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Question Five(10 marks)

X is a medical doctor. She conducts a medical practice as a sole trader in Suva. For a number of years the practice was conducted from rented premises in the suburb of Nasinu. In early 2020, X decides to relocate her practice near to Suva's main hospital. She purchases an old house in the suburb of Toorak near the main hospital. A portion of the house (2/5ths) is used for her medical practice (reception room, consulting room, bathroom). The remainder of the house is used as X's family residence.

The following paragraphs provide specific information concerning events taking place in 2020.

Required: Consider each paragraph in turn. What expenses/expenditures, including deductions for depreciation, may be taken account of in determining X's chargeable income for the year 2020?

Provide reasons for your answers and include reference to any relevant sections/regulations and case law where appropriate.

[Note: business profit is normally determined on an earnings basis. To this there are exceptions (see Carden's case where the taxpayer carried on a medical practice). Presume X does not fall within the exception.]

(i)The purchase of the house in Toorak closes in late February. X and her family take up residence in March. X's medical practice commences operating from the Toorak property on April 1. The medical practice operates at the Toorak property (the 2/5ths) for the remainder of the year.

(ii)The purchase of the Toorak property is funded in part from X's savings and in part from a loan from ANZ. Interest accruing due and paid by X on the loan for 2020 is $15,000.

(iii)Prior to relocating to Toorak, X incurs expenditure of $12,000 in remodeling the portion of the premises dedicated to the practice, to better suit it to the needs of her business.

(iv)X's rented Nasinu premises become vacant after the practice is moved to Toorak. The lease of the Nasinu premises expires on December 31. Unhappily X is unable to sub-lease the Nasinu premises, nor is the landlord agreeable to an early surrender of the lease. Thus X is obliged to continue rental payments ($1,000 per month) on the now vacant Nasinu premises from April 1 through to the end of the year.

(v)All plant and equipment used in the medical practice is relocated from the Nasinu premises to Toorak in late March with the assistance of Removalco. Removalco's services cost $700.

(vi)Unhappily some delicate medical equipment is damaged in the relocation process. X incurs expenses of $2,000 in having the equipment repaired. Happily X is reimbursed $1,600 by Insuranceco under insurance cover affected by Removalco for the benefit of all their clients.

(vii)Many of X's patients drive their own cars. Soon after the Toorak clinic opens, X finds many of her patients are having difficulty finding convenient parking. It happens that adjoining the Toorak premises is vacant land owned by Neighbour. In May, X negotiates an agreement with Neighbour that her patients may park on the vacant land. Technically this agreement is a licence. The licence runs for four years. X pays Neighbour a single up-front payment of $10,000 for the four year licence agreement.

(viii) No doctor is perfect. In July, a patient suffers complications after X removes an ingrown toenail. The patient sues X for medical negligence. X engages a lawyer and incurs legal expenses of $5,000 defending the claim. Eventually the patient agrees to abandon his legal action on terms that each party is to bear its own legal costs.