year and it was agreed in its terms that the company will charge a fee to Kate of $2,000 per month for the promotion work. The contract states that the payments will be deducted from Kate’s income up to the amount of that income and if the income is less than the total fees the fees will be deferred until Kate has sufficient income from the activity. During the current tax year ended 30 June, Kate in fact suffered from a bad case of stage fright and earned only $4,000 from her singing activities under the contract. Thus she paid only $4,000 to the company during the year. In relation to the tax treatment of the expense:

Select one:

1. Kate will not be able to deduct any of the $24 000 under s 8-1 ITAA 97 because she has not yet incurred the expense.

2. Kate will be able to deduct $20 000 under s 8-1 ITAA 97.

3. Kate will only be able to deduct $4000 under s 8-1 ITAA 97 as this is the only amount incurred for the year.

4. Kate will be able to deduct $24 000 under s 8-1 ITAA 97.

5. Kate will only be allowed to deduct $24 000 under s 8-1 ITAA 97 if she recognizes her income under the cash method.