Joe had for several years run a pizza outlet in Toowoomba. In setting up the bus

Question

Joe had for several years run a pizza outlet in Toowoomba. In setting up the business in several years ago, he had borrowed from the Witch Bank Ltd. The loan was to be repaid over a period of 10 years. Unfortunately for Joe his business suffered from the cut price competition undertaken by some large operators early in the previous tax year and as result he closed his outlet in April of the previous tax year and returned to his work as a concert pianist employed in a national orchestra. During the current tax year ended 30 June, Joe paid a total $12 000 interest under the loan relating to the pizza business. Joe’s business was profitable for the whole period he operated it until the last two income years. The tax treatment of the amount would be:

Select one: 1. Joe could not deduct any of the interest as there is no longer any corresponding income to match it against. 2. Joe can capitalise the interest paid and claim a capital loss. 3. Joe would not be able to deduct the interest because it is a capital expense associated with buying the asset that was the pizza business. 4. Joe could deduct the amount but only if he has income that is recognized on the accruals basis and cannot be matched against wages because that is recognized on a cash basis. 5. Joe could deduct the entire amount of the interest because the expense relates to a previous income earning activity.

Daniel, a resident, carries on a business buying and selling land. During the current year he purchased two blocks of land for $60 000 each. Having purchased the blocks he spent $15 000 on each block to clear some trees to make the blocks suitable for building houses. On 24 May of the current tax year he sold one of the blocks of land for $170 000 and incurred $12 000 in marketing costs associated with selling that block. What amount will Daniel derive as ordinary income in accordance with s 6-5 ITAA 97 as a result of selling the block of land?

Select one: 1. $158 000. 2. $83 000. 3. $98 000. 4. $170 000. 5. $143 000.

Explanation / Answer

Joe could deduct the entire amount of interest because the interest relates to previous income earning activity.

Ordinary income= net income from the sole proprietorship business

=( 170000-12000)-75000 =$83000.

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