Jeremy runs his own public relations business. During the year he incurred the following

expenses:

(a) salary costs of $500,000;

(b) salary costs of $5,000 for his daughter who worked with him for one week as part of her university training;

(c) travel expenses of $7,000 for travel between home and work;

(d) travel expenses of $3,000 for travel from a client's premises to his home;

(e) $1,500 on a new suit to impress his clients;

(f) $700 on membership of the local sports club where he entertains clients; and

(g) $8,000 in meal expenses on entertaining clients.

Advise Jeremy of his tax consequences in relation to the above expenses.

Question 12.2

Sulin is an accountant at a large accounting firm. In May, she went to Hong Kong for an accounting conference. She incurred expenses of $2,000 on the plane ticket and $500 on hotel costs. Her employer did not reimburse her for those expenses but provided Sulin with a daily allowance of $200 for her meal and local transportation costs. Sulin had chosen to go to the conference because her family is in Hong Kong and she took the opportunity to visit them

while she was there. The conference ran for two days and she stayed on for an additional four days at her parents' home.

Advise Sulin as to the deductibility of the airfare and hotel costs.

Question 12.3

QI Pty Ltd is a job recruitment agency located in the Melbourne CBD. The company uses new technology invented by its parent company in the UK. QI recently incurred $200,000 of legal expenses in successfully preventing a rival UK company from using the same technology in Melbourne. The court order prevents the rival UK company from using the same technology

in Melbourne for a period of five years.

Advise QI as to the deductibility of the legal expenses.

Question 12.4 Rumpole is a scientist. He uses his own car to travel to various locations to conduct experiments. He acquired the car on 1 October 2016 for $60,000. The acquisition cost was funded entirely by a loan at an interest rate of 15%. He has determined that the depreciation deduction on the car would be $2,300 for the year. In addition, Rumpole incurred the following expenses during the year:

Registration and insurance = $2,000;

Repairs and maintenance = $1,000; and

Oil and fuel costs = $1,500.

For the period 1 October 2016 to 30 June 2017, Rumpole estimates that the car travelled a total of 15,000 kilometres, 12,000 of which were for business purposes. You may assume that Rumpole has maintained all necessary records and a logbook.

Calculate Rumpole's deduction for car expenses under the two methods in Div 28 of ITAA 1997. Assume that depreciation has been adjusted for part year use and the impact of the car limit

Question 12.5

Sarah is employed as a personal assistant to Martha Tallis, a successful freelance lifestyle consultant and motivational speaker. One day, Martha told Sarah to go to the library and borrow a book which Martha needed to prepare for a speech. Sarah borrowed the book and gave it to Martha. Four weeks later Sarah received an email from the library advising her that the book was overdue. Sarah asked Martha for the book so that she could return it.

Martha could not find the book. When Sarah told the library that the book was lost, the library demanded that she pay a $110 fine for the loss of the book.

Advise Sarah as to the deductibility of the $110 fine payment.

Question 12.6

Following on from 12.5, Sarah did not have $110 in cash in order to pay the library fine, so she charged the fine payment to her credit card, which incurred interest at a rate of 20% per annum. On that same day, Sarah also paid a $190 speeding fine with her credit card, which was the result of her speeding to get to work on time. Twelve months later Sarah was able to pay off the total amount of $300 which she had charged to her credit card. By that time, she

had paid an amount of $60 in interest.

Advise Sarah as to the deductibility of the interest.

Question 12.7

Following on from 12.5 and 12.6, Sarah felt extremely annoyed about the library fine and decided to talk to Martha about it. She told Martha that she thought that Martha should reimburse her for the cost of the library fine, since it was Martha who had lost the book. Martha replied that it was Sarah's job as her personal assistant to make sure Martha didn't lose any books, and so it was only right that Sarah should bear the cost. They argued for a long time. After the argument, Martha rang her lawyer and the lawyer advised her that she

should reimburse Sarah for the library fine. The next day, Martha reimbursed Sarah $110. How does the reimbursement impact upon Sarah's ability to claim a deduction for the fine payment?

Question 12.8

Following on from 12.512.7, after Martha reimbursed Sarah the $110, she discovered that Sarah had sent out to all of Martha's clients an email describing Martha as a fraud and a bully. Unfortunately, the email had been passed on to a popular gossip website and it was running as its lead story Martha Tallis bullies PA. Martha realised immediately that this could seriously impact upon her business. She fired Sarah and called her lawyer again. Her lawyer agreed to begin preparing a defamation suit against Sarah and the gossip website. Three weeks later Martha's lawyer sent her a bill, which included:

(a) a charge of $250 for the oral advice given over the phone in relation to whether Martha should reimburse Sarah for the library fine (described in Question 12.7); and

(b) a charge of $10,000 for the lawyer's work in preparing the defamation suit.

Advise Martha as to the deductibility of the legal fees.

Question 12.9

Following on from 12.512.8, within six months it was clear to Martha that her business had suffered greatly and her revenue had dropped by 50%. She was forced to give up her lease on an office in the city and work from home in her lounge room. She put her desk in one corner of the lounge room and worked there on her laptop, which she leased from Executive Rentals.

Advise Martha as to the deductibility of the mortgage payments for her home, electricity costs for lighting and heating, and lease payments for the laptop.

Question 12.10

Following on from 12.512.9, in order to rebuild her business, Martha decided to put together a DVD, which included the best parts of all her motivational speeches and a summary of her key philosophies as a lifestyle consultant. She sent the DVD to all her former clients, her few remaining current clients and to potential new clients. Martha spent $20,000 to make the DVD. Although it is a lot of money, she believes that it will be worth it in the long run.

Advise Martha as to the deductibility of the DVD production costs.

Question 12.11

Jake is an accountant who migrated to Australia three years ago. As part of establishing himself in Australia, he intends to invest in the property market. As Jake is not familiar with the Australian property market, he engaged the assistance of a property broker to assist with finding a suitable investment property. The broker charged an upfront fee of $5,000. Six months later, the broker located a vacant block of land and suggested that Jake develop

three townhouses on it. The cost of the land ($1 million) and estimated development costs ($900,000) exceeded Jakes budget and he decided to undertake the venture with a business partner. The agreement with the business partner was that Jake would purchase the land and the partner would incur all development costs. The profits from the eventual sale of the

townhouses, expected to be in 18 months, would be split equally between Jake and the partner. Jake established a $1 million line of credit facility with his bank which would enable him to access the required funds as necessary. The interest rate on the facility was 8.5% per annum and Jake provided the title to the land as security for the funds.

Advise Jake as to the deductibility of the property brokers fee and bank interest charges under s 81.

Question 12.12

Following on from 12.11, shortly after the land was purchased, Jakes business partner declared bankruptcy. Jake was unable to find another suitable business partner and subsequently sold the land at auction at a loss for $900,000. With sale proceeds being insufficient to discharge his borrowings, Jake continues to pay interest charges on the remaining $100,000 owed to the bank. Advise Jake as to the deductibility of the interest charges incurred after the land was sold?

Question 12.13

Consider the facts from 12.11. Would your response to the deductibility of the bank interest charges change if Jake borrowed the money from the bank and provided the title to his residential home as security for the line of credit facility? Assume that the value of Jakes residential home exceeds $1 million.

Question 12.14

Following on from 12.11, would your response to the deductibility of the bank interest charges change if, instead of buying the block of land himself, Jake on-lent the funds to his sister at an interest rate of 3% and Jakes sister purchased the block of land in her name?