Principles of Income Tax Law - Desklib

This article discusses the principles of income tax law with a focus on answering question 1A and Part 1B. It also explores the policy-based question of negative gearing and its impact on the economy and society.

Running head: PRINCIPLES OF INCOME TAX LAW
Principles of Income Tax Law
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1PRINCIPLES OF INCOME TAX LAW
Table of Contents
Part I:..........................................................................................................................................2
Answer to question 1 A:.............................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................4
Part 2: Policy Based Question....................................................................................................8
Introduction:...........................................................................................................................8
Arguments against Negative Gearing:...................................................................................8
Arguments for Negative gearing:.........................................................................................10
Conclusion:..........................................................................................................................12
References for Part I:...............................................................................................................13
References for Part II:..............................................................................................................14

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Part I:
Answer to question 1 A:
Issues:
Will the taxpayer be held liable for assessment relating to the profits that are obtained
from the disposal of the apartment under “section 6-5 of the ITAA 1997”?
Rule:
An individual taxpayer that obtains income from the sale of property is viewed as the
ordinary income depending on the situations where the taxpayer develops or enhances the
property for producing profit from the property development activities1. Taxpayers that are
engaged in the property development activities is usually held as property developers. When
the property is sold during the ordinary course of business, income derived from the sale of
property would be considered as the chargeable income for the gross earnings made under
“section 6-5 of the ITAA 1997”.
The “taxation ruling of 92/3” provides guidance to the taxpayer in determining
whether the proceeds that is obtained from the isolated transactions would be held profits and
hence assessable under the “subsection 25 (1) of the ITAA 1936”2. Profits obtained from the
isolated transactions is regularly held as earnings when the elements such as intent of entering
the transactions was to derive profit and the transaction was entered or profit made was in the
sequence of performing occupational or commercial transactions.
1 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
2 Robin, H. Australian taxation law 2017. Oxford University Press, 2017.

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The taxpayer must hold requisite intention while entering into the transaction. Sale of
revenue generating assets results in ordinary income for the taxpayers. The high court
decision in “Whitfords Beach Pty Ltd v FCT (1982)” held that a taxpayer is held liable for
taxation under “subsection 25 (1) of the ITAA 1936” relating to profits derived from the
disposal of land since the activities are held as the business of land development3. The
taxation commissioner states that profits from transactions of isolated nature give rise to
income which is held taxable under the ordinary meaning of “section 6-5 of the ITAA 1997”
as the execution of commercial transaction.
Application:
Kristie bought an investment property with the necessary purpose of making profit.
She also sought the service of professional planner for sketches and apartment plans. As
obvious, Kristie had the definitive purpose of entering the transaction with profit making
motive. The activities of activities of Kristie constitute performance of business activities or
commercial transaction for profit making scheme. Citing the reference of “Whitfords Beach
Pty Ltd v FCT (1982)” profit derived by Kristie from such activity is an income from
carrying on the business of land development4.
3 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
4 Martin, Fiona, and Margaret Connor. "Using Blended Learning to Aid Law and Business
Students' Understanding of Taxation Law Problems." J. Australasian Tax Tchrs. Ass'n 12
(2017): 53.

4PRINCIPLES OF INCOME TAX LAW
Conclusion:
Conclusively, proceeds from the sale of apartment block is an income assessable
under the ordinary meaning of “section 6-5 of the ITAA 1997”.
Answer to Part 1 B:
The prevailing is based on ascertaining whether an individual taxpayer would be held
liable for the capital gains tax obtained from selling of assets under the provision of “ITAA
1997”?
Capital gains is implemented on the individual taxpayer that obtains the assets or any
other events taking place on or after the 20th September 1985. An individual taxpayer can
produce capital gains or losses if the assets are sold or transferred through gifts5. A business
asset usually includes the premises, goodwill, licences or business rights. A taxpayer is under
the obligation of including the sum of capital gains that is earned in the income year at the
time of filing tax return.
As defined by the Australian Taxation Office an individual taxpayer owning the
commercial property are most likely to produce capital gains or losses. The taxpayers remain
in the most likely situation of producing capital gains or losses while selling the commercial
property6. On finding that the taxpayer produces capital gains in the particular income year,
an obligation of paying the capital gains tax arises for the taxpayer. Capital gains or losses
earned by taxpayers refers to the difference amid the costs which is obtained by the taxpayers
5 Maley, Mr Nicholas. "Australian Taxation Office Guidance on the Diverted Profits Tax."
(2018).
6 Barkoczy, Stephen, Australian Tax Casebook 2018 14E Ebook (OUPANZ, 2018)

5PRINCIPLES OF INCOME TAX LAW
while disposing the property. An amount that is claimed as deduction by the taxpayers for
reducing the tax liability is left out from the cost base of property.
The current facts obtained suggest that Dave purchased a business property that
amounted to $900,000 along with the business goodwill that amounted to $100,000. Due to
the ill health of the taxpayer Dave in the end sold the business to the Doors RU for a sum of
$2,000,000. Dave further sold the goodwill to the Doors RU and fetched a sum of $400,000
for the sale of business goodwill. Based on added sales stipulation, a premature end of
contract between the Doors RUs and Dave led to the receipt of $80,000 as the lump sum
amount of compensation of for Dave.
Citing the provision of “section 102-5 of the ITAA 1997” a capital gains tax liability
originates for Dave relating to the sale of business premises and business goodwill. The
selling of business premises and goodwill have resulted in capital gains with capital gains on
the sum of gains obtained in the relevant income year7. The capital gains that is obtained by
Dave reflects the difference between the cost of purchase and sales.
Within the provision of “Section 104-25 of the ITAA 1997” a CGT event C2 occurs
when the taxpayer receives any compensation arising from the termination of the CGT assets
that are intangible character8. The case facts of Dave provide that he received a lump sum
amount of $80,000 in the form of compensation from the dissolution of contract. Referring to
the explanation that was made in “section 104-25 of the ITAA 1997” the cessation of
7 Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
8 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.

6PRINCIPLES OF INCOME TAX LAW
contract resulted in intangible CGT assets9. Therefore, the sum of $80,000 must be held as
CGT event C2 since it resulted in the dissolution of the intangible CGT assets.
In the later instances of the case it is noticed that Doors RU paid a lump sum of
$10,000 to Dave for not directly competing in the business of manufacturing doors for a
period of three years. A CGT event D1 originates when the taxpayer created the contractual
right or any alternative legal rights of equitable nature. Citing the decision of court of in
“Higgs v Oliver (1951)” the receipt of lump sum was paid to the actor that stipulated him not
to act, direct or produce for a period of 18 months. The taxation commissioner held that sum
would not be held as income but constituted a CGT event D110. Citing the reference of the
preceding case judgement the receipt of $10,000 as the lump sum that was paid to Dave for
not setting up the business of door manufacturing for a period three years resulted in CGT
event D1. The amount resulted in creation of contractual right in favour of Doors RUs.
As defined by the Australian taxation office an individual taxpayer is allowed to claim
exemption from capital gains tax for the main residence11. A taxpayer can get exemption for
the main residence only when there is a dwelling on the property and the taxpayer had dwelt
on that property. An individual taxpayer is even allowed to claim full main residence
exemption when the residence is the base for the taxpayer for that period when the property
was owned by the taxpayer. A taxpayer can be entitled to full main residence exemption only
when the dwelling was owned for that time period.
9 McCouat, Philip, Australian Master GST Guide 2018
10 Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
11 Taylor, C. J et al, Understanding Taxation Law 2018

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As understood from the current situation of Dave, he purchased a residential property
in Dwelling so that he can use it as main residence. In this situation a partial main residence
exemption can be claimed by Dave since he used the property from January 20, 2013 to 2015.
However, in 2018, the Coburg residential property was disposed for an amount of $650,000.
The Coburg property can be claimed by Dave for main residence since he has resided on the
property from the time he acquired. Dave spend a significant amount of time and the gains
made by Dave from the selling of property would be held as eligible for claiming the partial
main residence exemption from the capital gains tax.
As per the Australian taxation office a taxpayer that holds the property for at least 12
months would be considered entitled to 50% discount on capital gains. A SBE can lower their
CGT liability through CGT concession12. In the present situation of Dave he can claim a
retirement exemption as he is under the age of 55 years. Gains made by Dave from the sale of
business premises can be considered for CGT concession. As the age of Dave is below 55
years the retirement must be paid in super funds and retirement savings.
Conclusively, Dave can obtain CGT concession from sale of business premises with
partial main residence exemption on his residential property.
12 Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)

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Part 2: Policy Based Question
Introduction:
Negative gearing is regarded as the type of financial leverage where an investor
borrows the money to obtain the profit making investment with the gross income produced
from such investment is lesser than the cost of owing and administering the investment
including the interest and depreciation that is charged on the loan. An investor might enter
into the negatively geared investment with the expectation of tax benefits or capital gains
from investment, when the investment property is entirely sold to go past the accumulated
loss or holdings of investment (Blunden 2016). The concept of negative gearing has attracted
spotlight recently. The recent announcement by the prime minister that changes in negative
gearing are presently off the table, though settling some worries but upsetting some feathers.
Arguments against Negative Gearing:
Presently, the economic and the social impacts of the negative gearing has been a
subject of continuous debate. The negatively geared investors have lent support to the private
residential tenancy market as it helps those that cannot afford to purchase and reduce the
demand for the government public housing. According to Grudnoff (2015) properties that are
negatively geared are expensive to keep than it earning rents. This makes the purchase of
property reasonably priced and provides the investors with the access of long term capital
gains despite the property is not producing any profit in the short-tem. Organisations namely
the Australian Council of Social Services states that tax relief together with the capital gains
discount is increasing the speculative purchase of real estate in Australia eventually shooting
up the price of daily home purchasers.
Negative gearing and the tax break for capital gains does not help in improving the
housing affordability as it makes it worse by increasing the booms in home price unlike the

9PRINCIPLES OF INCOME TAX LAW
one that is prevailing in Sydney (Davidson and Evans 2015). Arguments by Critics suggest
that the deducting the loss of property from the other sources income acts as the tax shelter
that helps in imposing the unfair burden on the taxpayers. The negatively geared properties
encourages the over-investment in the housing property that results in economic distortion.
Investors usually inflate the market of housing property by making it less affordable for the
first home purchasers or the property occupiers. Majority of negatively geared properties in
Australia were existent in the dwellings and the formation of rental supply mainly originates
at the expense of displaced probable property owners. Therefore, if the negative gearing is to
prevail it must be implemented only to the properties that are newly constructed.
Jacobs (2016) argues that tax deductions and overall benefits accrues to those that
have higher income that would make the investors richer with the poor population even
poorer. This eventually creates prolonged social division between the socio-economic classes.
Certain arguments have claimed that negative gearing helps in building more houses but
negative gearing is held as an inefficient way of doing it. Only five per cent of the negatively
geared properties are new house while the remaining are remaining in the properties. As
negative gearing raises the price of homes it might promote a few additional construction.
However, the bigger limitation is one the new building that does not lacks the cost-
effectiveness in housing but the land obtainability and varying system of planning.
As per Cho, Li and Uren (2017) tax concession on investment, negative gearing is
regarded biased for the rich persons. Majority of the people with the negatively geared
residual property falls within the bracket of 40 per cent of revenue earners with the top two
income producers claims half of the capital gains. The most noteworthy argument compared
to the negative gearing is that it increases the price of houses as it increases the after tax
returns for the housing financiers and hence the prices are greater than it would have
otherwise been. This assist the current home owners but increases the declined rate of

10PRINCIPLES OF INCOME TAX LAW
housing ownership amid the younger population age groups. According to the Myths and
popularity of the taxpayer it is not wise to maintain the expensive, ineffective and inequitable
arrangement of tax that shoots up the ownership of house greatly out of young generation
people (Eccleston, Verdouw and Flanagan 2018). Perhaps negative gearing should be
considered as the tool that must be abolished sooner than later.
Arguments for Negative gearing:
According to the Hulse and Burke (2016) changes in the residential gearing is most
likely to result in reduction in the housing affordability and reduces the standard of living for
Australians. The new houses is considered as one of the overtaxed areas in the economy and
removing the negative gearing would lead to worse situation and would dampen investment.
This would lead to reduction in the supply of housing and increase the rental cost.
According to the Australian Council of Property negative gearing cannot be as the
tool that is only used by the wealthy people, but it is also the feature for several Australians in
planning their long run financial security. The evidences obtained is conclusive in stating that
negative gearing is primarily used by the average workers that majorly own one investment
property. As stated by Frost (2016) removing the negative gearing would not only effect
negatively to the everyday investors but would also create a noteworthy impact on the private
renters. The figures obtained from the independent research states that more than 79 percent
of the rental properties in the form of investment earns less than the $1,00,000.
Approximately three-quarters of investors earns lower than $80,000.
The negative gearing allows the taxpayer in subtracting the loss that they make on the
investment from their assessable income. It is sensible for the investors to drop the running
costs of the asset if they earn a capital gain (Chappell and Campbell 2018). The strategy
could be regarded as attractive policy since the taxpayers can subtract the entire sum of

11PRINCIPLES OF INCOME TAX LAW
interest that is paid but would simply pay income tax on the half amount of capital gains. One
of the best way of reducing the housing market distortion and reducing the budgetary expense
of negative gearing would be to abolish the capital gains tax discount. This would result the
commonwealth to increase revenues additionally by $5 billion whereas removing the
incentive for the housing price speculations.
The move of restricting the negative gearing concession cannot be held as the popular.
Several million taxpayers have structured their tax affairs so that they can gain the benefit
from such tax concessions (Gribbin 2017). This would result the system to be more complex,
discouraging the sale of property and would establish the advantage for the taxpayers that are
wealthy enough to have their own investment property. There are few transition that is
required to lower the risk of the rapidly falling price of houses because investors reorganise
their portfolios. It would be practical to level the variations over the period of five years as
the investors would be able to claim 80 per cent of the losses during the first year with 60 per
cent in the subsequent year and so on. Negative gearing creates employment where investors
can demand for the support of building the property industry.
Negative gearing helps in encouraging the individuals to make investment and save as
well which would particularly help the investors in becoming self-sufficient during
retirement. Negative gearing would help in deducting the interest expenses for the investors
since investors would be taxed on the result (Liu, Judd and Santamouris 2017). Defenders of
the policy has suggested negative gearing is mainly used by the prudent savers to reduce the
unduly amount of higher burden of taxations that ultimately blunts the works incentives.
With fixed amount of land supply, negative gearing provides the investors of property
with the outbid the other land users. A portion of the tax breaks gets shifted to the higher land
and price of houses.

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As stated by Martin, Pawson and Nouwelant (2016) the appeal related to property
investment for the higher tax bracket is that they can negatively gear the acquisition of asset,
yet forms an important element of return with lower taxes in comparison to other types of
investment. The removal of negative gearing would then result in creating an impact on the
supply side which is not effected by the straightforwardness that has been suggested in media
commentary. The rental yields would result in growth of low tax bracket investors.
Conclusion:
The prime minister has ruled out the changes in the negative gearing, much in the
direction of providing relief in the housing industry. The current example comprises of
notable amount of increase in the rents when the negative gearing abolished in Sydney and
Perth. It adds both to the higher prices but also to the higher number of rental vacancies. The
argument cannot be viewed consistent that negative gearing is a significant factor as negative
gearing helps in introducing the negative impact on the rental properties in every part of the
city. Increase in rental costs may result in temporary abolition of negative gearing but it is not
likely that abolishing the negative gearing would lead a noteworthy effect on the rents in any
capital city of Australia.

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References for Part I:
Barkoczy, Stephen, Australian Tax Casebook 2018 14E Ebook (OUPANZ, 2018)
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
Maley, Mr Nicholas. "Australian Taxation Office Guidance on the Diverted Profits Tax."
(2018).
Martin, Fiona, and Margaret Connor. "Using Blended Learning to Aid Law and Business
Students' Understanding of Taxation Law Problems." J. Australasian Tax Tchrs. Ass'n 12
(2017): 53.
McCouat, Philip, Australian Master GST Guide 2018
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Robin, H. Australian taxation law 2017. Oxford University Press, 2017.
Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
Taylor, C. J et al, Understanding Taxation Law 2018
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)

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References for Part II:
Blunden, H., 2016. Discourses around negative gearing of investment properties in
Australia. Housing Studies, 31(3), pp.340-357.
Chappell, J. and Campbell, N., 2018. The Housing Gap—Sydney, Australia. In Sustainable
Development Research in the Asia-Pacific Region (pp. 293-304). Springer, Cham.
Cho, Y., Li, S.M. and Uren, L., 2017, November. Negative Gearing and Welfare: A
Quantitative Study for the Australian Housing Market. Reserve Bank of Australia
Quantitative Macroeconomics Research Workshop (13-15 December 2017).
Davidson, P. and Evans, R., 2015. Fuel on the fire: Negative gearing, capital gains tax &
housing affordability. ACOSS Papers, p.29.
Eccleston, R., Verdouw, J. and Flanagan, K., 2018. Gradual reform to capital gains, negative
gearing and stamp duty will make housing more affordable.
Frost, J., 2016. Generation less: How Australia is cheating the young [Book
Review]. Communication, Politics & Culture, 49(1), p.111.
Gribbin, C., 2017. Negative gearing: An update ahead of the 2017-18 federal
budget. Taxation in Australia, 51(10), p.554.
Grudnoff, M., 2015. Top gears: How negative gearing and the capital gains tax discount
benefit the top 10 per cent and drive up house prices.
Hulse, K. and Burke, T., 2016. Private rental housing in Australia: Political inertia and
market change. Housing in 21st-century Australia: People, practices and policies, pp.139-
152.
Jacobs, K., 2016. A discussion on negative gearing and its implications for housing.

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Liu, E., Judd, B. and Santamouris, M., 2017. Challenges in transitioning to low carbon living
for lower income households in Australia. Advances in Building Energy Research, pp.1-16.
Martin, C., Pawson, H. and Nouwelant, R., 2016. Housing policy and the housing system in
Australia: an overview.