University Taxation Law Case Study Assignment Analysis

This assignment delves into a taxation law case study, examining the tax residency status of an individual, Arun Sharma, and determining his tax obligations for the financial year 2018-2019. The analysis applies relevant rules of law, including the Resides test under Common law and factors outlined in Taxation Ruling 98/17, to establish Arun's Australian residency. The assignment then calculates Arun's assessable income, considering salary, car allowance, gifts, and business income, while differentiating between ordinary income and windfall gains. It also addresses deductible expenses, referencing sections of the Income Tax Assessment Act 1997 (ITAA 97) to determine allowable deductions. Part 2 of the assignment focuses on expenditure deductibility, analyzing a court case concerning the deduction of expenses for strengthening a business. The assignment discusses tests like the 'enduring benefit', 'business entity' and 'once and for all' to differentiate between capital and revenue expenditures. The document concludes with a detailed tax calculation, including taxable income, net tax payable, and tax offsets.

Running head: TAXATION LAW
CASE STUDY ASSIGNMENT
Name of the Student
Name of the University
Author Note

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Part 1:
Issue:
The issue that has to be determined in the instant case study is analysis of the tax
residency status of Arun Sharma and to determine he shall be regarded as a resident for the
taxation purpose in the financial year of 2018-2019 as the first issue.
Relevant Rules of Law:
Generally, four types of test are used to determine the residential status of any person.
The Resides test under Common law is an adequate method used primarily to determine
whether one is the resident of Australia for tax calculation purposes. Such person has to come
to Australia and must be belonging to a foreign country. An individual residing in Australia is
regarded as an Australian resident under the ordinary meaning of the word reside. Under
Taxation Ruling 98/17, taxation for a person having residence in Australia is dependant on
many factors that are contained in the said ruling (Barkoczy, 2016). These factors consist of
presence of the individual in Australia physically, existing economic, social as well as family
ties, frequency of the visits made, regularity of such visits, the reason and intention of staying
in Australia, ties of employment, permanent being in Australia and others (Henry, Plesko, &
Utke, 2018)
Application:
As per the facts of the given case, Arun Sharma is a student belonging to India
originally. He passed his graduation from University of Sydney in Accounting on 2017
ending. He married on 20th December of 2008 with another Indian lady who also did her
graduation in accounting from University of NSW. He works as a financial controller with
Bell Computers Pty Ltd having operations in fifteen different locations in and around Sydney.
All these facts contribute to the fulfilment of the factors given in TR 98/17. The reasons are

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Arun is being living as well as working in Australia. He is having his wife here which
indicates that he has family plus social ties in Australia. He works for Bell Computers Pty
Limited with operations in fifteen different locations in and around Sydney which shows he
has employment tie here. Thus he proves to be an Australian resident for purpose of taxation
and is liable to pay income tax to ATO for earning income world wide (Barkoczy, 2016).
Conclusion:
Arun being an Australian resident for purpose of taxation is liable to pay income tax
to ATO for earning income world wide.
Net Payable Tax by Arun:
Arun receives gross salary for his employment in Bell Computers Pty Limited. This
can be construed as a type of income earned as ordinary source of income being employee.
As per section 6.5 of Income Tax Assessment Act 1997 (ITAA 97), income incurred from
ordinary source is to be regarded as ordinary income. Hence gross salary 85000 dollars is an
assessable income.
Arun also got 2910 dollars for making use of his cars for work purpose. It amounts to
the car benefit incurred by him. It forms an assessable income as per section 15.2 since it is
an allowance which cannot be regarded as a fringe benefit. Thus this amount of 2190 dollars
will not be considered under FBTAA 1986 (Braverman, Marsden & Sadiq, 2015).
Being the best employee of the year, he received a Sony TV of value 6000 dollars
from his employer. This cannot be regarded as an assessable income as it is a gift and has no
connection with the income making act as per Scott v. Federal Commissioner of Taxation
[1966] HCA 48 (1966) 117 CLR 514. If anything is received by the employee not related to
employment or any service given, it is regarded as the Wind fall gain and not as an ordinary
income.

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The managing director of Bell computers attended his 10th marriage anniversary party
on 20th December of 2018 and gifted him 2000 Dollars cash along with a gift box. This is also
regarded as the Wind fall gain as it has no connection to his employment and not an ordinary
income as per the case of Scott v. Federal Commissioner of Taxation. Moreover the token
honorarium he received for the year by the Indian Business Council will be again considered
as the Wind fall gain as it has no connection to his employment and not an ordinary income
as per the case of Scott v. Federal Commissioner of Taxation. This is also not assessable like
the wedding anniversary gift.
The expense of 12750 dollars cannot be regarded as deductible as per sections 8.1(1)
and 8.1(2) as the travelling cost are regarded as private expense and hence not deductible.
The investment made by him for 850000 dollars for buying a property is a Cost Base
Element 1 as per section 110.25(2) because such property as per section 108.1 is a Capital
Asset. Stamp duty of 33740, loan application fees of 2500 and cost for solicitor of 3000 are
all to be regarded as Element 2 as per section 110.25(3) and all these are not deductible
expenses.
All other expenses are deductible expenses as producing income as per sections 8.1(1)
and 8.1(2) which state that expenses gained for producing the assessable income are
deductible expenses when they are not capital in nature and for private use.
2500 dollars paid for getting advice by Arun is deductible as per section 40.88 which
allows the deduction of expenses caused for gaining assessable income by way of creation of
a business. 12000$ received from ABC Petrol is Income from business. It forms an income
earned from an ordinary source of income like employer. Hence it is an ordinary income as
per section 6.5 of ITAA 1997. It is however half assessable as it is of a partnership business.

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Again, 12000$ from Sweets restaurant forms an income from business. . It forms an
income earned from an ordinary source of income like employer. Hence it is an ordinary
income as per section 6.5 of ITAA 1997. It is however half assessable. 15000$ is an income
from business. . It forms an income earned from an ordinary source of income like employer.
Hence it is an ordinary income as per section 6.5 of ITAA 1997. But the income is yet to be
received according t o cash method accounting and it is to included next year.
All other are deductible except the entertainment as it was not incurred to create any
assessable income. 500$ as donation also forms a deductible expense being a statutory
deduction as per ITAA 1997. Expenditure of 1500$ and 1000$ are deductible as per sec. 25.5
hence they form deductible expenditure. The reason behind this is that they are borne to
manage tax matters. Estimation given is not deductible as per s. 8. Reimbursement of 350$
will be assessed as it is already subjected to deduction.
Tax calculation :
Particulars Amounts References
Salary received 85000 S.6-5 of ITAA 1997
Allowance given
for Car
2910 s.15-2 of ITAA 1997
Television (not
considered)
Gift for wedding
anniversary (not considered)
Honorarium for business council (not
considered)
Income out of rent 9750 s6-5 of Income Tax

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Assessment Act 1997
Business income
(not considered)
ABC Petrol
Station
6000 s6-5 of Income Tax
Assessment Act 1997
Sweet Indian
Restaurant
6500 s6-5 of Income Tax
Assessment Act 1997
Others (not
considered)
-
Reimbursement of
Accounting Fees
350
Total assessable income
calculated
110510
Deductions made
Allowance for Car 4850 3201
Indian Business council 12750
Deduction for property
Borrowing Expense 2500 125
Agent 975 488
council 450 225
Interest 12000
other expenses 1750 875
Travel expenses 200
Business Deductions
Advertising Cost 450 225

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Stationary Cost 1240 620 s40-88 of Income Tax
Assessment Act 1997
Entertainment
Cost
250
Accounting expense for
2018
1500 750 s25-10 of Income Tax
Assessment Act 1997
Accounting expense for
2019
Expenses of Formation 2500 1250
Private deduction
Donation made 500
Tax management for 2018 1000 s25-10 of Income Tax
Assessment Act 1997
Tax management for 2019
Total Deduction
made
9259
Taxable Income 101252
Net Tax Payable 24960.24 20797+((101252-
90000)*37%)
Medicare Levy
2%
2025.04
Medicare Levy Surcharge -
Levy of Tax and Medicare 26985.28

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Tax offset made
LMITO 361.23
Taxation after
offset
26624.05
Minus PayG 30000
Net tax
refundable
3375.95
Part 2:
Answer a:
In the present case, the appellant made a claim for deduction related to assessable
income for the payment of money for an agreement made between Messrs. E. G. Theodore
and D. F. H. Packer and Sydney Newspapers Ltd and the appellant. The issue is concerned
with the deduction of expenditure for a particular period of accounting. Both the companies
have claimed their respective deductions. Sun Newspapers attempted to prohibit a competitor
to introduce a better newspaper of competition in Sydney. This was affected by making an
agreement of 865000 dollars. The Court in this case, made a rule that the expenditure is not
deductible because the newspaper company attempted to strengthen its business by buying
the rights of its competitors. The main rule of claiming deductions is that any expenditure
caused for producing assessable income forms a deductible expense provided it is not capital
in nature or for private use. Thus, any expenses incurred for business activities but also
capital in nature cannot be deducted. First negative part of sec. 8.1 prevents a deduction for
loss or outgoing if ‘it is a loss or outgoing of capital or of a capital nature’. Losses or
outgoings in relation to ‘Capital’ must be differentiated from losses or outgoings related to

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‘revenue’. Only the latter can be deducted as per sec. 8.1. The courts have several years to
effectively differentiate between the ‘capital’ and ‘revenue’ outgoings or losses. They have
also formed several judicial tests to apply in these situations. The 3 leading tests are the
‘enduring benefit’ test, the ‘business entity’ test and the ‘once and for all’ test which have
been discussed below.
Answer b of part 2:
The principles that have been discussed in the answer (a) are repeatedly used by the
courts for deciding various cases in Australia for the determination of expenditure
deductibility. The statements made by Justice Dixon in the case of Sun Newspapers have
been accepted and followed widely in various cases in Australia. The ‘business entity’ test is
the most popular test used to distinguish between revenue and capital expenditures. The ‘once
and for all’ test had its origin in the decision made in the case of Vallambrosa Rubber Co Ltd
v Farmer (1910) 5 TC 529 in UK which is related to a tax payer who owned and operated a
rubber company at Malaya. The TP claimed for deductions for the general expenditure in
relation to the estate of the Rubber company. The expenditure comprised of expenses for
weed, controlling of pest and estate superintendence. But, only 1/7th of the trees of the estate
were growing rubber during that time, thus Inland Revenue Commissioners allowed
deductions for only 1/7th of the general expenditure. As per the arguments made by the
Commissioners, the 6/7th part of the expenditure incurred was capital in nature. In the instant
case, it was held by the courts that the expenditure, incurred purchasing the competitors’
rights to strengthen its own business, cannot be allowed as deductibles. The main rule of
claiming deductions is that any expenditure caused for producing assessable income forms a
deductible expense provided it is not capital in nature or for private use as observed in the
decision made in Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542. Thus, any
expenses incurred for business activities but also capital in nature cannot be deducted as those

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are not related to daily operations of the business. This criterion is tested under the business
entity test. For applying it, the courts have adopted a very wide view for calculating the
capital expenditure and have aimed to protect the business entity of the TP even if it does not
result in favour of the TP for acquisition of new asset or modifying a current asset. This type
of observation was made in the leading cases of PBL Marketing Pty Ltd v FC of T 85 ATC
4416 and Tooheys Ltd. v. C. of T. (N.S.W.) (1922) 22 S.R. (N.S.W.) 432.

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References:
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Braverman, D., Marsden, S., & Sadiq, K. (2015). Assessing Taxpayer Response to
Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl.
Tax'n, 17, 1.
Fringe Benefits Tax Assessment Act 1986
Henry, E., Plesko, G. A., & Utke, S. (2018). Tax Policy and Organizational Form: Assessing
the Effects of the Tax Cuts and Jobs Act.
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542
PBL Marketing Pty Ltd v FC of T 85 ATC 4416
Scott v. Federal Commissioner of Taxation [1966] HCA 48 (1966) 117 CLR 514
Taxation Ruling 98/17
The Income Tax Assessment Act 1997
Tooheys Ltd. v. C. of T. (N.S.W.) (1922) 22 S.R. (N.S.W.) 432.
Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529