Taxation Law: Deductions, CGT Events, Assessable Income

This document discusses various topics in taxation law including deductions, CGT events, and assessable income. It covers topics such as general expense deductions, tax offsets, marginal tax rate vs average tax rate, consumption tax, and more. It also provides examples and references to relevant tax rulings and cases.

TAXATION LAW
STUDENT ID:
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Question 1
a) The topic dealt by TR2018/4 is the effective life for the depreciation assets considered for
the purposes of income tax1.
b) Division 17 ITAA 1997 details the various tax offsets.
c) Top tax rate for a resident taxpayer stands at 45% for 2018/2019.
d) One example of a CGT exempt asset is car as outlined in s. 118-52.
e) The underlying CGT event refers to the enjoyment of asset without the possession of the
legal title.
f) The formula contained in s. 4-10(3)I ITAA 1997 outlines the formula meant for
computation of income tax. In order to compute the liability regarding income tax, it is
essential to find the product of taxable income and the applicable tax rate. However, for
determining the net tax liability, a deduction of tax offsets is made from the above
product.
g) The key issue that the highlighted case dealt with was to determine if the legal expenses
were deductible for the customer officer or not. The Tax Commissioner objected to the
claim of the taxpayer regarding deduction of these legal expenses under s. 8-1 ITAA
1997. However, the High Court finally endorsed the position of the taxpayer as it
indicated that the legal expenses were borne in context of representation related to
professional position and hence had a direct link with the assessable income production3.
h) The difference between marginal rate and average rate in taxation context is quite stark.
The marginal tax rate would refer to the tax rate that would apply to the extra dollar of
income which the taxpayer would draw. It is essentially the highest amount of tax rate
which any component of the taxable income would draw. In contrast, the average tax
would indicate the amount of tax rate that on average would apply to each dollar of
taxable income. In order to illustrate the difference between the two, a numerical example
can be assumed. Assume that the taxable income of the concerned taxpayer is $ 95,000
for 2018/2019, then in accordance with the applicable tax rates, marginal tax rate would
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 Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
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be 37% as any additional taxable income would be taxed at this rate. The average tax rate
computation is illustrated as follows4.
Amount of tax to be paid on the above taxable income = 20797 + 0.37*(95,000-90,000) =
$22,647
Average tax rate = ($22,647/ $95,000)*100 = 23.84%
i) Consumption tax refers to a type of tax which is levied on the consumption of particular
goods. The government tends to assign these taxes on those items whose consumption it
wants to reduce on account of the negative externalities associated primarily with the
health of the consumers. One prime example of this is sugar tax in which products that
contain high amount of sugar are taxed in accordance with their sugar content. This tends
to lead to higher prices and thereby the consumers may look for cheaper alternatives
where the healthy versions may prove to be useful. In this manner the choices of
consumers can forcefully be made healthy though economic intervention. Another
consumption tax is soda tax along with fat tax. The concept of consumption tax is being
tried in various geographies with limited success as there is resistance to the imposition of
these which equates to government interference in consumption choices.
Question 2
(a) In accordance with s. 8-1, ITAA 1997 general expense deduction would be available on
the outgoings only when it has used for deriving assessable income5. Further, according
to ss. 8-1(2) ITAA 1997, the expenses must not be private or capital type. The taxpayer
has an expense in the form of loan interest which he has taken to pay the wages to his
employees. Here, the interest expense of Brett is utilized for deriving assessable income
and thereby, the deduction will be available under the concepts of s. 8-1, ITAA 1997.
(b) Deduction will not be available for taxpayer when the expenses is private in nature under
ss. 8-1(2) ITAA 1997. Further, the deduction will only available when there is a direct
relationship with producing assessable income through expense. Also, if part of expense
has used for deriving assessable income, then only that portion of the expense will be
4 Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company, 2017)
5Austlii, Income Tax Assessment Act 1997- SECT 8.1, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html
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used for deduction. Julie has an expense of $500 on her mobile phone out of which 60%
of this expense has been incurred for work purpose calls. It is apparent that general
deduction will be available for (60%*500 = $300) as this is the amount which has been
used for deriving assessable income by Julie.
(c) The relevant aspect is indicated in TR95/9 whereas the expenses incurred in regards to
child care will not be considered for tax deduction by the employee6. The verdict of
Lodge v. FC of T7 case is the testimony of this where the expenses in relation to childcare
were categorised as private expense of taxpayer and were not considered to be necessary
for assessable income generation. Based on this underlying fact, it can be said that
expense of Sally i.e. $1200 in childcare would not be deductible because it is private
expense.
(d) Expense of taxpayer which has been incurred owing to theft for goods would be
deductible since such activities tend to be part and parcel of the respective business. The
judgement of Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation8
case is the evidence of this aspect. Jerry has suffered a loss of $20,000 because one of his
employees has stolen the goods worth $20,000 from the business in the given tax year.
Hence, it can be said that the expense will be tax deductible under s.8-1 because the
stealing of goods is part and parcel of business of taxpayer and the goods which are stolen
was part of assessable income production.
(e) In accordance with s. 8-1, ITAA 1997 general tax deduction would be available on the
outgoings only when it has used for deriving the assessable income9. Further, as per ss. 8-
1(2) the outgoings which are used for assessable income production but of capital nature
will also not considered for tax deduction. Here, the expenditure $5000 for contesting
election will not be deductible despite that it has used for deriving assessable income
because the expenditure is termed as capital expense and not revenue expense. Besides,
owing to not being related to business, this capital expense would not have any deduction
under s 40-66410
6ATO, Taxation Ruling, TR 95/9, https://www.ato.gov.au/law/view/document?DocID=TXR/TR959/NAT/ATO/00001
7Lodge v. FC of T (1972) 128 CLR 171
8Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
9Austlii, Income Tax Assessment Act 1997- SECT 8.1, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html
10 ITAA 1997
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Question 3
(a) The transaction incurred for issuing new lease or renewing the existing lease at premium
is classified as CGT Type F1 event. Further, under the highlights of ss. 104-110 ITAA
1997, the capital gains will be determined through derived premium amount minus
incidental costs incurred. According to ss. 115-5, the capital gains derived for the
transaction of CGT event Type F1 will not be considered for discount11.
Derived premium amount = $5000
Incidental costs incurred = 0 (ASSUMPTION)
Capital gains = Derived premium amount-Incidental costs incurred = $5000 – 0 = $5000
(b) When taxpayer issues an option to the other party to purchase the asset for premium then
this transaction would be categorised as D2 CGT event. Further, under the highlights of
ss. 104-40 ITAA 1997, the capital gains will be determined through income derived from
granting option minus incidental costs incurred in grating option.
Income derived from granting option = $40,000
Incidental costs incurred in grating option = 0 (ASSUMPTION)
Capital gains = $40000 – 0 = $40,000
In accordance with ss. 115-5 ITAA 1997, discount method will not be available here as the
capital gains raised for the transaction of D2 CGT event are exempted.
(c) Subdivision 118-B reflects the CGT liabilities for the transaction which are incurred on
the sale of the main residence of taxpayer12. Further, it is essential to note that the
taxpayer can treat his/her dwell as main residence even they did not live there for a
maximum period of 6 consecutive years. Jamie and Olivia own a house for residential
purposes but they did not stay in that house because they were travelling overseas for a
two-year period. Also, there is no evidence that implies that Jamie and Olivia had shifted
their main residence and thus, according to six-year rule, their house would be considered
as main residence of taxpayer and therefore, CGT liabilities would not be applicable on
the capital gains derived from the sale of their main residence.
11 Austlii, Section 115-5<http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.5.html>
12 CCH, Subdivision II8B <https://iknow.cch.com.au/topic/tlp104/overview/main-residence>
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(d) Selling of share is termed as CGT event Type A1 because the shares are categorised as
CGT asset. In accordance with ss. 104-10 ITAA 199713, the capital gains from the sale of
shares are computed by total selling price minus total cost base of CGT asset.
BHP Shares
Wesfarmers Shares
Shares are not long-term assets because their holding period is lower than 1 year and
therefore, discount method cannot be used to find the CGT liabilities for capital gains.
Question 4
a) The pivotal aspect to be focused on in the given context is whether receipts in the form of
prize would contribute to assessable income or not. In this regards, taxation ruling TR
1999/17 through the reference to various relevant cases hints at prize money contributing
to assessable income in the scenario when this is linked with the skills of the taxpayer and
not a matter of luck or chance14. Further, it is also critical that the award should not be
adhoc but is common and the taxpayer expects to receive the same someday. Comparing
the requisite conditions with the scenario provided, the prize is linked to advertiser skill,
the award functions are common periodic events and the taxpayer would expect to win
prize in such events. Thereby, the prize money of $2,000 would be considered as
assessable income.
13Austlii, Income Tax Assessment Act 1997 – SECT 104.10, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s104.10.html
14ATO, Taxation Ruling TR 1999/17, https://www.ato.gov.au/law/view/document?Docid=TXR/TR199917/NAT/ATO/00001
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b) The key issue in this scenario is to outline the different in tax implications associated with
reimbursement and allowance. A key factor to be noted is that in case of reimbursement,
the employee does not draw any economic benefit as the amount paid by the employee is
the same as that spent. However, this is not the case with allowance where a fixed amount
is paid irrespective of the underlying expenses owing to which any savings from this
amount would lead to practical benefit. Therefore as indicated in tax ruling TR 92/15,
allowances are included in assessable income15. For the given scenario also, the amount of
$ 500 provided for the Sydney official trip is an allowance as it is not linked to the actual
expenditures by the employee and hence would contribute to assessable income.
c) It is noteworthy that the client has given a Iphone. Clearly, this would be statutory income
as economic benefit is being received in the form of non-cash benefit. Also, this is
material enough to be stated and included in the computation of assessable income.
Further, it is important to highlight that as per s. 6-10 ITAA 1997, all components of
statutory income would lead to production of assessable income16.
d) A key principle for identifying the compensatory payments nature and taxation treatment
has been indicated in TD 93/58. In accordance with this, compensatory payments would
be assessable income only when they are compensating the loss of assessable income.
Further, if as per agreement between the taxpayer and the compensation provider a certain
portion of compensation is extended as compensation for assessable income, then the
same would be considered as assessable income17. Based on the information provided, it
is apparent that the compensation payment is related to personal injuries only and hence
would not lead to assessable income generation.
e) There are two contributors to assessable income namely ordinary income18 and statutory
income19. One of the components of statutory income is capital income as indicated in
relevant statute20. The realisation of capital gains on any asset tends to happen when the
trigger is provided in the form of a CGT event. When the underlying asset is a CGT asset
such as shares, then the disposal would lead to capital gains computation as it is termed as
15 Ibid, 4, 741
16 Ibid, 3, 632.
17Mc Laurin v. FC of T (1961) 104 CLR 381
18 Section 6-5 ITAA 1997
19 Section 6-10 ITAA 1997
20 Section 104-5 ITAA 1997
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A1 CGT event. However, any gains or losses before liquidation are not of any relevance
as the same cannot be realised till there is sale of underlying asset. Hence, in the given
scenario, the gains in share would not lead to any assessable income before the shares are
sold
Question 5
The key issue is to determine the tax residency of Nisu (a Nepal resident) who has come to
Australia for studies. In determination of individual tax residency, ss. 6(1) 21 along with tax
ruling TR 98/17 are relevant. There are essentially four tests that are available for
ascertaining if the given taxpayer is Australian tax resident or no22.
1) Domicile Test – This test is used for Australian residents and demands the fulfilment of
following two conditions23.
 Taxpayer has to hold Australian domicile.
 Permanent abode of taxpayer has to be lie in Australia
Clearly, Nisu does not hold Australian domicile and thereby fails this test.
2) 183 day test – This test is used to determine the tax residency of foreign residents and the
key condition to be met is stay of 183 days atleast in Australia during the tax year under
consideration24. Considering that Nisu arrived on 30th December and left on 39th June, he
manages to fulfil the 183 days primary condition. However, it is apparent that on 39th
June, he returns to Nepal and would not return. As a result, he has not intention to stay in
Australia owing to which this test is failed.
3) Superannuation test – This is a very specific test which is only applicable for employees
of Australian Federal government who are serving abroad25. This is not the case with
Nisu and hence this is not a relevant test for Nisu.
4) Ordinary “Residency” Test – This test is applicable for foreign residents and considers
factors such as reason of visit, behaviour during stay in Australia coupled with nature of
ties with Australia socially, personally and professionally26.
21Austlii, Income Tax Assessment Act 1936 – SECT 6,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html
22ATO, Taxation Ruling TR 98/17, https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001
23Ibid, 3. 679
24 Ibid, 4, 345
25 Ibid, 6, 851
26 Ibid, 3. 412.
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 The taxpayer is considered to be tax resident is he/she has arrived in Australia for a
significant purpose such as education or employment and intends to stay in Australia for a
sizable time.
 Also, higher the extent of professional and personal ties that taxpayer has in Australia
would imply greater chances of being categorised as Australian tax resident27.
 Besides, if the taxpayer tends to have a healthy social life in Australia which is
comparable to country of origin, then also chances of Australian tax residency are
enhanced28.
Based on the above factors it is evident that Nisu would be held as an Australian tax resident
for 2018/2019. This is because the purpose of visit is study which is significant and that too
for three years. Also, Nisu has professional and personal commitment in Australia in the form
of friends and part time jobs. Further, his social life during his stay in Australia seems to be
quite normal and may be comparable to that in his country of origin.
Bibliography
Austlii, Income Tax Assessment Act 1997- SECT 8.1,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html
27Peel v. The Commissioners of Inland Revenue (1927) 13 TC 443
28 Ibid, 3. 6.
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ATO, Taxation Ruling, TR 95/9,
https://www.ato.gov.au/law/view/document?DocID=TXR/TR959/NAT/ATO/00001
ATO, Income Tax Assessment Act 1997 – SECT 118.5,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html
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
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)
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