Taxation Law: Depreciating Assets, Tax Offsets, Marginal Tax, Deductions

TAXATION LAW
STUDENT ID:
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Question 1
a) TR 2018/4 deals with the depreciating assets effective life with regards to income tax1.
b) The relevant division dealing with tax offsets is Division 17 ITAA 1997.
c) Resident taxpayer would attract a top tax rate to the extent of 45% for the tax year
2018/2019.
d) An instance of an asset which is exempt from capital gains tax is car which has been
indicated as per s. 118-52.
e) CGT event B1 s104-15 deals with the tax treatment of asset enjoyment without
possessing the legal ownership of the asset.
f) The underlying formula that has been outlined in s. 4-10(3) pertains to the income tax
liability computation. It highlights that that the first step in this regards is to multiple the
tax rate (as per applicable tax slabs) with the taxable income after requisite deduction.
However, it is possible that the actual tax liability is lower than the above amount as tax
offsets would be deducted3.
g) The FC of T v Day 2008 ATC 20-064 is a case whose significance pertains to the
deduction that may be availed by the taxpayer under s. 8-1.The key legal issue in the
given case was whether the legal expenses incurred by the taxpayer would provide
deduction or not. The Tax Commissioner denied the same but the High Court allowed the
same. The key principle indicated was that it is essential to consider whether the legal
expenses incurred are with regards to assessable income derivation. This was true in the
given case as the legal services were hired by a custom officer so as to defend against
charges levied in regards to professional conduct. The charges could impact the
professional career of the taxpayer and thereby the expenses were incurred in order to
ensure that assessable income remains intact4.
h) The tax rate which would be levied on the last dollar of the taxable income for the
taxpayer would be referred to as marginal tax. Most countries tend to have a progressive
income tax system whereby the tax slabs tend to progressively increase and thereby a
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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higher marginal tax may be applicable for income above a certain threshold. The average
rate of taxation which is levied on each of each dollar of taxable income would refer to
the average tax rate. For enhanced clarity in this regards, the working using actual
numerical values is exhibited below.
Let the net taxable income for the resident taxpayer be $ 110,000 for 2018-2019. Any taxable
income lying in the bracket of $ 90,000- $180,000 attracts a marginal tax rate of 37% which
would be the marginal tax rate for the taxpayer. The total tax liability in accordance with the
personal income tax slabs can be computed as shown below.
Income tax liability = 20797 + 0.37*(110,000-90,000) = $28,197
Average tax rate = ($28197,/ $110,000) = 25.63%
i) The consumption tax is levied by the government with the underlying intention to bring
about a change in the consumption pattern of consumers. This is required since there are
certain products which are harmful for the health of people and lead to the negative
externality of higher strain on public health infrastructure and lower productivity of
people. This negative externality is not built in the prices owing to which the
consumption of this products is in excess to the socially efficient level. For correcting this
mismatch, consumption tax is levied so that higher cost would act as a deterrent for
consumption and thereby reduce consumption. Some of the examples of these taxes
levied by various nations in the developed world are sugar tax, soda tax and fat tax. The
name itself suggests the underlying items on which these taxes would be applicable.
Ideally, the government should use the revenue collected from this tax to subsidise the
purchase of healthy substitutes which would bring about real change but this is seldom
done.
Question 2
(a) Outgoings which are pivotal for assessable income generation by the taxpayer will be
claimed as general deduction under s. 8-1 ITAA 1997. Further, the deduction will not be
claimed for the outgoings under ss. 8-1(2) ITAA 1997 which have realised for the
generation of non-assessable income, private or capital in nature. Brett has taken loan so
that he can pay employee wages which refers that he has realised the loan payment in
regards to generation of assessable income as non payment of salary would potential shut
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down business. Thereby, the interest payment against loan will be deducted under the s.
8-1 ITAA 19975.
(b) As discussed above, any expenses which are personal expense of the taxpayer will not be
deductible. Further, if a portion of the expenses has been realised for production of the
assessable income then that amount will be available for deduction. In given case, Julie
has an expense of $500 on her mobile phone charge which might be considered a private
expense. However, the use is not entirely private as 60% of the total calls are work
related. This indicates that only 60% of $500 will be taken for deduction. Thus, the
deduction is available for $300 only.
(c) As per TR 95/9, the expenses in the form of child care will not be considered for
deduction because it belongs to the category of private expenses of the taxpayer. The
ruling of Lodge v. FC of T6case also supports this observation. In given scenario, Sally
has paid $1200 to babysitter for taking care of her child. Thereby, this private expense of
Sally will not be considered for deduction despite this payment being necessary for her to
attend work.
(d) Losses which are borne by business in the form of stolen items are business related
expenses which take place in normal course of business and hene considered to be
deductible under general deduction as clarified in the verdict of Charles Moore & Co
(WA) Pty Ltd v. Federal Commissioner of Taxation7 case. Thus, the loss in terms of stolen
goods of monetary worth $20,000 will be deductible as the goods were part of the
business of Jerry and would have derived assessable income for him.
(e) The expenditure which is related to assessable income derivation but are of capital in
nature would not be considered for deduction under ss. 8-1(2) ITAA 1997. The
expenditure of $5000 for contesting the local election belong to capital expenditure as
they donot relate to discharging of duties of elected representative and thus, no deduction
5 Austlii, Income Tax Assessment Act 1997- SECT 8.1, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html
6 Lodge v. FC of T (1972) 128 CLR 171
7 Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
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