Taxation Law Case Study: Calculating Eric's Assessable Income and Tax

This case study analyzes Eric's tax situation for the year ended June 30, 2019, focusing on the taxability of his various income sources and the deductibility of his expenses. It examines income from employment, including gross wages, shift allowances, and fringe benefits; income from his business, including sales, trading stock, and compensation; and income from rental properties, detailing allowable deductions. The study also determines Eric's eligibility for the dependent tax offset. The report applies relevant tax laws and case precedents to calculate Eric's taxable income, including adjustments for trading stock, depreciation, and borrowing expenses. It also addresses the tax treatment of specific items such as reimbursements, fringe benefits, and repairs to rental properties. The analysis provides a comprehensive overview of Eric's financial situation and the application of tax regulations.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION LAW
Table of Contents
Introduction:...............................................................................................................................2
Assessable Income and Expenditure Information:.....................................................................2
Income from Employment:........................................................................................................2
Income from Business:...............................................................................................................3
Income from Rental Property:....................................................................................................6
Dependent Tax offset:................................................................................................................8
Conclusion:................................................................................................................................9
References:...............................................................................................................................10

2TAXATION LAW
Introduction:
The current report is associated with the taxability of the numerous types of receipts
and deductibility of the expenditure that has taken place in the year ended 30th June 2019 for
Eric. The report will be prepared on the basis of tax laws to determine whether Eric is
considered eligible for getting the dependent tax offset or not. The report will be computing
the taxable income of Eric and the eligible expenses for deduction.
Assessable Income and Expenditure Information:
Prior to determining the taxable income of Eric, it is very important to know the
concept of ordinary income. As explained in “sec 6-5 ITA Act 97” the taxable income of a
taxpayer involves income from all the sources (Nightingale, 2014). The assessable income of
an individual taxpayer is computed by summing up the total receipts and deducting the
allowable deductions. Interest are termed as ordinary earnings and included in the taxpayer’s
assessable income for assessment purpose. The interest that is earned by Eric from ANZ
Bank is an ordinary taxable income under “sec 6-5 ITA Act 97”.
A specific deduction under “sec 25-5 ITAA 1997” is only made allowable when a
taxpayer has occurred expenses for preparing a tax return with a registered tax agent. Eric
paid $400 to a registered tax agent for preparing the 2018 tax return (Sadiq, 2019). Hence,
Eric can obtain a specific deduction under “sec 25-5 ITAA 1997” for the expense occurred
on tax agent for preparing tax return.
Income from Employment:
Income that is earned from personal exertion involves salaries and wages are taxable
ordinary earnings under “sec 6-5 ITA Act 97”. In “Brent v FCT (1971)” rewards for
personal exertion are viewed taxable in the recipient’s hand. The gross wages of $7,800
received from employment is personal exertion income (Van Brederode, 2019). With

3TAXATION LAW
reference to the case of “Brent v FCT (1971)” the salary is an ordinary taxable income under
“sec 6-5 ITA Act 97”.
Income From Employment
Particulars Amount ($) Amount ($)
Income From Employment
Gross Wages 7800
Less: PayG withholding 200
Less: Work related deductions 300 7300
Add: Shift allowances 2000
Add: Reimbursement of software fees 800
Net income from employment 10100
The shift allowance received by Eric will be included for assessment under “sec 15-2
(1) ITAA 1997”. While referring to “Roads and Traffic Authority of NSW v FCT (1993)”
the reimbursement received is non-taxable since it is payment received for the expenditure
made. While “sec 7 (1) FBTAA 1986” says that car fringe benefit happens when car is
available for employee’s private usage. The car that is received by Eric is a fringe benefit
under “sec 7 (1) FBTAA 1986” (Woellner et al., 2016). The fringe benefit will not be
included in his taxable income while the employer Blue Marlin being the employer of Eric
will be considered taxable for providing Eric with the car based on the value of it.
Fringe Benefit
Particulars Amount ($)
Value of car 60000
FBT Gross up rate 1.8868
Taxable value of car FBT 113208
Income from Business:
Gains when a taxpayer earns from the business are termed as taxable proceeds of that
business activity. The commissioner of taxation in “GP International Pipecoaters Pty Ltd v
FCT (1990)” gave his verdict given by saying that revenue earned from business are taxable

4TAXATION LAW
ordinary business income “sec 6-5 ITAA 1997”. The accounts receivable that is received by
Eric is a revenue earned from business and it is taxable ordinary business income “sec 6-5
ITAA 1997”.
As per the “sec 70-35 ITAA 1997” deduction is permitted for the value of trading
stock. This is done by comparing the trading stock at the beginning of the year with the
trading stock at the end of the year (Burman et al., 2016). The differences are included as
income for assessment purpose or allowed as deduction. Eric reported the following
Value of opening stock = $7,100
Value of closing stock = $8400
Income taxable in the hands of Eric = $8400 - $7100 = $1300
Consequently under “sec 75 (3) ITAA 1997” the value of closing stock is more and it
will be taxable as business income.
Important Assumptions:
It is assumed that the business follows the accrual basis of accounting and the trading
stock of $5,000 which is owed but yet to receive is included in the determination of closing
stock as the business income is computed on the basis of accrual method.
Adjustment for Stock Withdrawn for personal purpose:
If a taxpayer withdraws a trading stock that is brought for trading purpose for making
a personal use of it, the amount of stock withdraw will be considered as sold and the value of
such drawings will be included as sale of stock. Eric has withdrawn stock for personal and
family use purpose that amounted $2,500. The value of stock is deemed as sold stock.

5TAXATION LAW
Workings Computation of Sales
Income From Business
Particulars Amount ($)
Cash Receipt 85000
Add: Closing Value of Accounts Receivables 19800
Less: Opening balance of Accounts Receivables 17600
Net Sales 87200
Add: Drawings 2500
Volume rebates from overseas suppliers 3500
Other income
Compensation for loss of Income 7900
Total Business Income 101100
Assumptions:
The compensation that is received by Eric has been included for assessment. This is
because under the “sec 25 and 26J of the ITAA 1936” compensation received from
insurance under the loss of income policy is included for assessment (Mankiw et al., 2019).
The famous example of FCT v DP Smith (1981)” compensation receipts from insurance
policy is taxable ordinary business income. The compensation amount of $7900 is included
for assessment in the taxable business receipts.
Computation of Purchase:
The purchase of trading is an allowable deduction under the “sec 70-15 ITAA 1997”.
The payments made for the accounts payable is a permissible deduction for Eric under “sec
70-15 ITAA 1997”.
Determination of Closing Stock Inventory
Particulars Amount ($)
Closing Stock of Accounts Payable 5830
Add: Cash Payments 43000
Less: Opening stock 5280
At Market Selling Price 43550

6TAXATION LAW
Deduction of Depreciation of assets
Deduction for decline in the value of depreciation asset is permissible for deduction.
As noted in the “sec 40-25 (2) ITAA 1997” the deduction is permitted to the taxpayer when
the asset is held for dual purpose. In other words a deduction is permitted when the asset is
used for both producing income and for private purpose (Braithwaite & Reinhart, 2019).
Similarly the mobile phone that is used by Eric for business purpose and private purpose then
only deduction is permitted for business purpose. Hence, Eric is permitted to get deduction up
to 60% of the business use under “sec 40-25 (2) ITAA 1997”.
Assets
Co
sts
Purchas
e date
Effecti
ve life
Adjustabl
e value
Busine
ss use
Div
Method
Days
Held
Decline
in Value
Mobile
Phone
30
00
01-06-
2017 4 2188 60%
Diminishi
ng value 365 656.4
Office
Furniture
15
00
0
01-06-
2017 10 13375 100%
Prime
Cost 365 1337.5
Laptop
Computer
40
00
01-08-
2018 3 100%
Prime
Cost 333 1216.4
Printer
15
0
01-03-
2019 2 100%
Prime
Cost 121 24.9
Income from Rental Property:
Income from Rental property
Particulars Amount ($)
Rent Received 23750
Compensation from rental bond board 1300
Rent in advance 3000
Insurance recovery for storm damage 2100
Total Rental Income 30150
Allowable Rental Deductions
Decline in value (Note 1)Rental property
Carpets 1000.0
Hot water system 100.0

7TAXATION LAW
Ceiling fans 320.0
Barbecue (fixed) 140.0
Window blinds internal 800.0
Window curtains 1000.0
Mortgage repayments to Westpac Bank - Interest 23800
Loan application fee 82.5
Council and water rates 3400
Building insurance premium 850
Payments to solicitors
Lease preparation fees 150
Ejecting tenants 375
Garden hose and attachments 165
Travel cost 830
Pest control 280
Payment to registered tax agent 170
Total Rental Deductions 33462.5
Net Rental Loss -3312.5
Deduction for the capital works:
For any kind of capital works that is conducted on the property following the 1st July
1992 a deduction for capital is permitted to the taxpayer at a rate of 2.5% per annum. As Eric
has begun capital works on 1st May a deduction for 2 months will be permitted to Eric.
Deduction for repairs:
Repairs generally fall under the provision of specific deduction. As stated under the
“sec 25-10 ITAA 1997” a deduction for repair is permitted to the premises or the
depreciating asset if the asset is held by the taxpayer completely for the taxation purpose and
generating earnings. But the taxpayers should denote that they are not given the permission of
claiming deduction for the expenditure that are capital in nature. The legislative provision of
“sec 25-10 (3) ITAA 1997” provides an explanation that a deduction is not allowed to the
taxpayer that relates to the initial repair soon after acquisition of the asset (Robin &
Barkoczy, 2020). As evident in the famous example of “Law Shipping Co Ltd v Inland

8TAXATION LAW
Revenue Commissioners (1923)” the verdict given by the commissioner of taxation held that
initial repairs to the ship following its acquisition is not permitted as tax deduction under
“sec 25-10 (3) ITAA 1997”.
The case facts that is obtained in the situation of Eric suggest that he has carried out
the painting of the exterior wall of the premises soon after its acquisition on 1st July. As a
result, the repairs carried out on the wall is an initial repair. The example of “Law Shipping
Co Ltd v Inland Revenue Commissioners (1923)” can be cited to deny Eric with an
allowable tax deduction under “sec 25-10 (3) ITAA 1997”.
Deduction for borrowing expenditure:
The Australian taxation office has stated that when a borrowing expenditure is more
than $100 then such expenditure is simply spread over certain number of years or up to the
period of loan. Accordingly under the legislative provision of “sec 25-25 ITAA 1997” a
deduction for borrowing expenses is usually allowed for a period of three years from the date
of borrowing (Woellner et al., 2016). Eric in the current situation reports a borrowing fees of
$825 on the mortgage for purchasing the investment property. Accordingly, under the
legislative provision of “sec 25-25 ITAA 1997” Eric is permitted to claim the deduction for
the borrowing expenses amounting for a period of term of loans.
Dependent Tax offset:
The Australian Taxation Office in recent times has made addition to the Income Tax
Act regarding the tax offset for invalid and invalid carer tax offset. The deduction was
introducing during the year 2012. The primary objective of the invalid and invalid carer tax
offset is to help the carers that are maintaining their spouse, child or those that are related
their spouse from disability. According to the “sec 65-1 of the ITAA 1997” an individual
taxpayer is given the permission of making a claim associated to the dependent tax offset if

9TAXATION LAW
their spouse or child is invalid (Mankiw et al., 2019). An individual is considered eligible for
tax offset only when they meet the following criteria;
a. If the taxpayer has maintained a spouse or has a child and takes care of them
b. It also includes those that are the parents of spouse living in Australia and are invalid
c. The spouse’s child is above the age of 16 years and invalid
It is noteworthy to denote that the invalid person gets social security assistance under the
Disability or special needs disability assistance under Social Securities Act, 1991.
Furthermore, the taxable income of the dependent should be less than $11,346 and the taxable
income of the carer must be below $100,000.
As evident from the computation that the taxable income of Eric is below the limit of
$100,000 and her spouse receives a disability support payment from the centre link.
Therefore, Eric will be allowed to claim an income tax offset relating to the invalid and
invalid carer because his spouse Linda has lost her vision in an accident and Eric wholly
takes care his spouse.
Conclusion:
A conclusive evidence can be drawn from the above given case that all the relevant
legislation relating to income and deduction has been considered in arriving at the taxable
income of Eric. The case study states that Eric is eligible for an invalid carer tax offset as
well.

10TAXATION LAW
References:
Braithwaite, V., & Reinhart, M. (2019). The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research
School of Social Sciences, The Australian National University.
Burman, L. E., Gale, W. G., Gault, S., Kim, B., Nunns, J., & Rosenthal, S. (2016). Financial
transaction taxes in theory and practice. National Tax Journal, 69(1), 171-216.
Mankiw, N. G., Weinzierl, M., & Yagan, D. (2019). Optimal taxation in theory and
practice. Journal of Economic Perspectives, 23(4), 147-74.
Nightingale, K., (2014). Taxation: Theory and practice. Pearson education.
Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). (2020). Australian
Taxation Law 2020. Oxford University Press.
Sadiq, K. (2019). Australian Taxation Law Cases 2019. Thomson Reuters.
Van Brederode, R. F. (2019). Systems of general sales taxation: theory, policy and
practice (Vol. 33). Kluwer Law International BV.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation
Law 2016. OUP Catalogue.