QUESTION 3

Part A

Paul Smith Lives in suburban Melbourne and borrowed $1 million from State Bank in July 2020, at an interest rate of 10% per annum, to purchase a large parcel of vacant land near a proposed airport site. Paul planned on operating a motel business on the site. In August 2020 Paul engaged an architect to draw up plans for the construction of the motel. Paul approached his bank to raise the additional finance of $10 million to build the motel.

However, given the size of loan requested and his other financial obligations, the bank rejected his application. Paul then continued to approach other financial institutions but was unsuccessful in raising the funds required.

Paul subsequently incurred various advertising costs to find prospective partners who would invest in his business. Unfortunately for Paul, no prospective partners were found as it subsequently transpired that the construction of the airport would be delayed for several years. Eventually after 5 years Paul decided to abandon his plans and he sold the land.

Required:

Applying the IRAC principle and citing relevant case law and legislation to support your answer, advise Paul as to the deductibility, if any, of the loan interest for the purposes of s 8-1 of the Income Tax Assessment Act 1997.

(13 marks)

Part B

Consider each of the following independent transactions in the case of Oz Furniture Ltd, a retailer of furniture. The company's annual turnover is $632 million for the year ended 30 June 2021 making it a large business taxpayer.

During the 2020-21 income tax year, the company purchased the following assets for exclusive use in the business:

Item	Date of acquisition	Accounting useful life	Cost
(a) Desktop computer	13 July 2020	4 years	$3000
(b) Motor vehicle	9 September 2020	6 years	$82 000
(c) Copyright	1 December 2020	20 years *	$100 000
(d) Trademark	9 February 2021	20 years	$60 000
(e) Accounting software acquired	5 April 2021	4 years	$1440
(f) Commercial building	1 June 2021	30 years	$8 million

*The period that the copyright ends.

The company would like to use the same useful life values for taxation purposes for the depreciable assets as they are using for accounting purposes as shown in the table above.

Required:

Calculate Oz Furniture Ltd.s decline in value (i.e. depreciation) claim in respect of the abovementioned assets for the year ended 30 June 2021, bearing in mind that it wishes to use the depreciation method that will maximise the deduction that can be claimed. Please show and round all calculations to the nearest whole dollar and refer to relevant legislation to support your answer.