MLC301 Principles of Income Tax Law - Assessment Questions

QUESTION 4. 26

Felicity operates a chain of clothing stores and is in the process of building a new retail shop in an outer suburb of Melbourne. Her original plan was to open the store before the Christmas period to capitalise on Christmas sales. However, there have been several delays to the construction project and it is not envisaged
that it will be completed on time. In an attempt to get the shop open as planned Felicity offered a bonus of $30 000 to the building contractor if he completes on time. Ultimately the building is finished on time and Felicity happily pays the bonus which she based on the extra income received due to early completion. In preparing to answer this question the following points need to be considered.
(a) Is the expense incidental and relevant to the production of assessable income under either of the two positive limbs of s 8-1?
(b) Is the expense excluded from deduction by the first negative limb of s 8-1?
(c) If the expense is capital and excluded from s 8-1 is a specific deduction available under Div. 40 or Div. 43?
(d) If neither Div 40 or 43 apply consider other specific provisions such as s 40-880, or whether the cost can be added to the cost base of a CGT asset?
Prepare an answer to this problem considering each of the questions above.