1TAXATION LAW Table of Contents Answer to question 1:.................................................................................................................2 Answer to question 2:.................................................................................................................4 References:.................................................................................................................................8
2TAXATION LAW Answer to question 1: Issues: Whether the taxpayer will be held as the Australian resident under“section 6 (1) of the ITAA 1997”?Whether the taxpayer will be held liable for taxation under the ordinary meaning of“section 6-5 of the ITAA 1997”. Rule: According to the“section 6 (1) of the ITAA 1997”, an Australian resident generally implies that the person has their domicile in Australia except when the taxation commissioner is satisfied that the taxpayer has the perpetual place of dwelling outside Australia. As per the “taxation ruling of TR 98/17”migrants or individuals that comes to Australia with the pre- arrangedemploymentcontractwouldbetreatedastheAustralianresident(Kenny, Blissenden and Villios 2018). However, the period of physical presence and intention of staying in Australian forms the matter of fact. The court in“FCT v Joachim (2002)”held the taxpayer to be Australian resident since the taxpayer had the permanent residence in Australia and also maintained his family home. According to“section 6 of the ITAA 1936”personal exertion income comprise of salaries, wages or bonus earned in capacity of employee. As stated in“Section 6-5 of the ITAA 1997”ordinary income includes the majority of the earnings that is earned by the taxpayers (Sadiq et al. 2018). As held in“Scott v CT (1935)”receipts should be determined in accordance with the necessary principles of ordinary concepts. Payments that are received by the taxpayers for surrendering or limiting right are not treated as income. As held in“Pritchard v Arundale (1972)”payment of lump sum
3TAXATION LAW compensation for surrounding the status of“Partner”was not held as income (Taylor et al. 2018). According to“subsection 6-5 (2) of the ITAA 1997”the taxpayers are required to include the gross earnings for assessment purpose. As held in“Firstenberg v FCT (1976)” the employment earnings should be assessed under cash basis (Woellner and Woellner 2018). Wages and salaries or income from any other occupation are held taxable under the cash method despite they are related to the future or past periods of earnings. To impose tax the sources of income must be determined. The double taxation agreement restricts the ATO from implementing tax on certain income and allocates the rights of taxation to a particular nation (Dumiter and Jimon 2016). As held in“FCT v Spotless Services Ltd (1995)”source of income should be ascertained where interest payment obligation originates. Application: Joseph resided in UK before moving to Australia to take up the employment for ten years with Lifestyle Pty Ltd. referring to“taxation ruling of TR 98/17”Mary Joseph arrived Australia with a prearranged work agreement. Referring to“FCT v Joachim (2002)”Mary would be treated as Australian resident under“section 6 (1) of the ITAA 1997”as she entered Australia with the intent of residing for a period of 10 years and her behaviour reflects continuity of living here. Later, Mary was given a stopover expense of $2500 to visit Singapore. Referring to “section 15-2”the amount of $2500 is a statutory earnings because it is related to her employment and is considered for taxation. Mary was paid with $200,000 for surrounding her independent status. Referring to“Pritchard v Arundale (1972)”surrounding of independent
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4TAXATION LAW status amounted to relinquishing or restricting her rights and the amount is excluded from assessment as it is not an income. During the income year Mary earned salaries and wages. Referring to“Scott v CT (1935)”the salary and bonus is income from personal exertion and is counted in for taxation under the ordinary concepts of“section 6-5 of the ITAA 1997”.Mary also received bonus but was paid on 10 July. Quoting“Firstenberg v FCT (1976)”the bonus is included for assessment based on receipt basis despite it was related to future period of earnings. Later, Mary received rent and bank interest from UK that amounted to£36,000 and £800 for June 2018. Based on DTA with UK the bank interest and rental income is not included for taxation and the taxing rights has been allocated to source nation of UK. ParticularsAmount ($) Assessable Income Gross Salary1,50,000 Bonus30,000 Total Assessable Income1,80,000 Computations of Assessable Income For the year ended 30th June 2017/18 Conclusion: Mary is held as Australian occupant within the meaning of“section 6 (1) of the ITAA 1997”while the employment income and bonus is included for assessment as income based in ordinary meaning of“section 6-5 of the ITAA 1997”. Answer to question 2: Issues: The present issue is related to the determination of adopting correct process of ascertaining tax accounting for transactions within the“subsection 6-5 (2) and (3) of the
5TAXATION LAW ITAA 1997”. Is the non-transferable business benefits will be treated as ordinary income under“sect 21A of the ITAA 1936”? Rule: According to the“taxation ruling of TR 98/1”earnings from business is treated as revenues generated from carrying of business activities. As per“subsection 6-5 (4) of the ITAA 1997”income that is derived by the taxpayer either in real or in constructive manner should be classified under cash basis (Braithwaite and Reinhart 2019). The receipts method of accounting takes into the account the cash receipts that is made all through the income year. As defined under“section 21 A of the ITAA 1936”benefits that are non-convertible in money will be considered as if it were convertible in cash. As per the“section 21 A of the ITAA 1936”if a non-cash business benefits is received by the taxpayer then it would be held as income (Barkoczy 2016). The business benefits would be bought within the value of arm’s length reduced by any value of the recipient’s contribution. The court of law in“FC of T v Cooke & Sherden (1978)”held that the worth of free overseas holiday that are inconvertible into cash received by the retailer as the sales incentives will not be held as income (Woellner et al. 2018). However, with the application of legislative response under“section 21 A of the ITAA 1936”non-cash business benefits would be held as ordinary income under the ordinary concepts. The ATO states that a person may derive certain amount that does not attracts tax liability and therefore does not forms the part of assessable income. Certain rewards or gifts
6TAXATION LAW are not held as ordinary income (Black 2018). Nevertheless, gifts may be subjected to taxation if they are significant in amount and received as the part of business activity or in relation to revenue producing activities as an employee or contractor. Application: Evidences from the case study suggest that Jimmy and Jane carried a retail business as Orange that sold software and computers. A receipt of $1,200,000 was reported by Jimmy and Jane. Citing the“taxation ruling of TR 98/1”the sum of $1,200,000 should be treated as business income derived from business activities (Gideon 2017). Referring to“subsection 6- 5 (4) of the ITAA 1997”these receipts should be accounted under the cash method of accounting. During the year Jimmy and Jane reported highest sales and was rewarded with a trip to Hong Kong. Referring the decision of court in“FC of T v Cooke & Sherden (1978)”the inconvertible free trip to Hong Kong amounted to non-transferable non-cash business benefits. Referring to the principle of“section 21 A of the ITAA 1936”the amount of $10,000 received by Jimmy and Jane as free overseas holiday is an inconvertible business benefits will be treated as income and is included for assessment based on the ordinary concepts of income. Jane received an iPad from one of its clients as the part of 10thanniversary of business that valued $500. The market value of the iPad amounted to $500 and will be treated assessable income because Jane received the gift from her business activities that holds relevant relation with the revenue producing activities.
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7TAXATION LAW ParticularsAmt ($) Receipts Cash Receipts1200000 Add: Opening Debtors230000 Less: Closing Trade Debtors320000 Gross Receipts1110000 Non-Cash Business receipts10000 Non-Cash Gifts (IPAD)500 Total Assessable Income1120500 Calculation of Assessable Income For the year ended 30th June 2017-18 Conclusion: The business receipts has been included for assessment under the cash basis of accounting within the meaning of“subsection 6-5 (4) of the ITAA 1997”. Whereas, the non- cash business receipts in the form of trip to Hong Kong amounted to income within the meaning of“section 21 A of the ITAA1936”. While the gifts received was in relation to the business activities and is included for taxable purpose.
8TAXATION LAW References: Barkoczy, S., 2016. Core tax legislation and study guide.OUP Catalogue. Black, D., 2018.The incidence of income taxes. Routledge. Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian Tax Office comply and who benefits?. Dumiter, F. and Jimon, Ș., 2016. Double Taxation Conventions in Central and Eastern European Countries.Journal of legal studies,18(32), pp.1-12. Gideon, M., 2017. Do individuals perceive income tax rates correctly?.Public Finance Review,45(1), pp.97-117. Kenny, P., Blissenden, M. and Villios, S. 2018.Australian Tax. Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A. 2018.Principles of taxation law. Taylor, C., Walpole, M., Burton, M., Ciro, T. and Murray, I. 2018.Understanding taxation law 2018. Woellner, R. and Woellner, R. 2018.Australian taxation law. Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2018.Australian taxation law 2018.