Taxation Law of Australia

TAXATION LAW OF AUSTRALIA
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Question 1
a) TR 2018/4 deals with the topic of effective life of depreciating assets for income tax
purposes1.
b) Division 17 of ITAA 1997 details the available tax offsets.
c) The highest marginal tax rate applicable for personal income tax is 45%.
d) Car is an asset which is exempt from the purview of CGT in Australia as has been indicated
in s. 118-5 ITAA 19972.
e) CGT event B1 tends to deal with using and enjoyment of asset without the possession of title.
f) The given formula is used for computation of income tax liability. As per the formula, to
compute the income tax liability the taxable income is multiplied by the applicable tax rate.
However, from this amount, any available tax offsets are subtracted so that the net tax
liability of the concerned reporting entity may be determined.
g) The given case involved a customs officer who had used legal services with regards to
defending his position against certain charges against him by his employer. The Tax
Commisioner disallowed a host of these expenses as being non=deductible under s. 8-1
ITAA 1997. However, the High Court finally decided that the legal expenses which the
customs officer incurred in defending himself were deductible under s. 8-1 ITAA 1997.
While reaching this verdict, the honorable court highlighted the following two aspects.
 The expenses should be related to the production of assessable income which was tru
for the custom officer since he had to defend himself against formal charges with
regards to his conduct.
 Also, the expenses should not be of private nature which was also satisfied with
regards to the custom officer.
h) There is a significant difference between the marginal tax and average tax since the former
refers to the tax rate that is applicable to any additional taxable income unlike the latter
which provides an average value which would be applicable to the complete income. In order
1 ATO,
Taxable Ruling TR 2018/4, https://www.ato.gov.au/law/view/document?DocID=TXR%2FTR20184%2FNAT%2FATO
%2F00001
2 ATO,
Income Tax Assessment Act 1997 – SECT 118.5, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s118.5.html

to explain the difference between the two terms, consider that the annual taxable income for a
concerned individual is $100,000. Based on the individual tax rates applicable for 2018/2019,
The marginal tax rate for this taxpayer would be 37% since additional income will be taxed
at this rate.
Income tax liability = 20797 + 0.37*(100,000-90,000) = $24,497
Average tax rate = ($24,497/ $100,000)*100 = 24.50%
i) Consumption tax refers to a tax which is levied by the government on the consumption of
certain items. A popular example of consumption tax is sugar tax which is levied on various
products that contain high amount of sugar such as soft drinks, beverages containing artificial
sweetners and similar products. Another example of consumption tax is fat tax which can be
used to deal with issue of obesity. The objective of these taxes is to ensure that healthy
consumption choices are made by the customers by ensuring that the healthier foods become
comparatively cheaper in comparison to unhealthy foods.
Question 2
a) As per s. 8=1 ITAA 1997, general deduction of expenses is permissible provided the
outgoing is used for the production of assessable income. Also, as per ss. 8-1(2) ITAA 1997,
it is imperative that the outgoing should not be private, capital in nature or used for
production of non-assessable income. In this given case, interest expense has been incurred
on borrowing related to business so that the employee wages can be paid. Thus, deduction for
this expense under s. 8=1 ITAA 1997 would be available.
b) A particular negative limb identified under ss. 8-1(2) ITAA 1997 is that the expense should
not be private. Further, general deduction is permissible only for expense that is linked to
production of assessable income. In the given case, Julie has incurred mobile expenses to the
tune of $ 500. However, it is known that only 60% of this expense is work related. Hence,
deduction of only 0.6*500 = $300 would be claimed by Julie.

c) As per the relevant discussion in TR95/9, expenditure related to child care would not be
deductible by the employee. A relevant case law in this regards is Lodge v. FC of T3 where it
was indicated that the expenses related to childcare are of private nature and not incidental
for assessable income production. As a result, Sally would not be avle to deduct $ 1,200
incurred as expense on the babysitter since it is a private nature expense.
d) A relevant case law to tbe highlighted is Charles Moore & Co (WA) Pty Ltd v. Federal
Commissioner of Taxation4 where it was indicated that expenditure in the form of theft would
be considered as deductible expense if the same is part and parcel of the underlying business.
In the given scenario, stealing of goods from the business would be considered as deductible
expenses under s. 8-1 as this is a normal risk with regards to business and the loss incurred
from the theft is related to assessable income production from the business5.
e) General deduction would be available if the underlying expenditure is related to the
production of assessable income. A particular negative limb indicated in ss. 8-1(2) is that the
nature of expenditure should not be of capital nature. The money spent on contesting the
elections would be a capital expense and not revenue expenditure. Thus, even though the
income received by the elected representative would be assessable income, but the deduction
would not be available for taxpayer under s.8-1.
Question 3
a) Whenever a new lease is granted or there is a renewal of lease at premium, the underlying
transaction belongs to Type F1 CGT event. In accordance with ss. 104-110 ITAA 1997,
appropriate formula for computation of capital gains in such circumstances requires
subtraction of any incidental costs from the premium received.
Premium received = $ 5,000
3 Lodge v. FC of T (1972) 128 CLR 171
4 Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
5 Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)