PART A (14 marks)

Required: Advise Katie as to:

a) the deductibility of the $20,000; and

b) whether the $1,200 and $1,000 are deductible as specific deductions.

Where appropriate, support your answer with legislative and judicial authority.

Katie owns a retail store (as a sole trader) that repairs smartphones and laptops. To save costs, Katie often uses substandard equipment to repair such items. One of her employees, being tired of such unethical behaviour, quits and threatens to go to the newspapers about Katies practices, which would substantially damage the reputation of Katies store.

To persuade the ex-employee not to go to the newspaper, Katie gives him $20,000. Katies accountant is unsure if this amount is capital or not.

Katies also borrows $100,000 to fund an expansion of her shop. This was for a 10 year loan with borrowing costs of $1,200.

During the year, Katie also lent $1,000 to an established customer (they did not owe the shop any money for the shops services). Unfortunately, this money has not been repaid and has been written off.