Question

Consider whether the $50 000 is deductible for the taxpayer

The taxpayer is a large eco-caravan hirer. During the current tax year they made a lump sum payment of $50 000 to the Government to be the only government accredited eco-caravan provider for the next 2 years. As a result, the Government agreed to promote the eco-caravans as part of its tourism campaigns. Tourists were still able to hire any type of caravan they wanted when traveling, but they would receive a special discount if they hired this particular eco-caravan as a result of the advertising campaign.

Answer 1

The amount of $50,000 that was paid by the taxpayer to become the only government accredited eco-caravan provider for the next 2 years will be regarded as a business expense. This is because this payment will provide a fillip to the tax payer’s business and more number of tourists will avail of his services given the fact that he is the only government accredited eco-caravan provider.

The payment is made for 2 years and so the entire amount of $50,000 cannot be claimed as a deduction at once. The tax payer will claim only half of the total amount in the 1^st year. Thus $50,000/2 = $25,000 will be claimed in the 1^st year. The balance $25,000 will stand as unamortized fees in the taxpayer’s balance sheet at the end of year 1. In year 2 the $25,000 unamortized fee will be deducted as expenses.