David recently purchased an investment property that was in poor condition. Befo

Question

David recently purchased an investment property that was in poor condition. Before leasing the property to tenants, he renovated the kitchen and replaced the front picket fence with a new brick fence. David also runs a large courier business in regional New South Wales and during the previous financial year, it billed on of its customers $1,100 (inclusive of GST) for services that it had provided. The company has recently discovered that the client is experiencing financial distress and will not be able to pay its bill. Required: Advise David whether he may claim any deductions for repairs in relation to these expenses Explain how the net income of the trust for the year of income ended 30 June 2014 would be assessed and what action David’s business should take, from the tax perspective, with reference to legislation and case law. (10 marks)

Explanation / Answer

Since there is no reasonable certainity that David will be able to collect the rent from tenant, and if he employs accrual method of accounting, then he may be able to deduct it as a business bad debt.

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