Principles of Australian Taxation Law

This assignment delves into the fundamental principles governing Australian taxation law. Students are expected to demonstrate their understanding of concepts such as income tax, capital gains tax, and double taxation conventions. The assignment likely involves analyzing relevant legislation, case law, and scholarly articles to provide a comprehensive overview of the subject.

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 A:................................................................................................................2
Answer to question B:................................................................................................................4
Answer to question C:................................................................................................................5
Answer to question D:................................................................................................................7
Answer to question E:................................................................................................................9
Reference List:.........................................................................................................................11

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Answer to question A:
The present issue is concerned with the determination of the taxability of the income
that is received by Fashionista Pty Ltd for the promise made to an Australian clothing
manufacturer for not trading in the territory of South Australia. According to the “taxation
ruling of TR 94/D33”, it determines the consequences of the capital gains tax consequences
relating to the considerations of the sum received for the purpose of granting restrictive
covenants and trade ties (Barkoczy 2016). The “Taxation rulings of TR 94/D33” address
restrictive covenants to the contracts or agreements that is formed exclusively based on the
trade ties amid the two parties with the agreement that is entered into by the business entity
by agreeing not to trade in the geographical region for a period of time.
The taxation ruling considers the former “subsection 160M (7)” is applicable to the
present context of Fashionista Pty Ltd since the company agreed not to compete in the
selected territory for a period of four years (Braithwaite, 2017). The amount that has been
received by Fashionista Pty Ltd can be regarded as the restrictive covenant payments since
the company abided by the trade promise of not entering the specified geographical area for
trade. In the present context of Fashionista Pty Ltd it can be stated that the new “subsection
of 160M (6)” is applicable for any transaction where the amount of money that is received is
related to the contract for entering into the restrictive covenant along with the exclusive trade
ties and the agreement of not to trade (Cao et al. 2015). The commissioner of taxation
considers the purpose and the effect of the subsection that extends to identify the
considerations as the benefit of mutual promises that is flowing towards the parties in the
agreement.
Paragraph 17 of the ruling defines the view where the considerations that is received
within the “Subsection 160M (7)” it is not restricted to the money or property. Instead the

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considerations extend to the assessable mutual promise that is flowing to the parties. As held
in the case of Esso Petroleum Co. Ltd v. Harper's Garage (Stourport) Ltd [1968]
restrictive covenants under the general law represents to be regarded as the restraint of trade
(Saad 2014). The judgement defines that the restraint of trade is applicable where an
individual has contracted to surrender the freedom which could have otherwise been
available. In the present scenario of Fashionista Pty Ltd it can be stated that the company
agreed not to trade in south Australia represents a restraint of trade as giving up the freedom
of trading in that the geographical boundary which could have been otherwise available for
trade.
As held in the case of Bacchus Marsh Concentrated Milk Co Ltd (in Liq) v Joseph
Nathan & Co Ltd [1919] a restraint of trade can be considered as the valid under the
common law which is not held by an unreasonable restraint by the courts requires that the
covenantee is under the obligations of protecting the interest (Lang 2014). Such interest is
generally characterised as the interest in the property or the goodwill of the business.
Additionally, from the current case of Fashionista Pty Ltd it can be stated that the business
ties such as agreement of not trading in the particular territory is a restraint of trade that is
valid under the common law. The amount that is received by Fashionista Pty Ltd could be
considered for the capital gains tax purpose for the considerations of $440,000 received by
the Australian company for grating the restrictive covenants and trade ties.
Computation of Taxable Income
Particulars Amount ($) Amount ($)
Assessable Income
Gross Receipts $ 4,40,000.00
Less: GST $ 40,000.00
Net Receipts $ 4,00,000.00
Total Assessable Income $ 4,00,000.00
Less: Company Tax 27.5% $ 1,10,000.00
Total Tax Payable $ 1,50,000.00
Net Income $ 2,90,000.00

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Answer to question B:
As defined under the section 7 of the Fringe Benefit Tax Assessment Act 1997, it sets
out the conditions in which the users of the car will be considered for taxation under the
taxable fringe benefit. The act lay down the two alternative method of valuing the benefit. As
evident from the present case study of Fashionista Pty Ltd it can be stated that car provided to
Jane Jackson constitute fringe benefit where an employer’s car is used by the employee or the
associate for the private purpose or that is available for the purpose of private use.
As held in the case of “Lunney and Hayley v FC of T (1958)”it is affirmed that the
position of travel between an individual home and the place of work or business is considered
as the ordinary private travel (Miller and Oats 2016). Fringe Benefit Liability is applicable to
the all the private use along with the private home to work travel. As evident from the current
scenario that private use under the “sub section 136 (1)” use of car made by the employee or
the associate which is not in the course of gaining and producing the taxable income of the
employee would be regarded for the private use of the car. Consequently, the car that was
used by the Jane Jackson for travel from work to home would constitute private use, was not
related in the process of gaining or producing the assessable income, and was not related for
carrying on the business purpose.
In consistent with the present scenario it is understood that car expenses incurred on
the employees can be considered as the Fringe Benefit Tax, which can be considered for
allowable deductions. However, Jane Jackson would not be able to claim allowable
deductions since the travel from work to home would be considered as the private expense
and they do not constitute allowable deductions since it was not gained for producing the
assessable income. Additionally, it is also found that Fashionista Pty Ltd had also reimbursed

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Jane $40,000 for the school fees and also paid the latest contribution that was due on her part
for the outstanding HELP loan which can be considered as the payment to fringe benefit and
the company can claim an allowable deduction for that expense.
Answer to question C:
As defined under the “Taxation ruling of IT 2631” owners of the rental premises
especially in the districts of central business of the major capital cities of Australia,
frequently offer incentives to induce businesses to enter in the lease of the premises (Davison,
Monotti and Wiseman 2015). The “Taxation Ruling of IT 2631” takes into the
considerations both the cash and non-cash lease incentives. In the present case of Fashionista
Pty Ltd, it is found that the company moved from one premises to another premise and the
sum received would be considered as the income.
As held in the case of “F.C of T v. Myer Emporium Ltd” the federal court defined
that the a receipt would be considered as the income given that such income originates from
the isolated business operations or commercial transactions that is entered into in the ordinary
course of carrying on of a business. The judgement contained that the receipts would be
considered as income so long the taxpayer entered in the transition intending to generate
profit or gain from the transaction (Evans, Minas and Lim 2015). As evident from the
decision where it is found that the taxpayer operates from the leased premises and the move
of one premises to the another premises with the leasing of the premises occupied would be
considered as the act of the taxpayers under the course of the business activity that results in
taxpayer’s assessable income.
Additionally, the judgement of the federal court in the case of “F.C of T v. Cooling
1990”, where a taxpayer of the business is provided with the case incentives to enter in the
lease of the business premises the incentive would be treated as income for the taxpayer

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(Woellner et al. 2016). In view of the current situation of the Fashionista Pty Ltd it can be
defined that the taxpayer was provided with the cash incentive of entering in the lease of the
new business premises and the cash payment received represents incentive in the nature of
income and would be considered for assessable. In respect of the Fashionista Pty Ltd the
transaction that is entered into by the firm should be treated as the commercial transaction.
Furthermore, it formed the part of the business activity of Fashionista Pty Ltd a not an
insignificant part of it was the obtaining of the commercial profit by way of the incentive
payment. Accordingly, it can be considered as the payment will be viewed as income under
the ordinary concepts and will be considered for assessment.
In the later stages it is found that the Fashionista Pty Ltd has to incur the expense on
repairing the property. As stated under the “Taxation Ruling of 97 /23”, it provides the
situations in which the person incurs an expense for repairs where allowable deductions can
be claimed (Schreiber 2013). Additionally “Section 8-1 of the ITAA 1997” provides the
provision that is related to gaining permission of taking into the considerations the deduction
as the allowable deductions (Robin 2017). As defined under “Section 8-1 (2) of the ITAA
1997” a person is not allowed to claim deductions for loss or outgoings having the extent of
the loss or outgoing is not capital in nature. Payments that is made by will not be allowed as
deductions since the repairs that it is required to be made should be considered as the initial
repairs.
Taking into the considerations the “Taxation rulings of 97/23” an individual would
not be allowed to claim allowable deductions that has the nature of the capital works. As held
in the case of “Hallstroms Pty Ltd v. FC of T (1946)” repairs having the nature of capital
would not be considered for deductions (Blakelock and King 2017). As evident in the present
case of Fashionista it can be bought forward that the initial repairs that is carried out by the

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company in the new lease premises are not treated as expense and they should be treated as
capital work expenditure with no allowable deductions.
Answer to question D:
The “Taxation ruling of TR 95/25” is concerned with the deductibility of the interest
in the form of outgoings that comprises interest under “Section 8-1 of the ITAA 1997” by
satisfying the words of the section which represents that loss or outgoings forms the part of
the appropriate apportionment (Vann 2016). The general principles govern the deductibility
of the interest under “section 8-1 of the ITAA 1997” is that interest expense incurred by the
taxpayer for the purpose of gaining and producing assessable income of the taxpayer with
loss and expenses are not having the nature of capital, private or domestic in nature under the
first limb (Kristoffersson 2014).
Another purpose that governs the deductibility of the interest is that it is necessarily
incurred by the taxpayer for executing business activities with the objective of producing
taxable income of the taxpayer and not having the nature of capital or private under the
second limb (Barkoczy et al. 2016). As evident from the current situation of Fashionista Pty
Ltd states that the interest expense has been incurred for the purpose of carrying on of a
business with the objective of producing taxable income. The present case study clearly
identifies that whether or not the expenses or outgoings that is incurred by the taxpayer
satisfactorily meets the criteria of the section 8-1 being reliant on the facts and matter relating
to the outgoings that is incurred by the taxpayer in the question.
As defined under the “section 8-1 of the ITAA 1997” the interest should possess
sufficient amount of association with the functions and activities of the taxpayer that is more
directly gained or produced by the taxpayer for the purpose of assessable income and not
possessing the nature of the capital, private or domestic in nature (Grange et al. 2014).

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Additionally, “section 8-1 of the ITAA 1997” identifies that character of the interest for the
funds borrowed should be generally decided by the reference to the circumstances of the
borrowed money is used by the borrower (Tran-Nam and Walpole 2016). Nevertheless,
regards should be paid in all the circumstances surrounding the character of the taxpayers
undertaking or business together with the objective purpose of the borrowing having the
nature of the transaction. A tracing of the borrowed money by the Fashionista Pty Ltd
establishes that borrowed money was for the purpose of the income producing activities that
reflects the connection between the interest and the income generating activities (Graetz and
Schenk 2013). As evident from the case study, it establishes that fact that the sum of $40,000
that is borrowed by the Fashionista Pty Ltd as the interest on loan that is made by the foreign
bank was for increasing the manufacturing capacity of the company.
As held in the case of FC of T v. Roberts the judgement of the court stated that
interest on the borrowing to fund the repayments of moneys that was originally advanced by
the partner and put into use as the partnership capital will be considered for deductions under
“section 51 (1)” (Snape and Souza 2016). It will be considered for deductions up to the
extent that the partnership capital was employed in the business for the purpose of producing
or gaining taxable income.
As held in the case of Herald and Weekly Times Ltd v. FC of T (1932) at the time of
determining the interest on capital to be considered as deductible appropriate regards should
be given in respect of the commercial context for which the companies borrowed the relevant
funds (James 2016). On applying the reasons full federal court in Smith v FC of T to
companies will represents that interest on borrowing by the company might be considered for
deductions where the borrowings of the funds would be considered as the repayment of the
share capital to the shareholder. Interest on borrowing would be considered for deductions if
it satisfies to meet the expenses of the business in gaining and deriving the assessable income

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of the company (Kiprotich 2016). As evident from the current case study, it can be stated that
interest on borrowings can be considered for deductions under “section 8-1 of the ITAA
1997” for the purpose of gaining business income.
On the other hand, it is found that Fashionista Pty Ltd occurred a bad debt after a
failed attempt by the company to recover the amount. As defined under the “paragraph 34-
39 of the Taxation Rulings of TR 92/18” bad debt must be written off in the year in which
the income is earned prior to making the bad debt allowable as deductions under “Section
63” (Pope, Rupert and Anderson 2016). Any form of business losses or outgoings having the
nature of the revenue would be considered as the deductions that is allowable under “Section
51 (1) of the ITAA 1997” when incurred. In the present case study of Fashionista Pty Ltd the
company can claim allowable deductions on the assumption that the bad debt was incurred in
the income year. Furthermore, the losses or outgoings suffered by the Fashionista Pty Ltd
comprised of the revenue in nature and would be considered as the allowable deductions
(Morgan, Mortimer and Pinto 2013).
Answer to question E:
As evident from the present case of Fashionista Pty Ltd it is found that the company
has acquired factory for $605,000. However, prior to the use of the factory Fashionista has to
incur expenses on initial repairs the roof of the factory which costed the company $66,000.
As held in the case of the “Law Shipping Co Ltd v IRC (1923)” initial repairs are not
considered as the allowable deductions (Fleurbaey and Maniquet 2017). The reason for not
considering the repairs as the allowable deductions is because the taxpayer might have
received deductions in the purchase price of the asset and so appropriate to consider the
expenses as the part of the acquisition cost (Krever 2013).

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Initial repairs are not considered for allowable deductions even where the taxpayer is
not aware of the defect at the time of purchasing the property (Pomp and Rodriguez 2015).
In the present case study, it is observed that repairs that is carried out by the taxpayer was
before the purchase of the factory and hence would not be allowed as deductions. Arguably,
an assertion can be considered in the present context that the initial repairs that is performed
on the purchase of new factory would be considered as the expense and such expense are
viewed as the capital work expenditure. As defined under “section 8-1(2) of the ITAA
1997” a person is not allowed to claim allowable deductions for loss or outgoings to the
extent that the loss or outgoing is having the nature of the capital or capital nature (Preez
2016). As held in the case of “FC of T Western Suburbs Cinemas Ltd (1952)” the full
federal court passed a noteworthy judgement (Coleman and Sadiq 2013). The judgement
stated that that any form of expenses that is incurred by the taxpayer in association with the
asset having the outcome of functional improvements in the quality of the asset then the
expenses would be considered under improvement and not repairs.
As the result of this, such expenses would be considered as capital nature where the
deductions would not be allowed as deductions (Kenny 2013). Presently in the case of
Fashionista Pty Ltd, the expenses of $66,000 incurred on initial repairs of roof of the factory
would be considered under improvements and not repairs. Consequently, the expenses would
be regarded as capital nature of expense and deductions cannot be claimed by Fashionista Pty
Ltd.

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Pack 3 2016. Oxford University Press Australia & New Zealand.
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Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major
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Graetz, M. and Schenk, D. (n.d.). 2013 Federal income taxation.
Grange, J., Jover-Ledesma, G. and Maydew, G. (n.d.). 2014 principles of business taxation.

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James, K., 2016. The Australian Taxation Office perspective on work-related travel expense
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Routledge.

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Tran-Nam, B. and Walpole, M., 2016. Tax disputes, litigation costs and access to tax
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