Taxation Law of Australia

This document provides an overview of various aspects of taxation law in Australia. It covers topics such as tax rulings, tax offsets, marginal tax rates, CGT implications, business expenses, main residence exemption, and more. The document also discusses the assessability of prizes, allowances, compensatory payments, and capital gains. It provides insights into the tax residency status of individuals in Australia.

TAXATION LAW OF AUSTRALIA
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Question 1
(a) Tax Ruling (TR 2018/4) covers the various aspects regarding the effective life of assets which
are depreciating over a period in relation to the income tax liabilities1.
(b) The relevant factors regarding tax offsets present in division 17, ITAA 1997.
(c) The maximum marginal tax rate applied for personal income tax is 45%.
(d) CGT implications would not be applied on vehicles in Australia under s. 118-5 ITAA 19972.
(e) The CGT event of category B1 covers the utilization and enjoyment of numerous assets which
do not have any defined title.
(f) The respective formula contains the various steps that would be taken into consideration for
determining the tax payable on behalf of the taxpayer. The main steps involve the computation of
taxable income which is then multiplied with the applicable tax rate for the given income year.
Further, the net tax payable would be computed after subtracting the current tax offsets of the
taxpayer.
(g) The plaintiff was a custom officer who had to pay various legal expenses while endorsing his
position against the claim of the employer for certain events. The Tax Commissioner had
declared that the incurred legal expenses would not be considered for deduction as per the
highlights of s. 8-1, ITAA 1997. The court announced the verdict that the expenses had been
incurred in order to save his employment which means the expenses are made so as to produce
the assessable income. Also, the expenses were not personal nature and therefore, the legal
expenses would be considered for deduction under s. 8-1, ITAA 19973.
(h) Average and marginal tax rates are entirely two different tax rates in Australia. Average tax rate
is ratio of total amount of tax by total income. Let a taxpayer has total income of $100,000 and
he pays $15,000 then the average tax rate would be 15%. While, marginal tax rate is the
additional tax amount paid on the additional income of taxpayer. Let the taxpayer has earned an
extra income of $10,000 on which he paid $130 of the payroll tax and the $1500 of the income
tax then the total marginal tax rate of the taxpayer would be 30.30%.
(i) Consumption tax represents the taxation that is imposed by government on consumption of some
defined items or services. One of the examples of consumption tax is fat tax that mainly deals
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
3 Woellner, Robin, Australian Taxation Law (CCH Australia, 2014)

with the problem of obesity. The main objective of applying such tax is to ensure that the
individuals would prefer healthier foods over unhealthy food stuff considering the low-price
ranges4.
Question 2
a) General business expenses are deductible as per s. 8-1 as the key condition is that outgoings
should be related to assessable income production5. There are additional requirements about
the expenditure not being private, capital or for non-assessable income generation. The
interest paid on the borrowing is for business purpose since the principal amount has been
used to pay wages for employees. Thus, interest is pivotal to assessable income generation
and thereby deductible for taxpayer.
b) General deductions are available for business expense and not for private expenditure since
the latter does not produce any income6. The expense related to mobile which Julie has
incurred has two components namely private and business. The business portion of the $ 500
mobile expense is 60% of $ 300 and thereby deduction under s. 8-1 may be claimed by Julie
for this amount
c) The key issue is whether babysitting expenses would be private or business expenses
considering that these expenses are necessary for the taxpayer to do his/her job which
produces assessable income. Tax ruling TR95/9 and also verdict of Lodge v. FC of T7 case
both indicate that child care expenses are private expenses and no deduction may be availed
4 Coleman, Chris, Australian Tax Analysis (Thomson Reuters, 2016)
5 Austlii, Income Tax Assessment Act 1997 – Section 8-1 < http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html>
6 Subsection 8-1(2) ITAA 1997
7Lodge v. FC of T (1972) 128 CLR 171

on the same despite this being a necessity for deriving assessable income8. Based on this,
Sally would not be able to derive any deduction on $ 1,200 spent on babysitter.
.
d) The key question that needs to be decided is whether losses caused due to theft would be
categorized as normal revenue losses arising in normal course of business. In accordance
with the verdict in Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of
Taxation9 case, it is clearly highlighted that losses on account of theft tend to be part of
normal business losses. This would imply that the taxpayer would be able to obtain deduction
for these losses in the given case10.
e) For expense deduction under s. 8-1, it is mandatory that it should not be capital in nature but
revenue11. The money spent on campaigning is essentially a capital expenditure as it is not
related to fulfilling the duties of a elected representative. Such an expenditure would not be
deductible as per s. 8-1 ITAA 1997. Also, considering that the capital expenditure is not
business related, hence deduction under s. 40-880 ITAA 1997.
Question 3
a) Renewing a lease by obtaining a premium amount to F1 CGT event and the CGT derived in
the process is the premum amount obtained minus any cost incurred for the lease renewal12.
No information has been given about the cost incurred for lease and hence the capital gains
realized from the transaction is $ 5,000. The discount method would not be applicable as F1
CGT transactions are excluded13
8 ATO, Taxation Ruling TR 95/9, < https://www.ato.gov.au/law/view/document?DocID=TXR/TR959/NAT/ATO/00001>
9Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
10Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)
11 Subsection 8-1(2)ITAA 1997
12 Section 104-110 ITAA 1997
13 Section 115-5 ITAA 1997

b) The act of granting option for purchasing a asset triggers a D2 CGT event for which capital
gains would be calculated by deducting any incidental costs in option creation from the
premium received14 Assuming that incidental expenses are zero, hence the capital gains
would be equal to the premium of $ 40,000. The discount method would not be applicable as
D2 CGT transactions are excluded.
c) Subdivision 118-B highlights the main residence exemption as per which any capital gains
arising from the sale of main residence would be exempted from CGT. Also, as per the six
year rule, it is possible for the taxpayer to consider a dwelling as main residence for a period
of six year even if the underlying taxpayer is not physically present and the house is used for
rental income provided no other location acts as the main residence for the taxpayer during
the period15. In the given situation, the house has been purchased by Jamie and Olivia post
which it is given on rent as taxpayers are travelling overseas. During the two year period that
taxpayers are absent, the house continues to their main residence in accordance with 6 year
rule. Hence, main residence concession would be available to the taxpayers and hence no
CGT would apply on any capital gain in the sale of house.
d) The sale of shares would trigger A1 CGT event since share is an example of CGT event. The
relevant formula applicable for computing capital gains would be the the difference between
the selling price of asset and cost base of asset16
14 Section 104-40 ITAA 1997
15Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
16Austlii, Income Tax Assessment Act 1997 – SECT 104.10, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s104.10.html

Cumulative capital gains from the share sale transactions = -$15,500 + $13,320 = $2,180
Discount method would not be applicable for the given share transactions as the holding period
for these shares is lesser than one year.
Question 4
a) A pivotal question arises as to whether prizes would contribute to assessable income. TR
1999/17 highlights that prizes would constitute as assessable income if it requires skill which
the taxpayer has and derives assessable income from. Besides, the prize should be expected
by the taxpayer and must not be a one off event17. In the given case, the advertisement related
prize is directly attributed to the advertising skills of the taxpayer. Further, such awards are
held at periodic intervals and the taxpayer would expect to receive the same. Thus, the prize
in this case would constitute as assessable income18.
b) Economic benefit ought to be derived from a payment for it to be recognized as income as
has been indicated in TR 92/15. In this context, it is noteworthy that allowance involves
payment by the company for a purpose without requiring the details of the actual
expenditure. As a result, allowance is essentially an economic benefit given to the employees
owing to which it would be assessable19. This is not the case with reimbursements which
merely repay the expenditure incurred by the employee and is therefore not assessable.
17 ATO, Taxation Ruling TR 1999/17, https://www.ato.gov.au/law/view/document?Docid=TXR/TR199917/NAT/ATO/00001
18Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company, 2017)

Considering the situation provided, the $ 5000 provided to the employee is allowance for
business trip to Sydney as a fixed amount is allocated and thus this would be assessable
income.
=
c) With regards to mobile electronic devices being given by employer to employee, the Fringe
Benefit Tax Assessment Act 1986 would be applicable as this is a form of fringe benefit.
Even under this act, s. 58X exempts terming the extension of mobile devices as fringe
benefits and thereby no tax implication arises for any of the parties (i.e. employer and
employee) on account of IPhone being given to employee20.
d) The compensatory payments would essentially assume the same nature as the underlying
payments that they are substituting or providing compensation to21 However, in cases where
it is clearly specified that a component of compensation is derived in lieu of income, then
such compensatory payments would assume the nature of assessable income22. The
compensation ($ 10,000) derived by the taxpayer in the gicen case relates to personal injuries
and thereby would not be assessable income.
e) Capital gains derived by the taxpayer would contribute to assessable income as it is form of
statutory income23. However, computation of capital gains is carried out only when any CGT
event is triggered due to any action such as CGT asset disposal24. In the scenario provided,
there is appreciation in value of shares but the same is notional gain and would not be
recorded for taxation purpose till the time any CGT event is triggered. This would happen
only when the shares would be disposed off and hence for the year ending despite the
increase in value of shares, no assessable income has been derived.
19 ATO, Tax Ruling TR92/15, < https://www.ato.gov.au/law/view/document?docid=txr/tr9215/nat/ato/00001>
20 Austlii, FBTAA 1986 Sect-58X < http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s58x.html>
21 ATO TD 93/58, < https://www.ato.gov.au/law/view/document?DocID=TXD/TD9358/NAT/ATO/
00001&PiT=99991231235958>
22Mc Laurin v. FC of T (1961) 104 CLR 381
23 Section 6-10 ITAA 1997
24Austlii, Income Tax Assessment Act 1997 – SECT 104.5,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.htm

Question 5
Tax residency has been highlighted in ss. 6(1), Income Tax Assessment Act 1936. FurtherTR
98/17 highlights the four tests termed as residency test that are taken into account while
determining the tax residency status of an individual. A brief discussion about these residency
tests are summarized below25.
 Domicile Test- This test is applied only when the concerned taxpayer holds Australian
domicile but is staying outside from Australia owing to professional obligations or personal
ties.
 183-day test- This test is applied only on the foreign residents who are living in Australia due
to their commitments.
 Residency test- This test is applied on the foreign taxpayers by considering the various
aspects such as behavioural actions, professional commitments, personal tines, study social
ties and so forth.
 Superannuation fund test- This test is applied on the government officials who have involved
in the commonwealth superannuation scheme of government and has resided abroad because
of their duties26.
In present scenario, the concerned taxpayer is Nisu whose tax residency status needs to be
determined through residency tests. It is apparent that Nisu is not a government official of
Australia and thus, superannuation test would not be applicable. Further, he does not posses the
Australian domicile and thus, domicile test is also not applicable. Here, Nisu is a citizen of Nepal
and has arrived to Australia for higher study. Therefore, the applicable residency tests would be
183 days test and residency test.
Test 1: 183 days test
This test has two conditions that must be satiated by taxpayer in regards to be classified as tax
resident of Australia. First is that the minimum duration of stay must be not less than 183 days in
the tax year under consideration27. There must not be any suspicion in the Tax Commissioner’s
mind regarding intention of taxpayer to settle in Australia in the long term. The total period of
25 Ibid, 4.
26 Ibid, 3.
27 Ibid, 4.

stay of Nisu in Australia is not 183 and thus, this test fails to label Nisu as an Australian tax
resident.
Test 2: Residency test
The resides word does not have any specific meaning in Australian statute and thereby, case laws
and their subsequent verdicts are the main source of determining the tax residency through this
test. Nish has arrived Australia for a course which has the duration of completion of 3 years.
High duration of stay can be taken as significant purpose and taxpayer would be considered as
tax resident as per the verdict of FC of T v. Pechey28. Also, Nisu has social ties in Australia same
as he had in Nepal which can also be contributed to the claim of being tax resident of Australia
as per TR 98/17. Based on this, it can be said that as per residency test, Nisu would be
categorised as tax resident of Australia for FY2018/19.
Bibliography
ATO, Income Tax Assessment Act 1997 – SECT 118.5,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html
28FC of T v. Pechey75 ATC 4083

ATO, Taxable Ruling TR 2018/4, https://www.ato.gov.au/law/view/document?DocID=TXR
%2FTR20184%2FNAT%2FATO%2F00001
ATO, Taxation Ruling TR 1999/17,
https://www.ato.gov.au/law/view/document?Docid=TXR/TR199917/NAT/ATO/00001
ATO, Taxation Ruling TR 98/17,
https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001
Austlii, Income Tax Assessment Act 1936 – SECT 6,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html
Austlii, Income Tax Assessment Act 1997 – SECT 104.10,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.10.html
Austlii, Income Tax Assessment Act 1997 – SECT 104.5,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html
Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press
Australia, 2017)
Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
Coleman, Chris, Australian Tax Analysis (Thomson Reuters, 2016)
FC of T v. Pechey75 ATC 4083
Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company,
2017)
Lodge v. FC of T (1972) 128 CLR 171
Mc Laurin v. FC of T (1961) 104 CLR 381
Peel v. The Commissioners of Inland Revenue (1927) 13 TC 443
Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
Woellner, Robin, Australian Taxation Law (CCH Australia, 2014)