Taxation Theory, Practice and Law Question Answer 2022

Running head: TAXATION THEORY, PRACTICE AND LAW
Taxation Theory, Practice and Law
Name of the Student
Name of the University
Author Note

1TAXATION THEORY, PRACTICE AND LAW
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................5
References................................................................................................................................10

2TAXATION THEORY, PRACTICE AND LAW
Answer to Question 1
(a) Tips from Customers in cash- $335
According to “Division 6” of Income Tax Assessment Act 1997, an assessable income
includes both ordinary as well as statutory income (Mavropoulos 2017). “Section 6-5” of
Operative provisions of ITAA 1997 states that if a person is resident of Australia, then the
assessable income will include the ordinary income derives from the direct or indirect way
from all sources, whether the resident is within or outside Australia throughout the income
year (Ato.gov.au 2020). Further, ATO in TR 95/11 in para 19 states that acceptance of tips by
hospitality employee is an assessable income within Paragraph 26(e) of the Income Tax
Assessment Act 1936.
Emmi is studying accounting at Holmes Institutes as well as works part-time in
Crown Melbourne restaurant. She earned $335 in cash during her part-time employment in
Australia. As per “Section 6-5” under Division 6 of ITTA 1997 and ATO Taxation Ruling
95/11, the income earned from tips of $335 during the year while working as a part-time job
by Emmi will be an assessable income.
(b) Income from Working in Crown Melbourne Restaurant- $25,000
According to “Division 6” of “Income Tax Assessment Act 1997”, ‘Section 6-5 (2)’,
an assessable income to the resident of Australia shall include the ordinary income either
direct or indirect way of sources whether the resident stays or not stay in Australia during the
year (Richards 2014). Further, “Section 6-5 (3)” of ITAA 1997 states that if an individual is a
foreign resident then, their assessable income comprises of the income resulting directly or
indirectly from an Australian source as well as provision consists in the assessable income for
the income year on some basis that is not from an Australian source (Legislation.gov.au
2020).

3TAXATION THEORY, PRACTICE AND LAW
Emmi is directly earning an income of $25,000 from her part-time employment from
an Australian source. Therefore, as per ‘Section 6-5 (2)’ of “Income Tax Assessment Act
1997”, the income earned by Emmi from Crown Melbourne restaurant for working as a part-
time job there will be treated as an assessable income.
(c) Perfume gifted from customer to Emmi which she has given to her mother- $250
It is mentioned under “Section 23 L (1)” of “Income Tax Assessment Act 1936” that
income resultant by an individual through the means of provision of a fringe benefit is not to
be considered as an assessable income and to be exempt income (Legislation.gov.au 2020).
Whereas “Section 23 L (2) specifies that the income will be an exempt income in the
following two conditions:
i. A taxpayer originates income together with one or more non-cash business profits
under section 21 A in single year of income; and
ii. The total amount provided within section 21 A does not exceed $300.
It finds common to people residing in Australia, to gift someone a bottle of perfume
on occasion of Christmas (Ford and Dibden 2019). In the given information, it is mentioned
that Emmi has gifted by a bottle of perfume worth $250 from a customer on the Christmas
time. She has given the gift to her mother without using it.
As per “Section 23 L (2) of “Income Tax Assessment Act 1936”, gifts more than $300
shall not come under assessable income. The gift received by her is not exceeding $300 and
thus, referring to Section 23 L (2) of ITAA 1936, this gift is exempt from assessable income.
(d) Monthly entertainment event paid by owner as Spending on Meal- $380
“Section 32-10 (1)” of “Income Tax Assessment Act 1997" states the meaning of
entertainment as:

4TAXATION THEORY, PRACTICE AND LAW
i. Entertainment through food or drink or recreation; or
ii. Lodging or tourism along with entertainment by the means of food, drink or
recreation.
As per this section, the entertainment will include business lunches and social
functions (Richards 2014). But, it will not be considered as entertainment when meals on
business travel are for overnight, theatre presence by critic and food writer’s restaurant meal.
According to the “Section 32-5” subdivision 32-30 (1.3), employer expenses of
“Income Tax Assessment Act 1997”, the employer will get a deduction if he/she is providing
meal as food or drink in a dining facility to the employees who execute their duties well and
in association with the dining facility or facility for providing travel, accommodation or
recreation.
Here, a monthly entertainment event is paid by the restaurant owner as an employer as
a reward for their employee’s hard work. The assessable income and deduction as a fringe
benefit of $30 will be in the hand of the employer on spending $380 in the month (Hodgson
and Pearce 2015). Therefore, the entertainment event organized for the employees of the
restaurant by providing meal will not be treated as an assessable income for her.
(e) Cash received as Christmas Gift from father- $15,000
“Division 30” of “Income Tax Assessment Act 1997” sets out the rules for deductions
for gifts or contribution. However, as per “Section 78A (2)” of “Income Tax Assessment Act
1936” gifts are not be allowed for deductions which is 'a gift of money or property is given
by a person (donor) to a fund, an authority, or person deductible under Division 30” of
Income Tax Assessment Act 1997’ (Case 2015).
Whereas “Section 78A (2) (c)” states that on gaining some benefit or advantage by
the donor or associate which is mentioned under paragraph (a), deduction would be

5TAXATION THEORY, PRACTICE AND LAW
allowable from assessable income of the donor under “Division 30” of “Income Tax
Assessment Act 1997”. The Act clearly states that any deduction or assessable income will be
allowable to the donor.
Emmi has received cash of $15,000 from her father as Christmas gift. As per “Section
78A (2)” of “Income Tax Assessment Act 1936” it will not be allowed for deduction (King
and Case 2015). “Section 78A (2) (c)”states that the assessable income will be allowable to
the part of donor.in this case, the assessable income and deduction received will be in hand of
the donor that is Emmi’s father. Therefore, the gift given by her father as cash of $15,000 is
not allowable as an assessable income for Emmi.
Answer to Question 2
Liu is a 65-year-old woman and a resident of Australia. However, she was born in
China. Liu is retiring from her business, so she decided to sell all her Australian Assets. After
that, she wants to move to her home to China permanently.
As mentioned under “Section 108-“5 of “Income Tax Assessment Act 1997", a CGT
asset consists of:
 any type of property or

6TAXATION THEORY, PRACTICE AND LAW
 A legal or equitable right that is not property (O’Connell 2017). Examples of CGT
assets are debts, shares, options, land and buildings, foreign currency and a right to
enforce the contractual obligation.
(a) Selling of the main residence which is now worth - $630,000
The capital gain tax will not be imposed to the assets that have been attained before
the date 20 September 1985. According to the Australian law of taxation, the capital gain tax
will be imposed only on those assets that have acquired on or after 20 September 1985
(Walrut 2014). Consequently, as per the preceding and following date terms Pre CGT and
Post CGT is used within the law.
As per“S118-110” of “ITAA 1997”, a capital gain or loss made from a CGT event
occurs in relation to a CGT asset will be omitted if:
i. He/she is an individual,
ii. His/her dwelling was the main residence throughout the ownership period and
iii. The interest did not transfer to that individual as beneficiary or trustee or deceased
person (Grudnoff 2016).
Here, Liu has purchased her house in the year 1981 for worth $55,000, which is now
worth $630,000. In the entire period of ownership, Liu has resided there as her main
residence. Therefore, under “Section 118-110” of " 1997” the Capital Gain of $575,000 for
Liu will not be applicable to her, and hence, it is disregarded.
(b) Selling of car which is now worth - $ 8,000
As per “Section 108-20” of “Income Tax Assessment Act 1997”, losses occurred from
personal use asset is to be omitted. As mentioned under “Section 108-20 (2)” that personal
use asset includes:

7TAXATION THEORY, PRACTICE AND LAW
i. A CGT asset except a collectable that is for personal use or enjoyment,
ii. An option or right to acquire a CGT asset,
iii. A debt arises from a CGT event.
iv. A debt arising other than:
 For producing an assessable income or
 For carrying a business.
Liu has purchased her Car for personal use worth $37,000 in the year 2011. The cost
depreciated to $8,000. She has made a loss in the asset for $29,000. According to “Section
108-20 (1)” of “Income Tax Assessment Act 1997”, the loss made from the acquired asset
will not be considered for tax in capital gain.
Liu has held capital loss in the sale of her car. Therefore, the Capital Gain Tax is not
to be imposed for Liu and hence, disregarded from CGT.
(c) Selling of small business enterprise - $ 125,000
As per “Division 152”, small business enterprises is benefited from reduction. The
reduction will get only on the fulfilment of some condition such as:
i. Turnover of the business below $2 million at present and in the previous year,
ii. Net worth asset less than $6 million (Kenny and Blissenden 2014),
iii. CGT asset will be an active asset.
The concessions for the small business enterprises as a relief to the taxpayer are
classified into four different types. These are as follows:
i. If CGT asset holds for more than 15 years, then it comes under the type of 15-year
exemption.
ii. Capital Gain gets decreased up to 50% under 50% reduction.

8TAXATION THEORY, PRACTICE AND LAW
iii. Retirement Concessions refers to a business that uses its sales revenue used as
personal retirement (Maples and Karlinsky 2014). The link can ignore the CGT in the
CGT asset’s disposal.
iv. If the taxpayer bought a replacement asset, the capital gain would be regarded as a
deferred asset under Rollover relief.
The selling price of Liu’s business includes $53,000 for all her equipment and
$50,000 as goodwill. The net worth her assets of the business is more than $6million.
Therefore, she is liable to get concessions under “Division 152”.
 Liu is residing in Australia for more than 15 years. Therefore, Liu is suitable to get a
15-year deduction for CGT.
 She is moving to China and leaving Australia permanently. Therefore, the reference to
her goodwill, CGT event F1 exists (Littlewood and Elliffe 2017). Liu is at her age of retirement and closes her business permanently. For moving
permanently, she is liable to come within Subdivision 152-C” where she gets a 50%
deduction.
 While closing her business either that is planned or unplanned, if the business’s
goodwill faces any loss, then it is benefited under “Taxation ruling of TR 1999/16”.
(d) Furniture sold out - $2,000
According to “Section 118-10 (3)”, the asset that is purchased less than $10,000 and
used by the taxpayer as for her personal use then it will be disregarded from Capital Gain
Tax.
Liu has purchased the furniture worth $4800, which she has sold for not more than
$2,000. Therefore, under “Section 118-10 (3)”, CGT will be disregarded.
(e) Selling of paintings - $ 28,000 while exception in one painting

9TAXATION THEORY, PRACTICE AND LAW
As per “Section 108-10” of “Income Tax Assessment Act 1997”, Collectables item are
those assets which are used for the purpose of private or for entertainment. The items
included under Collectables are such as jewellery, antiques, arts, coins, paintings and stamps
(Allerdice 2014). According to “Section 108-10”, the collectable items that have been
purchased for less than $500 then it will be exempted from the Capital Gains Tax. Any loss
made on selling these collectables is allowed to be offset with the Capital Gains.
Liu has purchased all her paintings within the cost of $500. Therefore, under “Section
108-10 (1)”, for all the paintings, Liu will be exempted from capital gain tax.
However, there is one exception in the purchase cost of her paintings. Amongst all the
paintings, she has purchased one of the paintings for $1000 directly from the seller.
Therefore, in this case, she will not get any exception and is liable to pay Capital Gain Tax.

10TAXATION THEORY, PRACTICE AND LAW
References
Allerdice, R., 2014. CGT provisions. Marks' Trusts & Estates: Taxation and Practice, p.213.
Ato.gov.au 2020. Legal Database. online Ato.gov.au. Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9511/NAT/ATO/00001
Accessed 15 Jan. 2020.
Case, c., 2015. An international individual income tax comparsion: the united states,
australia, and united kingdom. Editorial review board, p.65.
Ford, S. and Dibden, A., 2019. Gifted assets, valuation and ordinary income. Taxation in
Australia, 53(10), p.560.
Grudnoff, M., 2016. CGT main residence exemption. The Australia Institute Policy brief,
January.
Hodgson, H. and Pearce, P., 2015. TravelSmart of Travel Tax Breaks: Is the Fringe Benefits
Tax a Barrier to Active Commuting in Australia. eJTR, 13, p.819.
Kenny, P. and Blissenden, M., 2014. The $6 million net asset value test for small business.
King, D. and Case, C., 2015. An international individual income tax comparsion: the united
states, australia, and united kingdom. Business studies journal, 7(2).
Legislation.gov.au 2020. Income Tax Assessment Act 1936. online Legislation.gov.au.
Available at: https://www.legislation.gov.au/Details/C2017C00242 Accessed 15 Jan. 2020.
Legislation.gov.au 2020. Income Tax Assessment Act 1997. Online Legislation.gov.au.
Available at: https://www.legislation.gov.au/Details/C2017C00336/Controls/ Accessed 15
Jan. 2020.

11TAXATION THEORY, PRACTICE AND LAW
Littlewood, M. and Elliffe, C. eds., 2017. Capital Gains Taxation: A Comparative Analysis
of Key Issues. Edward Elgar Publishing.
Maples, A. and Karlinsky, S., 2014. The United States capital gains tax regime and the
proposed New Zealand CGT: Through Adam Smith's lens. Journal of Australian
Taxation, 16(2), p.156.
Mavropoulos, B., 2017. Tax help for Australian start-ups. Taxation in Australia, 52(6), p.319.
O’Connell, A., 2017. Australia. In Capital Gains Taxation. Edward Elgar Publishing.
Richards, R., 2014. Taxation: Employee share schemes. Law Society Journal: the official
journal of the Law Society of New South Wales, 52(3), p.40.
Walrut, B., 2014. Tax files: Death, dwellings and CGT. Bulletin (Law Society of South
Australia), 36(10), p.44.