Taxation Law in Australia

This article covers the key functions of Australian taxation system, equity, computation of taxable income, tax residency status, and depreciation of business assets. It also provides expert guidance on taxation law in Australia.

TAXATION LAW IN AUSTRALIA
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Question 1
a) One of the key functions of the Australian taxation system is to provide the necessary
financial resources for the government to fulfil its duties towards the people. Further,
owing to the progressive nature of Australian taxation system, it also acts as a mechanism
for redistribution of wealth1.
b) Equity implies that all individuals should pay a fair tax share. One of the types of equity is
horizontal equity which implies that similar tax amounts should be paid by individuals in
similar financial position. Another type of equity is vertical equity which implies that
taxpayers who are better off need to pay atleast the same tax as paid by those who are
worse off2.
c) In accordance with s. 4-15 ITAA 1997, the taxable income must be computed by
subtracting the cumulative deductions from cumulative assessable income for the given
taxpayer3.
d) A progressive tax system aims to achieve resource redistribution and reduce inequality to
some extent. This is because a higher amount of tax is collected from rich people and the
same is deployed for the welfare of vulnerable and poor sections of the society4.
e) The relevant section is s.15-2 ITAA 19975.
f) Tax ruling TR 2004/15 deals with issue of determining tax residency of those companies
which are not incorporated in Australia6.
g) Division 40 and Division 43 are the relevant divisions7.
h) The marginal tax rate applicable to such an individual taxpayer would be 32.5%
i) The relevant sub-division is subdivision 11-B8.
j) 63 cents per km9
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
8 Ibid. 2
9 ATO, TD2017/4, 2017 < https://www.ato.gov.au/law/view/document?DocID=TXD/TD20174/NAT/ATO/
00001&PiT=99991231235958>

Question 2
The objective in the given case is to determine the tax residency status of Martelle
considering the relevant factors and also determine the underlying tax consequences of the
decision.
With regards to determining the tax residency of individuals, subsection 6(1) ITAA 1936 is
quite relevant. Further, tax ruling TR98/17 highlights the various specialised tests that could
be applied to determine tax residency besides the general residency test. The specialised tax
residency tests are outlined as follows10.
1) Domicile Test – This is applicable for taxpayers having Australian domicile as per
Domicile Act 1982. Based on the given information, it is known the country of domicile is
France for Martelle and hence this test is not applicable.
2) Superannuation Test- This is applicable only for Federal government employees who are
serving approach and make contribution to the specified superannuation schemes. Clearly,
this test is not applicable for Martelle who is not a Australian government employee.
3) 183 day test – This is applicable for foreign residents who are staying in Australia. In
order to pass this test, it is essential that the underlying taxpayer should reside for more
than 183 days in the tax year under consideration and must have intentions to settle in
Australia. In the given case, it is apparent that Marlette has no intention to make Australia
her future home and hence would not be able to pass this test.
Residency Test – It is imperative to note that the word “resides” lack a statutory explanation
in Australian context. As a result, the various relevant factors have been derived on account
of relevant case laws and tax rulings11. The various factors to be considered under this test are
as follows.
 Purpose for visiting Australia – A person who is in Australia for reasons such as
employment, education would be expected to have intention of staying in Australia
unlike a causal visitor. However, in case of employment, a short work related trip of
few weeks would not lead to tax residency as highlighted in FC of T v. Pechey12 case.
Pre-arranged employment in excess of six months is considered a significant reason13.
10 ATO, TR98/17, 1998 < https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001>
11 Ibid.1
12 FC of T v. Pechey (1975) 5 ATR 322 case
13 Ibid.10

 Personal and Professional Ties – A person having significant personal and
professional ties in Australia is more likely to be termed as a tax resident rather then
one who have more ties with the country of origin rather than Australia. The presence
of ties in Australia typically leads to longevity of stay and hence is significant.
 Location of assets – The presence of assets in Australia highlights the commitment of
the taxpayer to stay in Australia for longer period of time. The act of possessing bank
account in Australia or motor vehicles also adds weight to the individual case for
being classified as Australian tax resident.
 Social and living arrangement – As per tax ruling TR 98/17, if the taxpayer tends to
live in Australia in a similar manner as in country of origin and have active social
involvement, then the taxpayer is more likely to be considered as an Australian tax
resident.
Residency Status of Martelle – It is apparent that the purpose of Martelle’s visit to Australia
is significant considering she has a minimum stay of six and a half month in regards to her
employment. Further, she has purchased asset in the form of boat coupled with maintaining a
bank account in Australia where her salary is credited. Also, Martelle has a healthy social life
in Australia which is apparent from her behaviour. Hence, it would be appropriate to
conclude that Martelle is a Australian tax resident for the given year.
Tax consequences - In accordance with s. 6-5(2) ITAA 1997, for an Australian tax resident,
the income from both Australian sources as well as foreign sources would be taxable. This is
in sharp contrast with the taxation treatment for foreign tax residents who would be taxed
only on income sources located in Australia14. Additionally, the tax concessions are
comparatively much less for foreign tax residents in comparison to Australian tax residents.
Since Martelle is an Australian tax resident, hence all her income irrespective of the
underlying geography of the source would be taxed in Australia.
Question 3
The relevant treatment of the various items is indicated below.
Amounts
Received Nature Explanation
14 Ibid. 4

$9,000 per
month in bank
account
Taxable Salary is ordinary income as per s.6(5)15
$425 rent on
bank account Taxable Rent is classified as ordinary income as per s.6(5)
$ 6,500 winnings
designer Taxable
The winnings does not arise on account of luck but
rather is derived from the skill of taxpayer and hence
ordinary income under s.6(5). The price is the result
of the skills possessed as designer by Ellen and not
her luck16. Relevant case law: Kelly v FCT (1985).
$ 10,000
restrictive
covenant
Not Taxable
Proceeds are capital in nature since Ellen would give
up her right to open business within one year.
Relevant case: Higgs v Olivier (1952). Capital
proceeds are not taxable although CGT may be
applicable17
$ 500 spent on
private health
insurance
No
deduction
The expense is private and not related to assessable
income production. Thus no deduction under s. 8-1
Based on the above, the computation of taxable income needs to be performed which is as
shown below.
Particulars Amount ($) Comment
Salary 108,000 Monthly salary 9000*12 = 108000
Interest income 425 Westpac bank account interest
Winnings 6,500 "Queensland Designer of the Year”
Total taxable income 114,925
The personal income tax slabs for 2017.2018 are reflected below.
15 Austlii, Section 6-5 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>
16 Ibid. 1
17 Ibid. 2

Considering that the taxable income of Ellen is $ 114,925, hence, the tax payable = 19822 +
0.37*(114925-87000) = 19822 + 10332.25 = $ 30.154.25
Also, Medicare levy would be applicable at the rate of 2% of taxable income. Further,
Medicare levy surcharge would not be applicable in the given case even though taxable
income being greater than the threshold income level for singles at $ 90,000 per annum since
private insurance has been availed by the taxpayer18.
Medicare levy & surcharge = 2% of taxable income = 0.02*114925 = $2,298.5
Hence, total tax payable = 30.154.25+ 2298.5 = $ 32452.75
Question 4
In accordance with s. 40-60 ITAA 1997, depreciation for business related asset may be
deducted to the extent that these are used for business19. For computing the decline in value,
the following two methods can be used and s. 40-65 ITAA 1997 provides choice to the
taxpayer to choose the suitable method based on the asset consumption20.
18 Ibid. 4
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>

1) Prime Cost Method – This provides for uniform decline in value of the asset over the
useful life of the asset. The relevant formula is as highlighted below21.
Decline in value = Cost of Asset * (Days Held/365)*(100%/Asset effective life)
2) Diminishing Method – This provides for decreasing decline in value and hence more
decline in value is observed during the initial period as compared to later period. The
relevant formula is as highlighted below22.
Decline in value = Base Value * (Days Held/365)*(200%/Asset effective life)
It is noteworthy that the base value of the asset would change every year after adjusting the
decline in value from the previous year.
Asset 1 – Hair Dryer
Clearly, it is a business asset which is used in hairdressing business and hence, deduction on
account of depreciation is allowed.
Cost of asset = $ 8,000
Effective life = 7 years
Since the asset has been purchased on July1, hence it would be available for the complete
year.
Decline in value (Prime Method) = 8000*(365/365)*(100%/7) = $ 1,142.86
Decline in value (Diminishing Method) = 8000*(365/365)*(200%/7) = $ 2,285.71
Asset 2: Computer Software
In accordance with s. 40-30(1) ITAA 1997, an intangible asset can be a depreciating asset if
the same is highlighted in s. 40-30(2). One of the items mentioned is in-house software which
according to the definition need not be necessarily developed inhouse and can also be
21 Ibid.1
22 Ibid. 4

acquired from an outside vendor23. Thus, computer software would be a depreciating asset.
Also, it would be used in business for managing booking and hence it is a business asset
owing to which deductible in nature.
Cost of the asset = $ 295
Effective Life = 3 years
Decline in value (Prime Method) = 295*(365/365)*(100%/3) = $98.33
Decline in value (Diminishing Method) =295*(365/365)*(200%/3) = $98.33
Asset 3: Audi Q5
It is apparent that the asset would fall within the definition of depreciating asset but this does
not have any business use and is essentially a personal asset24. As a result, no deduction
would be available on account of depreciation of this asset. Since no deduction is allowed,
hence no computation of the actual decline in value based on the methods. However, if the
car was used for business purposes, then to the extent of business usage decline in value
would have been deductible.
Question 5
It is imperative to distinguish between a business and hobby as the income from the former
would be taxable while normally any income derived through hobby would be non-taxable.
There are various factors which are considered so as to distinguish between hobby and
business as have been highlighted in tax ruling TR 97/1125. It is imperative to note that the
courts take into consideration the below mentioned factors collectively while making a
judgement as evident from the ruling in Evans v. FC of T26..
1) The presence of intention to profit – If the underlying activity is carried out with the
predominant objective of deriving profit, then the given activity is more likely to be
business. On the contrary, if the underlying activity is more driven by individual
23 Austlii, Section 40-30 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.30.html>
24 Ibid. 2
25 ATO, TR97/11,1997 < https://www.ato.gov.au/law/view/document?docid=TXR/TR9711/NAT/ATO/00001>
26 Evans v. FC of T (1989) 20 ATR 922

satisfaction and enjoyment, then it is likely to be a hobby. In case of Julie, her activities
would more likely be business if earning money is the prime reason rather than enjoyment
and satisfaction.
2) The regularity with which the activity is repeated – Typically hobby is done in spare time
whereas a business activity tends to be more regular. Hence, for Julie also, if she does
photography on a regular basis, then it would be more a business in comparison to a
situation when she does photography occasionally only.
3) The amount of time and resources that are invested – Typically, in business there would be
more investment in terms of time, financial resources on taxpayer’s behalf. On the other
hand, in case of hobby the time and resource commitment is significantly lesser. In Julie’s
case, the buying of expensive equipment used by professionals coupled with attending
workshops of photography would indicate that the given activities would be business and
not hobby.
4) The size, scale and manner in which the activity is carried – Businesses are typically done
on a larger scale and are meticulously planned coupled with maintenance of books of
account. In case of hobby, these activities are typically lacking. In Julie’s case also, the
amount of clients that she is serving in a given time frame and the underlying financial
record maintenance of the same would reflect business.
Question 6
The deductibility of the various expenses is discussed in the tabular format shown below.
S.No
. Expenses Nature Explanation
(a) Salary cost $
300,000 Deductible
Under s.8(1) general deduction. Outgoing is
revenue in nature and used for producing
assessable income. Both positive limbs
satisfied27
(b) Salary cost $ 4000
to son Deductible
Under s.8(1) general deduction. Outgoing is
revenue in nature and used for producing
assessable income. Only assumption is that the
payment is on arm's length i.e. market price
has been paid. If not then deduction to the
extent of market rate can be availed under s.
8(1)
27 Austlii, Section 8-1 < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html>

(c ) Membership fee $
900 Deductible
Under s. 8(1) general deduction. There is a
close relationship between entertaining the
client and general of assessable income
considering that the business is marketing
related where client relationships are pivotal.
(d) Smart clothing $
2000 Deductible
Under s. 8(1) general deduction. Relevant case
law: FC of T v. Edwards28, Relevant Tax
ruling: TR94/22. Even though clothes are
conventional but they are necessary for
portraying the appropriate image to client
which is essential for assessable income
production
( e) Meal expenses on
clients $ 5,500
Non-
deductible
As per TR 97/17. no deduction is available for
meal expenses on clients. Further, the same is
also highlighted in Fringe Benefit Tax
Assessment Act (FBTAA 1986) due to which
50/50 method is used for meal expenses on
client. Exception to the above rule is when the
meal is within office premises which do not
seem to be the case here29.
(f) Interest cost $ 3,400 Deductible
Under s. 8(1) general deduction. When
borrowed funds are used for producing
assessable income, then interest payments are
deductible30.
(g)
Travelling cost
between home and
work $ 3,000
Non -
deductible
Under s.25-100(3) ITAA 1997. When either
the source or destination is home, then no
deduction available31
(h) Telephone bill $
2500
80%
deductible
Since 80% usage is far calling clients, hence it
is used for producing assessable income and
also not a capital expenditure, Hence,
deduction under s.8(1) to the extent of
business usage
(i)
Airfare and
accommodation $
6000
Deductible
In accordance with s.8(1) and TR 98/9, this
would fall within self-education expense and
has sufficient connection to assessable income
production
(j) Accountant fees $
500 Deductible Tax related expenses are deductible under s.
25-5 ITAA 199732
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>

Bibliography
Websites and Books
ATO, TR 94/22, 1994 <
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9422/NAT/ATO/00001>
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