Question

Mahmood is an employee of China Imports, a company of which he is the sole shareholder. With a view to expanding his business, he purchased a small retail store in Auburn on 1 August 2018 to distribute goods he imported.

In mid- July 2019, Mahmood approaches you to prepare his tax return and to obtain tax advice on expenses he incurred during the financial year ended 30 June 2019. In the course of the meeting the following issues come to your attention:

The purchase price of the retail store included an amount of $28,000 for book debts. By 30 June 2019, Mahmood had collected $12,000 of the debts and decided on that date to write off the remaining $16,000 as a bad debt.

In September 2018, he went on a trip to China where he visited a range of businesses producing products of interest to his clients. He had not arranged before the trip to call on particular businessmen or to inspect specific businesses. He spent 3 weeks on business activities and was so impressed by his stay in China that he decided to stay on for a 6-week holiday in China when his business there was finished.

His expenses for the overall trip included airfares, accommodation, meals, taxis and guided tours to interesting places in China.

Prepare a report advising Mahmood on the issues related to the deductibility or otherwise of the expenses in question.

Answer 1

1) Bad Debt- For bad debt of $16,000, Mahmood will receive a deduction whil computing his taxable income for tax purposes. Hence $16,000 to be deducted from taxable income.

2)Expenses deduction in relation to airfares, accommodation, meals, taxis and guided tours to interesting places in China - The total expenses should be bifurcated/apportioned between 3 weeks and 6 weeks i.e., for official purpose and un-official purposes. Expenses occurred during 3 weeks will be treated as business expenses and Mahmood will get deduction for the same. However all expenses incurred in 6 weeks holiday trip are not allowed as deduction.

Thank you!