Question 1:

Christine Young is a new client of the accounting practice that you work for. She has come to see you and Serena your senior manager. She provides the following information.

She owns 4 investment properties and also works as an environmental officer for a large mining company.

In her 2022 income tax return she had claimed allowable deductions in respect of her investment properties, employment work related expenses and travel expenses relating to her occupation as an environmental officer.

Her 2022 tax return was lodged on time. A notice of assessment was issued 10 days later on 10 November 2022, which agreed with what she had claimed in her tax return.

However under the self-assessment system the Australian Tax Office (ATO) had the right to review her claims for deductions and 8 months later in July 2023 the ATO conducted a desk audit on her 2022 tax return and made the following adjustments to her original tax return:

The ATO made the following adjustments:

Expenses:

The ATO disallowed the following expenses:

1. Repairs of $23,500 claimed on the rental properties on the basis they were improvements,
2. Travel costs of $1,860.
3. Interest of $5,000 paid on the investment loans.
4. Motor vehicle expenses of $6,214 in relation to her occupation as the claimed percentage of 100% was too high.
5. Donation to the Red Cross Society of $500.

Income:

The ATO Increased her assessable income by including:

1. Lump sum of $120,000 being an inheritance from her late father.
2. Interest of $1,200 (AUD equivalent) paid to her on the above lump sum.
3. Profit of $168,000.

This resulted in a higher tax liability.

Christine advises you of the following information:

1. The amount spent on repainting three of the four investments properties was because of damage caused over the years by the sun and rain as well as replacing rotting timber weather boards cost $18,200. The balance of $5,300 was for the purchase of a new air conditioner on 30 January 2022 for one of the investment properties. The old air conditioner would have cost $3,600 to repair and Christine felt it was cheaper to buy a new one. The effective life is 10 years.
2. Christine travelled from her home in Melbourne to inspect the rental investment properties. The properties were located in Ballarat, Ringwood in Victoria and the Gold Coast in Queensland.
3. The Bank would not accept the investment properties as security and insisted on the family home being the security for the loans to buy the investment properties.
4. In her occupation as an environmental officer she is required to travel between various locations in regional Victoria. She did not keep a detailed logbook of the kilometres travelled but estimates it would be at least 4,245 kilometres out of 15,900 kilometres (total kilometres travelled for the year) for work purposes. She got these numbers by looking up her dairy on the computer. Her credit card statements show that she spent $15,000 on petrol, registration maintenance and insurance on the car.
5. The donation was to the Australian Red Cross Society a deductible gift recipient. $250 was a donation and the other $250 was to buy a ticket to a gala dinner event at the Melbourne Town Hall.
6. Her late father lived in New Zealand and the $120,000 that she received was as the beneficiary of his estate. The money was kept in a New Zealand bank account in her name.
7. The interest was paid into her NZ bank account and as she did not physically receive the interest in Australia, she ignored it. The NZ Tax Authorities also deducted $120 in withholding tax from the $1,200 interest.
8. She inherited a house in the country from her late father in May 2019. The house was used by her and her family as a holiday home. The cost of the property at May 2019 was $382,000. She spent $18,000 improving the property and the rates, insurance and maintenance costs of the property was $12,864. The property was sold for $550,000 on 1 May 2022 and settlement was on 1 August 2023. She believed that any capital gain should be in the 2023 year of income.

Required:

Advise Christine

1. Whether the five deductions above claimed by her but disallowed by the ATO are allowable deductions.

1. Whether the three adjustments to her income are assessable income are correct.

You must come to a conclusion and justify your answer. Merely stating the law without application to Christines facts will not be accepted.

In your answer you must refer to the legislation as well as case law and any guidelines issued by the ATO if appropriate to support your answer.