Taxation Law: Effective Life of Depreciating Assets, Tax Offsets, Highest Tax Bracket, CGT Implications, Marginal Tax Rate, Consumption Tax

TAXATION LAW
STUDENT ID:
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Question 1
a) The topic of effective life pertaining to depreciating assets in the income tax context has
been dealt by TR 2018/41.
b) Division 17 highlights the various tax offsets available to the taxpayer.
c) The highest tax bracket that may be applicable for a resident taxpayer amounts to 45% for
2018-2019.
d) An asset which is exempt from any CGT implications is car whose legislative reference is
indicated though ss. 118-52
e) The outlined CGT event tends to outline the appropriate tax treatment in regards to
enjoying asset without possessing the ownership i.e. legal title.
f) The given section ss. 4-10(3) ITAA 1997 tends to list down the formula which can be
used for determination of income tax payable. The formula essentially has the following
two steps3..
Step 1: Obtain the product of taxable income considering the relevant tax rate applicable
based on the underlying slab in which the taxable income falls.
Step 2: The net tax liability would be derived after deduction of available tax offsets from
the above tax liability.
g) The significance of the case provided pertains to the application of general deduction
clause i.e. s. 8-1 ITAA 1997. The case highlights that deduction of a given expense
essentially would depend on the underlying circumstances and facts as it would determine
the nature of the expenses. A particular negative limb applicable to s. 8-1 is that the
expenditure should not be private or no deduction is available. However, if the legal
expenses are incurred in relation to assessable income production, then the same would be
deductible. In the given case, a custom officer was charged with entering illegally in a
premises owing to which charges were being pressed on him. In this background, legal
aid was assumed by the taxpayer and was declared as deductible by the honourable High
Court4.
1ATO, Taxable Ruling TR 2018/4, https://www.ato.gov.au/law/view/document?DocID=TXR%2FTR20184%2FNAT
%2FATO%2F00001
2ATO, Income Tax Assessment Act 1997 – SECT 118.5, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s118.5.html
3 Austlii, INCOME TAX ASSESSMENT ACT 1997 - SECT 4.10 How to work out how much income tax you must pay, <
http://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s4.10.html>
4 High Court of Australia, COMMISSIONER OF TAXATION v SHANE DAY <
http://www.hcourt.gov.au/assets/publications/judgment-summaries/2008/hca53-2008-11-12.pdf>
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h) Marginal tax rate is defined as the tax rate levied on the taxable income’s last dollar. For
instance, if the taxable income of the taxpayer is $ 120,000, then any additional income
would be taxed at 37% which would be marginal rate. The average tax rate on the other
hand provides the average taxation that may be applicable on the taxable income as a
whole. The computation of this can also be demonstrated using certain numerical values
which would provide clarity on the underlying concept. Assume that there is individual
taxpayer whose taxable income after deduction is $ 110,000. The computation of income
tax liability and the consequent average rate of tax is shown below.
i) The concept of consumption tax essentially refers to the tax that the government
introduces in order to alter the choices made by the public with regards to consumption of
goods. There are certain goods which have negative externality attached with the
consumption. Some of these products refer to those with high amount of sugar or fat
which is harmful for the health of the consumers. In order top reduce the consumption of
these items, consumption tax is levied so as to discourage the consumers from buying
these products and instead choose healthier products5. The concept is still at a nascent
stage with only a handful of developed countries having implemented the same. There are
issues in relation to efficiency of these taxes along with the freedom of consumers which
may be compromised.
Question 2
(a) Expenditure used in relation to derive assessable income will be deducted as witnessed in
s. 8-1 ITAA 1997. Also, the expenditure would not be taken for deduction under ss. 8-
1(2) ITAA 1997 for the three cases as shown below.
 Expenditure is private expense of taxpayer
5 Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
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 Expenditure is capital expenses of taxpayer
 Expenditure has used for non-assessable income production
Brett takes loan because he needs to credit the wages to his employees. Clearly, the expense
in terms of loan interest has been used for assessable income generation purpose and thereby,
the deduction will be availed under s. 8-1 ITAA 19976.
(b) There can be a situation where only a part of the private expenditure is used for assessable
income generation and then, in such case the deduction will also be present for that part
only. Julie has net expenditure of mobile balance charge of tune $500. Clearly, mobile
balance recharge is private expenditure for Julie and thus, no deduction may be claimed.
However, it is known that Julie has used the 60% of the expenditure to do work related
calls which means $300 out of $500 has been realised for deriving the assessable income.
Therefore, deduction will be available for $300 only under s. 8-1 ITAA 19977.
(c) Expenditure in relation to paying fees to the babysitter for taking care of children is
clearly personal expense. Also, no deduction will be applicable on the such expenses as
evident from TR 95/9. The relevant case in this scenario is of Lodge v. FC of T8where the
payment for child care will be categorised as personal expenses and no deduction was
available for taxpayer even though without childcare the taxpayer would not be in a
position to attend office. Here, the taxpayer Sally has made a payment of $1200 to
babysitter which is personal nature expenses. She has hired babysitter so that she can go
to work but still the amount would not be available for general deduction as it an expense
of personal nature.
(d) Any business losses in the form of theft is deducted as evident from the verdict of Charles
Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation9 case. This is because it
is a normal risk which any business runs. It is part of the business that losses tend to arise
on account of stealing of inventory by employees or potentially clients. Jerry’s employee
6Austlii, Income Tax Assessment Act 1997- SECT 8.1, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html
7 Ibid, 5, 493
8Lodge v. FC of T (1972) 128 CLR 171
9Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
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