Taxation Law - Analysis of Australian Tax System and Case Studies

This assignment provides a comprehensive analysis of the Australian taxation system, focusing on key aspects such as income tax assessment and allowable deductions, and the application of relevant sections of the Income Tax Assessment Act 1997. It examines the tax implications in various scenarios through case studies. The first question deals with determining the tax liability of an individual receiving income for writing a book based on her husband's life, considering personal exertion income. The second question focuses on whether an accountant can claim a tax deduction for daycare expenses. The assignment applies legal rules and regulations, including residency tests, to determine tax liabilities. The analysis also references relevant case laws, such as Brent v. Federal Commissioner of Taxation and Charles Moore & Co (WA) Pty Ltd V FCT, to support the conclusions regarding tax consequences and compliance with legal standards. Overall, the assignment aims to build a strong understanding of Australian taxation principles through practical application and legal analysis.

TAXATION
TABLE OF CONTENT

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INTRODUCTION......................................................................................................................1
Question 1..................................................................................................................................1
QUESTION 2.............................................................................................................................3
QUESTION 3.............................................................................................................................5
CONCLUSION..........................................................................................................................8
REFERENCES...........................................................................................................................9

INTRODUCTION
In the current changing environment, the external market competition is increasing
day by day which increases the overall difficulties in the path of a business. Taxation plays an
integral role in ascertaining the future activities of an individual or group of individuals in the
present time by determining the tax burden of the future period in advance which helps an
individual in improving its existing position. In the current assignment, Australian taxation
system has followed to answer the tax questions belongs to different taxation concepts as this
helps in building stronger knowledge about this particular stream (Hoopes, Robinson &
Slemrod, 2018). This assignment focuses on three questions such as explaining section 393-
10 of the income tax assessment act 1997, second part emphasizes on section 8-1 about the
deduction of all the expenses incurred in the tax returns of an individual in a particular
financial year. Lastly, the third question focuses on the business revenue earned by an
individual along with the tax incurred on all the business revenues earned by an entity in a
particular period to ascertain its tax liability. A motive of this assignment is to build the
strong taxation knowledge with the help of case laws and various rules and the regulations.
QUESTION 1
Identifying issue
The current case study is about the determination of the tax liabilities incurred by
Jenny for a particular financial year. In this case, Henry is a famous jazz singer who passed
away recently as he was a tax resident of Australia. A published named as Jack wants to write
a book on the life story of Henry in the form of autobiography to inspire other people who
follow the lifestyle of Henry. After the death of Henry, jack the publisher approach his wife
Jenny who is also an Australian tax resident to take interview of her to know about the life
facts of Henry to write a book. The publisher offered an amount of $1 million to write a book
on her husband’s life. $50000 was paid to Jenny as an advance amount before taking her
interview and rest amount is paid to her after taking her interview. The tax consequences
incurred on Jenny for accepting this amount is discussed as per the Australian tax ruling and
case laws to determine the tax liability appropriately.
Explanation of Law
In the present case study, section 393-10 of Income-tax assessment act 1997 of
Australia is applicable to determine the income earned by an individual. It includes income
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received by a person from salaries, bonus, commission, fee, pension and retirement benefits
received by an employee from its employer. It also consists of income from business in the
form of subsidies received and income generated by an individual from property consider as a
part of the services deliver by personnel in an entity (Ingles & Stewart, 2018). Benefits and
press received by an employee from its employer during and after the business tenure are also
considered as a receipt of income by an individual for a particular financial year. Income
produces from the sale of property by a person is considered as an assessable income. All
these income earned by an individual is considered in context to the personal exertion as an
employee earned these during the working period of the business where they offer its quality
oriented services will form part of their personal income after leaving the organization.
Application of law
After stating all the laws and regulations relevant for the current study, the next step is
to apply all these legal principles in finding the solutions to all the problems Aim of an
individual in this case study is to determine the overall tax consequences imposed on Jenny
for receiving the amount for writing story on the life of her husband.
Jenny was offered $1 million for writing story on her husband’s life story who was a
jazz singer for which the publisher wants to take her interview. For this interview, she
received a deposit of $500000 as a deposit and rest $500000 will be paid after completing her
interview. In the above case, relevant sections of the income tax assessment act emphasize on
identifying the assessable income by majorly focuses on the personal exertion income. But in
the current case, Jenny has received money for writing a book by publisher on her husband’s
life and for which she has to give interview will change the overall tax consequences incurred
on its action. In this case, the amount received by her will not consider as a personal exertion
income and nor the personal services income.
Personal services income earned by an individual should be more than 50% of the
overall value of a contract for the services or labour of another party (Personal services
income, 2017). In the present assignment, Jenny received 50% of $1 million that is $500,000
but this does not satisfy the requirement as per the regulations, the more than 50% should be
received by an individual in form of contract but Jenny just received 50%. In determining the
tax liability of Jenny, she can disclose the personal service income in its tax returns but the
benefit of decreasing its tax returns of a particular year will not get achieved by Jenny as her
receipt does not fall under the personal services income.
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Hence, $1milllion received by Jenny from the publisher for taking her interview in
writing an autobiography in the life of her husband is considered as a normal receipt which
will be taxed according to the basic tax rates applicable on the total receipts without getting
any tax deductions.
But at the same time, the tax consequences on the receipt received by jenny will get
changes when the book on the life of her husband written by her. If the payment received by
jenny for selling the copyrights of the whole book to a publisher is considering as a personal
exertion income. Tax applicable to the personal income is usually considered as a progressive
tax in which the rate is directly proportionate to the value of taxable income. The maximum
marginal tax rate applicable to the personal income of Jenny will by 45%.
Compliance with law
The judgment of the current case study of Jenny is taken with the help of previous
law case of BRENT V. FEDERAL COMMISSIONER OF TAXATION (1971) 125 CLR 418
is based on the similar case where the wife sells the copyright of her husband’s life story to a
publisher (BRENT v. FEDERAL COMMISSIONER OF TAXATION (1971) 125 CLR 41,
2017). In this case, the court given verdict that the sum of $10000 received by a wife for
selling the rights of a book based n the life story of her husband is considered as a personal
income taxable in the hands of a wife who is also a tax resident in Australia.
QUESTION 2
Identifying legal issue
The legal issue of this case is to identify the tax consequences faced by Sally who is
an accountant for which she utilizes the services of the day-care centre by outing her child in
the day-care centre so that she meets her employment duty without any disturbance. The
question arises in this case, is to know whether Sally can get a tax deduction under section 8-
1 of the income tax assessment act 1997 in reducing its overall tax returns within a given
period of time.
Legal rules and regulations
Income tax assessment act 1997, is applicable on all the tax residents resides in or
outside Australia or any of the states of Australia used to determine the overall tax incurred
on the taxable value of an individual. Section 8-1 is for all the deductions for the overall
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expenses incurred by an individual in a particular year. This section helps in checking the
assessable income by excluding all the deductions taken for all the expenses incurred by a
person (Allowable deductions, 2012).
Section 8 has two divisions such as 8-1 subsection 1 deal with all the conditions in
determining the deductibility of the expenses incurred in the tax returns of an individual and
8-1 subsection 2 states the exclusions which are not deductible as it includes all those
expenses which are excluded from the deductibility lists (Income under income tax, 2017).
An expense is called as a deductible expense if it is incurred in the tax return of an individual
or an entity in producing the assessable income. Expenses which are excluded from the
deduction lists include capital expense, domestic expense, and generation of exempted
income.
Application legal rules and regulations
In the case of Sally who is an accountant and also a single parent who put her child in
a day-care canter to fulfil its duties as part of their daily routine. Section 8-1 states that the
expenses incurred by Sally for putting her child in a day-care centre as this helps in
generating assessable income. The assessable income includes he salary, bonus, commission
earned by Sally by doing its job to fulfil its social responsibility towards her child. Income
tax assessable act 1997 helps in prescribing guidelines for determining the overall tax liability
of an individual who is a tax resident of Australia.
Before determining the tax liability of Sally, It is essential to apply the residency tests
in determining the residency status of an individual whether resident or non-resident for the
purpose of the tax. There are three kinds of tests used in determining the residency status of a
person which helps in assessing the tax consequences of a person for a particular financial
year.
The Domicile tests are applied in ascertaining the status of an individual as a person
who has a permanent home in Australia or a person came to this country from outside to
Australia for Employment purpose is also considered as a resident for the tax purpose
(Residency tests, 2017). Another test is of 183 days tests in which an individual who resides
183 days in Australia is considered as a resident individual of an Australia otherwise consider
as a non-resident in determining the tax liabilities. For an employee who resides in Australia,
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the residency status of all the employees is tested through the Superannuation fund of all the
employees.
From the above residency test, the residential status of Sally is determined by using domicile
test and the superannuation tests of the employee that is Sally who is an accountant.
Hence, with the help of section 8-1, the expense of day-care centre will consider as a
deduction in reducing the overall tax incurred on the assessable income of Sally for a
particular year (Business deductions, 2007). It is important to consider all the taxable
components and also to determine the deductibility of all the expenses incurred by a user for
a particular financial year. In the given case, Sally as an accountant incurred day-care centre
expenses as being a Single Parent she has no one to take care her young child while she was
at work.
Compliance with the legal rules and case laws
Allowable deductions determine as per section 8-1 helps in determining the tax
liability of an individual as this allowable deduction are excluded from the assessable income
to determine the taxable income of Sally. Day-care centre expense is an allowable deduction
which will get deducted from the salary earned by Sally to ascertain its taxable income on
which tax is ascertained by using specific tax rates in Australia. Previous case laws and its
verdict help an individual in taking decisions for the current case. In the case law of Charles
Moore & Co (WA) Pty Ltd V FCT (1956) 11, ATD 147 is a case law in which expenses
incurred by a taxpayer in producing the assessable income. The action of an individual is
considered under the stage of first positive limb section. Every expense considers an
individual in reducing its overall tax liability as their motive is to consider an expense which
further helps in generating the assessable income. So in this particular case the court of law,
consider the expenses as an allowable expense which gets deducted from the overall
assessable income of a person.
QUESTION 3
Identifying the legal issue
This case is about paying interest on the loan taken for growing commercial crops to sell and
earn profit out of the grown crops. Joseph in this case running its existing plumbing business
who purchase additional 20 hectare of land along with the plants which he planned to harvest
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the same on the land with an intention to sell the same in the external market to generate
enough returns in the external entity as their motive to is to earn extra income from its current
business and also from harvesting of the crops. Initially, Joseph clears the land by using
ploughing method and also uses compost. He ascertains the life of the harvest that it is
expected to not to harvest for 5 years. He needs to pay the interest on the amount of loan
taken from the external party or lenders to fund its requirements for various purposes such as
for purchasing the land, preparation costs to transform the barren land into fertilizing land for
growing commercial crops for earning higher profit, fertilizers costs and all the costs of
purchasing plants samplings and seeds to grow different variety of plants. The legal issues
identified in this case is to determine the tax consequences on Joseph who operates its
business along with the diversification of purchasing and growing plants on the lands is
separately different from their regular business.
Legal rules and regulations
The regulation of property is applicable in the current case in order guide the action of
Joseph who has purchased a vacant land with an intention to grow plants on the same to
generate profits out of it. A vacant land purchased by an individual will be considered for the
tax treatment as if a person generates something from the sale of land or growing of the crops
or anything which is directly related with the vacant land purchased by an individual. The
consideration of vacant land in the tax treatment as per the nature of that particular land as
capital nature of land is usually considered by an individual in determining the overall tax
liabilities incurred on an individual. On the basis of purpose of the vacant land purchased by
a user, its tax treatment depends on the same as a land purchased for the purpose of a capital
asset to be held in a business for a longer period of time then it is tax-free from the tax return
payable by an individual.
On another hand, the purchase of the similar land for the business purpose or
commercial purpose as growing plants on the vacant land will help in generating higher
returns for an individual. A land considered as a commercial land due to some commercial
activities performed on the purchased land is treated as a business asset on which GST is
applicable. Goods and services tax rates are different for the different purpose of an
individual as the officials of the tax authority of Australia will first assess the nature of the
land and then impose GST rates. In contrast to this, a vacant land purchased as a capital asset
for the longer time period in a business is treated in determining the capital gain from the sale
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of that asset in an entity. Capital gain is produced on the sale of an asset whose sales
considerations is higher than the overall costs incurred on the same asset. A capital loss arises
from the proceeds of the land whose sales consideration is less than the total cost of the assets
and the entire improvement expenses incurred on the similar asset.
An individual will also need to pay tax on the capital gain arises from the sale
proceeds of all the capital assets. A capital asset is segregated into two kinds such as short-
term as well as a long-term asset depends on in the time period an asset is held by an
individual.
Application of legal rules
Above discussed rules and the regulations is applied in resolving the legal issue of this
case. In the current case Joseph is running its plumbing business and further he shifted its
interest from the plumbing business to the purchasing of a vacant land on which plants are
grown to sell all the plants in generating some returns to meet its overall costs of purchasing
the land. For purchasing the land and other ancillary services used in preparing the land,
fertilizing costs and purchasing of plants are funded by taking a loan from the bank as their
motive is to satisfy the financial and non-financial needs of their existing business and also
the new business started by them. Joseph is required to pay the goods and services tax for
using the vacant land for the business purposes as land is tax-free but it should not be used for
any commercial purpose. So, Joseph is required to pay Goods and services tax for growing
plants on the vacant land aloes paying tax on taking loan from the banks as they pay interest
on the land for 5 years as for initial five years harvesting will not be done on the land which
results no income for Joseph which needs to pay the interest and instalments. But at the same
time, the land will remain to vacate for five years which is considered as a vacant land which
is a tax-free in the terms of the tax treatment of Australia as tax will be applicable after the
furs five years from where the actual growing of crops will occur.
Compliance with laws
Under this stage, Joseph’s case is compared with another similar case where the verdict of the
court of law will help an individual in taking the judgement of the current case.
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CONCLUSION
It is summarized from the above study that the verdict of three cases is ascertained in
the above assignment is discussed hereunder. These cases are all about the personal exertion
income, deductions of expenses and finally, the last case is about the determination of tax
consequences on the business venture income generated by Joseph for growing crops.
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REFERENCES
Books and journals
Hoopes, J. L., Robinson, L., & Slemrod, J. (2018). Public tax-return disclosure (No.
w24318). National Bureau of Economic Research.
Ingles, D., & Stewart, M. (2018). Australia's company tax: Options for fiscally sustainable
reform. In Australian Tax Forum (Vol. 33, No. 1, p. 101). Tax Institute.
Online
Allowable deductions, 2012. Available through: <
https://www.cpdlive.com/charteredaccountants/seminarNotes/TaxForYoungProfessionals-
AllowableDeductions-Essentials-TechnicalPaper.pdf> [Accessed on 14th May 2017].
BRENT v. FEDERAL COMMISSIONER OF TAXATION (1971) 125 CLR 41, 2017. Available
through: < https://jade.io/article/66285> [Accessed on 14th May 2017].
Business deductions, 2007. Available through: < http://www.tved.net.au/index.cfm?
SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://www.tved.net.au/PublicPapers/
March_2007,_Tax_Basics,_Tax_Basics____Program_14___Business_Deductions.html>
[Accessed on 14th May 2017].
Income under income tax, 2017. Available through: <
https://www.ato.gov.au/Individuals/Lodging-your-tax-return/In-detail/What-is-income-/>
[Accessed on 14th May 2017].
Personal services income, 2017. Available through: <
https://www.ato.gov.au/Business/Personal-services-income/> [Accessed on 14th May 2017].
Residency tests, 2017. Available through: < https://www.ato.gov.au/Individuals/International-
tax-for-individuals/Work-out-your-tax-residency/Residency-tests/> [Accessed on 14th May
2017].
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