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Deductions: Expenses incurred to keep the business running

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Q: I have a sole trader client who has been audited for claiming high expenses. He is registered on an accruals basis. He did a job for a restaurant in the 2015 financial year in which he invoiced but did not get paid (he was required to report it as he invoiced his client). He still has not been paid to date. The restaurant owner was about to claim bankruptcy as they had too much debt until they both came to an agreement that our client would fund the restaurant in the hope that it would succeed, sell for a profit in the future and hopefully recoup his money The ATO states that he needs to pay GST and penalties on that.

What we want to know is if our client is able to claim the expenses he incurred to keep the restaurant operating against the income the ATO is chasing him for.

 

A: In the first instance, as this is a debt that the debtor is not able to repay, the taxpayer is entitled to a deduction for the bad debt (ITAA 1997 s 25-35; see also Taxation Ruling TR 92/18). If the ATO insists that the income from the restaurant is taxable (which is a reasonable position), then relief for the underlying bad debt must be given. The restaurant income can then be considered in its own right. Under s 8-1, a taxpayer is entitled to deduct expense incurred in earning assessable income, so all expenses associated with generating the restaurant income will be deductible.

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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