Taxation Law: Assessable Income and Resident Status

This article discusses the concept of assessable income and resident status in taxation law. It covers various scenarios and their application of laws such as ITAA 1936, Domicile Act 1982, and Section 6-5 of ITAA 1997. The scenarios include determining the resident status of an individual, inclusion of income from illegal activities, inclusion of non-cash benefits, and assessability of termination payments. The article provides a detailed analysis of each scenario and concludes with a summary of the applicable laws.

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
Answer to Scenario 1:................................................................................................................2
Issue:..........................................................................................................................................2
Laws:..........................................................................................................................................2
Application:................................................................................................................................2
Conclusion:................................................................................................................................4
Answer to Scenario 2:................................................................................................................5
Issue:..........................................................................................................................................5
Laws:..........................................................................................................................................5
Application:................................................................................................................................5
Conclusion:................................................................................................................................7
Answer to scenario 3:.................................................................................................................7
Issue:..........................................................................................................................................7
Laws:..........................................................................................................................................7
Application:................................................................................................................................7
Conclusion:................................................................................................................................9
Answer to scenario 4:.................................................................................................................9
Issue:..........................................................................................................................................9
Laws:..........................................................................................................................................9
Application:................................................................................................................................9

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Conclusion:..............................................................................................................................10
Answer to question 2:...............................................................................................................11
Issue:........................................................................................................................................11
Laws:........................................................................................................................................11
Application:..............................................................................................................................11
Conclusion:..............................................................................................................................14
Reference and Bibliographies:.................................................................................................16

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Answer to question 1:
Answer to Scenario 1:
Issue:
The current issue is based on determining whether Kate will be considered as the
Australian resident during her stay in Fiji for the period of three year?
Laws:
a. IT 2650
b. Section 6 (1) of the ITAA 1936
c. Domicile Act 1982
d. “Applegate v Federal Commissioner of Taxation (1979)”
e. “Jenkins v Federal Commissioner of Taxation (1982)”
Application:
The current case study of Kate outlines that Kate was an Australian born and worked
as Teacher in Toowoomba. After having resigned from her job in Toowoomba she joined her
husband Jack who has been working in Fiji University. During the period when she was
outside of Australia Kate maintained her bank account in Australia and had rented out her
home to derive rental income1. The “taxation ruling of 2650” is based on determining
whether an individual permanent place of abode is outside of Australia.
“Section 6 (1) of the ITAA 1936” defines the term resident and resident of Australia.
According to “section 6 (1) of the ITAA 1936” an individual apart from the company who
lives in Australia and includes those people that have their domicile in Australia, unless it is
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014

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satisfied by the commissioner that the person permanent place of abode is outside of
Australia2. It also includes person that have actually been present in Australia either
constantly or intermittently for more than one half of the income year, unless is contented by
the commissioner that the person usual place of residence is outside of Australia and does not
intends to take up the Australian residency.
Domicile can be regarded as the legal concept of determining the residential status
under the “Domicile Act 1982”. The primary common law rule states that an individual
acquires the domicile of their origin being the nation of an individual’s father permanent
home. The judgement of the court stated in “Henderson v Henderson (1965)” that a person
retains the domicile of their origin unless the person acquires the domicile of their own
choice3. As evident from the situation of Kate, it can be stated that she retains the domicile of
their origin she is born in Australia.
“Subsection 6 (1)” determines that in determining the domicile of an individual it is
necessary to take into the account an individual’s intention as to which nation a person
decides to make their home indefinitely. The federal court in “Applegate v Federal
Commissioner of Taxation (1979)” stated that in ascertaining the domicile under the term
“resident” in “subsection 6 (1)” it is necessary to take into the account the intention of the
person as to where the person intends to make their home indefinitely4. Similarly, an
2 Choong, Kwai Fatt, Advanced Malaysian Taxation (Infoworld, 2014)
3 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
4 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation

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individual living outside Australia will be retaining the domicile if the person returns on a
clearly foreseen and reasonably expected contingency that is after the end of his or her
employment.
Kate in the current circumstances has neither established a permanent place of abode
outside Australia and has no intention of make home indefinitely outside Australia. The
federal court in “Jenkins v Federal Commissioner of Taxation (1982)” stated that to
ascertain an individuals permanent place of abode the intended and the actual length of
taxpayer stay in overseas country is necessary5. The court has also considered whether the
person any residency or place of abode is present in Australia or has maintained a bank
account in Australia. Similarly, referring to the federal court view it can be stated that Kate
has maintained her bank account in Australia where she received interest income.
Additionally, during her absence she rented her home and derived rental income.
The analysis states that Kate will be considered as the Australian resident with the
intention of returning to Australia following the end of transitory overseas stay. She has
maintained her bank account and home in Australia as well. Therefore, she has maintained
her Domicile in respect of Domicile Act 1982 and would be considered as the Australian
resident under the extended definition of the term stated under “subsection 6 (1) of the ITAA
1936”6.
5 James, Malcolm, Taxation Of Small Businesses 2014/15
6 Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

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Conclusion:
Conclusively, Kate will be considered “resident of Australia” under “subsection 6
(1)” since her domicile is in Australia and does not have the intention of taking up residency
in overseas country as she has maintained her bank account and home.
Answer to Scenario 2:
Issue:
The current issue is based on determination whether the receipt from the sale of drug
by Greg will be included in the assessable income? Additionally, the issue revolves around
determining if any of the income derived will be included in his assessable income?
Laws:
a. Section 6-5 of the ITAA 1936
b. “Partridge v Mallandaine (1856)”
c. “Federal Commissioner of Taxation v Harris (1982)”
Application:
“Section 6-5 of the ITAA 1936” defines that income from the personal exertion or income
generated from earnings, wages, salaries, fees, commissions, proceeds from any business
carried on the by the taxpayer or subsidy in carrying on of a business will be included in the
assessable income of the taxpayer7. “Section 6-5 of the ITAA 1936” defines that an item
having income character is derived when it has come home to the taxpayer. The existence of
illegality, dishonesty or ultra vires does not preclude derivation. As evident from the current
situation of Greg who has been operating illegal drug operation from his home in Brisbane.
7 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

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Evidences obtained from the case study suggest that Greg sold drug that worth
$147,000. “Section 6-5” provides that an item that has the character of income will be
regarded as the income in context of the amount of realisable value. An item holding the
character of income should be judged in the circumstances of derivation by an individual
taxpayer8. In order to have the character of income it should be gain for the taxpayer that
derives it. There cannot be any gain unless the item has been derived by the taxpayer
beneficially.
The current circumstances of Greg suggest that the sale of Drug constitute an item of
income and represents gain for the taxpayer since it derived beneficially by Greg. The federal
court in “Partridge v Mallandaine (1856)” states that an item of income character is derived
when it has the characteristics of come home to the taxpayer. Similarly, in the case of Greg
the presence of illegality, immorality or ultra vires does not preclude derivation since the sale
of drug and the amount derived is a realisable value for Greg9. The sale of drug constitute
income under ordinary concepts of “section 6-5 of the ITAA 1936” and will be included in
his assessable income.
On the other hand, Greg won $15,000 as the lottery and the same was used by Greg to
purchase more drug to sell in public. “Section 6-5 of the ITAA 1396” defines that a mere
windfall gain does not have the character of income10. The court of law in the case of
8 Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
9 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
10 Sadiq, Kerrie et al, Principles Of Taxation Law 2014

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“Federal Commissioner of Taxation v Harris (1982)” has distinguished the windfall gains
that is received unexpectedly or infrequently11. The receipt from lottery winnings by Greg is a
windfall gain since it’s received unexpectedly. Therefore, such gain is not included in
assessable income.
Conclusion:
A conclusion can be provided by stating that the sale of drug under “section 6-5 of
the ITAA 1936” will be included in Greg assessable income since it is derived in the act of
carrying on of a business12. Winnings from lottery will be excluded from taxable income
since it is a non-assessable windfall gain.
Answer to scenario 3:
Issue:
The current issue revolves around determining whether Bernie is required to include
in his assessable?
Laws:
a. “Section 21 A”
b. “Tennant v Smith (1892)”
c. “FCT v Cooke & Sherden 80 ATC 4140”
11 Krever, Richard E, Australian Taxation Law Cases 2015
12 Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

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Application:
The current case study defines a situation where Bernie carried on the delivery
business and provided a delivery of $5000 worth of service to one of his customer Paul. Paul
instead of paying money to Bernie offered free accommodation in one of his residential rental
properties to live in with his family. “Section 21 A” is applied on the circumstances where
the non-cash benefit is provided to a person that is non-transferable and non-redeemable in
cash.
As held in the case of “Tennant v Smith (1892)” the value of free accommodations
provided to the bank employee will not be considered as the taxable income. In another
instances of “FCT v Cooke & Sherden 80 ATC 4140” a home delivery of soft drink retailer
was offered with the free non-transferable, non-redeemable overseas holidays under the sales
incentives scheme run by the supplier13. The court in its decision held that the benefit from
the holiday could not be considered as the income under the ordinary concepts since it was
not able to convert the same into the money. However, section 21 A is applied to the value of
the non-cash property or service benefit that is received by the taxpayer originating out of the
business relationship and the same will be included in the assessable income.
Similarly, in the case of Bernie the value of free accommodations that is received is
obtained out of the business relationship. Therefore, the legislative response stated under
“section 21 A of the ITAA 1936” deems non cash benefits to be convertible into the cash14.
13 Woellner, R. H et al, Australian Taxation Law 2014
14 Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. "Why do small business
taxpayers stay with their practitioners? Trust, competence and aggressive
advice." International Small Business Journal 34.3 (2016): 329-344.

10TAXATION LAW
The value of free accommodations received by Bernie will be included in his assessable
income.
Conclusion:
On a conclusive note “section 21 A of the ITAA 1936” is applicable in the case of
Bernie and the value of free accommodations will be included in his assessable income.
Answer to scenario 4:
Issue:
Is the amount received by Melanie for the termination of the contract to provide
service assessable as income in respect of the ordinary concepts under “section 6-5 of the
ITAA 1997”?
Laws:
a. “Section 6-5 of the ITAA 1997”
b. “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)”
Application:
The current case study is based on the situation where Melanie carried on the business
of cleaning and derived $500,000 as income. However, one of her biggest customer named
Brown Pty Ltd accounted 95% of her work decided to cancel the contract and paid $200,000
for cancelling the contract. Melanie considered closing her business since she believed that
her business will have inadequate customer to run her business operations. An assertion can
be bought forward in case of Melanie that the agreement constituted whole of the business
that was carried on the by taxpayer.

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The taxpayer in the current context accepted the amount as the compensation for the
termination of contract15. Hence, on accepting the payment, Melanie lost the right of
providing service to the other party which represented that she was put out of the business
upon the termination of the agreement. The amount received by taxpayer constituted as the
capital receipt.
As held in the case of “Californian Oil Products Ltd v. Federal Commissioner of
Taxation (1934)” the high court considered the termination payment represented a payment
of capital account16. The federal court held that the right to provide services to the other party
terminated the taxpayer from carrying on of the business. The amount received by Bernie is
similar to the circumstances of the Californian Oil case and this should be characterised as
the capital receipt.
Conclusion:
On a conclusive note, the amount received by Melanie was as the compensation for
the loss of right of providing service and the loss of her means of making profit. therefore, the
compensatory receipts will not be included in the assessable income since it does not
constitute income under ordinary concept of “section 6-5 of ITAA 1997”.
15 Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and
Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
16 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.

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Answer to question 2:
Issue:
The current issue is based on the determination of the taxable income for Elizabeth
and determining the transactions that would be considered as the allowable deductions.
Laws:
a. section 6-5 of the ITAA 1936
b. “Scott v FCT (1935)”
c. Section 8-1 of the ITAA 1997
d. “Ronpibon Tin NL v FCT (1949)”
e. Section 25-10 of the ITAA 1997
f. “Higgs v Oliver (1951)”
g. section 25-100 of the ITAA 1997
Application:
The case study highlights that Elizabeth carried on the business of pharmacist. The
sale of prescription drugs and other elements of the trading stock represented assessable
income under “section 6-5 of the ITAA 1936”. The sale of trading stock represented income
from personal exertion or income that is derived from the proceeds of business carried on by
the taxpayer17. The sale of trading stock will be included in her assessable income. The
federal court in the case of “Scott v FCT (1935)” held that the term income does constitute
the term of art and requires necessary principles to be applied in treating those receipts as the
income. The receipts must be determined with respect to the ordinary concepts of income and
17 Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.

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usages of mankind. The sale of prescribed drug by Elizabeth constitute ordinary income
under “section 6-5 of the ITAA 1936”18.
“Section 8-1 of the ITAA 1997” provides that an individual can deduct expenses
from their assessable income if the outgoings and losses are incurred in producing the taxable
income. Similarly, Elizabeth reported expenses such as salaries and wages and expenses on
purchase of trading stock. The expenses reported by Elizabeth were incurred necessarily in
carrying on of the business for the purpose of deriving and producing the taxable income.
As held in the case of “Ronpibon Tin NL v FCT (1949)” the federal court stated that
expenditure constitutes an allowable deduction in the form of outgoing that are incurred in
gaining or producing the taxable income if they are incidental and relevant to that end19.
Similarly, the expenses incurred by Elizabeth in salaries, leasing, purchasing of trading stock
and leasing cost of shop will be considered as the allowable deductions.
Elizabeth had drawn a sum of $55,000 from the business. “Section 8-1 of the ITAA
1997” defines that losses and outgoings that are private or carrying the nature domestic will
be considered as the allowable deductions since it does not meet the criteria of positive limbs
18 Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The accounting
review 91.1 (2015): 47-68.
19 Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

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nor considered deductible under negative limbs20. The drawings expenses by Elizabeth does
not represents allowable deduction under positive limbs since it is private in nature.
“Section 25-10 of the ITAA 1997” defines a circumstances where the taxpayer can
claim specific deductions. Therefore, the taxpayer, Elizabeth in this circumstances incurred
expenditure on repairs of broken window and these expenses will be considered as allowable
deductions.
During the year Elizabeth was considering to open a new pharmacy in the town.
However, a new pharmacist approach Elizabeth to not open a new pharmacy store and paid
$20,000 for restricting or relinquishing the rights of not doing business. As held in the case of
“Higgs v Oliver (1951)” payments received by the taxpayer for relinquishing the rights does
not constitute income. Similarly, Elizabeth on accepting the payment of $20,000 for not
opening a new store constitute relinquishing and restriction of rights therefore the sum
received will not be considered as the allowable income.
The legislative response of “section 25-100 of the ITAA 1997” allows a person to
claim deductions for the cost incurred on travel between the workplace. The tax payer
Elizabeth incurred expenses on cost of travel and accommodations of $720 which constitute
private travel and is not related in deriving the taxpayer assessable income. Therefore, these
expenses will not be considered as allowable deduction. However, Elizabeth would be able to
claim deductions under “section 8-1 of the ITAA 1997” for expenses incurred on registration
of pharmacy conference and flight cost since they were incurred as the part of business.
20 Burton, Hughlene A., and Stewart Karlinsky. "Tax professionals' perception of large and
mid-size business US tax law complexity." eJournal of Tax Research 14.1 (2016): 61.

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In the books of Elizabeth
Computation of taxable Income
For the year ended 30 June 2018
Particulars Amount ($) Amount ($)
Sale of Prescription Drugs 457000
Total gross Income 457000
Allowable Deductions
Purchase of trading stock
Salaries and wages paid 95000
Leasing cost 25000
General Expenses 26000
Home office deductions 6000
Prepaid Expenses 25000
Running cost of car 3920
Cost of replacing the window 4500
Cost of goods sold 175000
Cost of registration 500
Cost of return flight 750
Total Allowable deductions 361670
Total Taxable Income 95330
Conclusion:
On a conclusive note the derivation of income from the sale of drugs will be
considered as the assessable business receipts under “section 6-5 of the ITAA 1997”. While
the expenses incurred in deriving the business income will be considered as the allowable
deductions21. However, expenses such as drawings, payments received for relinquishing
rights and expenses on private travel and accommodations will not be considered as the
allowable deductions under positive limbs.
21 Richardson, Grant. "The Determinants of Tax Evasion: A Cross-Country Study." Financial
Crimes: Psychological, Technological, and Ethical Issues. Springer, Cham, 2016. 33-57.

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Reference and Bibliographies:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Bloom, Ira Mark, and Kenneth F. Joyce. Federal Taxation of Estates, Trusts, and Gifts.
LexisNexis, 2014.
Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.
Burton, Hughlene A., and Stewart Karlinsky. "Tax professionals' perception of large and
mid-size business US tax law complexity." eJournal of Tax Research 14.1 (2016): 61.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and
Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
Choong, Kwai Fatt, Advanced Malaysian Taxation (Infoworld, 2014)
Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The accounting
review 91.1 (2015): 47-68.
Eccleston, Richard, and Helen Smith. "Fixing Funding in the Australian Federation: Issues
and Options for State Tax Reform." Australian Journal of Public Administration 74.4 (2015):
435-447.
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
Hill, Frances R., and Douglas M. Mancino. "Taxation of exempt organizations." (2014).

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Hoffman, William H., et al. South-Western Federal Taxation 2015: Corporations,
Partnerships, Estates and Trusts. Nelson Education, 2014.
James, Malcolm, Taxation Of Small Businesses 2014/15
Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)
Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
Krever, Richard E, Australian Taxation Law Cases 2015
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
Murphy, Kevin E., and Mark Higgins. Concepts in Federal Taxation 2017. Cengage
Learning, 2016.
Richardson, Grant. "The Determinants of Tax Evasion: A Cross-Country Study." Financial
Crimes: Psychological, Technological, and Ethical Issues. Springer, Cham, 2016. 33-57.
Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
Sadiq, Kerrie et al, Principles Of Taxation Law 2014
Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2017.
Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. "Why do small business taxpayers
stay with their practitioners? Trust, competence and aggressive advice." International Small
Business Journal 34.3 (2016): 329-344.

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Willbanks, Stephanie J. Federal taxation of wealth transfers: cases and problems. Wolters
Kluwer Law & Business, 2015.
Woellner, R. H et al, Australian Taxation Law 2014
Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)