Problems with Abandoning the Full-Deduction Rule

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Laws:......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................5
Answer A:..............................................................................................................................5
Answer B:...............................................................................................................................6
Answer C:...............................................................................................................................6
Answer D:..............................................................................................................................7
Answer E:...............................................................................................................................7
References:.................................................................................................................................9

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Answer to question 1:
Issues:
The issue involves ascertaining the taxability of receipts that is earned by the taxpayer
from part-time employment.
Laws:
Receipts which is linked with performance of contracts or provision of service is
characterized as payment to those that receives it. These receipts hold adequate link with
taxpayer’s income making activities (Graetz et al. 2015). As observed in “sec 6-5(1) ITA Act
97” the taxable income comprises the income which is in agreement with ordinary concepts.
When a taxpayer receives any income from revenue producing activities are held as ordinary
income. Voluntary payments which is linked to the professional activities of taxpayer is held
as ordinary income. In “Calvert v Waingwright (1947)” tips got by taxi driver were held as
taxable earnings despite the passenger did not had any obligation of paying it.
Where a person earns an income for personal service and employment it forms the
part of income from employment and service as well which may be taxable as ordinary and
statutory earnings. Receipts of salaries, wages, bonus, fees, commission that forms the
ordinary incidence of work is ordinary income (Tiley and Loutzenhiser 2014). In
“Moorhouse v Dooland (1955)” amounts that is earned by taxpayer directly or indirectly
from any personal service of taxpayer is held as ordinary earnings.
A gain which amounts to a mere gift is not held as ordinary income. Payments which
is given to employees or service givers are usually not held as income given it can be traced
to certain personal relationship which is existent among the payer and receiver rather than
any kind of provision for specific service which is given in past (Saad 2014). As noticed in

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“Hayes v FCT (1947)” when a taxpayer receives any gift that relates to personal qualities
then it cannot be held as ordinary income. It is usually non-taxable to receiver.
As explained under “sec 66 (1) FBTAA” the FBT is commonly imposed on the
employer and not on the employee. This type of tax is normally imposed based on the
provision of fringe benefit and not upon the receipt of the benefit (Cooper, Krever and Vann
2016). “Sec 136 (1) FBTAA” says that fringe benefit involves the benefit that is given to
employee by employer when they are engaged in any employment activities. As noticed in
“Essenboourne Pty Ltd v FCT (2002)” a benefit will only be held as fringe benefit when
there is an adequate relation and material relation among the employment and provision of
benefit.
As stated by the ATO, cash gift or any other identical amounts that is received by a
taxpayer from their family members are not considered for assessment purpose while filing
tax return (Holland and Vann 2015). Usually money received as gift from a family person
that relates to personal reason and the gift does not have any connection to income producing
activities. These amounts are not taxable income and does not needs to be included in the tax
return.
Application:
Emmi in this case study is found to be student at Holmes Institute and works for part-
time only in Crown Melbourne restaurant. In the relevant income year a tips totalling $335 in
cash was received by a customer. The tips received must be treated as voluntary payments
which is linked to the professional activities of taxpayer. Referring to “Calvert v
Waingwright (1947)” tips got by Emmi should be held as ordinary income and will be
taxable under “sec 6-5 ITA Act 97”.

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In the relevant income year Emmi made an income of $25,000 from her work in
Crown Melbourne Restaurants. The receipts by Emmi is related to her performance of
personal service. The income holds the adequate link with Emmi’s income making activities.
Referring to “Moorhouse v Dooland (1955)” the amount of $25,000 is characterised as
personal exertion income and holds nexus with the Emmi’s income producing activity
(Gordon et al. 2014). The amount will be included in Emmi’s taxable return and will be
chargeable under “sec 6-5 ITA Act 97” as “ordinary income”.
There was one occasion when one of Emmi’s regular customer gifted her with an
expensive perfume of $250 during the Christmas time. By citing the federal court’s
judgement in “Hayes v FCT (1947)” the gift of perfume to Emmi is related to her personal
qualities. This is because a personal relationship which is existent among the customer and
Emmi rather than any kind of provision for specific service which was given in past (Aaron
and Slemrod 2016). The gift of perfume is non-taxable to Emmi as ordinary income because
it is non-convertible to cash or money’s worth.
As Emmi was working in Crown Melbourne restaurant on part-time basis she was
given a monthly entertainment event which her employer paid. There was also a meal
expense of $380 was made by Emmi’s employer for the meal consumed by her. With respect
to “Sec 136 (1) FBTAA” the entertainment event and meal expenses paid by Crown
Melbourne restaurant for Emmi is a fringe benefit. Referring to “Essenboourne Pty Ltd v
FCT (2002)” the benefit will be held as fringe benefit for Emmi because there is an adequate
and substantial relation among the employment and provision of benefit (Lam and Whitney
2016). Under “sec 66 (1) FBTAA” Crown Melbourne restaurant, being Emmi’s employer
will be liable FBT relating to the value of benefit provided.

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At the end of the year Emmi received a Christmas gift from her father that amounted
to $15,000. The money received as gift by Emmi from her father relates to personal reason
and the gift does not has any connection to income producing activities. As a result, the
amount of $15,000 is not taxable income for Emmi and she does not needs to include in her
tax return.
Conclusion:
As evident from the above stated analysis, Emmi in her taxable return is under
obligation of reporting the tips received from customer and her employment income by
working on part-time basis because it constitute an assessable ordinary income under “sec 6-
5 ITA Act 97”. While her employer will be accountable for FBT under “sec 66 (1) FBTAA
1986” for benefits given to Emmi during her employment with Crown Melbourne restaurant.
Answer to question 2:
Answer A:
The main objective of introducing the CGT legislation was to impose tax on the
capital gains. Capital gains happens when the CGT assets that is purchased on or following
the 20 sept 1985 are subsequently sold (James and Wallschutzky 2016). These type of assets
are better known as “post-CGT assets”. While on the other hand “Pre-CGT Assets” refers to
those assets that are bought before 20/9/1985. Any capital gains or loss that is earned from
the disposal of “pre-CGT assets” are exempted from the provision of CGT.

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Liu in the relevant tax year disposes her main residence that she has held under her
ownership all through the period. Liu took the decision of selling the house for a market
value of $630,000 and the purchase value of the house in 1981 was $55,000. The main
residence of Liu must be classified as “pre-CGT asset”. Liu had bought the house in 1981
and this means that the property was purchased before the introduction of CGT regime.
Consequently, no taxes will be imposed on capital gains because it is an exempted property.
Answer B:
An explanation regarding the personal use asset is given in “subdivision 108C”.
Denoting the explanation given in “sec 108-20 (2) & (3)” personal use asset namely consists
of furniture, household items, electronic goods, motor vehicles, boats etc. that is kept under
the possession for private use of an individual (Aprill 2019). An important rule of “sec 108-
20 (1)” relating to personal use asset explains that any losses suffered from selling these type
of asset is basically ignored.
Liu in the relevant year has decided to sell a car. Liu sells the car for $8,000 but the
actual cost of car stood $37,000. Denoting the definition that is given in the “sec 108-20 (2)
& (3)” the car is referred as “personal use asset”. This is because Liu used the car primarily
for her private purpose. It is apparent that when Liu sold the car she suffered a capital loss
(Pu et al., 2019). Mentioning the special rules given in “sec 108-20 (1)” relating to personal
use asset, the capital loss suffered by Liu should be simply disregarded.
Answer C:
As given in the “Div 152” relief in the form of concession is given to small
businesses. There are certain important criteria for availing the concessions (Viswanathan
2019). This involves;

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a. On finding that the business has the net value of asset is inside the $6 million or the
total business revenue is not greater than $10 million then it will be categorized as
“small business entity”.
b. The CGT asset that is possessed by the company must be categorized as active asset.
On meeting the above criteria there are four types of concession that is available to
the small businesses;
a. “15-year exemption” from the CGT when it is noticed that the asset has been owned
for 15-years and the age of taxpayer is 55 years or greater than that.
b. “50% reduction” is given to the taxpayer that qualifies the conditions following the
general application of 50% discount (Siebert 2019).
c. “Retirement concessions” is provided to the taxpayer when it is found that capital
gains made from sale of CGT asset is used for retirement purpose and the proceeds is
not more than $500,000.
d. “Roll-over relief” is given when a replacement asset is acquired by the taxpayer
The case of Liu highlights that she was carrying the photography business and as she
is moving to China she decides to retire from her business. She eventually sells the business
for $125,000 with photography equipment fetching her $53,000 and the goodwill fetching her
$50,000 (De Villiers 2019). Liu is eligible for availing small business entity concession
because the value of her net asset is not more than $6 million. As she has met the eligibility
criteria she can avail retirement concession because the value of her capital stands $125,000
which is under the limit of $500,000.
Answer D:
As per the special rule that is given for personal use asset in “sec 118-10”, any capital
gain that is made from selling the asset having a purchase cost of not more than $10,000 is

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simply required to be ignored (Hoynes 2019). Accordingly, Liu in the relevant income year
reports the sale of painting for $4,800. The cost price of painting was not more than $2,000.
So the capital gains made by Liu from selling the painting must be simply ignored because
the cost of asset is not more than $10,000 and fails to meet the first element cost base given
under “sec 118-10”.
Answer E:
An explanation regarding the collectable is given in “subdivision 108B”. As noticed
in “sec 108-10 (2) & (3)” assets which the taxpayer has kept for private use is known as
collectable. Namely assets such as paintings, sculptures, jewellery, stamps, coins and antiques
is examples of collectables (Cohen and Viswanathan 2019). The special rule that is explained
in “sec 118-10 (1)” says that capital gain or loss for collectable purchased for $500 or less is
ignored.
In the relevant year, Liu sold all her paintings for a sales proceeds of $28,000. She has
purchased all the paintings with a cost base of $500 only. Referring to the special rules of
“sec 118-10 (1)” the capital gains from painting made by Liu must be ignored because the
cost of painting is not more than $500.
Apart from this, there was one painting which Liu had purchased from an artist
directly for $1,000 but sold it for $8,000. As a result the cost base of painting is more than
$500 and the sale of painting has resulted in capital gains for Liu. As there is a capital gains
earned from disposing the painting, Liu is required to denote that the gains will attract tax
liability within the legislative provision of “sec 102-5”.

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References:
Aaron, H. and Slemrod, J. eds., 2016. The crisis in tax administration. Brookings Institution
Press.
Aprill, E.P., 2019. A Tax Lesson for Election Law.
Cohen, N. and Viswanathan, M., 2019. Corporate Behavior and the Tax Cuts and Jobs
Act. Available at SSRN 3449860.
Cooper, G., Krever, R. and Vann, R., 2016. Income taxation commentary and materials.
Australian Tax Practice (ATP).
De Villiers, M., 2019. Tax avoidance eliminated by piercing the corporate veil: tax
law. Without Prejudice, 19(10), pp.39-40.
Gordon, R., Kalambokidis, L., Rohaly, J. and Slemrod, J., 2014. Toward a consumption tax,
and beyond. American Economic Review, 94(2), pp.161-165.
Graetz, M., Schenk, D., Freeland, J., Lathrope, D., Lind, S., Stephens, R., Burke, K., Brealey,
R., Myers, S., Allen, F. and Keyes, K., 2015. Federal Income Taxation, Principles and
Policies (University Casebook Series). Foundation Press/West Academic.
Holland, D. and Vann, R.J., 2015. Income tax incentives for investment. Tax law design and
drafting, 2, pp.2-9.
Hoynes, H., 2019. The Earned Income Tax Credit. The ANNALS of the American Academy of
Political and Social Science, 686(1), pp.180-203.
James, S. and Wallschutzky, I., 2016. Tax law improvement in Australia and the UK: the
need for a strategy for simplification. Fiscal Studies, 18(4), pp.445-460.

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Pu, Y., Liu, C., Chen, X., Cheng, Y. and Wang, J., 2019, December. Tax Treatment of
Employee Benefits. In 5th International Conference on Economics, Management, Law and
Education (EMLE 2019) (pp. 997-998). Atlantis Press.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’
view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Siebert, H., 2019. Reforming capital income taxation. Routledge.
Tiley, J. and Loutzenhiser, G., 2014. Revenue Law: Introduction to UK tax law; Income tax;
Capital gains tax; Inheritance tax. Bloomsbury Publishing.
Viswanathan, M., 2019. Tax Law: Problems with Abandoning the Full-Deduction Rule. The
Judges' Book, 3(1), p.16.