Understanding Taxation Law: Assessable Income and Allowable Deductions

This article discusses the provisions of Section 6-5 and 81 of the ITAA 1997 in understanding the assessable nature of income and expenses reported by an individual taxpayer. It covers the rules and applications of ITAA 1997, including examples and court verdicts. The case study of Bridget is used to explain the concepts of assessable income and allowable deductions. The article concludes with the opinion that Bridget can claim deductions for self-education expenses and rental income expenses but cannot claim deductions relating to travel and contemporary suits under section 8-1.

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

1TAXATION LAW
Table of Contents
Heading:.....................................................................................................................................2
Issue:..........................................................................................................................................2
Rule:...........................................................................................................................................2
Application:................................................................................................................................4
Conclusion:................................................................................................................................7
Reference List:...........................................................................................................................9

2TAXATION LAW
Heading:
The following problem statement brings forward the provision of “Section 6-5 and 8-
1 of the ITAA 1997” in understanding the assessable nature of income and expenses reported
by an individual taxpayer.
Issue:
The following issue brings into the context of determining the tax assessment of
Bridget relating to the income and spending that is occurred during the income year. The
issues circles around the determination of the assessable nature of income derived and
outgoings incurred under “section 6-5 and 8-1 of the ITAA 1997”.
Rule:
As the overall rule an individual generating the taxable income from the salaries,
retirement, grant and gratitude would be considered as the taxable income under provision of
“section 6-5”. An individual taxpayer making salary from employment is regarded as income
from personal exertion. According to the court judgement in “Calvert v Wainwright (1937)”
the earnings must be having sufficient connection with the income generating capacity of the
taxpayer1.
Any form of periodic payment such as rent that is made to the property owner
associated with the use of property is held assessable in the hands of recipient. According to
the court judgement in “Dixon v F.C of T (1952)” any amount that is received by taxpayer is
held taxable given the money received in the hands of recipient is a periodic payment2.
1 Australian Taxation Law Cases 2014 (Thomson Reuters, 2014)
2 Bernstein, Peter W, The Ernst & Young Tax Guide 2013 (Ernst & Young, 2013)

3TAXATION LAW
However, expenditure sustained in generating rental income can be claimed as allowable
deductions under “section 8-1 of the ITAA 1997”.
An individual receiving sum from prize winning is not considered assessable income
under both the ordinary and statutory meaning3. This is because money from prize winning is
a windfall gain.
The character of income is determined relating to the situation in which the person
derives the income. Sum that is received by an individual from prize winning will be taxable
under the situation when the prize winning forms the part of taxpayer’s income generating
activity. The verdict passed in “Stone v FCT (2005)” states the situation where the
policewoman received income from salaries and endorsement. The policewoman used the
winning from prize in executing the profession of athlete4. As a result, the sum that is
received is taxable earnings for the reason that it was associated to service related work.
Another example of “Moore v Griffiths (1972)” where the prize winning is not regarded as
income since it lagged associated with employment related activities.
An individual taxpayer receiving money for relinquishing the right of doing any thing
will not be regarded as income. The primary reason for not considering such receipts as
income is for the reason that the taxpayer earn those sums of money as the agreement for not
indulging in any certain activity5. An example of “Pritchard v Arundale (1972)” where
money received by an bookkeeper for relinquishing the practice of accounting and working in
a firm for six months is not an revenue.
3 Caldwell, Rod, Taxation For Small Business 2014
4 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
5 Eliot, George, The Mill On The Floss (Open Road Integrated Media, 2016)

4TAXATION LAW
An instances of self-education expenditure is explained under taxation ruling of TR
98/9 where the taxpayer incurs any expenses related to the self-expenses and the expenses
being related to the current employment or for improving the prospect of future income is
permitted for claiming deductions6. According in “Studdart v F.C of T (1991)” where the
taxpayer was able to claim an allowable deductions for self-educations since the spending
was for improving the skill and was additionally related to the taxpayer current employment.
An individual is allowed to claim an allowable deductions related to expenses of
protective clothing or occupation specific clothing. Referring to “section 8-1” the law court
in “F.C of T v Mansfield (1996)” defined that the flight attendant will be able to claim the
cost of protective clothing since it was occupation specific.
“Section 8-1” outlines that a person can claim for travel expenses given the expenses is
related to employment. A demonstration of court’s verdict is stated in “Payne v FCT” where
the taxpayer was not allowed for claiming travel expenditure since they did not had any
connection with the work.
Application:
The case study of Bridget provides that Bridget was engaged in both the part time and
short time employment. In respect of the “section 6-5” the earnings of Bridget is associated
with the income from the personal exertion. In accordance with the rule of “calvert v
wainwright (1937)” the income from private exertion of Bridget from both the part time and
full time employment will held taxable under the “section 6-5”7. An instance has been found
where Bridget often worked late in her office and her employer often reimbursed the taxi fare
6 Figinski, Theodore F, The Economics Of Federal Tax And Employment
Laws (University of California, Irvine, 2013)
7 Gilders, F. M et al, Understanding Taxation Law 2014

5TAXATION LAW
that was incurred by Bridget. In compliance with the “FBTAA 1986”, the reimbursement of
taxi fare by Bridget employer will be considered as the exempted fringe benefit.
Bridget derived an Australian sourced rental income, which will be treated as taxable
earnings of Bridget under “section 6-5”. Apart from the receipt of income, she incurs
expenditure when the property was laid out8. Therefore, Bridget can bring forward the claim
for allowable deductions under “section 8-1 of the ITAA 1997” relating to the expenses
occurred when the property was rented.
As evident, Bridget won cash prize of $3000. The prize winning of $3000 is a
windfall gain since she did not received that sum as the part of her employment. Citing the
case of “Moore v Griffiths (1972” the receipt of $3000 constituted a windfall gain and
cannot be held as taxable income.
As observed in the later part of the case study where Bridget received a sum of
$30,000 with an equipment of $10,000 from the cooking TV show. With respect to section 6-
5, the sum of $30,000 constitute a chargeable income and the same will be included in
determining her tax liabilities. Moreover, she received from the same cooking TV show a
sum of $20,000 as the agreement for not make her appearance in similar cooking show for
time of two years. Referring to “Pritchard v Arundale (1972)” the receipt of $20,000
constituted a payment for giving up the right of appearing on similar television cooking show
and the money received is not a taxable income under “section 6-5 of ITAA 1997”9.
Bridget in the later part occurred self-education expenses as she underwent the course
of Masters in professional accounting. In compliance with the section 8-1 Bridget will be able
8 Gilders, F.M, John Taylor and Michael Walpole, Understanding Taxation Law 2015
9 J.K. Lasser's Your Income Tax 2014 (Wiley, 2013)

6TAXATION LAW
to claim the expenditure on self-education since these were related to her current employment
where she is employed. According to the verdict of court in “Studdart v F.C of T (1991)” the
self-education expenses occurred by Bridget was improving the employment skill and income
prospect in future therefore she can claim an allowable deduction in that respect10.
The case study also brings forward the scenario where Bridget received an award for
being the best accountant in Sydney. Bridget was awarded with the cash prize of $5000.
Citing the judgement of the full federal court in the case of “Stone v F.C of T (2005)” the
receipt of cash prize by Bridget will be included as the part of assessable income since the
money received is directly having association with Bridget employment and the same will be
held taxable income.
An instances was noted where Bridget incurred a spending on contemporary suits
with the anticipation of looking more experienced. By referring the court verdict in “F.C of
T v Mansfield (1996), the taxpayer is allowed to claim deductions only for occupational
related clothing11. Spending by Bridget on contemporary suits will not be held as allowable
deductions since it has no relation with the employment and not an occupational specific
clothing. Therefore, she cannot claim deductions for contemporary suits.
Bridget incurred a traveling expense on airfare and accommodations for attending an
interview in Melbourne. The Australian taxation office defines the circumstances that the
taxpayer is permitted to claim deductions for travelling between two places of work having
no connection with taxpayers home12. Citing to the “Payne v F.C of T (2001)” Bridget is not
10 Pinto, Dale, Kendall Kendall and Kerrie Sadiq, Fundamental Tax Legislation
2014 (Thomson Reuters, 2014)
11 Raftery, Adrian, 101 Ways To Save Money On Your Tax - Legally!
12 Prince, Jimmy B, Tax For Australians For Dummies 2014

7TAXATION LAW
permitted for claiming deductions on flight travel expense and accommodation expenses
since they were not in the course of income making undertakings.
The table represents the taxable income of Bridget and allowable deductions with
total tax payable is stated below;
Conclusion:
The case study can be concluded with the opinion that Bridget can claim deductions
for self-education expenses and rental income expenses but she cannot claim deductions
relating to travel and contemporary suits under “section 8-1”. Her income from both part
time and full time employment, rental income, appearance on television show and award for
best accountant will taxable under “section 6-5” of the act.

8TAXATION LAW
Reference List:
Australian Taxation Law Cases 2014 (Thomson Reuters, 2014)
Bernstein, Peter W, The Ernst & Young Tax Guide 2013 (Ernst & Young, 2013)
Caldwell, Rod, Taxation For Small Business
Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
Eliot, George, The Mill On The Floss (Open Road Integrated Media, 2016)
Figinski, Theodore F, The Economics Of Federal Tax And Employment Laws (University of
California, Irvine, 2013)
Gilders, F. M et al, Understanding Taxation Law 2014
Gilders, F.M, John Taylor and Michael Walpole, Understanding Taxation Law 2015
J.K. Lasser's Your Income Tax 2014 (Wiley, 2013)
Pinto, Dale, Kendall Kendall and Kerrie Sadiq, Fundamental Tax Legislation 2014 (Thomson
Reuters, 2014)
Prince, Jimmy B, Tax For Australians For Dummies 2014
Raftery, Adrian, 101 Ways To Save Money On Your Tax - Legally!

9TAXATION LAW