QUESTION Dave is a mechanic who started up his own business in September 2018 fixing Morris Minors. He runs the business from a small garage in St Lukes, Auckland, held under a 5 year lease. Dave hears that Rob, another mechanic, is going to live in Australia for 2 years. Dave initially offers to buy Rob's business but Rob will not sell. Instead Dave agrees to a contract whereby he pays $10,000 to take over Rob's business for the 2-year period. At the end of that period the business reverts to Rob. To cope with the increased work from both his and Rob's business, Dave needs larger premises. He moves to a bigger garage in Westmere and therefore no longer needs the small garage in St Lukes, which still has 4 years to run on its lease. Dave does all his book-keeping in a room of 20m set aside in his home of 150m. Dave has a mortgage on his home and pays $6.000 in principal and $4.000 in interest during the 2016 inc es. By doing all his accounts personally Dave saves himself the cost of an accountant, which he estimates to be $2,000. Dave also keeps much of his surplus stock in an old shed at the back of his house. The shed is 10m. One weekend in March when he is away surfing, the shed is broken into and $2,000 of stock is stolen. It was insured but the insurance payment is not received until April 2019. Dave puts on a Christmas party for all the clients. The food costs $500 and the drinks $1.000. He buys himself a new pair of overalls for the garage ($200) and a pair of new trainers ($120). Using the appropriate sections and cases advise Dave on what deductions he may be entitled to? SUGGESTED ANSWER The facts raise several issues regarding the deductibility of expenditure or losses incurred by Dave. Students should begin with a general introduction of deductibility: s.DA 1 - relates to allowable deductions S.DA 1 - general deductibility provisions, including apportionment to the extent that" S.DA 2 - defines what is not an allowable deduction see the various limitations deductions must be allocated to an IY and may be subject to a timing regime Banks v CIR (1978) 3 NZTC 61,236 - nexus test and now mentioned in the statute - tutor claimed a deduction of $108 for mortgage interest, insurance, lighting, heating etc./apportionment and timing also important Buckley & Young V CIR (1978) 3 NZTC 61,271 confirming nexus test and putting onus of proving the deductions on to the TP ISSUES Students should identify each possible deduction and assess whether it meets the nexus test and whether it is otherwise prohibited from deduction. Use of case examples is essential 1. Dave started his business in Sept - can he claim a deduction for pre-commencement expenditure? 2. Lease of Rob's business for 2 years. Apply DA I(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part. 3. Payment for the lease of the garage. Apply DA 1(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part. 4. You should discuss the home office expenditure. S DB 18 AA. Please note that Dave only in business for 7/12 months in the first year. 5. Cost of accounting records. Is this cost really incurred? 6. Theft of items from shed - s DB42 (Note, as stock was insured, any insurance proceeds would be taxable as a negative deduction under s CG6 - but only in year of receipt (ie. April 2016 is 2017 IY year).) 7. Dave's Christmas party for all the clients. - s DD1 - DD 4 8. He buys himself a new pair of overalls for the garage $200 and a pair of new trainers $120. Apply DA 1(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part QUESTION Dave is a mechanic who started up his own business in September 2018 fixing Morris Minors. He runs the business from a small garage in St Lukes, Auckland, held under a 5 year lease. Dave hears that Rob, another mechanic, is going to live in Australia for 2 years. Dave initially offers to buy Rob's business but Rob will not sell. Instead Dave agrees to a contract whereby he pays $10,000 to take over Rob's business for the 2-year period. At the end of that period the business reverts to Rob. To cope with the increased work from both his and Rob's business, Dave needs larger premises. He moves to a bigger garage in Westmere and therefore no longer needs the small garage in St Lukes, which still has 4 years to run on its lease. Dave does all his book-keeping in a room of 20m set aside in his home of 150m. Dave has a mortgage on his home and pays $6.000 in principal and $4.000 in interest during the 2016 inc es. By doing all his accounts personally Dave saves himself the cost of an accountant, which he estimates to be $2,000. Dave also keeps much of his surplus stock in an old shed at the back of his house. The shed is 10m. One weekend in March when he is away surfing, the shed is broken into and $2,000 of stock is stolen. It was insured but the insurance payment is not received until April 2019. Dave puts on a Christmas party for all the clients. The food costs $500 and the drinks $1.000. He buys himself a new pair of overalls for the garage ($200) and a pair of new trainers ($120). Using the appropriate sections and cases advise Dave on what deductions he may be entitled to? SUGGESTED ANSWER The facts raise several issues regarding the deductibility of expenditure or losses incurred by Dave. Students should begin with a general introduction of deductibility: s.DA 1 - relates to allowable deductions S.DA 1 - general deductibility provisions, including apportionment to the extent that" S.DA 2 - defines what is not an allowable deduction see the various limitations deductions must be allocated to an IY and may be subject to a timing regime Banks v CIR (1978) 3 NZTC 61,236 - nexus test and now mentioned in the statute - tutor claimed a deduction of $108 for mortgage interest, insurance, lighting, heating etc./apportionment and timing also important Buckley & Young V CIR (1978) 3 NZTC 61,271 confirming nexus test and putting onus of proving the deductions on to the TP ISSUES Students should identify each possible deduction and assess whether it meets the nexus test and whether it is otherwise prohibited from deduction. Use of case examples is essential 1. Dave started his business in Sept - can he claim a deduction for pre-commencement expenditure? 2. Lease of Rob's business for 2 years. Apply DA I(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part. 3. Payment for the lease of the garage. Apply DA 1(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part. 4. You should discuss the home office expenditure. S DB 18 AA. Please note that Dave only in business for 7/12 months in the first year. 5. Cost of accounting records. Is this cost really incurred? 6. Theft of items from shed - s DB42 (Note, as stock was insured, any insurance proceeds would be taxable as a negative deduction under s CG6 - but only in year of receipt (ie. April 2016 is 2017 IY year).) 7. Dave's Christmas party for all the clients. - s DD1 - DD 4 8. He buys himself a new pair of overalls for the garage $200 and a pair of new trainers $120. Apply DA 1(general permission) followed by DA 2 (general limitation). See the worked example on Canvas for an idea of how to answer this part