Taxation Law: Deductions and Residency Status

This article discusses the deductions available under the Australian taxation system and the residency status for tax purposes. It also compares the deduction regimes of Australia and New Zealand.

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
Part A:........................................................................................................................................2
Letter of Advice.........................................................................................................................2
Part B: Deductions:....................................................................................................................6
Introduction:...............................................................................................................................6
Concerns regarding present arrangements:................................................................................7
Burden of Complaisance:...........................................................................................................7
Level of Deductions:..................................................................................................................8
Technological improvements and wider reformations:..............................................................9
International comparisons: New Zealand.................................................................................11
Tax system in New Zealand:................................................................................................12
Conclusion:..............................................................................................................................13
References:...............................................................................................................................14

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Part A:
Letter of Advice
To Jenny and John
From ABC Tax Consultants
Date: 30-3-2019
Dear Jenny and John
We would like to draw your kind attention toward our letter of advice to address the
residency status and also provide you valuable advice regarding the taxability of receipts
made during the year. We would like to inform you that the resident of Australia is held for
taxation purpose for income derived from all the sources. There are four test that determines
the residency status of an individual. Only one out of the four test is required to be met for a
person to be treated as Australian resident under “section 6 (1), ITAA 1936”.
Whether a person is residing in Australia is regarded as the primary test for residency.
A person is held as the Australian dweller for the taxation purpose if they are actually
residing in Australia, irrespective of their nationality, citizenship or the location of their fixed
home. The court in “FCT v Miller (1946)” stated that determining the residency is a question
of fact and degree. Factors such as time spent and purpose of visit is important.
While the Domicile Test states that a person will be held as Australian occupant if
their residence is in Australia, only when the commissioner is satisfied that a taxpayer’s
domicile is out of Australia. The Federal Court in “Applegate v FCT (1979)” saw that despite
the taxpayer has retained the residence of Australia, he has proven that the permanent place
of resident is somewhere else. Conclusively, permanent does not mean forever and it is
evaluated every year.

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As per the 183 day’s test an individual that is physically present in Australia for more than
six months will be treated as Australian resident. Finally, the superannuation test is applicable
to the eligible employee of commonwealth public servants.
As evident in your situation you and your wife Jenny arrived in Australia with a pre-
arranged eighteen-month employment contract. With respect to ordinary concepts you and
Jane have not been residing in Australia. Additionally, under the Domicile Test your
permanent place of abode is out of Australia. However, under the 183 day’s you will be
considered as the Australian resident because you have been physically presently in Australia
from 1st December 2018. The purpose of visit to Australia and the time that you and your
wife Jenny has spent in Australia can be considered to be consistent with that of residing in
Australia.
A receipt from the employment and rendering personal services would be subjected to
taxation for the employee. A connection with the receipt derived as a result of taxpayer’s
personal service would be subject to ordinary income under “section 6-5, ITAA 1997”. For
Jenny, the salary of $130,000 from your employment with Total Financial Service Pty Ltd
would be subjected to income tax as ordinary income.
Later John earns a salary of $38,000 in Australia for taking up the accounting contract
work in Australia. A nexus has been established for John here for the personal services
salaries and wages received. The amount will be included in your assessment which would
attract tax liability within the ordinary concepts of “section 6-5, ITAA 1997”.
During the year income year of 2018 Jenny and John held a number of investment in
the US stock markets. You both derived dividends that amounted to $5,000 AUD in October
2018 and $6,000 in March 2019. We would like to inform your dividends and gains arising
from the shares are treated as statutory income under the legislative provision of “section 6

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(1), ITAA 1936”. The dividends that is received by Jenny and John will be included for
assessment purpose under “section 44 (1) of the ITAA 1936”. You also acquired some shares
in the Australian listed company and received a dividends of $5000 on 10 July 2019. The
dividends were paid in the later income year of 2019 therefore, this will not be included in
your assessable income for assessment purpose.
During the year in February 2019 a land was acquired by John for a cost of $200,000
and spent a sum of $8,000 for the purpose of redevelopment. The land was initially acquired
for petrol station and service centre however due to the changes in the local council plan the
project was abandoned. The land was sold at profit for a sum of $230,000. We would like to
inform you that Land is regarded as the CGT asset and the disposal of land made by you will
be treated as “CGT event A1” based on “section 104-10, ITAA 1997”.
As the general rule, if it is noticed that the sale of land results in business or a portion
of the business then any kind of proceeds would be included for assessment purpose as
ordinary income under the ordinary concept of “section 6-5, ITAA 1997”. As held in
“Moana Sand Pty Ltd v FC of F (1988)” both the “section 25 (1) and 26 (a)” was applied to
consider the sum received by the taxpayer into the assessable income less the relevant costs
as the profit originating from the disposal of land. The relevant profit was treated as ordinary
income based on the decision made in “FC of T v The Emporium Ltd (1987)” and therefore
treated as assessable income under “section 25(1)”.
Similarly the sale of land will be treated as ordinary income under “section 6-5, ITAA
1997” based on the opinion stated in “FC of T v The Emporium Ltd (1987)” and hence
assessable income under “section 25(1)”.
Finally a John rented the commercial property that is located in Brisbane. The rent
was received in advance as lump sum. As held in “FC of T v Adelaide Fruit and Produce

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Exchange Co Ltd (1932)” the receipt of rent is regarded as ordinary income under the flow
concept. Even though the rent is received as lump sum it will still be treated as ordinary
income. The advance rent received by you constitutes ordinary income under “section 6-5,
ITAA 1997” and will be included for assessment purpose.
We anticipate that the above stated advice has helped you in serving your purpose and
we look forward to hear from you soon.
Thank You

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Part B: Deductions:
Introduction:
As per the Australian taxation system, taxpayers can lower their assessable income by
claiming income tax deduction that are allowed generally under “section 8-1 of the ITAA
1997”. The provision for general deduction enables the taxpayer to claim deduction for
expenses that taxpayers occurs while producing their personal income or business income
apart from expenditure that are capital, private or domestic in character (Woellner et al.
2016). Under the provision of general deduction expenditure usually falls under two
categories namely expenses that are related to work and expenses related to investment.
There are certain specific deductions that are not associated directly to the producing
of individual income. This comprises of cost related to managing tax affairs, tax deductible
donations and gifts, subscription payment made to trade, professional or business associations
and car expenditure valuation method (Barkoczy 2016). Accordingly, the income tax
deduction possesses the negative revenue implications for the government because tax
deductions helps in lowering the taxable income of taxpayers. This also has the effect on
governments tax revenue that is equivalent to the collective total deduction in the assessable
income for every impacted taxpayer multiplied by each of their individual effective marginal
tax rates. Ever since 1970, for the Australian government the individual income tax is
considered as the single largest source of revenue as it has constantly raised approximately 50
per cent of the tax receipts for the Australian government.
The research report critically assesses the deduction regimes of Australia to
understand whether it meets the principles of good tax system. A comparative analysis of
Australian deduction regimes would be performed with the New Zealand would help in
understanding the fairness and simplicity of the tax deduction system.

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Concerns regarding present arrangements:
There are majority of the submissions that have supported retaining the deduction on
personal tax, particularly for the work related expenses deduction. According to the Agranov
and Palfrey (2015) there are challenges under the present regimes. This includes the
significant amount of compliance burden at the time of claiming deduction, especially for the
work related expenditures. Several submitters have in their acknowledgement stated that the
increasing amount of overall personal deduction and concerns where the taxpayers may be
applying for tax deduction relating to expenses for which they are not allowed. As opinion by
Blakelock and King (2017) the present regime of deductions is unfairly benefitting some of
the individual or groups.
Burden of Complaisance:
As noted by Fry (2017) the present system of work related expenses deductions
comprises of significant amount of burden of compliance with cumbersome administrative
requirements for both the persons and the Australian Taxation Office. For instance, Sharkey
and Murray (2016) have noticed that the main level of complexity is related to managing of
work related expenditure is that it involves around 25 pages of the public ruling to provide
the explanation relating to the general values flowing from the legal conclusions to the
legislation relating to the deduction of clothing, uniforms and footwear. The ruling is also
backed up by the additional public rulings that relates to clothing for the particular
professions.
As opposed by the taxpayers there are some who are over-claiming the deductions
related to work expenses while there are other taxpayers that are missing out because of the
complexity relating to the present arrangement of tax (James 2016). As suggested by the
Chartered Accounts ANZ that persons that are preparing their tax return on their own might

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be facing disadvantage due to the complexities of the work related expenses deductions and
may overlook the deductions for items to which they are allowed.
In the scheme of self-assessment, a person can only sympathise with the self-assessor that
tries to work through the accessible guidance on what must be simply upfront issues of
individual deduction. As suggested by Braithwaite and Reinhart (2019) the generosity of the
rules related to work expenses is surrounded by concerns that relates to refund fraud which
can be created by the ATO because ATO has to refund a large sum of money.
Level of Deductions:
As per the recent statistics, the claims related to work related expenses have become
greater than before by 21% in the last five years after the value of work related expenses
deduction has doubled from $7,763 million in 1999-2000 to $19,761 million in 2012-13. As
argued by Sadiq (2018) the growth in the work related deduction claims over the years by the
individuals reflect that a need for the reformation in this area. The incidence of claims for
deductions related to the work expenses for the taxpayer’s ranges around $37,000 to
$150,000. This calls for the considerable level of standardisation and simplification. As
recognized by the treasury there are some individuals that would organize their financial
arrangement for maximizing the value deductions that can dent the integrity and
sustainability of the present system of taxation.
Burton (2017) states that there are some individuals that might make an effort to
thrust the limits by raising the value of their tax deductions. Tax benefit of this type can be
restricted based on the obligation that the expenditures must be commonly allocated based on
the portion of private use.
As argued by Black (2018) to ascertain the relation amid the expenditure and earnings
it is far from the accurate knowledge and hence regarded as the area where individuals are

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capable to pushing the envelope. The law council of Australia has placed an emphasis when
conversing regarding the over-claiming. This requires creating a distinction among the fake
claims that are against the ruling and those that are on the edge involving certain complexity
and uncertainty around the law. As noted by Morgan, Mortimer and Pinto (2018) there is a
perception that $300 substantiation requirement relating to the work expenses might offer the
taxpayer with the opportunity to over-claim the expenses where they have not occurred.
Furthermore, Robin (2019) acknowledges that tightening the access to the work related
deduction resulted in added investigation. While Robin and Barkoczy (2019) have argued
that any kind of considerable deviations would be untimely without any type of strong
evidence for suggesting that a significant portion of the work deduction is claimed
inappropriately.
Technological improvements and wider reformations:
Whilst presently, substantial requirements relating to compliance and costs are related
to the personal income taxation system of Australia however the technological advancements
would help in simplifying the taxpayers experience in applying for income tax deductions
and lodging of tax return. The ATO has constantly sought opportunities to use the technology
for lowering the complexity and cost of compliance (Harrison 2018). During the year 2014
ATO has introduced “myTax” that provides simple online interface based on which majority
of the taxpayers can access the simple tax matters and lodge the income tax returns pre-filled
by the ATO.
Moves in the direction of simplicity is dependent on the statement that a person would
have to do less compliance and supervision. While the present pre-filling taken by the ATO is
reliant on the data of income it obtains which is less upfront in respect of deductions since it
does not get third party data (Fulton 2018). An argument stated by CPA Australia stated that
if the work related expenses deductions were eliminated, there are large number of reasons

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where persons would still be required to lodge the tax return. A concern expressed by the
CPA Australia stated that changes may potentially lead to shifting in the burden of
compliance to the employers.
There are certain number of submitters that have suggested that changes in the
deduction regimes must be considered in relation to the broader reformation and probable
effects on the persons, business and wider economy. As stated by Ting (2018) the twin
purpose of the simpler taxation system with the lower tax rate can be attained by eliminating
some or all the tax deductions. Nationally, by removing the tax deductions it will result a rise
in the rate of tax collection which will be returned to the taxpayer in the form of low rate of
tax.
In addition to this, making the taxation system simpler would help in reducing the
cost to government relating to the collection of taxes. This would further allow the rates to be
lesser while instantaneously lowering the cost to persons and businesses that comply with
their tax requirements (Martin 2018). If all the persons and businesses occur the similar costs
in producing their revenue, this would form a judicious method. Though, this is presently not
the circumstance. The main reason for permitting income tax deduction on expenditure is
essentially for the fairness. There are some individuals and businesses that occur higher
outlays in deriving their revenue than others and the taxation structure accounts for the same
by permitting certain kinds of expenditures to be claimed as income tax deductions.
In spite of the improvements made in technology and initiatives taken to speak about
the burden of compliance present in filing the tax returns, this cannot completely address the
difficulty that are integral in the measures for deductions related to work. The system of tax is
usually assessed based on the fairness, efficiency and simplicity (Miller and Oats 2016).
There are rarely any situations where the simplicity wins in the tax system of Australia. This

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is considered suitable for simplicity. In an attempt to describe amid the good and bad work
expenditures and to deliver non-deductibility for corresponding outgoings for business is
troubled with the complication out of all the percentage to the assessment effects. A large
number of submitters have acknowledged that there are difficulties related with the present
arrangement for deductions mainly for the work expenses. However, very few have voiced
their complete support for the elimination of the individual deductions (Oishi, Kushlev and
Schimmack 2018). An important approach of addressing the concerns is that any kind of
reduction or removal relating to the work related deduction must be accompanied with
complimentary relief for the taxpayers.
As per the Research Australia assertion the main reason behind allowing the income
tax deduction for the income expenditure is mainly based on the fairness as some of the
people and companies occur higher amount of expenses in deriving their income than others
and the taxation system accounts for the same by permitting expenditure to be entitled as tax
deduction. As stated by Olbert and Spengel (2017) a customary deduction would offer
simplification however a standard deduction without any kind of changes would accompany
higher costs to revenue because every person that are below the threshold limit would claim
deduction while every people with expenditure over the standard deduction would keep on
claiming the deduction.
International comparisons: New Zealand
The subject of expenses related to work have obtained a considerable amount of
coverage submissions. The international evaluations reveal that the Australia has the
substantial work related expenditure deduction provision for the individuals. As noted by
Picciotto (2015) there are several OECD nations that have avoided the complications which
is intrinsic in the Australian treatment of expenses by narrowing the classifications relating to
the work related deduction or by using the standard deduction. On the contrary to the tax free

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threshold limit of Australia, there are number of OECD nations that have the standard lump
sum or thin tax allowance. It is regarded as the portion that are projected to cover the
expenditure in deriving the revenue. These expenditure does not require to be corroborated or
reported separately.
According to the law council of Australia, UK, Canada and US taxation system allow the
employee deductions associated to the deriving income, while they are not allowed in New
Zealand.
Tax system in New Zealand:
Tax reformations in New Zealand during the year 1980, provided cuts in income tax
that also involved removing the deductions that are related to work. According to the
Chartered Accountants ANZ it emphasised that expenses related to work formed the part of
important tax reformations in New Zealand and must be viewed as isolated subject. New
Zealand Income Tax Act 2007 forbids deductions related to employment Razin and Sadka
(2018). The Australian Law council have explained the rationale behind the elimination of
deductions relating to employment in New Zealand was to increase the degree of certainty in
the taxation system, preventing the abuse of taxation prospects and simplifying the returns for
both the revenue authority and taxpayers. The suggestion made by the law council of
Australia stated that it is also the way of identifying the accountability of employers to repay
the employee expenses.
Another main portion of the broader reformation in the New Zealand was the drop in
the rate of individual income tax. The Australian law council has found that in the last 25
years since the eradicating the individual income tax deduction, the highest private income
tax rate has declined from 66% to 33% in comparison to the present Australian top marginal
rate of 47% together with Medicare levy. As noted by FitzGerald and Siu (2018) New

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Zealand has different rate of tax mixture than the Australia. New Zealand has very lower rate
of personal income tax than Australia, but it also has very extensive goods and service tax
and has the widest base in the world of any tax. It increases three folds the sum of proceeds
from the indirect taxes than Australia derives.
The treasury has suggested that the absenteeism of work expense has led to the
reduction in the quantity of people that are under obligation of filing income tax return and
has accordingly been the main driver of the compliance savings. As evident in the system of
UK taxation system, Alt (2018) have noted that New Zealand has a withholding tax on the
source of interest that does not feature in the Australian taxation system. Statistics obtained
from the 2012-13 tax year have suggested that around 37% of the New Zealand taxpayers
have filed the tax returns in contrast to Australia’s roughly around 87 per cent.
Kemmeren (2018) have noted that in New Zealand, individuals tax returns are only
required if the taxpayer have earned income apart from the salary, wages, dividends, interest
etc. or the chargeable Maori authority distribution. In contrast to Australia where the lodging
of tax return is usually required, except the taxpayers are falling inside the exempted
category:
Conclusion:
On a conclusive note, there are opportunities of improving the operation system that
supports the ability of the Australians to claim genuine income tax deductions. The proposal
of introducing a system where all the taxpayers would be able to claim a deduction for
standard work expenses without any substantiation, together with the ability of making
additional claims for expenses with substantiation still lacks sufficient support.
Though introducing this system would help in providing the advantage of simplicity
but it would more likely lead to an increase in the cost to government revenue. Introducing

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the new tax system would help in claiming the standard deduction for all the taxpayers while
for those that has the substantial workplace expenditure would still be capable of claiming
their current work related expenses. Conclusively, it is recommended that ATO must
continue its progress and create further development to improve the experience of taxpayers
in claiming deductions.

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Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
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Taxation Office. The APPEA Journal, 57(1), pp.49-63.

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Fulton, J., 2018. Australia's hybrid mismatch. Taxation in Australia, 53(3), p.125.
Harrison, J., 2018. Assessing the Taxation of Superannuation in Terms of Horizontal and
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