1TAXATION LAW Table of Contents Answer to question 1:.................................................................................................................2 Answer to question 2:.................................................................................................................5 Answer to question 3:.................................................................................................................7 Answer to question 4:...............................................................................................................10 Answer to question 5:...............................................................................................................12 References:...............................................................................................................................16
2TAXATION LAW Answer to question 1: Answer A: Denoting the explanation in“taxation ruling of TR 2019/1”it is associated with determining when actually a company is conducting its business activities1. This ruling involves the view of commissioner when the company is carrying its business within the purview of small business entity stated in“s-23, ITRA 1986”as effective from 2015-16 and 2016-17 income years and inside“s328-110, ITAA 1997”. Answer B: The most important rules regarding the manner of computing the deduction for gifts and contribution has been explained under the“Division 30, ITAA 1997”2. Answer C: A person who is a tax resident of Australia and have reported an income of beyond $180,001 a maximum extent of marginal tax of 45% is applied on them for the income year of 2019-20. Answer D: From the regimes of capital gains tax generally motorcycle and car are not exempted from the capital gains tax3. They are considered as the personal use asset under“Sec-108-20, 1Taxation Ruling of TR 2019/1 2Division 30, Income Tax Assessment Act 1997 (Cth). 3Sec-108-20, Income Tax Assessment Act 1997 (Cth).
3TAXATION LAW IITA 1997”. An exemption is only allowed for CGT when the cost base of the motor cycles and car is below the $10,000. Answer E: Under the“s 104-20 (1), ITAA 1997”the GGT event C1 is largely related to end of CGT asset. The CGT event C1 follows when the taxpayer that owns the CGT asset is lost or destroyed. Under this event time plays a vital role4. This comprises of when the first compensation was received by the taxpayer for loss or destruction or if no compensation is received by the taxpayer following the loss or destruction of CGT asset. Answer F: When an individual is viewed as Australian resident then in such case their first $18,200 annual income is not considered for tax. The sum of $18,200 is viewed as tax-free amount. Answer G: The federal courts judgement in“Hayes v FCT (1956)”denoted that receipts that are not found to be the produce or reward for service then it is not held as taxable ordinary returns. The case is viewed as vital because it explains that a gift which is received by the taxpayer for their personal relation is not treated assessable as ordinary earnings5. While differentiating amid the non-assessable private gifts and taxable voluntary receipt associated to service, it is necessary to focus on the type or character of receipts in the hands of recipient. 4Sec-104-20, Income Tax Assessment Act 1997 (Cth). 5Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47
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4TAXATION LAW Answer H: There are certain differences between the ordinary and statutory income which are as follows; Ordinary IncomeStatutory Income Asexplainedin“sec6-5,ITAA 1997”ordinaryincomearethose incomethatisearnedbyan individual from both the direct and indirect sources irrespective of in or out of Australia6. Salaries, wages, commission, bonus, allowances etc. are considered as the commonexampleofordinary income. Statutory income represents all the amount that are not held as ordinary earnings.Itisincludedfor assessment on the basis of specific rules given under tax laws. Capital gains and dividend income are some of the common examples of statutory income. Answer I: TherearecertaindifferencesbetweentheMedicareLevyandMedicareLevy Surcharge which is given below; Medicare LevyMedicare Levy Surcharge It is the basic manner where most of workingAustraliancitizensmake contributions in Medicare cost. The MLS is an additional tax which is imposed by federal government in paying for public health system. 6Section 6-5, Income Tax Assessment Act 1997 (Cth).
5TAXATION LAW It is paid by those that has assessable income of more than $27,069 at a rate of 2%. It is paid by singles and families that hastaxableincomeofmorethan $90,000 and $180,000 respectively at rate of 1% to 1.5%. Answer to question 2: The saying“usual place of abode”must not be assigned a similar sense as the phrase “permanent place of abode”.The phrase “usual” and“abode”must be assigned in their ordinary and natural meanings7. The term “resident” or“resident of Australia”represents a person that has been in Australia for more than six months of income year except when the taxation commissioner is pleased that the “usual place of abode” of taxpayer is out of Australia and has no objective of staying in Australia. The “resides” test allows the taxation commissioner to take into the account“usual place of abode”and the objective of the person in taking up the residence in Australia8. As a result, individuals that are taking the pleasure of extended holiday are not held as Australia residents. In majority of the cases if a person is not held as existent in Australia within the ordinary perceptions then their“usual place of abode”is out of Australia. The question of “usual place of abode”is regarded as the subject of fact. The phrase is generally understood as the customary abode or used generally by an individual when they are present in a state physically. An individual’s place of abode must not be fixed but should portray the elements 7Sadiq, Kerrie et al,Principles Of Taxation Law 2014 8Taxation Ruling IT 2650
6TAXATION LAW of a particular place where he or she lives, in contrast to a mere overnight stay, weekly or monthly accommodation as visitor9. The expression“permanent place of abode”represents that a person that has his or her domicile in Australia with respect to the meaning given under“subparagraph (a)(i)”of residence. It also needs the contentment of commissioner that the person’s“permanent place of abode”is out of the country. What amounts to a“permanent place of abode”is given in “Applegate v FCT (1979)”.The federal law court noticed that in spite of the fact that Applegate has retained his domicile in Australia but has established a“permanent place of abode”out of the country10. The court noticed that“permanent”under this background was somewhat less than eternal, and was either a fixed or the habitual place of abode. Similarly, in“Harding v FC of T (2019)”in allowing the appeal of the taxpayer the federal court at the time of assessing stated that while determining a person’s residency the expression“permanent place of abode”must not be understood by referring to only a person’s specific dwelling11. As a substitute, adequate emphasis must be placed to take into account whether a person is residing permanently in a chosen state or nation. TheexplanationsabovefromApplegateandHarding’smakesitclearthat “permanent place of abode”cannot be determined by applying any hard and fast rules. It is only the matter of fact that needs to be ascertained in every instance. 9Woellner, R. H,Australian Taxation Law 2016(CCH Australia, 2016) 10Applegate v Federal Commissioner of Taxation (1979) ATC 4307 11Harding v Federal Commissioner of Taxation (2019) FCAFC 29
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7TAXATION LAW Answer to question 3: HECS-HELP: $850: As explained in the“sec 26-20, ITAA 1997”a deduction is prohibited to the taxpayer for certain study-associated payment such as the HECS-HELP. Evident here suggest that the trainee accountant has undertaken self-education and has occurred a sum of $850 as the HECS-HELP expenses. Under“sec 26-20, ITAA 1997”a deduction will be denied to trainee accountant12. Travel – work to university $110: An individual that has undertaken the self-education and occurs travel expenses to travel between work place and university or place of education is allowed as general deduction under“sec 8-1, ITAA 1997”13. The trainee accountant here incurred travel expenses of $110 for travelling between his work place to place of education. The expenses will be acceptable for deduction under“sec 8-1, ITAA 1997”. Books $200: Referring to“Taxation Ruling of TR 98/9”expenses related to self-education such as textbooks, stationaries, calculators are allowable for tax deduction under“sec 8-1, ITAA 1997”.14. The judgement denoted in“FCT v Studert (1982) ATC 4463”stated that an allowable income tax deduction is permitted to the taxpayer to claim the expenses for travel, 12Sadiq,KerrieandCynthiaColeman,PrinciplesOfTaxationLaw2016(Lawbook Co./Thomson Reuters, 2016) 13Section 8-1, Income Tax Assessment Act 1997 (Cth) 14Taxation Ruling of TR 98/9
8TAXATION LAW course fees and accommodation since the self-education expenses were taken for increasing the future income prospect in his present job. The trainee here occurs expenses of $200 for books related to self-education. Citing “FCT v Studert (1982) ATC 4463”a deduction is permitted under“sec 8-1, ITAA 1997” since the self-education expenses were taken for increasing the future income prospect in his present job. Childcare during the course of evening classes $80: A deduction is not permitted for child care expenses incurred to taxpayers under negative limbs of“sec8-1 (2)(b), ITAA 1997”.Denoting the conclusion made in“Lodge v FCT (1972)”the law court has denied the taxpayer with the tax deduction for child care expenses incurred to mind her child while she is on work. The court held the expenses to be irrelevant in production of assessable wages. The childcare expenses of $80 for attending the evening class is not permitted for deduction undernegative limbs of“sec8-1 (2)(b), ITAA 1997”15.Referring to decision of “Lodge v FCT (1972)”the expenses are irrelevant in production of taxable income. Fridge repair cost of $250 at home: Denoting the description of“sec25-10, ITAA 1997”a taxpayer is only permitted to obtain deduction for expenses which is sustained on repairs to depreciating asset held completely for producing assessable income. No deduction is permitted under this provision for capital or private expenses16. Likewise the expense of $250 incurred for repairing the 15Lodge v Federal Commissioner of Taxation (1972) HCA 49 16Section 25-10, Income Tax Assessment Act 1997 (Cth).
9TAXATION LAW fridge at home is a private expenses and non-deductible under“sec25-10, ITAA 1997”as the expenses is not occurred in making assessable returns. Black trousers and shirt purchase cost of $145 for official purpose: No general deduction is permitted for ordinary items of clothing in“sec 8-1, ITAA 1997”.Similarly in“Westcott v FCT (1997)”the judgement stated that no permissible deduction relating expenses incurred for office suits and ordinary clothing was allowed since it is not associated to the production of assessable income17. The sum of $145 for black trousers and shirts for official purpose is non-allowable deduction under“sec 8-1, ITAA 1997”.Applying the decision of“Westcott v FCT (1997)” no permissible deduction relating expenses incurred for office suits is allowed since it is not associated to the production of assessable income18. Legal expenses incurred in writing up new employment contract with new employer $300: As explained in positive limbs of“sec 8-1, ITAA 1997”no deduction is permitted for outgoings arose in procurement of new employment. The conclusion in“Maddalena v FCT (1971)”held that the taxpayer was the footballer who occurred expenses on travelling to new club for negotiating employment contract19. Likewise, citing the judgement of“Maddalena v 17Westcott v Federal Commissioner of Taxation (1997) ATC 2129 18Morgan, Annette, Colleen Mortimer and Dale Pinto,A Practical Introduction To Australian Taxation Law(CCH Australia, 2013) 19Maddalena v Federal Commissioner of Taxation (1971) 45 ALJR 426
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10TAXATION LAW FCT (1971)”, the legal fees occurred for writing up new employment contract to new employer is not allowed as tax deductible expenses under“sec8-1, ITAA 1997”. Answer to question 4: Answer to A: There are several capital gains tax events which can be applied on the lease of land. A CGT event F1 happens if they grant the lease of land to someone or they decide to extend or renew the lease which they held it earlier. The sum of capital gains or loss arising from the CGT event F1 constitute the differences between any kind of premium that they get for granting the lease and the expenses occurred by the taxpayer in granting the lease20. The taxpayer should understand that CGT discount is not eligible for applicable in case of CGT event F1. John grants the lease of land which he held to David for seven years. The premium received for granting of lease stood $7000. As John grants the lease of land to David, a CGT event F1 happened. Consequently a CGT discount is not eligible for John in this case. Answer B: 20Barkoczy, Stephen,Foundations Of Taxation Law, 2016
11TAXATION LAW Answer C: No tax on capital gains is applicable on the main residence of the taxpayer. In other words, the main dwelling is generally tax exempt. Where a taxpayer uses the house for making income or using it for any business then they can claim a partial main residence21. The case facts obtained suggest that a home was bought by Li on March for 200,000 and she converted a portion of her for physiotherapy business before selling the house in 2019 for $700,000. To determine the taxable capital gains for Li the portion of floor area used for producing income has been considered. Assessable portion = Capital gain x Percentage of floor area $700,000 – $400,000 = $300,000 (net capital gain) 300,000 x 20% = $60,000 (Taxable Portion) 21Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew,Principles Of Business Taxation. 2014
12TAXATION LAW The figures obtained suggest that taxable portion of capital gains is $60,000. Li here is assumed to have used the house for more than 12 months and she clearly satisfies the general rule of“home first home for producing income”because she started her business soon when she purchased the house. Answer D: A CGT assets cost base generally involves acquisition price which is paid by taxpayers at the time of purchasing the asset. The cost base of assets also includes some other costs such as the price paid for purchasing, holding and disposal of the asset. The reduced cost base represents when a CGT event happens to an asset and no capital gains are made by the taxpayer. A taxpayer is only permitted to use the reduced cost base of assets to lower the capital gains and cannot be used for lowering other capital loss22. The cost base on the other hand includes five elements such as money paid to acquire the asset, incidental costs, cost of ownership, capital enhancement cost and cost incurred to protect the title of the asset. Whereas the reduced cost base has the similar five elements but its third element is different from the cost base of asset which includes the balancing adjustment value which is taxable. Answer to question 5: Answer A: As per“s6-5, ITAA 1997”, a taxpayer derives a proceeds of income character when it comes to the home of taxpayer. An item of income character will be considered taxable irrelevant of whether there is any existence of illegality, immorality or ultra vires since these factors does not prevent imposing tax liability on such income. 22Kenny, Paul,Australian Tax 2013(LexisNexis Butterworths, 2013)
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13TAXATION LAW As evidence, if the income is earned from any illegal means namely drug-dealing or insider trading or theft then it will be considered taxable as ordinary income under“s6-5, ITAA 1997”. Answer B: Interest is regarded as having the character of income stream since it involves money received on periodical basis. Correspondingly, the sum of $500 received as bank interest from savings account is having the character of income stream and will be treated assessable ordinary income under“s6-5, ITAA 1997”. Simple windfall gain does not has income character23. Likewise, winnings of $2,000 from crown casino is a windfall gain and not taxable as ordinary income. Rent is regarded as the money paid to use someone’s property. The rental income of $2000 is held assessable under“s6-5, ITAA 1997”as ordinary income. Answer C: Earnings from individual effort under“sec 6, ITAA 1936”implies receipts that are receivedfromrenderingpersonalservicesincapacityofemployee24.Forexample, remunerations, wages, gratuities, allowances etc. that is earned in capacity of the employee. 23Krever, Richard E,Australian Taxation Law Cases 2016(Thomson Reuters, 2016) 24Dean v Federal Commissioner of Taxation (1997); 37 ATR 52
14TAXATION LAW Similarly in“Dean v FCT (1997)”employment remuneration was held as assessable income under“sec 6-5, ITAA 1997”. The receipt of $500 received by employee as the allowance constitute income from the personal exertion under“sec 6, ITAA 1936”.Mentioning the judgement of“Dean v FCT (1997)”the receipt of $500 is held as assessable income under“sec 6-5, ITAA 1997”25. Answer D: Answer E: 25Section 6-5, Income Tax Assessment Act 1997 (Cth)
15TAXATION LAW
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16TAXATION LAW References: Applegate v Federal Commissioner of Taxation (1979) ATC 4307 Barkoczy, Stephen,Foundations Of Taxation Law, 2016 Dean v Federal Commissioner of Taxation (1997); 37 ATR 52 Division 30, Income Tax Assessment Act 1997 (Cth). Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew,Principles Of Business Taxation. 2014 Harding v Federal Commissioner of Taxation (2019) FCAFC 29 Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 Kenny, Paul,Australian Tax 2013(LexisNexis Butterworths, 2013) Krever, Richard E,Australian Taxation Law Cases 2016(Thomson Reuters, 2016) Lodge v Federal Commissioner of Taxation (1972) HCA 49 Morgan, Annette, Colleen Mortimer and Dale Pinto,A Practical Introduction To Australian Taxation Law(CCH Australia, 2013) Sadiq,KerrieandCynthiaColeman,PrinciplesOfTaxationLaw2016(Lawbook Co./Thomson Reuters, 2016) Sadiq, Kerrie et al,Principles Of Taxation Law 2014 Sec-104-20, Income Tax Assessment Act 1997 (Cth). Sec-108-20, Income Tax Assessment Act 1997 (Cth). Section 25-10, Income Tax Assessment Act 1997 (Cth).
17TAXATION LAW Section 6-5, Income Tax Assessment Act 1997 (Cth). Section 8-1, Income Tax Assessment Act 1997 (Cth). Taxation Ruling IT 2650 Taxation Ruling of TR 2019/1 Taxation Ruling of TR 98/9 Westcott v Federal Commissioner of Taxation (1997) ATC 2129 Woellner, R. H,Australian Taxation Law 2016(CCH Australia, 2016)