Taxation Law in Australia - Desklib

This article covers the key concepts of taxation law in Australia, including objectives, equity, taxable income, residency status, depreciation, and hobby vs business income. It also includes relevant sections and cases.

TAXATION LAW IN AUSTRALIA
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Question 1
a) The Australian taxation system has the following two key objectives1.
 To appropriate the requisite monetary resources required for the government to
function.
 To act as a medium enabling wealth distribution from rich to poor
b) The concept of equity means that various taxpayers should bear a reasonable tax burden
only. Two types of equity2
Horizontal Equity – Similar tax burden for individuals having comparable fiscal position.
Vertical Equity – Higher tax burden on the rich and lower on the poor
c) The section 4-15 states the following3.
Taxable income = Total assessable income – Total Deductions.
d) It is defined as a tax system where the rich and economically well off taxpayers have a
higher contribution of their income to tax in comparison with poor people. This facilitated
the wealth redistribution4.
e) Value of allowances is dealt with in s.15-2 ITAA 19975.
f) The tax residency specifically of companies having foreign incorporation is the subject
matter of TR 2004/156.
g) The useful divisions in this regards are Division 40 & 437.
h) Considering the taxable income of the taxpayer, as per ATO, 32,5% would be the marginal
tax rate.
1 Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)
2 Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company, 2017)
3 Ibid. 1
4 Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
5 Austlii, Section 15-2 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.2.html>
6 ATO, TR 2004/15, 2004 <
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200415/NAT/ATO/00001&PiT=20041020000001>
7 Ibid. 4

i) Subdivision 11-B is relevant in this case8.
j) As per TD2017/4, the applicable rate is 63 cents per km9
Question 2
Based on the given information, Martelle’s residency status for tax purposes needs to be
determined. A crucial role is played by subsection 6(1) ITAA 1936 in highlighting the
various statutory tests that are available for checking the tax residency of an individual
taxpayer. These tests along with the basic residency tests have been explained in detail in tax
ruling TR98/17. The statutory tax residency tests are briefly explained below10.
1) Domicile Test – This test has two basic conditions namely that the taxpayer should be
Australian domicile holder and also permanent abode should be on Australian soil.
Martelle has domicile of France and hence fails to pass this test.
2) Superannuation Test- This applies to a specific set of employees those who are based
outside Australia on behalf of the Federal government. Martelle does not satisfy the
description and this test does not apply.
3) 183 day test – This is a common residency test which applies to foreigners currently
residing on Australian soil. Two conditions are required for this test as outlined below.
 Minimum physical presence for 183 days in Australia during the tax year.
 Intention of taxpayer to settle in Australia or make Australia home even though it
may not happen in future
While Martelle on account of her 6.5 month stay may have been in Australia for 183 days
but clearly on finishing her design project, she intends to return to France with no
intention to be in Australia. Thus, this test is not passed.
Residency Test – The only available test remaining is basic residency test which essentially
considers a host of factors and then derives the tax residency status, These factors that are
considered have been highlighted by courts in relevant cases in the past11.
8 Ibid. 1
9 ATO, TD2017/4, 2017 < https://www.ato.gov.au/law/view/document?DocID=TXD/TD20174/NAT/ATO/
00001&PiT=99991231235958>
10 ATO, TR98/17, 1998 < https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001>
11 Ibid.1

 Purpose to visit Australia – In order to be given tax residency, it makes sense that the
reason for visiting Australia is significant. A significant reason such as job or study
would ensure more commitment towards staying in Australia for a longer period. In
job related cases, a visit lasting only a few weeks does not result in Australian tax
residency as per the verdict of FC of T v. Pechey12 case. Thus, the stay period should
be little longer and preferably should exceed 6 months13.
 Family and Business Ties – The chances of residing in Australia for a longer time
duration would enhance if the underlying taxpayer has professional and personal ties.
These ties are often compared with corresponding ties in country of origin to make a
decision.
 Asset location and maintenance- If the taxpayer has fixed assets in Australia, it
implies commitment on part of taxpayer to reside for a longer duration. Also, having
an Australian bank account also hints at significant time commitment and is
imperative factor not to be ignored.
 Social arrangement – In accordance with TR 98/17, a taxpayer who tends to engage
in several social activities is likely to stay longer as it is indicative of the taxpayer
leading a healthy and normal life which can be compared with that existing in country
of origin.
Residency Status– Martelle has come to Australia on a design project and the expected
duration of stay is expected to exceed six months which seems significant enough.
Additionally, a boat has been bought by her, which amounts to fixed asset purchase. Besides,
she also has an Australian bank account in which her employee credits the salary. Further, it
is also known that Martelle tends to enjoy a healthy social life where she mingles with friends
on regular basis. Collectively, the above evidence clearly reflects that Martelle would be
treated as an Australian resident for tax purposes in the year under consideration.
Tax consequences - The key difference in tax consequences with regards to Australian
residents and foreign residents pertains to the geographical spread of income sources. For
Australian tax residents, s. 6-5(2) ITAA 1997 advocates that both domestic and foreign
source income ought to be considered. However, s.6-5(3) ITAA 1997 advocates that in case
of foreign tax residents, only domestic income sources ought to be included14. Further, the
underlying tax rate applicable coupled with tax concessions tend to be more generous for
12 FC of T v. Pechey (1975) 5 ATR 322 case
13 Ibid.10
14 Ibid. 2

Australian tax residents in comparison with foreign tax residents. Marlette being a tax
resident of Australia would need to pay tax in Australia on all the income she derives
irrespective of the source location.
Question 3
The respective taxation treatment of the given set of items is highlighted below.
Amount Details Nature Explanation
$90,000
Per month paid into
the Westpac Bank
Account
Taxable Salary is considered as ordinary
income under s. 6(5)15
$425
Interest amount in the
Westpac Bank
Account
Taxable Rent is considered as ordinary
income under s. 6(5)
$6500 Winning amount Taxable
It is apparent that winning amount
has not resulted because of luck of
the taxpayer and has been received
because of the skill of the taxpayer16.
Therefore, the winning amount
would be termed as ordinary income
under s. 6(5). The Kelly v FCT
(1985) case is the testimony of this
aspect.
$10,000 Amount resulted
through signing the
restrictive covenant
Not taxable According to the judgement in Higgs
v Olivier (1952) case the amount
would be considered as capital
receipts. Also, the amount is capital
proceeds because Ellen has restricted
her rights to start a business and
thus, CGT could be taken into
consideration for the taxation of
15 Austlii, Section 6-5 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>
16 Ibid. 4

capital proceeds17.
$500 Amount paid for
health insurance No deduction
It is apparent that nature of
expenditure is personal and would
not be the part of the assessable
income of the taxpayer. Hence,
would not be deducted under s. 8-1
Taxable income can be calculated based on the above classification.
Particular Amount
Winning amount $6,500
Interest amount $425
Salary amount = $9000 * 12 = $108,000
Taxable income =$114,925
The part of personal income tax for the year 2017/2018 is highlighted below.
It can be concluded based on the above table that the taxable income for Ellen would be
$114,925.
17 Ibid. 1

Tax amount payable on the part of taxpayer = 19822 + {0.37 * (114925 -87000)} =
$30,154.25
2% on the taxable income would be taken into consideration under Medicare levy. However,
in the present case, Medicare levy surcharge would not be applied despite the taxable income
exceeding the threshold income of the taxpayer at $90,000 p.a. since private insurance
amount has already been claimed on the part of the taxpayer18.
Medicare levy & surcharge = 2% of the total taxable income = 2%* 114925 = $2,298.5
Sum amount of tax payable = Tax amount payable on the part of taxpayer + Medicare levy &
surcharge = $30,154.25 + $2,298.5 = $32452.75
Question 4
According to s. 40-60 ITAA 1997, the depreciation in case of assets associated with the
business may be deducted to extent of the asset utilized for the business19. In accordance with
s. 40-65 ITAA 1997, depreciation would be calculated based on the two main methods which
are highlighted below20. Further, the selection of method would be decided by the taxpayer
based on the consumption of the asset in the business.
(1) Prime Cost Method
A steady and uniform depreciation would be taken into consideration in the asset’s value till
the life of the respective asset under this method. The formula to determine the decline in the
value is shown below21.
(2) Diminishing Method
The decreasing depreciation would be taken into consideration in the asset’s value under this
method. Also, significant decline would be observed in the value of the asset in the starting
18 Ibid. 2
19 Austlii, Section 40-60 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.60.html>
20 Austlii, Section 40-65 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.65.html>>
21 Ibid.4

period as compared with the later on period. The formula to determine the decline in the
value is shown below22.
The base value of the respective asset would be shifted every year after balancing the decline
value from the last year value.
Hair Dryer
It is apparent considering the business that taxpayer is running, that hair dryer is a business
asset. Further, it is also a depreciating asset and hence the decline in value would be tax
deductible.
Hair Dryer Cost = $ 8,000
Useful life = 7 years
For the given year, the hair dryer would be considered for full year considering the purchase
on July1 i.e. first day of the tax year.
Computer Software
As per ss. 40-30(1) ITAA 1997, depreciating asset may comprise of intangible asset as
mentioned in ss. s. 40-30(2) ITAA 1997. A particular intangible asset which is considered
depreciating asset is in-house software. It is not imperative that the business should develop
the same and purchasing from outside vendor is also permissible23. Hence, the computer
software is a depreciating asset for computation of decline in value. Further, software is
linked to the business and hence deduction is available for the decline in value that may be
computed.
Computer software cost = $ 295
22 Ibid. 1
23 Austlii, Section 40-30 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.30.html>

Useful Life = 3 years
Audi Q5
There is no denying the fact that a car is a depreciating asset and hence there would be a
decline in value. However, the same would not be deductible since it is not a business asset
but rather a personal asset24. The given business of hairdressing would not require any Audi
car and thus no deductions.
Question 5
It is significant to be able to differentiate between activity pursued as hobby and one pursued
as business. This is because the income generated from business activity would attract tax
liability while it would not be the case for hobby related income. In order to distinguish
between the two, tax ruling TR 97/11 & Evans v. FC of T25 provides guidance for identifying
the relevant factors26.
1) The profit intention – Any activity undertaken with the primary aim being generation of
profit, it is highly likely that this would be categorised as a business activity. However, if
the intention behind engaging in activity is more to derive enjoyment and self-satisfaction,
then this would be categorised as hobby. Hence, Julie needs to decide as to what is the
primary motive with which she wants to engage in her photography.
2) Repetition of activity – Isolated spells of engaging in an activity normally is categorised as
hobby which is meant for free time or leisure time. On the contrary, business activities are
repetitive in nature since they are done on regular basis and not ad-hoc basis. Thus,
depending upon how often Julie intends to engage in photography, s decision could be
made.
3) Investment in terms of resources – A large amount of resources is spent on business
activities owing to their ability to generate financial returns. As a result, more time would
be spent engaging in this activity and also investment in the form of requisite equipment
24 Ibid. 1
25 Evans v. FC of T (1989) 20 ATR 922
26 ATO, TR97/11,1997 < https://www.ato.gov.au/law/view/document?docid=TXR/TR9711/NAT/ATO/00001>

and training would be done. However, for an activity as hobby, typically the investment
would be lesser. Julie’s conduct with regards to the time given to photography coupled
with the capital expenditure on buying the professional equipment would be indicative in
this case.
4) Scale of operations and professional management – The business activities are well
managed and carried at large scale so as to earn maximum profits. Additionally, for
computation of profit/loss, suitable record keeping is done. However, in case of hobby, the
scale of activities is quite small with little management. Also, no bookkeeping is done
since the underlying profit or loss does not matter. Julie also through her scale of
photography in terms of clients served, time given and book keeping activities would
indicate whether or not the underlying activity is business or hobby.
Question 6
The relevant explanation with regards to deduction or non-deduction of the given expenses is
offered below.
S.No
. Expenses Type Comment
(a) $ 300,000 cost paid
as salary Deductible
The salary is paid for running the business
which produces assessable income. As a result,
general deduction under s.8(1) would apply27
(b) $ 4000 cost paid as
salary to run Deductible
The salary is paid for running the business
which produces assessable income. As a result,
general deduction under s.8(1) would apply. A
critical aspect is to consider whether the
amount paid is reasonable for the work done.
In case of any inflated payment, deduction
would be available only to the extent of work
done
(c )
$ 900 cost in form
of membership fee
for entertaining
clients
Deductible
There is a sufficient causal relation between
entertaining of clients and assessable income
generation. This is because the underlying
profession is marketing where a key
requirement is relationship building with
clients. Thus, general deduction as per s.8(1)
would apply.
27 Austlii, Section 8-1 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html>

(d)
$ 2000 cost on
smart clothing for
image
Deductible
The clothes may be conventional only but still
it is a vital part of the taxpayer’s job and
would have an impact on assessable income
generation. Thus, in accordance with
TR94/22., FC of T v. Edwards28 along with s.
8(1), deduction can be availed.
( e)
$ 5,500 cost in form
of meal expenses
on clients
Non-
deductible
The tax ruling TR 97/17 clearly highlights that
tax deduction cannot be availed on expenses
on meal for clients. The same is also validated
from the Fringe Benefit Tax Assessment Act
(FBTAA 1986)29.
(f)
$ 3,400 cost in form
of interest on
business loan
Deductible
Deduction available as per s.8(1) since
positive limb satisfied. This is because the
interest pertains to those funds which are used
for business30.
(g)
$ 3,000 cost in form
of travelling
between home and
office
Non -
deductible
If either the starting point or the final point is
home, then travelling expenses on such
journey would not be deductible as per s.25-
100(3) ITAA 199731.
(h)
$ 2500 cost as
telephone bill but
80% business usage
Deductible
(80%)
Telephone calls to the extent related to
production of assessable income are deductible
as per s. 8-1. Therefore, only 80% of the
telephone bill can be deducted by the taxpayer.
(i)
$ 6000 cost in
relation to
accommodation and
airfare for
conference
Deductible
The airfare and accommodation related to
conference having relation with assessable
income production would be categorised as
self –education expense and full deduction can
be availed as highlighted by TR 98/9 and s.
8(1).
(j)
$ 500 cost paid to
accountant for
completing tax
return
Deductible
Section 25-5 ITAA 1997 allows the taxpayer
to make deductions for expenses related to tax
returns filing32
Bibliography
Websites and Books
ATO, TR 94/22, 1994 <
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9422/NAT/ATO/00001>
28 FC of T v. Edwards (1994) 49 FCR 318; 94 ATC 4255
29 ATO, TR 94/22, 1994 < https://www.ato.gov.au/law/view/document?DocID=TXR/TR9422/NAT/ATO/00001>
30 Ibid. 27
31 Austlii, Section 25-100 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.100.html>
32 Austlii, Section 25-5 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.5.html>

Austlii, Section 25-100 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.100.html>
Austlii, Section 25-5 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.5.html>
Austlii, Section 8-1 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html>
Austlii, Section 40-30 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.30.html>
ATO, TR97/11,1997 <
https://www.ato.gov.au/law/view/document?docid=TXR/TR9711/NAT/ATO/00001>
Austlii, Section 40-60 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.60.html>
Austlii, Section 40-65 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.65.html>
Austlii, Section 6-5 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>
ATO, TR98/17, 1998 <
https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001>
Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press
Australia, 2017)
Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company,
2017)
Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
Austlii, Section 15-2 <
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.2.html>
ATO, TR 2004/15, 2004 <
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200415/NAT/ATO/00001&PiT=2004
1020000001>

ATO, TD2017/4, 2017 <
https://www.ato.gov.au/law/view/document?DocID=TXD/TD20174/NAT/ATO/
00001&PiT=99991231235958>
Case laws
FC of T v. Pechey (1975) 5 ATR 322 case
Evans v. FC of T (1989) 20 ATR 922
FC of T v. Edwards (1994) 49 FCR 318; 94 ATC 4255