BULAW 5916 Taxation Law & Practice Semester 2 2020 Written Assignment Total maximum marks: 100, weighted to 30% of the final mark for the course Due Date: Friday of Week 9, 11.55 pm (through Moodle)...

Luxwood is a company established in the year 2011, in the business of manufacturing good quality of furniture. This furniture is sold to retailers and then they sell it under various
and names. The company also sells the furniture to directly the customers.
Section 8-1 of Income tax assessment Act 1997 overviews the allowability of the deductions. As per the section expense is allowable as deduction if there is an outgoing or loss relating to the assessable income. Sec 8-1 of the income tax act deals with the meaning of the word incu
ed in the outgoing or loss and the timing of deduction. This section outlines that in most cases deduction of expenses is allowed when the amount is spent on the expenses and not when a provision or future liability arises. The timing of deduction of expenses for a future obligation will be allowed in future when the actual payment for expense is made. Deduction for any kind of provision is not allowable unless in few cases where there are exceptions. There is various ruling by court and case laws to suggest that the definition of the term incu
ed becomes exhaustive in providing the co
ect meaning.
The following general rules are set out to
ing in clear understanding –
A) An actual payment in respect of expense need not necessarily made if there is sure commitment of the expense in the same year as the year of income. The obligation to make payment should be a present obligation and not future and the expense should not be contingent in nature.
B) The obligation or liability to pay for the expense should have existed on the present date. It need not depend on any outcome.
C) The obligation or liability of the expense is determined or committed on a present day and there is reasonable estimation of the amount of liability. The estimate amount of expense should suffice even if it is not accurate.
D) Liability should have raised on the present scenario and should not be consistent in nature.
E) Payment is made in respect of liability that is not existing in present scenario, but payment deemed to have considered outgoing or loss.
Task 1
Issue
In the event of anniversary of Luxwood store, they issue non-refundable credit to every customer based on their purchases in last 12 months. This card is issued as a customer loyalty programme. The issue here is whether the amount on the credit of each customer is allowable as a deduction from the assessable income.
Rule
As per Taxation ruling TR 1999/6 of the Income tax, Customer loyalty points are credited to the customers card at the time of accrual in the form of Provision. The actual expense related to such loyalty points accrues only when the customer uses or redeems those points to claim against the points. To ascertain whether deduction is allowable or not, sec 8-1, of ITAA 1997, states that to avail deduction expense should be incu
ed. Expense is said to be incu
ed when there is something that is outgoing or a loss of any kind. To determine actual loss or outgoing, a liability as on the present day should have been existed. In the case law of Nilsen Development Pty Ltd V FC of T 144 CLR 166 at 624, it had been clarified that a liability as on present day should have existed to claim deduction. Liability should be not contingent in nature. Here, the Liability is contingent in nature because there are many factors pertaining to claim of reward points. For E.G. If a store that is providing loyalty points has 50 items to sell, at the time of crediting points to the customer it is also not clear which product will be bought against reward points.
As per the provisions of Sec 8 – 1 of the Income tax Act, the amount of outgoing must have nexus with the assessable income. The amount of outgoing should be for the same year of the year of expense and assessable income. If the expense provision is for one year and obligation to pay is for other period, the difference in timing will also change the year of deduction to the year of actual payment and the year when the expense actually incu
ed.
Application
Luxwood has a policy to issue Loyalty reward points to its customers on every anniversary depending upon their purchase during the year. Cu
ently company expect that on 30th June 2020 the total credit will be $2,20,000 on account of credit points but in the cu
ent financial year additional amount added shall be $2,45,000 for the year ended 30th June 2020. The store expects 10% of the credit to lapse at the end of the year. Since, the above is not a cu
ent liability and the liability will arise only at the time of redeeming reward points, it cannot be claimed as a deduction till the time these reward points are...