Question

Progessive Coal Mining Ltd is an Australian company that runs a coal mining company in country Queensland. During the year there was a large fire at their mine site which could not be contained for 3 weeks. During that time smoke, dust and debris from the fire caused health concerns to the residents of the town. Some residents had to be evacuated because of health concerns. When the fire was extinguished and the residents could return, they had to clean up their homes to make them habitable. The Government also decided to hold a Royal Commission into the cause of the fire to determine whether the company was negligent.

During the year the company spent the following amounts of money:

1. $78,562 was spent on hiring additional fire equipment to fight the fire.
2. $583,412 was spent on legal fees and advertising to represent the company and its directors at the royal commission
3. The company also made a provision in the company accounts for $568,438 for future liabilities from claims by the townspeople against illnesses that may arise from the effects of the fire.
4. To maintain its good name the company also spent $65,789 on sponsorship of the local football team
5. It also donated $55,000 to the local SES Fire services.

As the company’s tax adviser, please advise the company as to the correct tax treatments of the above items.

Answer 1

TAX TREATMENT AS FOLLOWS :

1. $78,562 was spent on hiring additional fire equipment to fight the fire.

This is a capital expenditure. Hence only depreciation on this capital asset can be claimed in tax calculation.

2. $583,412 was spent on legal fees and advertising to represent the company and its directors at the royal commission.

This is a huge expenditure. Hence, portion of this expenditure can be amortized every year say 3 years . Hence 583412/3 = 194471 can be spent every year and claimed in tax while allowable expenses . Hence this expenditure is deferred expenses.

3. The company also made a provision in the company accounts for $568,438 for future liabilities from claims by the townspeople against illnesses that may arise from the effects of the fire.

This expenditure is disallowed since it is in the nature of provision . Out of the provision, whenever actual expenses are incurred , the same can be allowed.

4. To maintain its good name the company also spent $65,789 on sponsorship of the local football team

This expenses is in the nature of advertisement expenses and the entire amount is allowed for taxation purposes.

5. It also donated $55,000 to the local SES Fire services.

Charitable contributions are fully allowed subject to limits if any in every year.