Principles of Taxation: Homework Solution and Analysis

This document presents a comprehensive solution to a Principles of Taxation assignment, addressing three key issues. The first section analyzes the residency status of an individual, Mr. S, who moved to Australia from Kuwait, examining the application of Australian residency rules and the tax implications of his overseas income. The second section focuses on Marissa's income, including salary, signing fees, software development income, and compensation received, applying relevant sections of the Income Tax Assessment Act to determine assessable income, ordinary income, and capital gains. The final section examines Joseph's fishing business, analyzing income earned, expenses, and capital gains from the sale of his boat, while also considering fuel tax credits and small business provisions. The solution provides detailed explanations, case law references, and calculations to support the conclusions for each scenario.

Principles of
taxation

Table of Contents
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................3
REFERENCES................................................................................................................................2

QUESTION 1
Issue
In the given case Mr. S who is living n Kuwait for a long time and is earning their with
his job as engineer. In income year 2017-2018, decided to leave his job to come permanently to
Australia to live with his family in the house which they own for a long time. He came to
Australia on 29th April 2017. he used to visit his family quite often, the commissioner of tax held
that he is a resident of Australia and his overseas income must be charged to tax.
Rulings
In Australia both residents and non resident both are taxed on their domestic income.
The rules laid down for residents are applicable to foreign in come of those resident as well
(Cobiac and et.al., 2017). Residents who have foreign income in their total income are taxes on
overall income while non residents are taxed on domestic income only.
For determination of status of an individual in Australia two test are applied to check whether
he/she was resident or non resident in previous year:
Income Tax Assessment Act 1936 (ITAA36)
Section 14 ZZE:
Residency rule
Common law test: a person is said to be tax resident in Australia if he/she resides in Australia
as per section 6(1) of income tax assessment act, 1936 (Residence, 2018). this can be
determined through:
 intention of presence of that person in Australia
 the extension of business or family of such individual in Australia
 location and maintained of assets of individual
 living and social arrangement of individual in Australia.
Statutory tests: this is a rule set for determination of residential level of an individual in
Australia with relevance to facts and circumstances (McGee, Devos and Benk, 2016). In
Australia
 a person is deemed to be a resident in the country if he/she spends half of their income
year (183) days in Australia unless they set up a place of resident outside Australia and so
no intent to come back to the country.
 The domicile (permanent place of resident) of the individual is in Australia
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 the person is a contributor in superannuation scheme of government scheme,
 employee eligible for the purpose of superannuation Act, 1976,
 spouse or child under age of 16 of above mention person (last two points)
Australian taxation office
Source rule: this rule is applied for identify income Source rule of an individual arising in
geographical boundaries of Australia.
Foreign income exempt from tax
Income of a person in foreign employment is exempt for taxation if all the following conditions
are satisfied:
 person is an Australian resident
 person is engaged in foreign employment for more than 91 days
 foreign service is directly related with certain activates related with employer.
Case law:
ZKBN and Commissioner of Taxation [2013] AATA 604 (27 August 2013
In this case commissioner of taxation held that the plaintiff was an Australian resident for
year ended June 2007 and 2008. but his order was objected by plaintiff that he was not resident
in country as he was out of nation for more than half year. According to a justice in this case the
fact can not be dined that person had permanent place of resident in Australia as per domicile test
and if he lives outside for purpose of earning, does not count as his is not residents.
Application
In Australia income year starts form 31st July and ends on 30th June. In given case S left
his job on 29th April and came to live in Australia permanently he is living outside the country
from past many years and sends substantial amount of his income to his family (Information on
residency for tax purposes, 2018). As given in the question that Mr S was present in Australia for
62 days only up to 29th April 2017.
total days of living in Australia
62+(1)April+ (31)May+ (30) June= 124 days
Conclusion
With this calculation this can be said that Mr S was in Australia for 124 days for
year ended June 2018. so it can be declared that did not passed residency test of 183 days for that
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income year. But with the case law cited above it can be said that he has permanent place to live
in Australia where his wife and children used to reside. So he is a resident as per domicile test.
Mr S does not fall in category of person whose foreign income is exempt so his liable to pay tax
on $300000.
QUESTION 2
Issue:
Marissa took up a job in Melbourn University under 18 months fixed contract for a
salary of $120000 per annum, with this she was paid $15000 signing fees. She her collogue Scott
developed a software for a company for which they got $2800 per month each. On discovering
the fact that her contract can not be renewed she sold her further payment right related with new
software to her colleague for $70000. later it was discovered that Scott plages some part of
software and with this recognition the company ended contract with them. She filed a case
against Scott for negative publicity and got compensation of $50000, later, after correcting the
software she sold it for $30000.
Rulings:
Income tax assessment Act, 1967
Section 6-5(1)
Employment income
Assessable income incudes Ordinary income, which means income as per ordinary
concept which is regular, periodic and expectable (Fraser and et.al., 2015). Salary and wages are
included in ordinary in come of an individual. It can be monthly, weekly or fortnight payment.
Compensation receipt: other income
Any amount revived for lost salary under income protection falls under this category and
no tax is charged for the same.
Section 104-35: Contractual agreement
Amount received when a contractual right or other legal right is created is terms as
capital gain and is liable to be taxed under capital gain tax.
Section 118-12: Capital gain tax
any profit/loss on sale of capital asset is terms as capital gain/loss, same will be taxed as
per capital gain tax slab defied in the act. Capital losses are disregard in income calculation of a
financial year.
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Case laws
FCT v Myer Emporium (1987)
C of T v Phillips (1936) 20000
ITAA97s6-5, FCT v Dixon
Application:
Application of above mentioned section in this case lead to the interpretation that salary
and wages falls under ordinary income (Evans, Minas and Lim, 2015). A lump sum amount
received against salary is a capital gain, software is a capital asset so ant profit or loss will be a
capital/gain/loss. Compensation received against item is exempt and for loss of pay.
Conclusion:
Salary for 3 months: 120000/2*3= $30000 will be taxed as ordinary income, noting is
mentioned in the act for taxation of signing allowance so it will be tax free. The amount of $2800
will be charged as wages under ordinary income. Amount received from Scott of $70000 for sale
of payment rights and sale of software for $30000 will amount to capital gain and taxes under
CGT. Lastly, compensation accepted for damages to reputation and $20000 against lost salary
are exempt.
QUESTION 3
Issue:
Joseph after taking up voluntary retirement, he builds up a boat and completed all legal
requirements to carry on fishing business for this he appointed two assistant one after another, as
first was inefficient due to lack of experience. For year ended June 2017 his sales and expenses
were $30600 and $17000 respectively. For year ended June 2018 they were $44000 and $14000.
in October 2018 boat was sold by Joseph and took up lawn bowls.
Rulings: ITAA,1997
Acquisition of a boat s.109-10
This section stats that when an asset is created or constructed it is assumed to be acquired
on date from date when work started.
Section 47:
This section lays down that income earned from a boat can be deduction when it is used
for non business activities.
Subsection 3: Business use of Boat:
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Using a boat for a purpose that is essential for carrying on and conducting a business
effectively. Income earned from this activity is assessed in assessable income of taxpayer.
Subsection 5: capital gain from boat:
The deduction amount is reduced with amount gained from disposal of such boat.
Small business:
As per provision of ITAA 1997, a small business has relief for capital gain tax on sale of
its capital assets in case total asset do not exceed $6 million or aggregate annual turnover is less
than $2 million.
Fuel tax credit : applicable to fishing business set up before 1st July 2012.
Application
In this case Joseph Conrad build his own boat and started licensed fishing will fall under
category of business (Saad, 2014). He was engaged in this activity in 2015 that is after 1st July
2012. he build the boat engaged himself in fishing business. This income earned from this is
ordinary income and sale of boat gives rise to capital gain taxes. As business was started in July
2016, date of acquisition of boat will be this date.
Conclusion
Joseph is not liable to fuel tax credit. Assessable income for year ended June 2017 will
be [30600- 17000]=$13600 and for year ended June 2018, income is [44000-14000]=$30000.
capital gain/loss will arise in financial year ended 2019, as it was sold in October 2018.
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REFERENCES
Book and Journals
Cobiac, L. J and et.al., 2017. Taxes and subsidies for improving diet and population health in
Australia: a cost-effectiveness modelling study. PLoS medicine. 14(2). p.e1002232.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative
way forward. Austl. Tax F. 30. p.735.
Fraser, D and et.al., 2015. Vapers’ perspectives on electronic cigarette regulation in
Australia. International Journal of Drug Policy. 26(6). pp.589-594.
McGee, R., Devos, K. and Benk, S., 2016. Attitudes towards tax evasion in Turkey and
Australia: A comparative study. Social Sciences. 5(1). p.10.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-
Social and Behavioral Sciences. 109. pp.1069-1075.
Online
Residence. 2018. [Online]. Available through
:<http://comparativetaxation.treasury.gov.au/content/report/html/12_Chapter_10-01.asp>.
Information on residency for tax purposes. 2018. [Online]. Available through
:<https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-
residency/Australia-Residency.pdf>.