Case Study

You have completed your Bachelor of Accounting studies at NT University. After studying for the Certified Public Accountant Exams $($CPA$),$ you work as a tax accountant.

A client by the name of Annabel Salim walks into your office. Ms$.$ Salim owns and operates a dog grooming business called "Healthy Pups Grooming." She is registered as a sole trader and has her own Australian business number. Ms$.$ Ahmed is also registered for GST as she earns more than $$75,000$ per year.

Ms$.$ Salim used a grooming van to travel from her home to her client$$s place to groom dogs. The van is used to travel to several client$$s places in a day. The grooming van was used for income$-$ producing purposes. The van$$s old diesel engine was worn out and required considerable expense to replace. Ms$.$ Salim decided to replace the diesel engine with a petrol engine, which improved the van$$s function. Ms$.$ Salim indicated to her tax accountant, "I only replaced the diesel with a petrol engine as it will reduce future repair bills."

Ms$.$ Salim$$s dog grooming business income was accounted for on an accrual basis rather than on a cash basis. She accounted for her income at the time when it was derived, not when it was received. Many of her clients were on a government subsidy pension and could not pay her for the dog grooming service. There were $12$ clients whose dogs were groomed; they owed $$100$ each. The total amount owed was $$1,200.$ All amounts include GST$.$ It has been three months since the previous invoice was issued and there is a $$1,200$ debt. Ms$.$ Salim plans to write off the debt as a bad debt.

Ms$.$ Salim was going through a difficult period in her life. One day, she was carrying $$500$ cash, taking the day$$s earnings to the bank when she was robbed along the way to the bank.

Meanwhile, a rival business company titled $$Healthy Dog Grooming$,$ which is a start business, was advertised to open in Ms$.$ Salim$$s neighborhood. MS Salim$$s application and legal avenue was to block the $$Healthy dog$$s grooming$$ to operate as a rival business. Ms$.$ Salim incurred $$5,000$ legal expenses to stop a rival competitive business from operating.

$3$

REQUIRED:

a$.$ Are the costs of replacing the engine deductible? $(5$ marks$)$

b$.$ Can Ms$.$ Salim write off the $$1,200$ debt? $(5$ marks$)$

c$.$ Can Ms$.$ Salim claim the loss of $$500$ as a deduction? $(5$ marks$)$

d$.$ Advise Ms Salim as to the deductibility of claiming legal expenses with respect to the rival business? $(5$ marks$)$