Taxation Law Report: Assessing Income, Deductions, and Tax Liabilities

This report analyzes a taxation law assignment, addressing income assessment, deductions, and capital gains tax. It examines a scenario involving an individual's assessable income, allowable deductions (including interest expenses on investment property, capital works, and repairs), and capital gains from share sales, as well as losses. The report also includes a letter of advice concerning compensation payments and legal expenditure, addressing the taxation of compensation for lost earnings, discriminatory pay, and the deductibility of legal expenses incurred in pursuing claims against an employer. The analysis references relevant sections of the ITAA 1936 and ITAA 1997, along with case law such as Western Suburbs Cinemas v Federal Commissioner of Taxation and Hallstorm Pty Ltd v Federal Commissioner of Taxation, providing a comprehensive overview of taxation principles and their application in the given scenarios. The report concludes with a list of references.

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

1TAXATION LAW
Table of Contents
Answer to question A:................................................................................................................2
Answer to question B:................................................................................................................4
Reference List:...........................................................................................................................8

2TAXATION LAW
Answer to question A:
“Section 6 of the ITAA 1936” provides that income derived from the personal sources
includes income from personal exertion. This comprises of the salaries, fees, bonus,
allowances or proceeds from business carried on by the taxpayer (Barkoczy 2014). Evident in
the situation of Emily the gross pay would be included in the assessable income for the
purpose of assessment. A person is allowed to claim deductions relating to the borrowing
expenditure that is occurred in purchasing the investment property. This comprises of the
interest expenses on borrowing where a person can claim deductions for the same under
“section 8-1 of the ITAA 1997”.
The loan interest incurred by Emily to purchase the investment property is held as the
allowable deductions under “section 8-1 of the ITAA 1997” (Brokelind 2014). However,
Emily shall only be allowed to claim deductions relating to the $400,000 only as the same
was used in purchasing the investment property. While the remaining sum of $200,000 and
the interest incurred for the same will not be allowed for deductions. This because the
expenditure constitutes private expenses under “section 8-1 (2) (b) of the ITAA 1997” since
the expense forms the part of the negative limbs (Coleman and Sadiq 2013).
According to the Australian taxation office an individual is allowed to claim
deductions relating to the capital works. Evidently in the situation of Emily the purchase of
new Air conditions relating to the rental property qualifies as the capital works and the same
is allowable for deductions. According to “section 25-10 of the ITAA 1997”, a person is
allowed to claim for deductions relating to the repairs of the premises (Eliot 2016). Yet, a
person is not allowed for deductions relating to the repairs which comprises of significant
capital improvement or cost incurred for replacing a significant part of the property. These
expenditures are held as capital in nature and are non-allowable deductions.

3TAXATION LAW
The court of law in the case of “Western Suburbs Cinemas v Federal Commissioner
of Taxation” denied the taxpayer with the deductions for the expenses that acquire the nature
of significant capital nature (Grange et al. 2014). In the situation of Emily, she is not allowed
to claim expenses for the cost that is occurred for replacing the roof of the rental property
under “section 25-10 of the ITAA 1997”. Furthermore, a capital gain was reported for the sale
of the BHP shares. Gains derived from the sale of BHP shares will be subjected to capital
gains tax. Nevertheless, Emily reported a capital loss originating from the loss of Orica shares
and these losses can be set off against the capital gains.
Collectables constitutes those objects that are usually kept for the personal use and
enjoyment. According to the Australian taxation office the taxpayers are under obligations of
disregarding the capital gains or losses originating from the collectibles given the collectibles
are obtained for $500 or less (James 2014). Evidently in the situation of Emily, the capital
gains from the sale of collectable should be disregarded because the worth of collectable was
less than $500.
The total sum of assessable income for Emily stands $420,920 and the Medicare levy
for Emily stands $8418.4. The total amount of tax liability for her stands $144,330.

4TAXATION LAW
Particulars Amount ($) Amount ($)
Assessable Income
Receipts of Compensation Payment 350000
Gross Salary 99920
Australian Sourced Rental Income 15000
Net Capital gains on disposal
BHP Shares
Proceeds 10000
Cost Base 6000
Gross Capital Gains (Proceeds less costs) 4000
Less: Loss from ACACIA shares 3000
Net Capital gains on BHP Shares 1000
Capital gains on Orica Shares 5000
Less: Capital loss 4000 1000
Total gross capital gains 2000
50% CGT Discount 1000
Total assessable income 465920
Allowable Deductions
Interest on Loan (400,000*4%) 16000
Installation of Air-Conditions 4000
Legal Fees 25000
Total Allowable Deductions 45000
Total Taxable Income 420920
Tax on Taxable Income 162646
Add: Medicare Levy 8418.4
Less: PayG 26734
Total Tax Payable 144330.4
In the Books of Emily Baff
Statement of Tax Liability
For the Year ended 30 June 2018
Answer to question B:
Letter of Recommendations
To Emily Buff
From Tax Accountant
Dear Emily,

5TAXATION LAW
We would like to draw your kind attention towards our letter of advice relating to the
subjects of receipts of compensation payment and the cost that was incurred by on legal
expenditure. We would like to provide you guidelines regarding the “Taxation ruling of IT
2424” where a general description of ascertainment of the nature of compensation payment
which a taxpayer receives and particularly whether the receipts from compensation is liable
for taxation in the receiver’s hands is largely dependent on the characteristics of the payment
(Kenny 2013).
Compensation payment that an employer provides to its employees relating to the lost
earnings is regarded as having the nature of income and such compensation payment is
regarded as taxable income for the employee who receives it (Krever 2013). There are
numerous ways where it is noticed that the employer discriminates its employees based on
the grounds of gender. General examples of the disparities comprise of the salaries, bonus or
allowance which is paid to the male or female employees performing the identical duties.
Compensation paid by employer to employee associated to salaries, wages,
allowances etc may have been received however these receipts has the nature of income and
usually regarded as the taxable earnings for the person that receives such income (Morgan,
Mortimer and Pinto 2013). According to “section 6-5 of the ITAA 1997” defines that
compensatory payment is held as having the nature of income and will be held for assessment
purpose.
We would further like to educate you regarding the compensation receipts that the
compensation payment by the employer based on discriminatory respect is held taxation
purpose during the year in which such income is received by you. The compensatory receipts
paid by the employer to you is regarded as assessable income under the “section 6-5 of the
ITAA 1997” as the income based on ordinary meaning.

6TAXATION LAW
As per “section 8-1 of the ITAA 1997” a person is allowed to claim for deductions for
those expenses that are incurred while producing the taxable income or whether the expenses
is necessarily occurred in deriving the assessable income of the taxpayer (Sadiq et al. 2014).
In respect of the legal expenditure that is occurred by you for bringing an action against your
employer will be allowed for deductions under “section 8-1 of the ITAA 1997”. This is
because the expenses occurred is relating to derivation of the assessable income. “Section 8-1
of the ITAA 1997” only allows you to claim for deductions for expenditure that are occurred
at the time of executing the business activities and generating the taxable income.
An important consideration of claiming deductions is that the expenses should satisfy
the nexus test and the expenditure should not be in the nature of capital. The expenses should
be meeting the criteria set under the positive limbs of the “section 8-1of the ITAA 1997”. An
individual is not allowed to claim deductions for expenses that are having capital nature
(Morgan, Mortimer and Pinto 2013). For an expense to qualify as capital expenses there are
three test and this includes the enduring benefit test, once and for all test and the business
entity test.
As understood from your situation the legal expenditure that is incurred by you is
associated to prosecuting your employer on the grounds of discriminatory pay. Referring to
the “Hallstorm Pty Ltd v Federal Commissioner of Taxation (1946)” the court explained that
it is obligatory to ascertain the nature of the legal expenditure for the purpose of deductions.
Similarly in “Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation
(1980)” legal expenditure is held deductible given the legal actions possess more than
peripheral association of the taxpayers income producing activities (Grange et al. 2014). The
taxation commissioner in “Federal Commissioner of Taxation v Rowe (1995)” permitted an
individual to claim deductions as it was related to his employment activities. Likewise, the
legal expense of $25,000 that is reported by you will be allowed for deductions since it is

7TAXATION LAW
associated to your income producing activities and the same will be held deductible under
“section 8-1 of the ITAA 1997”.
On a conclusive note we anticipate that the recommendations provided has helped in
serving your purpose. We look forward to serve you again in future.
Thank You

8TAXATION LAW
Reference List:
Barkoczy, S. 2014. Foundations of taxation law.
Brokelind, C. 2014. Principles of law: function, status and impact in EU tax law. Amsterdam:
IBFD.
Coleman, C. and Sadiq, K. 2013. Principles of taxation law.
Eliot, G. 2016. The mill on the Floss. New York: Open Road Integrated Media.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. principles of business taxation.
James, M. 2014. Taxation of small businesses.
Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation
law. North Ryde [N.S.W.]: CCH Australia.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A.
2014. Principles of taxation law.