Taxation Law Case Study Analysis

This Taxation Law case study analysis discusses the concepts of income tax, allowable deductions, and CGT events. It covers the issues, rules, and applications related to the case study. The conclusion provides insights into the taxation of employment income, allowable deductions, and non-deductible expenses.

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

1TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................2
Headings:................................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Applications:..........................................................................................................................5
Conclusion:............................................................................................................................9
References:...............................................................................................................................10

2TAXATION LAW
Answer to question 1:
Headings:
The current problem is associated to the ascertainment of the total chargeable earnings
that is earned by the taxpayer during the year and treatment of tax for the items occurred
during the year.
Issues:
The case study introduces the issues of ascertaining whether the receipts that is made
all through the year will be considered for taxation purpose under “Sec 6-5, ITA Act 1997”.
The case study also brings forward the issues of whether the taxpayer is entitled to an
allowable income tax deduction for outgoings under “Sec 8-1, ITA Act 1997”.
Rule:
When a person obtains a receipts from the employment and from providing personal
services it will be subjected to income tax for the employees. As per “Sec 6-1, ITA Act 1936”
earnings from the personal exertion represents the earnings from remuneration from
employment, wages, fees, superannuation, allowances etc. that is obtained from employment
or revenue obtained from the business.
As the general rule, “sec 6-5, ITAA 1997” majority of the earnings received by
taxpayer is ordinary income. In “Scott v CT (1935)” income is not the word of art and needs
the implementation of necessary principles to treat the receipts as ordinary income1. As held
in “Dean v FCT (1997)” retention payment made to employee as the consideration of to be
employment for additional twelve months is taken as ordinary income.
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014

3TAXATION LAW
As per “sect 8-1, ITA Act 1997” the deduction for home office expenditure is reliant
on whether the taxpayer is using the home office as the genuine home office or home is used
for convenience purpose2. Typically, “sec 8-1, ITA Act 1997” allows taxpayers deduction
relating to running and occupancy expenses for home office purpose. As held in “Swinford v
FCT (1984) 15 ATR 1154” the self-employed scriptwriter was permitted deduction up to a
portion of the rent that is paid for the flat where the taxpayer has dedicated a separate room in
the flat for study purpose. The taxpayer does not have separate business place and wrote
script from the room.
According to “sec 40-25 (1)” a person is permitted to claim deduction for the amount
which is equivalent to depreciation amount of the depreciating asset for an asset held all
through the year. Furthermore, “sec 40-25 (2)”, states that deduction is lowered for the
declining value which is attributable to the use of personal purpose beside the assessable
purpose. Beside this, a taxpayer under “section 25-55, ITAA 1997” a taxpayer is permitted
for deduction relating to subscriptions and membership fees paid to any business trade or
journals.
The statutory position of “sec 25-100, ITA Act 1997” explains that deduction is
permitted for travelling directly amid two place of work where the taxpayer is presently
involved in generating income. Travel on work such as travelling salesperson, self-employed
builder that are travelling for giving quotes is allowed for deduction3. The verdict in “FCT v
Wiener (1978) ATC 4006” stated that the commissioner of taxation permitted the taxpayer to
2 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
3 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

4TAXATION LAW
permissible deduction for travelling between the schools and also for travel amid the home
till the last school that was attended by the taxpayer.
The general rule given under “Lunney v FCT (1958)” stated that travel between the
home and the regular location of work is non-deductible. In “Payne v FCT (2001)”, travel
between unrelated workplace is not permitted for deduction under section “sec 8-1, ITA Act
1997”.
As per “sec 8-1”, conventional clothing is not permitted for deduction since it is not
occurred in gaining or generating the taxable income and they are held as personal or
domestic clothing. As held in “Mansfield v FCT 96 ATC 4001” ordinary clothing or articles
of apparel is not permitted for deduction, irrespective whether the outlays are vital in keeping
a proper appearance in a job4.
The self-education expenses are allowed for deduction if there is sufficient connection
with the revenue producing of the taxpayer taxable income. Nexus is established in the self-
education expenses if the expense is occurred in improving the prospect of income5. While
the taxpayer must bear in mind that self-education outgoings concerning an occupation in
which the taxpayer is not involved presently is not allowed for deduction since the nexus test
is not met.
Denoting the description in “section 104-10 (1)” a CGT event A1 takes place when
the CGT asset is disposed by the taxpayer. As per section 108-20(2) personal use assets
means assets that is mainly used or kept for the personal enjoyment. As defined in “section
4 Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)
5 Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

5TAXATION LAW
108-25 (2), ITAA 1997” personal use assets are held as single personal asset and each
disposal is held as the part of assets6.
Applications:
The case evidently brings forward that Sarah is working as the interior designer in full
time and also worked as the part time teach in a community college. Citing the event of
“Dean v FCT (1997)” the gross salary from both the employment is the receipt from
employment and personal services under “sect 6-1, ITA Act 1936”. Citing the event of “Scott
v CT (1935)” the salary constitutes ordinary income under the general rule of “sec 6-5, ITAA
1997”.
Sarah reported the expenses for her home office purpose where she has dedicated a
portion of house so that she can use it as the base for operations. Quoting the verdict of
“Swinford v FCT (1984) 15 ATR 1154” an allowable deduction is permitted to Sarah for the
running and occupancy of her spare room in her house under “section 8-1, ITA Act 1997”7.
The expenses include the home loan interest, electricity and insurance of her house. The
expenses are deductible because Sarah was not provided by her employer an office for work
and she did not have any other place but to use her home for work purpose. Sarah is entitled
to deduction of 60% of home office expense for the 20% floor area of her house.
A new design equipment was bought by Sarah which she used for other purpose other
than taxable purpose. Quoting “section 40-25 (1), ITAA 1997” Sarah is permitted to claim
6 Mankiw, N. Gregory, Ronald D Kneebone and Kenneth J McKenzie, Principles Of Taxation
2015.
7 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)

6TAXATION LAW
deduction for the amount which is equivalent to depreciation amount of the new equipment
for an asset held all through the year. As the equipment was used for both personal and
private purpose only 60% of the deprecation is attributable for deduction under “section 40-
25 (2), ITAA 1997”8. Beside this, Sarah is entitled to an allowable deduction for membership
expenses and subscriptions of annual design under section 25-55, ITAA 1997”.
Outgoings on travelling was occurred by Sarah while visiting client for onsite
assistance. Mentioning “section 25-100, ITAA 1997”, this constitutes travelling on work by
Sarah. Referring to “FCT v Wiener (1978) ATC 4006” a permissible deduction is allowed to
Sarah as it occurred for the purpose of work.
There was also clothing expenses incurred for skirt, trousers and tops during client
meetings. Referring to in “Mansfield v FCT 96 ATC 4001” the clothing expenses occurred by
Sarah is ordinary clothing which is not permitted for deduction under “sec 8-1” irrespective
whether it is vital in keeping a proper appearance in during client meetings9.
Later while performing her part time employment of teaching a travelling expenses
was occurred from her home to the community college. Referring to “Lunney v FCT (1958)”
the travelling from home to community college by Sarah is non-deductible10. Referring to
“Payne v FCT (2001)”, the travelling done by Sarah from her home to college is not allowed
for income tax deduction under “sec 8-1, ITA Act 1997”.
8 Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook
Co./Thomson Reuters, 2013)
9 Sadiq, Kerrie et al, Principles Of Taxation Law 2014
10 Tax, Law And Development (Edward Elgar, 2013)

7TAXATION LAW
Sarah also reported a self-education expenses for her MBA programme which also
included expenses on books and course fees11. The expenses occurred by Sarah for Self-
education fails to meet the nexus test because the self-education course in which she enrolled
was not related to work in which she is presently employed and hence these expenses are
non-deductible under “section 8-1, ITAA 1997”.
The furniture set bought by Sarah constitute personal use asset under “section 108-20
(2), ITAA 1997” because it was entirely for her personal enjoyment. Later the furniture was
sold which led to “CGT event A1” under “section 104-10 (1)”12.
Under section “section 108-25 (2), ITAA 1997” the disposal of furniture by Sarah is
considered as set and every sale under that set forms the part of asset. However, the asset was
only held for less than 12 months therefore under section “section 115-40, ITAA 1997” no
discounted method will be applicable for Sarah.
11 Bankman, Joseph, et al. Federal Income Taxation. Aspen Casebook, 2018.
12 Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

8TAXATION LAW
Asset Type Base Value Days Held Days in Year Percentage Effective life Total Depreciation Closing Balance
Design Equipment 9000 334 365 200% 9 1830 7170
Depreciation Worksheet

9TAXATION LAW
Conclusion:
The employment income will be included for taxation purpose under the ordinary
concepts “sec 6-5, ITA Act 1997”. The allowable deduction includes the travelling expense
for visiting clients. However, no deduction is permitted under “section 8-1” for ordinary
clothing, self-education and traveling to community college.

10TAXATION LAW
References:
Bankman, Joseph, et al. Federal Income Taxation. Aspen Casebook, 2018.
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)
Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
Mankiw, N. Gregory, Ronald D Kneebone and Kenneth J McKenzie, Principles Of Taxation
2015.
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook
Co./Thomson Reuters, 2013)
Sadiq, Kerrie et al, Principles Of Taxation Law 2014
Tax, Law And Development (Edward Elgar, 2013)
Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

11TAXATION LAW