Taxation Law: Understanding Taxable Income and Allowable Deductions

This article explains the concept of taxable income and allowable deductions under taxation law. It covers various scenarios and provides insights on how to calculate taxable income and claim deductions. The article is relevant for students studying taxation law and professionals working in the field of taxation.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................6
References:.................................................................................................................................8

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Answer to question 1:
Gains that is earned by the taxpayer from executing the commercial events are treated
as the taxable ordinary proceeds under “sec.6-5, ITAA 1997”. The proceeds that is received
from the individual effort involves of the bonuses, pensions, remunerations, commissions or
proceeds that are earned by the taxpayer from conducting on any business activities. As
clarified in the “sec 6-5 (1)” the taxpayer’s ordinary earnings includes the income that is
earned from all the sources (Lam and Whitney 2016). The decision cited in “Scott v CT
(1935)” the expression “income” must not be observed as just the word of art rather it should
be ascertained in arrangement with the ordinary meaning.
As obvious in the existing circumstance of Joe reported the receipt of $150,000 as
payment from clients for rendering electrical services that was provided by him. The receipts
earned from rendering electrical services will be held as income earned from rendering
personal services (Sharkey 2016). Referring to the explanation made in “Scott v CT (1935)”
the receipts received by Joe will be observed as chargeable revenues under “sec 6-5, ITAA
1997”.
There are circumstances when the taxpayers are given a specific deduction. Donations
and charities that are given under division 30 are permitted as allowable deductions.
Evidently in case of Joe he reported the receipt of $3000 which was eventually paid in charity
to Red Cross. The sum of $3000 will not be contained within in the chargeable proceeds of
Joe.
Gifts which a taxpayer receives related to the personal qualities are not treated as
ordinary earnings. A gains which only amounts to a simple gift cannot be treated as having
the character of income. As noted in the case of “Hayes v FCT (1956)” shares that were
received by the taxpayer from the spouse of long standing customer was not held as earnings

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(Sadiq 2016). Likewise, in the current situation of Joe he reported the receipt of an iPad from
one of his clients having a market value of $500 will be considered as non-taxable gift. The
iPad was received out of personal relationship between Joe and the client.
A non-cash benefits may pose the necessary connection with the private services or
the income producing activities of the taxpayer but if the same is not cash or cannot be
converted in cash then it will not be considered as the assessable ordinary earnings. The
decision that was given in “Cooke & Sherden v FCT (1980)” said that the value of the free
foreign trip which is non-transferable and cannot be converted in cash given to the retailers as
sales incentive scheme will not be considered as the taxable income (Kenny, Blissenden and
Villios 2016).
As it has been noted in the instance of Joe he reported the receipt of non-transferable
voucher of two night stay in luxury resort with market value of $2,000 and also his expenses
related to the trip was paid by the client. Therefore, it can be specified that the benefit that is
Joe has received will be held as non-cash business benefit. By quoting the realistic position of
“Cooke & Sherden v FCT (1980)” in the case of Joe the voucher is non-transferable and
cannot be converted in cash given by the client (Sadiq et al. 2017). Therefore, it will be
considered as the non-taxable benefit for Joe and cannot be held chargeable as ordinary
proceeds.
The “CGT event A1” under “sec 104-10 (1)” summarizes that if an individual
taxpayer sells the CGT asset then a “CGT event A1” occurs. Disposal of asset commonly
happens under “sec 104-10 (2)”, when there is a change in the ownership of beneficial.
“Section 108-5 (1)” very widely defines the CGT asset as any form of possessions or lawful
or reasonable rights that are not observed as possessions (Stumbles, King and Wood 2016).
Where a taxpayer holds any shares in a company or unit, then it is treated as CGT asset.

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When Joe dispose the shares held by him has given rise to “CGT event A1” under “sec 104-
10 (1)”. As the shares was under Joe’s ownership for greater than 12 months a 50% CGT
discount can be claimed against the sales proceeds.
As it has been explained in the “sec.108-20 (2)”, a personal use asset (PUA’s) is also
treated as the CGT asset that a taxpayer keeps for their private use purpose (Kenny 2015).
The capital gains from the PUA is only considered taxable when the first element cost base of
the asset is greater than 10,000. Joe bought a MG Sports car in 1985 and sells the same in
2019 for 60,000. The capital gains has been reported from the sale of car which under
“sec.108-20 (2)”, is a personal use asset. The car meets the “first element cost base” and the
gains earned will be considered as taxable income.
Collectables are referred as CGT asset under “sec 108-10 (2)” that mainly includes
the artwork such as painting, sculptures etc. Only those capital gains are taxed when the cost
base of asset is higher than $500 (Pert et al. 2017). Similarly Joe disposed “Painting A” for
$2,500 which he had acquired for a sum of $2,200. The painting is categorized as the
collectables under “sec 108-10 (2)”. As the cost of painting meets the first element cost base
the capital gains earned from painting is counted in the chargeable earnings. However, under
“sec 108.10 (4)”, capital gains from collectables is solely permitted to be offset alongside the
capital gains from other collectables (Barkoczy 2016). Joe acquired the painting B on 20th
September 1998 for $1,200. However, the painting was sold in 2018 for a sum of $1,000.
Upon selling the “Painting B” a capital loss has been suffered by Joe. With reference to “sec
108.10 (4)”, capital gains earned from Painting A has been offset alongside the capital gains
from B to minimize the tax liability of Joe.
While “sec 108-20 (1)” explains that the capital loss from the PUA is completely
required to be disregarded irrespective of the purchase cost (Freudenberg et al. 2017). Joe

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during the year sold the speed boat that he has acquired for 24,000 in 1998. The speed boat
here is classified as PUA under “sec.108-20 (2)”. Therefore, upon the disposal of speed boat
a capital loss has been suffered and Joe is advised to simply disregard the capital loss.
Where a taxpayer receives any rent from the rental property then such receipts are
treated as ordinary income within the denotation of “sec 6-5, ITAA 1997”. Joe reported the
receipts of $60,000 from the rental property. The rent received will be held as chargeable
ordinary revenues under “sec 6-5, ITAA 1997”.
A taxpayer under “sec 8-1, ITAA 1997” is allowed to get deduction for the certain
outlays that are associated to the rental property up to the period the property is considered
available for rent. The expenses that are incurred by Joe on rental property are permitted as
deduction under “sec 8-1, ITAA 1997” for the reason that the outgoings were sustained by
Joe when the property was rented out. Additionally, there was an expenses incurred on 1st
July 2018 relating to the replacement of wooden floor with concrete floor (Morgan, Mortimer
and Pinto 2018). The sum of $1,200 is omitted from deduction because it is not occurred in
the current income year.
Under “division 30, ITAA 1997” gift or contribution that is made by the taxpayer to
the deductible gift recipients is considered for deduction. Evidently in “Arnold v FCT
(2017)” gift can be in the form of money or property paid or contributed (Morgan and
Castelyn 2018). Similarly Joe reports gifts to Red Cross for $100. Referring to “Arnold v
FCT (2017)” the sum of 100 will be permitted as tax deduction under “division 30, ITAA
1997”. Joe also successfully bid in auction that was conducted by Salvation Army for
paintings of $1,000 but the market price of the painting was $150. Evidently, Joe is permitted
to get deduction for the paintings up to its market value.

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According to the “sec 25-5” a taxpayer is allowed to get deduction for the certain
costs that are incurred for management of the tax affairs (Kenny 2015). Similarly, the
expenses incurred by Joe for management of tax related affairs and lodging of objection
relating to income tax assessment can be obtained as deduction. Joe is also allowed with
entitlement of getting deduction for the work related purpose telephone calls while no
deduction will be permitted for expenses occurred in making calls to wife and kids as they are
personal in nature and non-deductible under “sec 8-1, ITAA 1997”.
Answer to question 2:
Computation of Taxable Income
In the Books of Joe
For the year ended 30 June 2019
Particulars Amount ($) Amount ($)
Assessable Income
Receipt from personal services 1,50,000
Australian Sourced Rental Income 60,000
Capital Gains Tax
Capital gains from CBA Shares
Sales Proceeds 7,00,000
Less: Acquisition Cost 20,000
Gross Capital gains 6,80,000
50% CGT Discount 3,40,000 3,40,000
Capital gains from MG Sports car
Sales Proceeds 60,000
Less: Acquisition Cost 7,000
Gross Capital gains 53,000
50% CGT Discount 26,500 26,500
Capital gains/loss from Painting A
Sales Proceeds 2,500
Less: Acquisition Cost 2,200
Gross Capital gains 300
Capital gains/loss from Painting B
Sales Proceeds 1,000
Less: Acquisition Cost 1,200
Gross Capital loss -200

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Net Capital gains from Paintings 100
Total Assessable Income 5,76,600
Allowable Deductions
Council Rates 1,680
Insurance 850
Painting of internal shop walls 1,025
Painting of external shop walls 1,160
Interest on shop mortgage 5,078
Gifts to red cross 100
Painting cost 150
Tax agent fees 500
Lodging of objection 1,000
Telephone calls cost 300
Total Allowable deductions 11,843
Total Taxable Income 5,64,757
Tax on Taxable Income 2,27,238
Add: Medicare Levy 11,295
Less: PAYG Withholding 45,000
Total Tax Payable 1,93,533

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References:
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Freudenberg, B., Chardon, T., Brimble, M. and Isle, M.B., 2017. Tax literacy of Australian
small businesses. J. Austl. Tax'n, 19, p.21.
Kenny, P., 2015. LexisNexis concise tax legislation 2016,
Kenny, P., Blissenden, M. and Villios, S., 2016. Australian tax 2016,
Lam, Dung and Whitney, Alex, 2016. Taxation and property: Practical aspects of the new
foreign resident CGT witholding tax. LSJ: Law Society of NSW Journal, (21), pp.84–85.
Morgan, A. and Castelyn, D., 2018. Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Pert, Alison, Chen, Helen and Carvosso, Rhys, 2017. 'Federal Commissioner of Taxation v
Seven Network Ltd' (2016) 241 FCR 1. Australian Year Book of International Law, 35,
pp.273–275.
Sadiq, K. et al., 2016. Principles of taxation law 2016 Ninth., Sydney: Thomson Reuters.
Sadiq, K.and C.C.& H.R.E.A.L. et al., 2017. Principles of taxation law 2017 10th ed., Place
of publication not identified]: THOMSON LAWBOOK CO.
Sharkey, N, 2016. Reinventing administrative leadership in Australian taxation: Beware the
fine balance of social psychological and rule of law principles. AUSTRALIAN TAX
FORUM, 31(1), pp.63–97.

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Stumbles, J. King and Wood Mallesons, 2016. Australian finance law Seventh., Pyrmont,
N.S.W.: Thomson Reuters.