Solution: Income Tax Assignment - Finance Module, Semester 1

This document provides a comprehensive solution to an income tax assignment, addressing various aspects of Australian tax law. The solution begins with a discussion on individual tax residency, including the relevant statutory tests and case law, such as F.C. of T. v. Applegate. It then analyzes barter transactions, assessing the tax implications for a dentist and their client. The assignment further explores the deductibility of expenses, specifically interest on loans related to property and business operations. Finally, it calculates assessable income, deductible expenses, and tax liability for Lincoln, including a detailed breakdown of income components, allowable deductions, and the application of tax rebates and Medicare levy. The solution references several key cases and tax rulings to support its arguments.

INCOME TAX
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Question 1
The individual tax residency is dealt with as per ss. 6-1 ITAA 1936. This subsection
highlights the various statutory tests available to ascertain the tax residency status besides the
general residency test. These tests have been discussed in detail in the tax ruling TR98/17.
The tax residency becomes pivotal owing to the differential tax treatment that is applicable
for Australian tax residents and foreign tax residents (Barkoczy, 2017). In accordance with
TR 98/17, the following tests may be applicable with regards to determine tax residency of
individual taxpayers (Coleman, 2016).
 The Residency Test – This is applicable for foreign residents who come to Australia
for various reasons
 The 183 Day Test - This is applicable for foreign residents who come to Australia for
various reasons
 Domicile Test – This is applicable to determine the tax residency of Australian
domicile holders or Australian residents
 Superannuation Test – This is applicable for government employees of Australia who
are serving abroad
Considering the given scenario, it would be fair to assume that Amity is an Australian
resident since she has been working with a company in their Adelaide office for 7 years.
Further, it is known that Amity is not employed by the government and works for a private
firm. As a result, the only test which would be relevant for the taxpayer in the given scenario
would be Domicile Test (Krever, 2017).
Domicile Test – In order to pass this test, it is imperative that two conditions ought to be
satisfied by the underlying taxpayer. These conditions are outlined below (Reuters, 2017).
 The taxpayer would to be a domicile holder of Australia in accordance with Domicile
Act 1982.
 Another requirement for the taxpayer is that the permanent abode must still be in
Australia even though the taxpayers may be physically in foreign territory.
For the taxpayer to be recognised as an Australian tax resident, it is pivotal that both the
above conditions ought to be fulfilled. While domicile holding can be determined
objectively, the determination of permanent abode location is little more complex and
multiple factors need to be considered (Sadiq et. al., 2015).

A relevant case that needs to be cited is F.C. of T. v. Applegate (1979) 9 ATR 899. In this
case, an Australian resident was sent abroad to establish the office of an Australian company
and was expected to return back to Australia after the branch is set which would require
substantial time. The taxpayer finally returned home after two years owing to an illness. In
this case, the court held the taxpayer as a foreign tax resident as shifting of permanent abode
does not imply permanent intention to stay abroad. A similar case which led to the same
verdict is F.C. of T. v. Jenkins (1982) 12 ATR 745 in which a bank officer was sent abroad
for three years but had to return to Australia within 18 months (Deutsch, Freizer, Fullerton,
Hanley & Snape, 2015).
Considering the verdict in above case laws, the given situation seems quite similar since
Amity was sent abroad for a substantial period of time with an option to extend the stay by
further period of three years. Also, her husband also shifted with her and thereby her personal
ties to Australia were limited to parents also. Besides, the health insurance was discontinued
in Australia. Additionally, they purchased a house initially in Kiribati which was later sold.
Clearly, it would be appropriate to conclude in the wake of given case facts that the
permanent abode has shifted from Australia to Karabati and hence Amity would not be
considered as an Australian tax resident for the year ending on June 30, 2016.
Question 2
a) In the given situation it is apparent that a barter transaction is being executed between the
dentist and client. A relevant case with regards to these transactions is F.C. of T. v. Cooke &
Sherden 80 ATC 4140. This case highlights that if the consideration arising from the barter
would fall in the definition of income as per s. 25-1 ITAA 1936, then the consideration
received on account of this transaction would also have income character and would be
taxable (Reuters, 2017). Besides, it is apparent from Henderson v FCT 70 ATC 4016 that
when a professional tends to offer services to a client, then the revenue becomes receivable
which may be received in cash or kind (Krever, 2017). Considering the above cases, it would
be fair to conclude despite the barter, on the part of the dentist $ 550 would be recorded as
ordinary income as toy of market value $ 550 is accepted for the service rendered.
b) Any prize would lead to ordinary income under s. 6-5 ITAA 1997 if it is linked to the
employment where it might be a common practice or related to skills as an employee. This
has been highlighted in the verdict of the Scott v. Federal Commissioner of Taxation (1966)
117 CLR 514 case (Sadiq et. al., 2015). Another relevant case to consider in the given

situation is Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR
570. As per this case, the assessability of prize would depend on the underlying motives and
circumstances in which the prize has been extended to the taxpayer (Coleman, 2016). If it is
for any service offered or linked to the employment skills, then the prize would lead to
assessable income.
In the given scenario, it is apparent that the prize won by the taxpayer is not on account of
any skill but purely on account of chance. This would therefore result in windfall gains which
would not be categorised as ordinary income under s. 6-5 ITAA 1997.
Question 3
a) With regards to s. 8-1 ITAA 1997, tax deduction is available if the underlying outgoing or
loss is necessary for the generation of assessable income. There are few negative limbs
related to general deduction under s. 8-1 which would prohibit any tax deduction under this
section. These are listed as follows (Barkoczy, 2017).
 The expenditure is not revenue but capital.
 The expenditure is incurred for production of non-assessable income.
 The expenditure is for domestic purposes and not business purpose.
In the given case, it is apparent that the loan has been assumed for a property which is partly
used for residential purpose and partly for earning rent or assessable income under s. 6-5
ITAA 1997. Further, as highlighted in Ronpibon Tin v FC of T (1949) 78 CLR 47 at 57 case,
it is essential to develop a causal relationship between the incurring of the expense and the
production of assessable income. In the given case, the rent income (which contributes to
assessable income) is produced only because of the expenditure undertaken. Thus, interest on
loan would be deductible to the proportion that loan amount is diverted to the purchase of the
ground floor since the first floor is personal expenditure (Deutsch, Freizer, Fullerton, Hanley
& Snape, 2015).
b) An essential condition for general deduction under s. 8-1 ITAA 1997 is that the expense or
loss has to be produced in the process of assessable income production. The given situation
needs to be analysed in the wake of the above statement which has been emphasised in the
Ronpibon Tin v FC of T (1949) 78 CLR 47 at 57 case (Krever, 2017).

i) In the given scenario the loan was taken for plant and equipment which in turn would have
led to production of assessable income. In the present however, these assets have already
been liquidated and no longer exist. As a result, the current pending loan cannot be attributed
to enhancing the assessable income and hence the interest would not be deductible under s. 8-
1 ITAA 1997 (Sadiq et. al., 2015).
ii) In the situation presented, the business has bound up and hence the loan proceeds pending
cannot potentially produce any higher assessable income and hence interest levied on the
same would not be deductible as the same is unrelated to production of any taxable income
(Reuters, 2017).
Question 4
a) The related aspects of Lincoln’s assessable income are discussed as follows.
Components of Assessable Income
Sales – It would be considered as ordinary income as per s. 6-5 ITAA 1997
Proceeds from loan – Not considered as assessable income since these proceeds are capital
and non-taxable
Lottery Win- It is not considered as taxable income since it is windfall gains
Incentive to Display – Since this incentive does not reduce the cost of purchase for the buyer,
thus it would be considered as assessable income as highlighted in tax ruling TR 2009/5\
Dividend – It is assessable income as per s. 6-5 ITAA 1997. Additionally, franking credit
would also be added to dividend income.
Components of deductible expenses
Gross wages paid – This would be deductible in accordance with s. 8-1 ITAA 1997.
Raw materials - This would be deductible in accordance with s. 8-1 ITAA 1997. Raw
materials used = Opening inventory + Purchases – Closing Inventory
Rent on premises - This would be deductible in accordance with s. 8-1 ITAA 1997.

Interest expenses - This would be deductible in accordance with s. 8-1 ITAA 1997 to the
extent that it is used for business purposes.
The assessable income and allowable deductions can be computed as shown below.
b) Taxable income = Total assessable income – Total deductions = 544,714 – 534,412 = $
10.302
It is noteworthy that for the tax liability arising on the above, a tax rebate of $ 2,314 would be
available on account of franking credit which has already been paid by the company
providing the dividend (Coleman,2016).
Medicare Levy = 2% of taxable income = (2/100)*10302 = $ 206.05
References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University
Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2015) Australian tax
handbook. 8th ed. Pymont: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON
REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., &Ting, A.
(2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.