Taxation Law: Understanding Income Tax Assessment Act 1997

This study explains the Income Tax Assessment Act 1997 and its impact on taxation of individuals and businesses. It covers different situations and how they are treated with respect to tax guidelines. The study covers topics such as exempt income, assessable income, deductions, and tax liability calculation. The subject is Taxation Law and the course code is LAWS3222. The study material is relevant for students studying in any college or university.

Taxation Law LAWS3222

Table of Contents
INTRODUCTION...........................................................................................................................3
1...................................................................................................................................................3
2...................................................................................................................................................3
3...................................................................................................................................................4
4...................................................................................................................................................5
5...................................................................................................................................................5
6...................................................................................................................................................6
7...................................................................................................................................................7
8. CONCLUSION............................................................................................................................7
REFERENCES................................................................................................................................1

INTRODUCTION
The income tax assessment act 1997 is the act which outlines all the laws relating to the taxation
of the individual and the business. this is necessary for the reason that this act provides all the
guidance that how the different element is being treated in order to calculate the tax and try to
meet all the tax related obligations. The division 4 and 6 of this act relates with ‘how to work out
the income tax payable on the taxable income of the person’ and ‘assessable income and exempt
income respectively’. Hence, the knowledge of both these divisions will be leading to better
treatment of the different situation being provided. The current study will outline the different
situations and how in every situation the event will be treated with respect to the tax guidelines
and the ITAA 1997. This compliance is very necessary because in case it will not be there the it
will be affecting the tax calculation and will be improving the efficiency as well.
1.
As per Section 6-5 of ITAA 1997, the amount of $5000 received by Britney as a scholarship is
an exempt income. It is because the section 6-5 state that the scholarship granted by the
University to meet the cost of education is exempt from Income Tax purpose in Australia.
Hence, in the given question the $5000 received by Britney is an exempt income and thus
excluded from the assessable income of Britney1. The assessable income basically includes
ordinary income plus statutory income.
2.
As per Section 6-5 of ITAA 1997, assessable income includes both ordinary as well as statutory
income and exclude exempt income and non-assessable non-exempt income. Further, as per
section 6(1) of ITAA 1997, ordinary income means the income consisting of earnings, salaries,
wages, commission, fees, bonuses, pensions, superannuation allowances, renting allowances,
retiring gratuity and gratuity received in relation to any service rendered etc. Thus, the gross
salary and superannuation contribution of Britney of $60000 plus 9.5% is considered as ordinary
1 Christians, Allison, and Laurens van Apeldoorn. "Taxing income where value is created." Fla.
Tax Rev. 22 (2018): 1.

income and assessable income. Thus, the amount of $65700 [$60000 + ($60000 * 9.5%)] is an
assessable income for Britney 2.
Also in this case, Britney is an Australian resident and because of this the assessable income
always includes the ordinary income being derived directly or even indirectly from the other
different sources as well. Also, this fact includes the income in or out of Australia as well and is
not restricted only to Australia.
3.
Along with the salary, Britney’s company has also decided to pay for $1000 for assisting
her in buying work clothes. Also the company is having strict policy relating to the clothes which
have relating to the quality. In addition to this the clothes also includes the very limited colours
and style and Britney spend $1000 for buying the clothes. But because of her good selection she
was able to wear those clothes for attending her personal event as well. thus, this will be included
in the deduction because it is being provided by the company and it will be deducted while
calculating the assessable income3. In accordance to ATO for all the work related expenses the
person can claim the deduction. But this is only with respect to when the employee themselves
buy the clothes or amount being spent on it and the cleaning cost. But in case the employer pays
for this clothing then the individual cannot claim.
But in the present case, Britney is also using the clothing for personal event as well which is not
correct. Hence, in this case this will not be a deduction as she is already using the dress in
personal use as well. also some part of this amount will not be a deduction but other will be. The
10 % of the clothes are worn and this implies that for $1000, $900 will be part of deduction as it
is used in workplace and $100 will not be because it is being used for the personal events of
Britney. Further in accordance to the section 34 C of ITAA 97 it is clear that the employee must
have the registration relating to the design for getting the uniform and also must take the written
notice of decision and even when the uniform is being registered on the name of the person.
2 Bucci, Valeria. "Presumptive taxation methods: A review of the empirical literature." Journal
of Economic Surveys 34, no. 2 (2020): 372-397.
3 Income Tax Assessment Act 1997. 2022. [Online]. Available through:
<https://www.legislation.gov.au/Details/C2021C00112>

4.
As per section 6-5 of ITAA 1997, the ordinary income is an income which is received by
individual for their employment such as wages, bonuses, rents etc. and also the income from
rendering personal services, income from property and income from carrying on trading
activities. The amount of license fees received by Britney is basically against its personal service
i.e., copyright to use their new band songs discovering. Hence, in the given scenario, the amount
of license fees i.e., $50000 + $2000 ($1000 * 2 months) = $52000 is consider as ordinary income
of Britney as per the section 6-5 of the income tax assessment act 1997. This is an ordinary
income of the Britney thus it is included in the assessable income of the taxpayer name Britney 4.
On the other hand, the expenditure of $10000 in buying copyright on their new bands
song is basically a capital expenditure. It is also falls under the negative limb. Hence, the
deduction on total amount of $10000 is not deductible as per section 8-1 of ITAA 1997. While
on the other hand, Britney can deduct under section 40-25 of income tax assessment act 1997,
the decline in the value of capital assets. Basically, copyright is an intangible asset which are
consider as capital assets but are not allowable for declining value deduction. Hence, the
expenditure on copyright is a non-deductible tax and Britney are not liable to claim deduction on
the same.
5.
Further in the present situation Britney is providing extra help to Tame Antelope in order
to line up the music performances. For this Britney is being provided with a $1000 for arranging
the performances for the band. In order to thank Britney, the lead singer of Tame Antelope sent a
cheque of $1000 and with that there was enclosed gold necklace worth $5000. This will be
treated as the deduction because in accordance to the CGT that is capital gain tax certain gifts are
being exempted from tax5. Hence, this will not be part of assessable income and will be treated
4 Hoynes, Hilary. "The earned income tax credit." The Annals of the American Academy of
Political and Social Science 686, no. 1 (2019): 180-203.
5 Boccabella, Dale, and Michael Blissenden. "No full FITO on US gains as CGT discount"
excludes" part of gain: taxpayer in Burton has a case. Part 1." Weekly Tax Bulletin (2019):
12-17.

as the deduction. Also, the amount of $1000 will be treated as the part of statutory income
because this has not been earned from the ordinary course of activity. This is necessary for the
fact that when the income is generated from the sources other than ordinary employment is being
treated as the deduction and it will not be included in assessable income.
Also, this will be affecting the calculation of the assessable income in case the deduction
will be treated in wrong manner and this will be affecting the total income being taxable. In
accordance to the section 6- 10 of ITAA 1997 the amount which is not included in the ordinary
income is being included within the statutory income6. Also, in case the person is an Australian
resident then assessable income will be including all the statutory income from other sources as
well.
6.
As per section 8-1 (1) of Income Tax Assessment Act 1997, the tax payer can deduct any loss or
expenses they incur in order to either gain or produce assessable income and incurred in carrying
on the business for the purpose of gaining or producing assessable income. Basically, the income
they received from Sony Music against their copyright for the songs are assessable income and
they are considering as part of ordinary income 7. Thus, in the given question the amount of
$10000 as a legal fees paid by Britney for defending the copyright infringement action to the
lawyer is consider as tax deductible. It is basically a tax deductible under category general
deduction as per section 8-1 (1) of the ITAA 1997.
Also with respect to the section 8- 2 the person can also deduct the specific deduction in order to
reach to the correct assessable income. This is pertaining to the fact that some of the provision of
this act involves preventing the person from deducting an amount which can be deducted
otherwise as well8. Thus any amount which is being deducted under the provision of the act that
6 Australia Individual - Income determination. 2022. [Online]. Available through:
<https://taxsummaries.pwc.com/australia/individual/income-determination>
7 Arnold, Brian J., Hugh J. Ault, and Graeme Cooper, eds. Comparative income taxation: a
structural analysis. Kluwer Law International BV, 2019.
8 Brydges, Neil, and Kelvin Yuen. "A matter of trusts: Trusts, income tax, CGT and foreign
residents." Taxation in Australia 53, no. 2 (2018): 80-82.

outside the division is being called as the specific deduction. Hence, the current case of copyright
against the songs is being part of infringement and is deductible.
7.
As per section 6 sub section 1 of the ITAA 1936, the rental income received from the
property is consider as ordinary income of the individual. Hence, the amount of $1000 which
Britney has received from its main residence via renting out it on Airbnb is consider as an
ordinary income and recorded as an assessable income. Further, Britney pays $200 commission
to Airbnb which is basically incur by the Britney in producing $1000 by renting out their
apartment through Airbnb. Thus, the amount of $200 commission is deductible under section 8-1
of ITAA 1997. It means Britney are allowable to take deduction of $200 because the amount is
apportioned properly so that Britney claim deduction only for the part of gaining income not
personal use. Generally, they do not fall under any specific deduction provision 9.
Thus, in accordance to the section 8- 1 of the ITAA 1997 the commission of the $200 is being
deducted as per this section, the person can deduct from the assessable income any loss or the
expenses being incurred in order to earn an income. Thus in this present case Britney has
incurred expense of $200 in order to earn $1000 from rent. Hence, because of this reason it will
be treated as the deduction from the assessable income.
8. CONCLUSION
Ordinary Income Statutory Income General Deduction Statutory Deduction
$60000* $1000
$52000 $5000
$10000
$200
9 Gardner, Matthew, Lorena Roque, and Steve Wamhoff. "Corporate tax avoidance in the first
year of the Trump tax law." Institute on Taxation and Economic Policy, Washington, DC,
https://itep. org/wp-content/uploads/121619-ITEP-Corporate-Tax-Avoidance-in-the-First-Year-
ofthe-Trump-Tax-Law. pdf (2019).

Assessable Income Deductions
$112000 $16200
Note* It is given in the question that the superannuation payment has no income tax
consequences for Britney and can be ignored. Thus, it is not considering for the purpose of tax
liability calculation of Britney 10.
Taxable Income Calculation: = $112000 – $16200 = $95800
Calculation of Tax liability:
Taxable Income Tax Rate Tax Payable
$18200 0% 0
$26800 ($45000 – 18200) 19% 5092
$50800 32.5% 16510
Total tax Payable $21602
Calculation of Help Debt repayment of Britney:
Britney need to pay the help debt repayment at the rate of 6.5% on their loan of $10000. It is
because the taxable income of Britney is $95800 which is fall under the category of $91710 -
$97212. On this basis, the repayment amount of Britney they need to report to ATO in their
income tax return is = $10000 * 6.5% = $650.
Note* In the given case study of Britney, it is identified and analysed that Britney is not liable
for any tax offset which they claim against its tax liability 11. Thus, on this basis the final tax
liability or tax payable before Medicare tax liability of Britney is $21602.
10 Goldin, Jacob. "Tax benefit complexity and take-up: Lessons from the Earned Income Tax
Credit." Tax L. Rev. 72 (2018): 59.
11 Sadiq, Kerrie. Australian Taxation Law Cases 2020. Thomson Lawbook Co, 2020

On the other hand, other levies also added to Britney income tax bill. For example, Britney in the
given case is liable to pay Medicare levy at the rate 2% and also need to pay Medicare levy
surcharge at the rate of 1%. It is because Britney is fall under the MLS income Threshold of Tier
1 $90001 to $105000. Also, as the Britney is obliged to pay Medicare levy surcharge of because
Britney does not hold private health insurance 12.
Calculation of Britney Medicare Levy:
= $95800 * 2% = $1916
Calculation of Britney Medicare levy surcharge:
= $95800 * 1% = $958
Calculation of Total or overall tax liability that need to be paid by Britney to ATO for the year
ended 30th June 2022 are as follows:
= Total Tax payable + Medicare levy + Medicare levy surcharge
= $21602 + $1916 + $958 = $24476
12 Medicare Levy Act 1986 (Cth) ss5, 6(1).

REFERENCES
Books and journals
1