Objections to Disallowance of Deductions

This article discusses the objections that can be made against the disallowance of deductions in taxation laws. It covers the process and time frames for objections, and also addresses the question of including administrative fees in income tax returns. The article also provides a case study on residency tests for income tax purposes.

TAXATION LAWS

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
PART A...........................................................................................................................................1
PART B...........................................................................................................................................2
1) Objections to be made against disallowance of deductions...................................................4
2). The objection process, and any relevant time frames of which Julie should be aware..........7
3). Julie should include the administrative fees charged by the property manager of her rental
property in her 2018 income tax return.......................................................................................8
REFERENCES..............................................................................................................................11

PART A
Rachel is born is Canadian resident who moved to Australia in year 2006 with her family an
husband. She admitted her sons in the local primary school for their education. Rachel and her
husband bought jointly a house in Australia and also opened a joint account in Australian for
having salary from the job. She moved to Australia due to her job. She maintained the Australia
account along with the bank account in Canada. Her husband did not found suitable job in
Australia.
As the Brisbane was very hot she decided of not raising the children in Australia. Also she
was not getting satisfaction from her job and also was missing her family. Due to these reasons
she secured a job in Canada in 2018 and left for her job on 1st July of 2018. That means mean the
first of starting of financial year. She left Australia nearly 11 years after residing in Australia
with her family. She left but her children and husband lived for completing their schooling year.
She returned to Australia on visit for 1 month in December and left with whole family on 1
January 2019. She left by selling her home in Australia. She did not return back to Australia in
the year and settled back in Canada.
For checking the residency of Rachel for the income tax purpose residency tax will be
applied. Residency will be assessed for the assessment year 2019-20.
The three test are :
Residency Test Provisions Implications
Reside Test It involves considering intention
of presence, business family,
assets location and living
arrangements of the individual
(Maley and Maley, 2018).
Rachel did not satisfy the
Resides as she is not present in
Australia for considerable
period of time. She did not
intend to reside in Australia as
she sold the house and returned
only for one month during the
year. Family also left by selling
social and living arrangements
in Australia.
Domicile Test Domicile inspects the place of
residence.
As per the proviso’s of Domicile
test Rachel will be considered
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This applies where the period of
stay is lengthy outside Australia
and the resides test is failed. It
identifies the permanent place of
abode and with factors such as
home overseas, residence in
Australia and financial ties.
Person is considered resident of if
there is no place of residence
abode and is moving constantly
within country.
Australian resident as she was
not having permanent place of
abode in Canada on leaving
Australia and was also having
financial ties in Australia
(Sadiq, 2019). The family was
living in Australia and the house
was sold in December.
183 day Test This test requires to satisfy that
usual abode place is out of
Australia. This requires the person
to be present for period of 183
days in financial year if the place
of abode is out of Australia.
This test does not apply as
Rachel is having permanent
residence in Australia in the
financial year.
Conclusion
Rachel is considered to be resident of Australia for the income tax purpose as she satisfies the
domicile test under the income tax residency tests.
PART B
MEMO
123 Accounting Pty Ltd
To : Douglas Park
From :
Date : 25th April 2020
Subject : Objection to Amended Assessment notice for 2018.
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Background
Julie is 27 year old resident of the Australia who is working on full time basis as personal
assistant of the executive editor of well known fashion magazine. Job was started on 1st july 2015
with a monthly payment of $10000 that is received on 3rd of next month. Due to this she received
payment for June in July.
July has also a hobby of up-cycling clothes and therefore doing the job is same field. She
moved to her neighbourhood with number of Op shops where she made purchases number of
times in a week. She also turns the unwanted clothes into the fashion masterpieces. Seeing the
talent and interested she was suggested to start her own Facebook page where she could sell the
creations of her own. She received high demand of her work and kept accurate records for all the
incomes and expenses. The expenses for the business totalled $16000 and the receipts totalled
$9000. The business page was advertised in different groups on Facebeook. The business was
being performed without obtaining the ABN as the motive was not of earning profit she was doing
out of interest.
The employment required to have quality clothes for daily use and was required to attend
the evening functions once every month. Express condition was not there regarding the purchase
of any specific outfits but was required to dress in defined manner for the work and events. She
made purchases related to these clothing outfits that cost $6000.
She takes laptop to home for the work related with her employment. As her job is
demanding she is required to work even after the usual office hours. She works in kitchen for the
office work as the apartment is small. Cost of running the work from her apartment is totalling to
$300.
During the year, she received rental income of $12000 from her residential property. For
inspection she travelled to the property when the tenants vacated property. travel expenses to the
property amounted to $500. She purchased a dish washer that was repaired by her for $200. She
also incurred administrative expenses of $20 per week.
She filed the annual return with the taxable income of 107250 which with all the above
mentioned expenses and income. The stated income and expenses have not been accepted by the
assessment officers and the taxable income was amended to $140,250. Adjustments have been
made in the income and also all the major deduction were dismissed by the company. Julie wants
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to know the actual amendments that are applicable to the case. She also wants to know the time
frame within which the issues are required to be addressed. She also wants to know the procedure
for charging the expenses after the return has been filed.
1) Objections to be made against disallowance of deductions.
Tax Commissioner under Section 170.70 is allowed for making amendments to the
deduction and disallow the deductions which are claimed by the taxpayer. However the tax payer
are allowed to object the amendment on the basis of strong ground in relevance to the sections that
the deductions are permissible by presenting required evidence related with the expenditure of
being incurred and is allowed by the Income Tax Assessment Act, 1997.
The objection against the deduction is required to be made within time for making the
amendments in the tax returns. After the deductions are clarified tax will be charged on the tax
liability agreed by the Commissioner of Income Tax.
Salary
Julie has declared salary income for 11 months as the payment for June will be received in
July 2019. The objection of Commissioner is viable as the salary is required to be reported for the
whole of 12 months by the individual tax payer. Section 86.80 of ITAA, 97 provides that the
salaries or income received before 14th of July will be considered as received on 30th of June. By
this provision Commissioner is right at this point and Julie is required to declare the salary for
June received in July. It is also to be noted that Julie has not received the payment as on 3rd of July
and if she does not receive the salary before 14th of July than the income will be taxed in the next
assessment year (Braithwaite and Reinhart, 2019). In such case she will be declaring income for
only 11 months and not for whole year. Hence the objection of Commissioner and Julie is
dependent on the date on which she receives salary for the Month of June (ITAA. 1997, 2019).
Bank Interest
Bank Interest is chargeable as ordinary income though received from any of the sources.
The interest received from bank will be charged as ordinary income in the income tax return as
per Section 6, ITAA,97. No amendment is made in bank interest.
Income from Facebook business.
It is important for determining whether the business is carried on separate from pursuing
hobby, sports or recreational activity and is not producing any assessable income. There are
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various rulings of the courts for the purpose of determining the activities as business such as
commercial purpose or character, undertaken for producing profits, having characteristic of
industry, is of considerable scale and size. However these are not decisive factors for determining
business. It is not having characteristic of business as per guidelines of ATO.
Julie is not operating page with the motive of earning profit but to have space from her job.
She is not having business of sufficient size and scale satisfying the other factors. Taxation
Ruling 97/11 states activity done as part of her enjoyment is not business and also she is not
earning any significant profits from carrying out the page (Lam and Whitney, 2016). Therefore,
she is not required to disclose the income from Facebook page as assessable income.
Rental Income
As per the guidelines of Australian taxation office rental income earned by Julie is taxable
as ordinary income and will be taxed on basic tax rates.
Deductions
Work Related clothing expense.
Taxation Ruling 97/12 has clarified that fact that requirement or expectation of the employer
from the tax payer of wearing specific type or style of the conventional clothing will not be
making cost of clothing as deductible. Case of (FC of T v. Cooper (1991) 29 FCR 17) gives more
clarification. Also if taxpayer perceives dressing style or conventional clothing as essential for
success will not make it deductible. Example: Case 16/93 93 ATC 208 at 214; AAT Case
8658 (1993). On the basis of this Julie is not allowed to claim deductions for expenditure of
clothing for office and attending evening functions (TR 97/12, 2019).
Home Office Deductions
As per taxation ruling 2020/1 provides for the deduction of work expenses. It provides that
deduction under Section 8 of ITAA 97 could be claimed if the tax payer satisfies positive test and
negative tests. July has satisfied the elements of both positive and negative test. Expenditure is
incurred for producing assessable income and is not reimbursed by the employer. Also it is not
incurred for producing exempt income and the expenses are claimed only for relating to the
proportion of work (Barkoczy, 2016). Julie can raise the objection for deduction of home office
expenses under general deduction as per TR 2020/1 after complying with record keeping
requirements of Div 900 ITAA, 1997.
Work Related Travel expense
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Section 900 of ITAA, 97 specifically provides for the deductions related to work.
Deductions are allowed by the Commissioners for work related travel expense.
Expenses of Facebook business.
After the recreation activities are classified as hobby individual cannot claim the expenses
related to the hobby. The recreational activities are classified as hobby as she does not have the
intent of making profits. As per the guidelines of ATO expenses that are related to the hobby
cannot be claimed as deductions. (Business Tax Deductions, 2019.). It is more beneficial to
consider it as hobby as Julie would not be claim deduction according to Section 35.1 of ITAA
1997 for non commercial activities. Claiming it as business will cause the Julie to pay tax on
Facebook business income of $900 without any deduction for expenses.
Trip for inspecting Rental property
Julie cannot claim the expenses for travel to the residential properties for inspection as per
Section 26.31 of ITAA, 1997. Further it is clarified by the guidelines provided by the Taxation
office that an individual that is not in business of letting out rental properties cannot claim
deduction related to residential property (Berg and Davidson, 2016). The amendment for this
deduction cannot be objected against the Commissioner as the Julie is not a corporate entity or
trust in business of letting out.
Repairing the Dishwasher
The deduction disallowed for the dishwasher cannot be objected by Julie as she had
purchased the dishwasher for the residential properly for producing assessable income. But in the
present case Julie has incurred the expenses of repair on the initial stage on purchase therefore
they will be considered part of capital expenditure and not revenue expenditure. Section 25 of
ITAA,97 disallow deduction for repairs incurred as capital expenditures. Taxation Ruling 97/23
further clarifies the repairs to be of capital expenditure as incurred on purchase.
Administrative Expenses.
Administrative expenses paid by Julie per week for the rental residential property could be
claimed as deduction as they are incurred for producing assessable income as per Section 8, ITAA
1997 for general deductions.
Amended Return
Julie will be required to file revised or amended return after the all the amendments are clarified
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by the Commissioner for the year 2019-20.
Revised Return for 2019-20
Particulars amount Amount
Salary 120000
Bank interest 150
Rental income 12,000
Total income 132150
Deductions
Home office expenses 300
Work related travel expenses 900
Administrative expenses 1040
Total expenses* 2240
Taxable income for the 2018 income
tax year 129910
Julie will have taxable income of $129,910 after declaring all the required assessable
income and after the deductions have been claimed as per the relevant divisions of ITAA, 1997.
The objection is required to be made by Julie within the prescribed time limit.
2). The objection process, and any relevant time frames of which Julie should be aware
As per the guidelines given by taxation office Julie is required to make the objection for the
amended assessment within 60 days are been required by an ATO from the date the decision was
given to Julie. She must be aware about that final lodgment day falls on a non-business day; the
objection can be lodged on the next business day by Julie (Woellner and et.al., 2016). This fact
related to time frame must be known by Julie. She can also extend the time by writing a request to
ATO. This can only be done when Julie has extended her time limit.
It has also been analyzed that If request is been accepted than only Julie’s objection will be
considered. All this objection process can be really helpful for Julie during the time of process of
objection. The objection can be done by Julie up to two or four years. This benefit is being
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available to all tax payers. The objection can be started from the 60 days which has been given to
Julie. It has also been analyzed that If the additional information is also been required by Julie
than the objection period can also be extended. All These fact must be known by Julie during the
time of objection process. It will be beneficial for Julie to have an idea about all these processes.
Amended assessment can be done at the end of tax period.
3). Julie should include the administrative fees charged by the property manager of her rental
property in her 2018 income tax return
Julie may make request for an online amendment in order to correct a mistake and to amend
income tax return. Individual can write upon the government linked account in order to amend the
mistake related to tax which has been made by an individual. Julie can only be the person who can
sign request paper. This must be kept in knowledge of Julie. It means no other person that Julie
can sign the paper (Woellner and et.al., 2016). If signed than it will be against law. If Julie has any
tax agent than his or her registered number must also be presented in the request paper. It has been
analyzed that all these procedures if being followed by Julie reduces the risk of administrative
errors that may delay the processing of amendment.
She also needs to fill upon the name and contact information so that she can further be
contacted related to in processing or any type of information that has to be given to Julie in
amendment process. In order to correct the mistake related to existing amount she has to select a
relevant field in which amendment needs to be made. It has been analyzed that Julie’s
administrative expenses are 1040. Julie is only been entitled to income when she is been engaged
in paying correct amount that has been due. The process depends upon whether they were entitled
to receive payment or not.
Brief summary
Particulars Amount Sec or Rulings Implications
Income
Salary $110,000 SEC 86.80 If received before 14th July, than the salary
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for 12 months will be taxable.
Bank interest $150 Sec 6
It is assessable as ordinary income and
taxable.
Income from
Facebook
business page $9,000 TR 97/11
Ruling states this as hobby as not obtained
ABN and not have commercial purpose or
character. Income from hobby is not
assessable.
Rental income $12,000 ATO guidelines
Rental income is assessable as ordinary
income and therefore taxable.
Deductions
Work related
clothing
expenses $6,000
Pt 22&21 TR
97/12
(FC of T v.
Cooper (1991) 29
FCR 17)
Is not deductible as work related clothing
just because the employer wants the clothing
to be in particular style or manner.
Home office
expenses $300
TR 2020/1, &
93/30 and Sec 8.1
Home office expenses are deductible under
general deductions.
Work related
travel
expenses $900 Sec 900
Work related travel expenses are
deductible.
Expenses
relating to
Facebook
business $16,000 TR 1999/17
No deduction for the expenses that are
related to hobby or producing non assessable
income.
Trip to inspect
rental property $500 Sec 26.31
Cannot claim deduction as it is residential
property and she is not in business of renting
properties, trip expenses are disallowed.
Repairing $200 TR 97/23, SEC Is allowable expense but as incurred on
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dishwasher 25.10
initial purchase it will become part of capital
expenditure and therefore no deduction
could be claimed
Administrative
expenses 1040 Sec 8.1
Can claim deduction for expenses related to
producing assessable income. For claiming
the amended return is required to be filed.
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REFERENCES
Books and Journals
Woellner, R. and et.al., 2016. Australian Taxation Law 2016. OUP Catalogue.
Woellner, R. and et.al., 2016. Procedural justice and the Australian Taxation Office: A study of
scheme investors. Centre for Tax System Integrity (CTSI), Research School of Social
Sciences, The Australian National University.
Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.
Maley, M.N. and Maley, D.M., 2018. Australian Taxation Office Guidance on the Diverted
Profits Tax.
Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian Tax Office
comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Berg, C. and Davidson, S., 2016. Submission to the House of Representatives Standing
Committee on Tax and Revenue Inquiry into the External Scrutiny of the Australian
Taxation Office.
Lam, D. and Whitney, A., 2016. Taxation and property: Practical aspects of the new foreign
resident CGT witholding tax. LSJ: Law Society of NSW Journal. (21).p.84.
Online
ITAA. 1997. 2019. [Online]. Available through :
<http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/>.
TR 97/12. 2019. [Online]. Available through : <https://www.ato.gov.au/law/view/document?
DocID=TXR/TR9712/NAT/ATO/00001>.
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