Taxation Law Assignment: Assessing Taxable Income and Deductions

This taxation law assignment addresses key concepts in Australian tax law, specifically focusing on assessable income, allowable deductions, and the determination of taxable income. The assignment begins with a series of short-answer questions exploring various tax scenarios related to employee expenses, assessable income, and deductible expenses, referencing relevant sections of the ITAA97. The core of the assignment involves calculating the taxable income of an individual named Manpreet, considering his salary, foreign-sourced income, and various deductions, including computer and printer expenses and new mobile for work purposes. The analysis delves into the residency status of Manpreet, clarifying the implications of his enrollment in a course at an Australian institution and part-time employment. Furthermore, the assignment meticulously examines the deductibility of self-education expenses, referencing relevant tax rulings and case law to determine whether Manpreet can claim a deduction for his educational expenses. The assignment also addresses the tax implications of Manpreet's income and expenses, providing a detailed breakdown of his tax liability, including calculations for tax payable, Medicare levy, and low-income tax offset. The assignment provides a comprehensive overview of Australian taxation law, including assessable income, deductible expenses, and taxable income for an Australian resident.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to I:................................................................................................................................2
Answer to II:..............................................................................................................................2
Answer to III:.............................................................................................................................2
Answer to IV:.............................................................................................................................2
Answer to V:..............................................................................................................................2
Answer to VI:.............................................................................................................................3
Answer VII:................................................................................................................................3
Answer to VIII:..........................................................................................................................3
Answer to IX:.............................................................................................................................3
Answer to X:..............................................................................................................................3
Answer to question 2:.................................................................................................................4
Reference List:.........................................................................................................................13

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Answer to question 1:
Answer to I:
The employer can claim deductions for the expenses incur when travelling for business or
paying for employee travel1.
Answer to II:
If the damages were paid for something pertaining to income according to ordinary concepts,
s6-5 of the ITAA97 will apply. Such payments are considered as tax-free.
Answer to III:
Fully assessable to the employee with no deduction allowable even though an allowance is
received.
Answer to IV:
Non-Assessable
Answer to V:
No. The prize is not ordinary or statutory income and therefore is not assessable income
under either section 6-5 or section 6-10 of the ITAA 1997. Rather, it is a non assessable
windfall gain2.
1 Barkoczy, Stephen, et al. Foundations Student Tax Pack 3 2016. Oxford University Press
Australia & New Zealand, 2016.
2 Berg, Chris, and Sinclair Davidson. "Submission to the House of Representatives Standing
Committee on Tax and Revenue Inquiry into the External Scrutiny of the Australian Taxation

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Answer to VI:
Non-Assessable: A deduction is allowable for self-education expenses if the education is
directly relevant to the taxpayer's current income-earning activities.
Answer VII:
A deduction is allowable for the cost of buying, hiring or replacing clothing, uniforms under
the taxation Ruling IT 2641.
Answer to VIII:
Non-Assessable: A deduction is allowable if the education is likely to lead to an increase in
the factory worker's income from his or her current income-earning activities.
Answer to IX:
Assessable: Trips between home and work are generally considered private travel.
Answer to X:
Deductible: A person can claim deductions in some circumstances, as well as for some travel
between two workplaces.
Answer to question 2:
Computation of Assessable income
Office." (2016).

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Computation of Assessable Income of Manpreet
For the year ended 2016/17
Particulars Amount ($) Amount ($)
Assessable income
Gross Salary 45000
Foreign Sourced Income
Income From Trust 10000
Total Assessable Income 55000
Allowable Deductions
Computer and Printer 2000
New mobile for work purpose 500
Total Allowable Deductions 2500
Total Taxable Income 52500
Tax on taxable Income 8609
Medicare Levy 1050
Low income tax offset 212.5
Total Tax Payable 9446.5
To understand the tax situation an individual is first required to work out if he or she is an
Australian or foreign resident for tax purposes3. An overseas student enrolled in a course that
is more than six months long at an Australian institution will be regarded as an Australian
resident for tax purposes. As evident from the following scenario Manpreet is a an Australian
resident for tax purposes since he is enrolled in a course that is more than six months long at
3 Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2016.

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an Australian institution4. Furthermore, Manpreet also works as as the part time in Australia
with an Australian firm. However, Manpreet incurs several educational expenses which shall
be considered taxable. As evident Manpreet incurs a self-education expenses of $18,000 for
which he cannot claim deductions. An individual may be able to claim a deduction for self-
education expenses if your study is work-related or if you receive a taxable bonded
scholarship. It is noteworthy to denote that the course must have a sufficient connection to
your current employment and:
 maintain or improve the specific skills or knowledge a person require in their current
employment, or
 result in, or is likely to result in, an increase in their income from your current
employment.
A person cannot claim a deduction for self-education expenses for a course that does not
have a sufficient connection to their current employment even though it:
 Might be generally related to it, or
 Enables a person to get new employment.
Manpreet has incurred also incurred expenses such as $2,000 on computer and printer for
the purpose of educational purpose. There he can claim the deductions for the expenses that
are incurred for self-educations.
As a general rule Expenditure is deductible under section 8-1 of the ITAA 1997 where
there is a sufficient connection between the expense and the income earning activities, such
4 Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.

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that its essential character is work related and not private or domestic in nature5. For an
expense to satisfy the tests in section 8-1 of the ITAA 1997, it must have the essential
character of an outgoing incurred in gaining assessable income or, in other words, of an
income-producing expense (Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478;
(1958). It is noteworthy to denote that there must be a nexus between the outgoing and the
assessable income so that the outgoing isincidental and relevant to the gaining of assessable
income (Ronpibon Tin NL v. FC of T (1949).
Citing the reference of Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR
344; (1956) it is necessary to determine the connection between the particular outgoing and
the operations or activities by which the taxpayer most directly gains or produces his or her
assessable income.
It is not sufficient that the expenditure is a prerequisite to the derivation of assessable
income. The expenditure must be relevant and incidental to the actual activities which gain
assessable income. The fact explained in Cooper's case, Hill J said (FCR at 200; ATC at
4414; ATR at 1636) that the expense is incurred at the employer's direction does not convert
the essential character of that expenditure from a private to a work related expense. The fact
that the employee is required, as a term of his employment, to incur a particular expenditure
does not convert expenditure that is not incurred in the course of the income-producing
operations into a deductible outgoing.
Similarly, in Mansfield's case, Hill J said (ATC at 4008; ATR at 375) it can be said
that generally expenditure on ordinary articles of apparel will not be deductible,
notwithstanding that such expenditure is necessary to ensure a suitable appearance in a
5 Feld, Alan. "Federal Taxation of State Tax Credits." (2016).

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particular job or profession6. An employed solicitor may be required to dress in an
appropriate way by his or her employer, but that fact alone would not bring about the result
that the expenditure was deductible.
On the other hand Manpreet was enrolled in an accounting course and also incurred
expenses. An expense is deductible under section 8-1 when it has the essential character of an
income-producing expense. The essential character is to be determined by an objective
analysis of all the surrounding circumstances. There are circumstances where apportionment
under section 8-1 is required. The expenses incurred by Manpreet shall not be considered as
deductible. This is because a deduction is not allowable for self-education expenses if the
subject of self-education is designed to get employment, to obtain new employment or to
open up a new income-earning activity.
The decision of the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR
541 establishes the principle that no deduction is allowable for self-education expenses if the
study is designed to enable a taxpayer to get employment or to obtain new employment7.
Such expenses are incurred at a point too soon to be regarded as incurred in gaining or
producing assessable income.
The Federal Court in FC of T v. M I Roberts 92 ATC 4787; (1992) 24 ATR 479
applied the principle in Maddalena when it overturned an AAT decision allowing a mine
6 Cao, Liangyue, et al. "Understanding the economy-wide efficiency and incidence of major
Australian taxes." Treasury WP 1 (2015).
7 Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

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manager a deduction for expenses associated with a Master of Business Administration
degree. Mr Roberts was retrenched by his employer in Australia and then undertook an MBA
course in the US for two years. On his return to Australia, he was re-employed as a mine
manager by another company at a significantly increased salary when compared with his
previous position.
The AAT had relied on Kropp to allow a deduction for his MBA studies, based on a
finding that there was a sufficient connection between the expenses and the income derived
on the taxpayer's return to Australia. In overturning the AAT decision, Cooper J considered
that moneys were spent to obtain a new employment, albeit one in a better position and on
higher wages, rather than in the course of employment and that Maddalena clearly applied.
In the course of his judgement, Cooper J considered the decision in Kropp where an
accountant resigned from his employment with an Australian accounting firm to take up a
two-year development appointment with an associated firm in Canada8. Mr Kropp later
returned to Australia and recommenced work with his old employer at an increased salary.
Waddell J allowed a deduction for the cost of the taxpayer's air fare to Canada on the basis
that there was a perceived connection between the expenditure and the gaining of increased
income on Mr Kropp's return to Australia. Cooper J considered that 'the principles enunciated
by the High Court in Maddalena were not applicable ...' on the facts of Kropp.
Despite the view expressed by Cooper J, we regard the decision in Kropp as in error.
The decision fails to recognise that, because of the break in employment, the expenses in
8 Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.

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issue were incurred at a point too soon to be regarded as incurred in gaining or producing
income9.
A deduction is not allowable because the study is designed to get Manpreet
employment in a new job and it is not derive income from work experience. It is incurred at a
point too soon to be regarded as incurred in gaining or producing assessable income.
An expense is deductible under section 8-1 when the essential character is that of an
income producing expense. The essential character is to be determined by an objective
analysis of all the surrounding circumstances (see Fletcher & Ors (199 ) 173 CLR 1 at 17; 91
ATC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622)10. If the purpose of a study tour or
attendance at a work-related conference or seminar is the gaining or producing of income, the
existence of an incidental private purpose does not affect the characterisation of the related
expenses as wholly incurred in gaining assessable income.
If the subject of self-education enables you to maintain or improve skills or
knowledge or is likely to lead to an increase in income from your current income-earning
activities, you can deduct an amount for the decline in value of a depreciating asset you use,
or have installed ready for use, for self-education purposes11. For example, you can deduct an
9 Taylor, Grantley, and Grant Richardson. "The determinants of thinly capitalized tax
avoidance structures: Evidence from Australian firms." Journal of International Accounting,
Auditing and Taxation 22.1 (2013): 12-25.
10 Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2016.
11 Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The Accounting
Review 91.1 (2015): 47-68.

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amount for the decline in value of assets such as technical instruments and equipment,
computers, calculators, professional libraries, filing cabinets and desks if the self-education
satisfies the principles outlined in paragraphs 13 and 14. You must reduce your deduction by
the extent to which you use the asset for other than a taxable purpose.
On the other Manpreet has come to Australia for studies and hence his educational
course is for more than six months therefore he shall be considered as taxable resident of
Australia.
According to the taxation rulings of IT 2650 the purpose is to provide guidelines for
determining whether individuals who leave Australia temporarily to live overseas, for
example, on temporary overseas work assignments or on overseas study leave, cease to be
Australian residents for income tax purposes during their overseas stay12.
In determining a person's domicile for the purposes of the definition of "resident" in
subsection 6(1), it is necessary to consider the person's intention as to the country in which he
or she is to make his or her home indefinitely13. Thus, a person with an Australian domicile
but living outside Australia will retain that domicile if he or she intends to return to Australia
on a clearly foreseen and reasonably anticipated contingency e.g., the end of his or her
employment.
12 Woellner, R. H., et al. Australian Taxation Law Select: Legislation and Commentary 2016.
Oxford University Press, 2016.
13 Vann, Richard J. "Hybrid Entities in Australia: Resource Capital Fund III LP Case."
(2016).

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Liability to tax arises annually and the question where a taxpayer resides must be
determined annually according to the facts applicable to the particular year of income under
consideration. However, events which have happened since the end of the tax year may be
taken into account in determining that question.
The extended definition contained in subparagraph (a)(i) of the definition of
"resident" is alternative to the ordinary meaning of the term "resides" (Applegate 79 ATC at
p.4314; 9 ATR at p.907). In other words, even if the person is found not to "reside" in
Australia within the ordinary meaning of the word, he or she may still fall within the
extended definition of "resident"14. Conversely, if the person does "reside" in Australia within
the ordinary meaning of that word, it is not necessary to determine whether the extended
definition is satisfied. As evident from the fact that an individual has established his or her
home (in the sense of a dwelling place; a house or other shelter that is the fixed residence of a
person, family or household) in an overseas country would tend to show that the place of
abode in the overseas country is permanent. Therefore, Manpreet will be considered as the
Australian resident for the purpose of tax and his income will be assessable under the ITAA
199715.
14 ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.
15 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.

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Reference List:
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
Barkoczy, Stephen, et al. Foundations Student Tax Pack 3 2016. Oxford University Press
Australia & New Zealand, 2016.
Barkoczy, Stephen. "Foundations of Taxation Law 2016." OUP Catalogue(2016).
Berg, Chris, and Sinclair Davidson. "Submission to the House of Representatives Standing
Committee on Tax and Revenue Inquiry into the External Scrutiny of the Australian Taxation
Office." (2016).
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.
Cao, Liangyue, et al. "Understanding the economy-wide efficiency and incidence of major
Australian taxes." Treasury WP 1 (2015).
Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The Accounting
Review 91.1 (2015): 47-68.
Feld, Alan. "Federal Taxation of State Tax Credits." (2016).
ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.
Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

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Schenk, Deborah H. Federal Taxation of S Corporations. Law Journal Press, 2016.
Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and
practice. Routledge, 2016.
Taylor, Grantley, and Grant Richardson. "The determinants of thinly capitalized tax
avoidance structures: Evidence from Australian firms." Journal of International Accounting,
Auditing and Taxation 22.1 (2013): 12-25.
Vann, Richard J. "Hybrid Entities in Australia: Resource Capital Fund III LP Case." (2016).
Woellner, R. H., et al. Australian Taxation Law Select: Legislation and Commentary 2016.
Oxford University Press, 2016.

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Reference List: