1TAXAXTION LAW Table of Contents Answer to question 1:.................................................................................................................2 Answer A:..............................................................................................................................2 Answer B:...............................................................................................................................2 Answer C:...............................................................................................................................2 Answer D:..............................................................................................................................2 Answer F:...............................................................................................................................3 Answer G:..............................................................................................................................3 Answer H:..............................................................................................................................4 Answer I:................................................................................................................................4 Answer to question 2:.................................................................................................................5 Answer to question 3:.................................................................................................................7 Answer to question 4:...............................................................................................................10 Answer to A:........................................................................................................................10 Answer B:.............................................................................................................................11 Answer C:.............................................................................................................................11 Answer D:............................................................................................................................12 Answer to question 5:...............................................................................................................13 Answer A:............................................................................................................................13 Answer B:.............................................................................................................................13 Answer C:.............................................................................................................................14
2TAXAXTION LAW Answer D:............................................................................................................................14 Answer E:.............................................................................................................................15 References:...............................................................................................................................16
3TAXAXTION LAW Answer to question 1: Answer A: The“taxation ruling of TR 2019/1”primarily deals with when the company carries on the business1. As per this ruling the commissioners consider when the company is actually carrying its business activities inside the small business entity definition given under“s-23, ITRA 1986”as valid from 2015-16 and 2016-17 income years and under“s328-110, ITAA 1997”. Answer B: Accordingly“Division30, ITAA 1997”setsdown therulesthatexplainsthe procedure of working out the deduction for certain gifts or contributions that a taxpayer makes during the year2. Answer C: For Australian resident that have the taxable income of beyond $180,001 and over a top marginal tax rate of 45% with each $1 over $180,000 is levied for the income year of 2019-20. Answer D: Neither motorcycle nor car is exempted from capital gains tax. Instead they are treated as personal use asset under the“Sec-108-20, IITA 1997”. An exemption is only allowed 1Taxation Ruling of TR 2019/1 2Division 30, Income Tax Assessment Act 1997 (Cth).
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4TAXAXTION LAW from capital gains or loss when the first element of the cost base of these assets are below $10,0003. Answer E: The CGT event C1 mainly deals with the end of the CGT asset under the“s 104-20 (1), ITAA 1997”. This event happens when the CGT asset which is owned by the taxpayer is destroyed or lost4. The time of this CGT event is important factor. This includes when the taxpayer first gets the compensation for the loss or destruction or if no compensation is given when the loss is found or the destruction happened. Answer F: Where an individual is held as the tax resident of Australia then the initial $18,200 of their annual income is considered as exempted. In other words the sum of $18,200 is the tax free threshold. Answer G: In the case of“Hayes v FCT (1956)”a receipt is not held as ordinary earrings given the receipts is found not to be the produce of occupation or the reward for services5. The case is considered important because a gift that is given for the personal qualities are not viewed as taxable ordinary income and would usually be not included into the assessable income of the recipient. At the time of distinguishing amid the non-taxable personal gifts and assessable 3Sec-108-20, Income Tax Assessment Act 1997 (Cth). 4Sec-104-20, Income Tax Assessment Act 1997 (Cth). 5Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47
5TAXAXTION LAW voluntary payments relating to services, the law court have place more emphasis on the nature of receipts in recipients hand. An unsolicited gifts cannot be held taxable ordinary income only for the reason that it was stimulated by the appreciation for some services. Answer H: The difference between ordinary income and statutory income are as follows; Ordinary IncomeStatutory Income Ordinaryincomeimpliesthose income which an individual derives either through the direct or indirect sources,irrespectiveofwhether inside or outside of Australia. Whilethecommonexamplesof ordinary income generally comprises ofsalaries,wages,bonus, commissions etc. Statutory income implies to all the amounts which is not the ordinary income,butisincludedintothe assessableincomebasedonthe specific rule into the taxation laws. Common examples of the statutory incomearecapitalgainsand dividends. Answer I: The difference between the Medicare Levy and Medicare Levy Surcharge are as follows; Medicare LevyMedicare Levy Surcharge The Medicare Levy is regarded as the basic method where majority of the Australian that are working are required to contribute towards the TheMedicareLevySurchargeis viewedasthetaxleviedbythe Federal Government which helps in payingforthehealthsystemof
6TAXAXTION LAW cost of Medicare. If an individual that has the taxable income of greater than $27,069 in the current tax year, will be under the obligation of paying Medicare Levy. The rate of Medicare Levy is 2% on the taxable income. public. The MLS is the additional tax that is imposedonthehigherincome earners that do not have any hospital cover. The MLS ranges from the rate of 1% to1.5%ofanindividualtaxable income,thisincludes$90,000for singlesand$180,000forcouples and families. Answer to question 2: To determine the residence status of person under“subsection 6 (1)”it is important to ascertain as to whether the person intent to make their home definitely in country of their choice. The“Taxation Ruling of IT 2650”“permanent place of abode”portrays that a person has set up their domicile or home in Australia and the taxation officer is satisfied that the taxpayer has no other“permanent place of abode”outside Australia. Whereas the expression“usual place of abode”means the residence of an individual where one lives with their sleeps at night with family6. As held in“Levene v IRC (1928)”the“usual place of abode”signifies the dwelling of an individual in which they live including their physical surrounding. In the meantime, the“permanent place of abode”constitute fixed home or the fixed residence of taxpayer’s dwelling. It is mainly treated as the abode or home of the taxpayer but 6Taxation Ruling IT 2650
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7TAXAXTION LAW cannot be considered as their permanent residence. It portrays an enduring relationship with a particular place of abode than those which forms the ordinary residence or those having their “usual place of abode”.Important factors such as continuity of presence, time span and durability of relationship with the particular place must be considered. Denoting the judgement in“FCT v Jenkins (1982)”the taxpayer who was transferred toNewHebridesforsettingupofficeforthreeyears’timewasconsideredhaving “permanent place of abode”out of Australia even though the taxpayer has not developed any kind of material intention of remaining in overseas for indefinite time7. Contrary to the statement where a taxpayer do not have any“usual place of abode”in Australia or any“permanent place of abode”out of Australia but keeps moving from one country to another then his or her movement would fully be held as transitory or temporary in nature. The taxpayer may not be regarded as obtained a substitute domicile of choice or “permanent place of abode”outside Australia. In leading up to the famous case of“Harding v FC of T (2019)”where the taxpayer was expats and worked overseas but maintained his family or the financial bonds in Australia. In the judgement passed by the full federal court held that the taxpayer was not the resident of Australia under the meaning of“section 6 (1), ITAA 1997”.When determining the residency of a person the work“permanent place of abode”must not be interpreted by referring to an individual’s permanence of specific house or dwelling but rather it must be interpreted as to where a person is living on permanent basis8. 7Federal Commissioner of Taxation v Jenkins (1982) 82 ATC 4098 8Harding v Federal Commissioner of Taxation (2019) FCAFC 29
8TAXAXTION LAW The aforementioned cases explains that a person should not be content that their “usual place of abode”is outside Australia. The principal test should be met for individuals given their“permanent place of abode”is outside Australia. Answer to question 3: HECS-HELP: $850: Importantly, the Australian Taxation Office explains that a taxpayer is not permitted togetanincometaxdeductionwhentheymakeanycontributiontotheAustralian government. As per the case facts the trainee accountant has occurred an outgoing in the form of HECS-HELP. The contribution that is made for the HECS-HELP will not be eligible for income tax deduction. Travel – work to university $110: As clarified by the ATO, self-education expenditure that are associated to the work of the employee and they incur when they take any formal course for improving their income producing activity then it is allowed for deduction. In order to obtain the self-education outgoings deduction, one should have to meet the conditions listed below a.The course undertaken would help in improving specific knowledge or skills needed in their present work activities. b.The taxpayer may show that course would result in rise in income from their present work activities. Similarly expenses that is incurred by the taxpayer for between home to place of education and work to place of education is allowed as deduction. The trainee accountant has occurred expenses for travel between work and university. Presumably the self-education undertaken is to improve the skills or knowledge in which the taxpayer is presently engaged
9TAXAXTION LAW and the travel between the works to university is allowed for general deduction under“s8-1, ITAA 1997”9. Books $200: As per the“Taxation Ruling of TR 98/9”self-education expenses such as cost incurred for study-related materials such as calculators, textbooks, stationaries are allowed for deduction under“s8-1, ITAA 1997”10.In“FCT v Studert (1982) ATC 4463”the taxpayer was allowed deduction for the sel-education expense occurred in course fees, accommodation and travel because it was related to the income earning prospect of the taxpayer in which he was presently engaged11. The trainee accountant will be allowed to claim deduction under“s8-1, ITAA 1997” for the cost books that was incurred for the self-education purpose because the expenses incurred in his present job occupation for improving his earning prospect. Childcare during the course of evening classes $80: No deduction is permitted under negative limbs of“sec8-1 (2)(b), ITAA 1997”for child care expenses. In“Lodge v FCT (1972)”the court denied the taxpayer with income tax deduction for child care expenses because they are not related to the derivation of assessable income12. Similarly the childcare expenses incurred for evening classes are non-deductible 9Lee, Yooree. “Australian Practice in International Law 2016.” Australian Yearbook of International Law, vol. 35, 2017, pp. 373–508. 10Taxation Ruling of TR 98/9 11Section 8-1, Income Tax Assessment Act 1997 (Cth). 12Lodge v Federal Commissioner of Taxation (1972) HCA 49
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10TAXAXTION LAW under“s8-1(2)(b), ITAA 1997”because they are not related to the derivation of assessable income13. Fridge repair cost of $250 at home: Most importantly under“sec25-10, ITAA 1997”a taxpayer is only allowed to claim deduction or the expense that are occurred in the repairs to the depreciating asset that is entirely held for generating assessable income14. The tax payer here incurred expenses of $250 for repairs to fridge at home. The taxpayer here will not be permitted to get deduction for repairs to fridge at home because the asset is not used for producing assessable income and the expenses constitute private in nature. Black trousers and shirt purchase cost of $145 for official purpose: As per“sec 8-1, ITAA 1997”no deduction is available to taxpayer for conventional clothing. The court in“Westcott v FCT (1997)”held that deduction for office outfits is not permitted because they do not relate to any income generating activities. These are treated as ordinary article of apparel and considered day-to-day living expenses. The expenses incurred by trainee for black trouser and purchase of shirt for office purpose is a non-deductible ordinary article of apparel and non-deductible under“sec 8-1, ITAA 1997”15. Legal expenses for writing up a new employment with a new employer $300: 13Section 8-1, Income Tax Assessment Act 1997 (Cth). 14Anderson, Colin, et al. “The Australian Taxation Office - What Role Does It Play in Anti- Phoenix Activity?” Insolvency Law Journal, vol. 24, no. 2, 2016, pp. 127–140. 15Westcott v FCT (1997) ATC 2129
11TAXAXTION LAW Under the 1stpositive limb of“sec 8-1, ITAA 1997”expenses occurred in getting new employment is not in the course of producing taxable income. In“Maddalena v FCT (1971)”expenses occurred by footballer to negotiate contract for new employment was non- deductible since it occurred at a point very soon16. The legal expenses incurred by trainee to write new employment with the new employer is non-deductible under the 1stpositive limb of “sec 8-1, ITAA 1997”because it is incurred in producing assessable and it occurred at a point very soon. Answer to question 4: Answer to A: There are several capital gains tax events that are applicable to the lease of land. A CGT event F1 takes place if the taxpayer grants the lease to somebody or if they extend or renew the lease that they had earlier granted17. The sum of capital gain represents the difference among the premium they get for granting the lease and the expenses they incur in granting the same. The CGT discount is not applicable to the CGT event F1. John here is the owner of land and grants the lease to David for a time seven years at the premium of $7,000. When John provided the land on lease to David for a time of seven years then it led to CGT event F1. The land was granted on premium. John must denote that a GGT discount is not applicable in case of capital gain. 16Maddalena v FCT (1971) 45 ALJR 426 17Lam, Dung, and Whitney, Alex. “Taxation and Property: Practical Aspects of the New Foreign Resident CGT Witholding Tax.” LSJ: Law Society of NSW Journal, no. 21, 2016, pp. 84–85.
12TAXAXTION LAW Answer B: Answer C: The ATO explains that the main residence of the taxpayer does not attract capital gains tax. Nevertheless, a taxpayer is not entitled to full main residence exemption if they use the house or any portion of the dwelling for generating income. As understood Li bought a house in March 2010 for $200,000 and partially used for her physiotherapy business18. The property was eventually sold for $700,000. The taxable capital gains is calculated below; Assessable portion = Capital gain x Percentage of floor area $700,000 – $400,000 = $300,000 (net capital gain) 300,000 x 20% = $60,000 (Taxable Portion) 18Sadiq, Kerrie, et al. Principles of Taxation Law 2016. Ninth ed., Thomson Reuters, 2016.
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13TAXAXTION LAW The above stated computation states that the house was owned by Li for greater than 12 months. Additionally, she also meets the common rule of “home first home for producing income” is also satisfied in the meantime because she soon commenced the business activity when she acquired the house. Answer D: The cost base of the CGT asset is usually viewed as the purchase price that is paid for the asset when the taxpayer purchases it along with the certain other costs that is related when acquiring, holding and selling the asset19. The reduced cost base on the other hand states that when the CGT event takes place to the asset and the tax payers are yet to make any capital gain. A taxpayer is required to use the asset’s reduced cost base to work out whether they have incurred capital loss. The taxpayers should denote that the capital loss is only used to lower the capital gain and they cannot use for reduce any other capital loss. While the cost base of the capital gains tax asset is generally made up of five elements. This includes the money that is paid to purchase property, incidental costs, ownership costs, capital improvement cost and cost of protecting the assets title. The reduced cost base also has the same five elements just like the cost base except the third element of the reduce cost base is associated with the balancing adjustment amount which are assessable. Answer to question 5: Answer A: Accordingly under“s6-5, ITAA 1997”, an item that holds the income nature is considered to be received by the taxpayer when the item of income has come home to 19Kenny, Paul, et al. Australian Tax 2016. 2016.
14TAXAXTION LAW taxpayer. The existence of illegality, immorality or the ultra vires does not prevents the taxability of the income20. On the current case facts, if the income is earned from the illegal means such as the drug-dealing, insider trading or theft. Similarly, the income that is earned from the illegal means are treated as assessable income under“s6-5, ITAA 1997”. This is because the item is derived when it comes to the taxpayer. Answer B: Interest represents an income stream. It means money paid on periodical basis. The amount of $500 that is received as interest from savings account amounts to annuities and will be taxable as ordinary income under“s6-5, ITAA 1997”. While a simple windfall gain is not treated as having the character of income21. The winnings from casino of $2,000 is a windfall gain and do not hold income character. Rent represents the amount paid to use another person’s property. The rental income are treated taxable as ordinary income under “s6-5, ITAA 1997”. Similarly, rent received from boarder sharing housing is a taxable ordinary income under“s6-5, ITAA 1997”. 20Sadiq, Kerrie & Coleman Cynthia & Hanegbi, Rami Et AL., et al. Principles of Taxation Law 2017. 10th ed., THOMSON LAWBOOK CO, 2017. 21Section 6-5, Income Tax Assessment Act 1997 (Cth).
15TAXAXTION LAW Answer C: An amount under“sec 6, ITAA 1936”that is derived as the personal exertion income may be included for assessment as either the statutory income or the ordinary income. This includes salaries, wages, allowances, pensions etc. received by working as employee. In “Dean v FCT (1997)”remuneration from employment was treated as taxable income under “sec 6-5, ITAA 1997”. The amount of $500 paid as allowance to employer is an income from personal exertion under“sec 6, ITAA 1936”. Citing“Dean v FCT (1997)”the allowance of $500 from employment is taxable income under“sec 6-5, ITAA 1997”22. Answer D: 22Dean v Federal Commissioner of Taxation (1997)
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17TAXAXTION LAW References: Anderson, Colin, et al. “The Australian Taxation Office - What Role Does It Play in Anti- Phoenix Activity?” Insolvency Law Journal, vol. 24, no. 2, 2016, pp. 127–140. Dean v Federal Commissioner of Taxation (1997) Division 30, Income Tax Assessment Act 1997 (Cth). Federal Commissioner of Taxation v Highfield (1982) ATC 4463 Federal Commissioner of Taxation v Jenkins (1982) 82 ATC 4098 Harding v Federal Commissioner of Taxation (2019) FCAFC 29 Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 Kenny, Paul, et al. Australian Tax 2016. 2016. Lam, Dung, and Whitney, Alex. “Taxation and Property: Practical Aspects of the New Foreign Resident CGT Witholding Tax.” LSJ: Law Society of NSW Journal, no. 21, 2016, pp. 84–85. Lee, Yooree. “Australian Practice in International Law 2016.” Australian Yearbook of International Law, vol. 35, 2017, pp. 373–508. Lodge v Federal Commissioner of Taxation (1972) HCA 49 Maddalena v FCT (1971) 45 ALJR 426 Sadiq, Kerrie & Coleman Cynthia & Hanegbi, Rami Et AL., et al. Principles of Taxation Law 2017. 10th ed., THOMSON LAWBOOK CO, 2017. Sadiq, Kerrie, et al. Principles of Taxation Law 2016. Ninth ed., Thomson Reuters, 2016. Sec-104-20, Income Tax Assessment Act 1997 (Cth).
18TAXAXTION LAW Sec-108-20, Income Tax Assessment Act 1997 (Cth). Section 6-5, Income Tax Assessment Act 1997 (Cth). Section 8-1, Income Tax Assessment Act 1997 (Cth). Taxation Ruling IT 2650 Taxation Ruling of TR 2019/1 Taxation Ruling of TR 98/9 Westcott v FCT (1997) ATC 2129