Principles of Income Tax Law Assignment - MLC703 T2 2019 Analysis

This document presents a comprehensive solution to an income tax assignment, addressing both problem-solving and policy-based questions. Part 1 analyzes scenarios involving restrictive covenants and the tax treatment of payments received for relinquishing rights, referencing relevant case law such as Dickenson v FCT (1958) and Pritchard v Arundale (1972). It also explores small business CGT concessions, including the 15-year asset ownership exemption, 50% reduction, and rollover relief, applying them to a case study involving the sale of land, goodwill, and an office desk. Part 2 delves into policy-based questions concerning Goods and Services Tax (GST), examining its impact on households and the arguments surrounding potential GST reforms, including base expansion and rate increases. The analysis considers economic models, such as those from NATSEM, and discusses the potential effects on revenue, income tax, and various sectors, referencing studies from organizations like the CPA and KPMG. The assignment emphasizes the importance of equitable tax systems and the complexities of GST policy in Australia.

Running head: INCOME TAX
Income Tax
Name of the Student
Name of the University
Authors Note
Course ID

1INCOME TAX
Table of Contents
Part 1..........................................................................................................................................2
Answer to question 1 A-............................................................................................................2
Requirement A:......................................................................................................................2
Answer to B:..........................................................................................................................3
Answer to question 1 B:.............................................................................................................4
Part 2: Policy Based Questions..................................................................................................8
Introduction:...........................................................................................................................8
Discussion:.............................................................................................................................8
Conclusion:..........................................................................................................................13
References................................................................................................................................14

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Part 1
Answer to question 1 A-
Requirement A:
When a taxpayer receives a payment for restricting or relinquishing any rights then it
is not held as an income. For example, payments received for not doing something is not held
as income. It is regarded as the agreement that is entered into by a parson that imposes a
restriction on the income producing activities of the taxpayer or their rights. Where a
taxpayer receives payment for entering into the contracts agreement are held as capital in
nature. The court of law in “Dickenson v FCT (1958)” held that the taxpayer was the
proprietor of service station and entered in an agreement with the Shell Oil Co to limit the
sale of his products for a specified time1. The taxpayer here also agreed not to operate any
identical form of service station inside the five miles for his current business without entering
in any other identical agreements. The court considered the payment as capital in nature.
Likewise, in case of Deb who is presently employed as tax specialist for a
supermarket chain entered into an agreement of giving up her contractual right of having paid
day off each month in exchange of $20,000. Referring to the case of “Dickenson v FCT
(1958)” the lump sum amount received in exchange of giving up the right of paid day off will
be treated as capital in nature and will not be held assessable2. This is because the payment
amounts to a restrictive covenant that imposes a restriction on the income producing activities
of Debt and her rights as well.
1 Brauner, Yariv and Miranda Stewart, Tax, Law And Development
2 Deutsch, Robert Et Al, Australian Tax Handbook 2018 (Thomson Reuters Australia, 2018)

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Answer to B:
In another instance it is noted that Deb also entered into an agreement of not carrying
her own tax business on business as this would hamper her job performance during working
week. Consequently, she entered into an agreement of $10,000 to give up her present tax
business. The court in “Pritchard v Arundale (1972)” held that the inducement payment
given to accountant to leave the private practice and work for the company for the six
months’ time period was not held as income3. Similarly, citing the case of “Pritchard v
Arundale (1972)” the payment of $10,000 that is received by Deb for giving up her present
tax business will be considered as capital in nature and will not be held assessable.
3 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

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Answer to question 1 B:
To assist the small business, given the basic conditions for relief are met, then capital
gains can be reduced based on numerous concessions given under Division 1524. The four
available small business concessions are as follows;
a. 15-year asset ownership CGT exemption under “Sub-division 152-B”
b. 50% reduction in capital gains tax under “Sub-division 152-C”
c. Retirement capital gains tax exemption under “Sub-division 152-D”
d. Roll-over relief asset replacement under “Sub-division 152-E”
A capital gain which meets the criteria for 15-year exemption is completely
disregarded and it is not considered under the “subsection 102-5 (1)”.
Land and Buildings: As Greg sold the land and building for $1,100,000 in February 2019 no
15 year exemption can be availed by Greg in this regard since the asset was not owned by
Greg continuously for 15 years period ending just prior to the CGT event5. However, Greg
can choose to apply 50% small business CGT concession stated under “subsection 102-5
(1)”. The asset has been under the ownership of Greg for more than 12 months and hence the
basic conditions of “subdivision 152-A” is satisfied.
Goodwill: When Greg entered into the contract of selling the business the Goodwill of the
business stood $150,000. In respect of goodwill, the views of ATO is that a CGT event C1
takes place when the business is ceased on permanent basis6. According to “TR 1999/16”
4 Kenny, Paul. "Small business capital allowances." (2018).
5 Festa, Domenic. "CGT amendments: Unnecessary complications for small business." Taxation in Australia 53.1 (2018):
18.
6 Douglas, Justin, and Amy Land Pejoska. "Regulation and small business." Economic Round-up 2017 (2017): 1.

5INCOME TAX
when the business stops operating on permanent basis, whether based on voluntary or
involuntary act then there is a loss or destruction of goodwill of business. It is worth
mentioning that business should be permanently ceased or else temporary closure would not
result in CGT event C1. As evident in case of Greg, at the time of selling the goodwill, the
business was ceased on permanent basis. Therefore, Greg can obtain a 50% active asset
reduction under “Sub-division 152-C”.
Office Desk: Greg later sold the office desk for $13,000. The asset has been assumed to have
been under the ownership of Greg for 12 months to be considered eligible for 50% CGT
reduction. Therefore, Greg under the “subdivision 152-A” can claim the 50% active asset
reduction since the basic condition has been satisfied7. Greg can additionally reduce the
capital gain by applying small business retirement exemption or small business rollover or
both.
Restrictive Contract: As evident Greg entered into a contract with Rachel for 3 years to not
compete with her in exchange for $200,000. A capital gains originating from specific CGT
events is not allowed for discount capital gains. This comprises of CGT event D1 where a
contractual right is created. The contract entered into by Greg with Rachel for not competing
with her in exchange of $200,000 has resulted in a CGT event D18. In other words a restraint
of trade has formed since the taxpayer here Greg has agreed not to operate identical business
for three years. In such a situation no 50% CGT discount is applicable for Greg.
Subdivision 152-E Small business roll-over:
7 Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
8 Sadiq, Kerrie, and Stephen Marsden. "The small business CGT concessions: Evidence from the perspective of the tax
practitioner." Revenue Law Journal 24.1 (2015): 6743.

6INCOME TAX
As per “section 152-400” a small business rollover enables a taxpayer to defer the
capital gains from the occurrence of CGT event for one or more small business assets given
the taxpayer purchases a replacement assets. The basic principles given under “section 152-
405” states that an individual is allowed to obtain the roll-over given the basic conditions
under the “subdivision 152-A” is met for the capital gains9. To obtain the small business roll-
over the taxpayer should purchase the replacement asset inside the time span of one year
prior to two years following the occurrence of last CGT event.
As understood from the case study that Greg following the sale of his business bought
shares in the company named Asset Pty Ltd during May 2019. This included the office which
was rented out to third party for $300,000 and a retail premises for $700,000 used by
company to conduct its clothing store. Greg can obtain the roll-over under sub-division 152-E
since the basic conditions of roll-over under “Subdivision 152-A” is satisfied for gain10. The
replacement asset here for Greg amounts to active asset when he acquired all the shares of
Asset Pty Ltd. The company is connected with Greg since he has the controlling authority.
Therefore, it can be stated that Greg is eligible for claiming rollover relief under
“subdivision 152-E” since the capital gains that has remained apart from rollover does not
goes beyond the total of the first and second element of cost base of replacement. The asset
was eventually acquired within the period of one year following the last CGT event in the
income year.
9 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.
10 Evans, Chris, John Minas, and Youngdeok Lim. "Taxing personal capital gains in Australia: An alternative way
forward." Austl. Tax F. 30 (2015): 735.

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Part 2: Policy Based Questions
Introduction:
GST can be defined as Goods and Service Tax that are among several taxes namely
the Income tax, capital gains tax and fringe benefit tax. The Henry review stated that several
organizations play different roles inside the system to make sure that its truthfulness and all
the people are treated in equal manner by assuring equity in the tax system11. Lately, GST has
been area of emphasis which has went under several changes and review due to the present
GST base to impose tax on basic foods. The Australian states and territories are indulged in
fiery dispute relating to GST issues and its likely reformation. It is argued that GST must not
be increased since it would upsurge the monetary problem on consumers and result in wrong
distribution of government amenities and other benefits among the citizens particularly the
developing territories of Australia leading to unequal distribution of revenue.
Discussion:
There has been a wide range of economic models to measure the effect of revenue on
widening the base of GST and increasing the rate on the households. According to the
“National Centre for Social and Economic Modelling” at Canberra University, they estimate
that the average household in South Australian presently pays $5,019 in GST which is equal
to 6.2% of disposable income12. The model of NETSEM has formed a regressive character of
GST. According to recent research in South Australia, the existing GST accounts for 9.8% of
disposable for lower income household while only 4.9% of the income for higher income
households.
11 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH
Australia, 2013)
12 Nethercott, Les, Australian Taxation Study Manual 2018 (Oxford University Press, 2018)

8INCOME TAX
Increasing the base of GST to contain the fresh food, education, health, financial
service and other numerous goods and service would result in making the tax system highly
regressive. As per NATSEM modelling it is noticed that the effect of GST on lower income
household is more as they pay 41.8% more GST while the highest income households would
only pay 36.7% more13. Increasing the GST rate to 15% would result in adding $48 each
week in GST for the average household in Australia. GST at present accounts for 6.2% of
household expenses countrywide but only accounts 6.4% in South Australia. The unfair
allocation of revenues from higher authorities to Commonwealth Grants Commission which
distributes GST has resulted in bigger deficits and public debts. The state is required to
respond to the developing reformation which would help increasing the recovery of debt.
This increasing amount of price of basic commodities and consumer would result in misery
of burden.
A research published by the chief accountancy group in Australia has suggested that
increasing GST will be a $27.5 billion a year well off with 15% GST on everything. The
research conducted by the KPMG, estimates that increasing the GST to 15 per cent and
implementing the same to all the goods and services would help in raising an added revenue
of $42.9 billion during the first year14. While other scenarios have stated that maintaining the
exemptions at a rate of 15% would help in increasing around $26 to 36.8 billion revenues.
Leaving the GST at a rate of 10% but extending the same would help in raising the estimated
$12.1 billion for the government.
As per the CPA Alex Malley, raising the revenue would help in eliminating the wide
range of taxes and cut down the personal income tax as this will help in boosting the gross
13 Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
14 Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook Co./Thomson Reuters, 2013)

9INCOME TAX
domestic product. Research suggest that additional amount of GST revenue can be helpful in
abolishing the wide number of inefficient state taxes and would also result in personal income
tax cut together with compensation for lower income households while simultaneously
advancing the economic development.
With an increase of 15% GST on everything, it is noticed that insurance taxes and
stamp duties can be totally abolished15. Cutting down the income tax rates and some kind of
increase in welfare payments would allow the average Australian household to almost $750
well off each year. This would make the economy $27.5 billion bigger by 2029-30 that it was
previously been.
Several economist has stated that a large part of the reported economic benefits and
income benefit stemmed from the assumption would result the unemployment becoming
zero. The CPA on the other hand also argues that increasing the GST would lead all the
households at all the level of income to be well off16. Researchers envisages that the lower
income brackets would be getting larger amount of reduction in tax rate, leading to reduction
in the overall amount of tax burdens when it is measured in terms of percentage. The model
also states that there is sufficient amount of revenues to return to the households as the
reduction in income tax or compensation for the lower income households that would not get
the benefit from the changes in the income tax.
Under the 15 per cent GST levied on everything, the report was entirely based on the
leaving the marginal amount of tax rate steady at 47 per cent for those that earn $180,000 or
more17. However, it cuts the next bracket at a rate of 33.1% from 37% below to 32 from
15 Taylor, C. J et al, Understanding Taxation Law 2018
16 Woellner, R. H, Australian Taxation Law Select 2018 (CCH Australia, 2013)
17 Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018 Ebook 28E (OUPANZ, 2018)

10INCOME TAX
32.5%, while the lowest tax bracket to 13.5 from 19%. Several scholar’s states that the
suggestion of increasing the GST would potentially increase the lower income earners
resulting in greater tax cuts and it is mainly due to higher income household starting from
bigger income base.
Researchers argues that the faults of increasing the amount of GST would out weight
the benefits. It is cursorily very much appealing to cut especially the flawed taxes and the fud
the tax but by increasing the less flawed tax such as GST. However, it is not as simple as this.
Majority of the people understands that GST generally hits the lower income group severely,
therefore increasing the GST would require compensation18. Awkwardly, compensation has
its own faults and it would most likely be highly targeted compensation. As an individual
works more, their compensation would fall as well. As a result, this would result in creating
discouragements in work.
Furthermore, the government of Western Australia has been pushing for repairing the
GST in order to secure the greater share of revenue. The prime minister has however side-
lined any kind of effort for increasing the rate of GST since he is convinced that there would
no such economic boost instead the consumers and the citizens would also suffer the burden
of increasing the rate of taxation19. The government would also struggle to deal with budget
in order to avoid imposing burden on the citizens and assuring that there is equity in
distribution of resources as well as other benefits.
The overall effect of widening GST would proportionately result in lower impact on
the South Australia than in any other parts of Australia. The proportion of household
expenses from increased GST would result a rise of 2.5 points in Southern Australia in
18 Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). Australian Taxation Law Select 2019: Legislation And
Commentary. Oxford University Press, 2019.
19 Butler, Daniel. "Who can provide taxation advice?." Taxation in Australia 53.7 (2019): 381

11INCOME TAX
comparison to 2.2 points nationally. If the proposal of increasing or widening the GST is
regarding cutting other taxes particularly the business or progressive income taxes, this would
eventually take the money from the poor and will give it poor. Therefore, this proposal
should be rejected out of hand.
Increasing the GST without any kind of increase in additions would not result in
positive for consumers and developing states in Australia. The realism is that any kind of rise
in the GST without any form of rise in the pension would be inferior since it would be
compensated by lowering the living cost20. There is ample amount of tax reformations which
needs to be addressed before thinking of increasing the GST which directly creates an impact
on the consumers and poor federals as well.
GST must not be increased largely based on the expense of consumers and small
business units. This is mainly because the burden is passed to citizens through increase in the
price of goods and services21. Imposing GST on food would usually require larger
compensation exacerbating the problems that was raised earlier. Furthermore, health and
education is largely subsidised, therefore adding GST in these activities would mean that
teachers, professors and doctors would claim increased amount of subsidies. Hence, imposing
more tax on education and health combined with the increased spending on education and
health cannot be viewed as improvement.
Conclusion:
On a conclusive note, it can be actually argued that GST rate must be raised or the
base should be broadened since it would burden the consumers and would result in inequality
in distribution of government benefits and social services particularly in developing the
20 Liu, Joyce. "Understanding Australian commercial law." Taxation in Australia 53.6 (2018): 300.
21 Murray, Ian, et al. "Understanding Taxation Law 2019." (2018).