LAWS20060: Taxation Law of Australia - Individual Assignment Analysis

This document presents a comprehensive solution to a taxation law assignment, addressing various aspects of Australian taxation. It begins with an analysis of taxation rulings and key provisions within the Income Tax Assessment Act 1997 (ITAA 1997), covering topics such as depreciation, tax offsets, top tax rates, capital gains tax (CGT) exemptions, and CGT events. The solution then delves into deductible expenses, examining scenarios involving interest, phone charges, babysitting costs, business losses, and political contributions. Furthermore, the assignment explores CGT events related to granting leases and disposing of assets, including farms and residential properties, and analyzes the application of CGT discounts. The final section addresses assessable income, differentiating between ordinary and statutory income, and examines the tax implications of various income sources, such as awards, reimbursements, gifts, and compensation payments. The solution also considers a case involving share transactions and presents a detailed analysis of an international student's tax situation.

Running Head: Foundation of Taxation 1
Foundation of Taxation
Name
Institute
Date

Foundation of Taxation 2
Question 1
a. Taxation ruling TR2018/4
The ruling became effective on 1st July 2018. It highlights the procedure used by the ATO to
determine the effective life of a depreciating asset under section 40-100 of the Income Tax
Assessment Act 19971. It is a ruling used by entities to estimate the period an asset can be used
for taxation purposes.
b. Division of ITAA 1997 that details available tax offsets
Tax offsets are contained in division 13 of ITAA 1997. Section 13.1 issues a list of allowable
offsets for the purposes of taxation2. The checklist referred to provisions in both ITAA 1997 and
ITAA 1936.
c. The top tax rate applicable to a residence in 2018/19 tax year
The highest rate for an Australian resident taxpayer is $54,097 plus 45c for each $1 over
$180,0003 which does not include Medicare Levi but includes all the changes announced in the
2018/19 budget.
d. An asset that is exempt from capital gain tax (CGT)
Assets acquired before capital gain tax started on 20 September 1985 are referred to as pre-CGT
assets, and they are exempt from CGT. They include pre-CGT share from a private company.
1 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=TXR%2FTR20184%2FNAT%2FATO%2F00001
2 Income Tax Assessment Act 1997
3 Individual income tax rates. (2019). Retrieved from https://www.ato.gov.au/Rates/Individual-
income-tax-rates/

Foundation of Taxation 3
This is in line with the ruling TR 2004/18 and provision for pre-CGT shares in section 140-230
of ITAA 19974.
e. CGT event B1 s104-15 tax?
Under the ITAA 1997, section 104.15 where the CGT event B1 is applicable when an individual
enters into an agreement with another entity to transfer ownership of an asset5. The title of the
asset may be transferred before or after the agreement is finalised.
f. Explain the formula contained in s4-10(3) ITAA 1997
This section covers how to calculate the income tax paid by an individual. The formula
prescribed is Income tax= ( taxable income x rate )−Tax offsets. Income tax is determined by the
amount of taxable income available in a financial year6. For companies, the income year is
usually the previous fiscal year. The amount of taxable income determines the rate while the tax
offsets are used to reduce the amount of tax liability. Division 63 of ITAA 1997 explains actions
to be made when the tax offsets exceed the tax liability7.
g. Significance of the High Court case, FC of T v Day 2008 ATC 20-064
The issue is the case was to determine whether a customs officer was entitled to deductions for
legal expenses incurred for defending himself against charges brought against him in the Public
Service Act 19228. The court referred to Ronpibon Tin NL vs. FCT (1949) to decide whether the
4 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=TXR/TR200418/NAT/ATO/00001
5 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).
6 Above 2; Ibid
7 Income Tax Assessable Act 1997
8 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).

Foundation of Taxation 4
expense was deductible9. The court concluded that in day’s position as a public officer, the legal
expense was deductible since he was still a public officer when the charges were filed against
him.
h. Difference between marginal tax and average tax
Marginal tax is the amount of tax paid on the next dollar amount of income while the average tax
is the total amount of tax paid divided by total income.
i. Consumption tax
In Australia, a consumption tax applies directly to individuals who take their wages or allowable
deductions under income tax for savings10. It can also apply to the indirect taxation of goods and
services bought by individuals.
Question 2
Most of the deductible expenses are directly related to the taxpayer's income. All work related
expenses are deductible if the taxpayer spent money but was not reimbursed, the expense was
work-related, and there must be some evidence to show that the expense occurred.
a. The interest expense is a positive limb according to section 8-1 ITAA 1997. Brett
incurred the expense to produce assessable income. Employees only work when they are
paid regular wages. A personal asset might have secured the loan but it was used to cover
a business expense which is also a positive limb11. Now Brett can use the paid employees
to produce assessable income.
9 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?locid=
%27JUD/78CLR47%27
10 Carroll, R., Joulfaian, D., & Mackie, J. (2011). Income Versus Consumption Tax Baselines for
Tax Expenditures. National Tax Journal, 64(2, Part 2), 491-510.
11 Above 6; Ibid

Foundation of Taxation 5
b. Julie has a claim to partial deduction on her phone charges given that 60% of the entire
cost is a work-related cost. In the case Ure v FC of T 81 ATC 4100, the federal court
recommended the apportionment of a business expense into both income producing and
personal expenses12. Only the amount incurred as a result of business activities is
deductible which in this case is 60% of $500.
c. The amount paid to the babysitter is categorised as a negative limb of a private nature. It
is not a deductible expense according to provisions in the ITAA 1997. Sally is a salaried
employee and having a babysitter is not an employment expense nor is it a business
expense. The expense incurred by Sally is domestic in nature which under section 8-1 of
ITAA 1997 is a negative limb that is not deductible from the taxable income
d. The loss is an allowable deduction according to section 51(1) of the Income Tax and
Social Services Contribution Assessment Act 1936-195213. In the case of Charles Moore
& Co (WA) Pty Ltd v FC of T (1956) the federal court concluded that the income stolen
from the taxpayer was a deductible loss since it direct lt related to the operations of the
business14. The same applies to this case where goods worth $20,000 were stolen from
the taxpayer's premise, and it will lead to a business loss if they are not deducted from the
taxable income.
e. The maximum claim a taxpayer can deduct when it comes to a local government election
is $1,000 for each election even if the expenses are for more than one financial year. The
$2,000 amounts to a political contribution to a political party which is non-deductable.
12 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).
13 Waight, P. (1964). A Commentary on Section 260 of the Income Tax and Social Services
Contribution Assessment Act 1936—1965. Federal Law Review, 1(2), 292-305.
14 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=JUD%2F95CLR344%2F00002

Foundation of Taxation 6
For the whole sum, only $1,000 is deductible from the taxpayer's income15. IT is a law
that all contributions to a political party or an individual candidate have to be disclosed
for the purpose of filing returns.
Question 3
a. Andy with apply CGT event F1 to grant a lease to Brian. The amount of capital gain or
loss is calculated by getting the difference between the premium got from the grant
(5,000) and the cost of setting up the grant16. The market value consideration for capital
proceeds does not apply in CGT event F1. The CGT 50% is not applicable in this case as
CGT discount does not apply to CGT event F117.
b. For the disposal of the farm CGT event A1 would be most appropriate. It involves the
normal disposal of an asset. Section 104-10 of ITAA 1997 defines disposal of an asset as
the transfer of ownership from one individual to another entity18. John is also entitled to
the 50% CGT discount. He has had the farm for more than 12 months as per section 115-
25(1). The asset was also purchased after 20 September 1985 which means CGT tax rules
apply19.
15 Election expenses. (2019). Retrieved from https://www.ato.gov.au/Individuals/Income-and-
deductions/Deductions-you-can-claim/Other-deductions/Election-expenses/
16 Above 12;Ibid
17 CGT events involving leases. (2019). Retrieved from https://www.ato.gov.au/General/Capital-
gains-tax/Your-home-and-other-real-estate/Sale-of-property-and-other-CGT-events/CGT-events-
involving-leases/
18 Types of CGT events. (2019). Retrieved from https://www.ato.gov.au/General/Capital-gains-
tax/Selling-an-asset-and-other-CGT-events/Types-of-CGT-events/
19 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).

Foundation of Taxation 7
c. From 2006 to 2008, Jaime and Olivia must have entered into a CGT event D1 (Section
104-35) where they must have entered into a contractual agreement for a period of two
years with their tenants before they made the house their permanent home in 200820. For
the disposal of the house, the couple will have to initiate a CGT event A1 (section 104-10
(1) ITAA 1997) to initiate the transfer of ownership of the asset21. Capital gain is
calculated by subtracting the assets cost base from the capital proceeds from the sale of
the house. The couple is also entitled to a 50% discount they have owned the home for
four years. The couple is not eligible for the main residence CGT exempt since they
rented out the house for the first two years after they purchased the house. The house was
used to generate assessable income for two years which makes them eligible for partial
main residence exempt22. They are liable for capital gain tax which is a form of statutory
income.
d.
Shares Purchase sale Capital gain/loss
20 Modified active asset test for CGT event D1. (2019). Retrieved from
https://www.ato.gov.au/General/Capital-gains-tax/Small-business-CGT-concessions/Basic-
conditions-for-the-small-business-CGT-concessions/Active-asset-test/Modified-active-asset-test-
for-CGT-event-D1/
21 Above 19; Ibid
22 Your main residence. (2019). Retrieved from https://www.ato.gov.au/general/capital-gains-
tax/your-home-and-other-real-estate/your-main-residence/

Foundation of Taxation 8
BHP 12000 x 0.45=5400 12000 x 1.56=18720 18720−5400=13320
Westfarmers 5000 x 5.20=26000 5000 x 2.10=10500 10500−26000=(15500)
The net capital loss recorded would be 15500−13320=$ 2 ,180. The 50% discount does
not apply for capital loss. It is only applicable for CGT capital gains23. It is a CGT event
A1 where it involves the disposal of assets. Chris is looking to dispose off the share and
in the process he earns a net loses of $2,180.
Question 4
Assessable income includes both statutory income and ordinary income according to section 6-5
ITAA 1997.
a. In the case, FC of T v Stone [2005], an award that arises from other activities that are
not related to the employee's position is not assessable, but an award that arises as a result
of business activities is considered an ordinary business receipt24. The $2000 tv award
from having the best tv advertisements is as a result of business activity which is
supposed to be reported as an ordinary receipt making the amount taxable. The prize is
also an incident of a taxpayer’s income-producing activities.
b. Reimbursements of a business expense are considered a form of ordinary income. $500
received by the employee from an employer as a result of travelling cost related to the
employee’s position in the organization25. The reimbursement is income in nature since it
is replacing the amount that could have been received in the revenue account.
23 Above 19; Ibid
24 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).
25 Occupation and industry specific guides. (2019). Retrieved from
https://www.ato.gov.au/Individuals/Income-and-deductions/Occupation-and-industry-specific-
guides/

Foundation of Taxation 9
c. The iPhone worth $1,000 is taxable since it was as a result of a business transaction from
a client as a token of appreciation26. Small gifts such as birthday gifts are not part of
assessable income.
d. Compensation payments received from personal injuries are treated as capital income. A
statement from FC of T v Whitaker 9827. The 10, 000 received as a result of personal
injury is not assessable in accordance to the provisions of s 6-10, s 6-5, s 6-15, and s 15-
30 0f ITAA 1997.
e. Without any transaction, there will be no income to tax from the shares. Assessable
income may arise if the shareholder receives regular dividends, but in our case, the
taxpayer only owns shares that have appreciated28. There is no CGT which constitutes
statutory income. The current value of the shares is not assessable since no income is
being generated from the shares.
Question 5
Issue
Nisu is an international student who stayed in Australia from 30th December 2018 to June 2019
after which he traveled back to Nepal with no prospects of returning. In Australia, Nisu shared a
rental apartment with friends and had joined a local football team. The initial plan was for Nisu
26 (2019). Retrieved from
https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Gifts-
and-donations/
27 Above 24; Ibid
28 Valuing trading stock. (2019). Retrieved from https://www.ato.gov.au/Business/Income-and-
deductions-for-business/Reconciliation-activities/Accounting-for-trading-stock/Valuing-trading-
stock/

Foundation of Taxation 10
to stay in Australia for a period of three years, but his stay was cut short due to family
commitment.
Regulations
The main tests to be carried out while determining the residency of an individual are contained in
section 6(1) of the Income Tax Assessment Act 193629. The tests to be locked at include the
residency test, residency in Australia, the 183-day test, and the commonwealth superannuation
test30. This test is not conducted to determine the nationality of an individual but for the sole
purpose of determining whether an individual will be required to file an income tax return in
Australia and they do not affect the immigration policies as outlined in the constitution31. Nisu
only needs to satisfy only one test to be considered a resident for the purpose of filing income tax
Application
The Residency Test
It states that one must be residing in Australia. The test applies to immigrants, scholars, academic
teachers, and people working in Australia on prenegotiated contracts. The term residency is not
defined in the constitution. Hence the ATO assumes the standard definition32. It means to dwell
29 Income Tax Assessment Act 1936
30 Residency tests for tax purposes. (2019). Retrieved from https://www.ato.gov.au/Tax-
professionals/Prepare-and-lodge/Tax-Time-2018/Before-you-lodge/Residency-tests-for-tax-
purposes/
31 Work out your tax residency. (2019). Retrieved from
https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/#Residencytests
32 Work out your tax residency. (2019). Retrieved from
https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-

Foundation of Taxation 11
permanently or for a considerable amount of time continuously or through regular visits. In TR
98/17 the commissioner insists that the quality and character of a person while in Australia plays
a role in determining the residency of an individual33. Nisu’s main goal was to be a student in
Australia but he also worked for the whole duration he stayed in the country. This factors makes
Nisu an Australian resident for income tax return.
The ATO also looks at the taxpayer's assets which includes a dwelling place where the taxpayer
resides. They also look at the social and living arrangements of an individual which include
joining a sports club. Nisu lived in a boarding house with four other students where they paid
rent, and he also joined a local football team which also support the claim that Nisu is an
Australia resident.
The Domicile Test
A person is an Australian residency if the domicile is in Australia unless the commissioner is
satisfied an individual’s permanent residency is abroad according to section 6(1)(a)(i). A persons
domicile in Australia is determined by the Domicile Act 1982. A person’s home is where one
lives and sleeps as it was determined in the case of R v. Hammond (1852) 177. A man’s
residence was concluded to be where he sleeps and lives with his family, and it is always his
residency/#Residencytests
33 Woellner, R. H., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2010). Australian taxation
law. CCH Australia.

Foundation of Taxation 12
place of abode34. From 30th December to 30th June Nisu lived in Australia in a rented apartment
where he slept and conducted his business away from school and work. He has since relocated
back home where he has no prospects of returning to Australia. For the duration Nisu stayed in
the country, he will be considered an Australian citizen for taxation. Australia was Nisu’s
domicile by choice before he moved back home due to family reasons.
The Commissioner relies on IT 2650 to determine where a person’s home is a permanent abode
outside of Australia. They consider whether an individual has set up permanent residency outside
Australia and they also look at the length of stay in an overseas country. Nisu has no plans of
ever coming back to Australia which makes him a non-resident from July 2019.
183-day Test
Nisu Left Australia before the end of 2018/2019 income year which makes him a non-resident
according to case S19 85 ATC 22535 which states that the 183-day test does not apply to
individuals who reside in Australia but subsequently leave before the end of year and is no
longer a domicile of the country. Nisu fails the 183-day test since he no longer resides in
Australia and has subsequently abandoned the house he boarded with four other students. He
also fails the domicile test from July 2019 for he has permanently moved back home as stated un
the question.
Commonwealth Superannuation Test
34 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=ITR/IT2650/NAT/ATO/00001&PiT=99991231235958
35 Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).

Foundation of Taxation 13
Nisu fails all condition set for residency under this test. He is not a member of a superannuation
scheme established under the Superannuation Act of 1990. He also had no spouse or a child
during his stay in Australia36.
Conclusion
Nisu will be required to file income tax as an Australian citizen for the 2018/19 income year for
he passed the residence test. He went to school and worked in Australia from 30th December
2018 to 30th June 2019 which makes him a resident during that income period. Australia as also
his domicile of choice for the same period but he has since relocated back home with no signs of
ever coming back.
36 Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/view.htm?
docid=EV/1013118164096&PiT=99991231235958

Foundation of Taxation 14
Bibilographies
Barkoczy, S. (2019). Foundations of taxation law (Eleventh ed.).
Carroll, R., Joulfaian, D., & Mackie, J. (2011). Income Versus Consumption Tax Baselines for
Tax Expenditures. National Tax Journal, 64(2, Part 2), 491-510. doi: 10.17310/ntj.2011.2s.03
CGT events involving leases. (2019). Retrieved from https://www.ato.gov.au/General/Capital-
gains-tax/Your-home-and-other-real-estate/Sale-of-property-and-other-CGT-events/CGT-events-
involving-leases/
Income Tax Assessable Act 1997
Income Tax Assessable Act 1996
Individual income tax rates. (2019). Retrieved from https://www.ato.gov.au/Rates/Individual-
income-tax-rates/
Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=JUD%2F95CLR344%2F00002
Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=TXR%2FTR20184%2FNAT%2FATO%2F00001
Legal Database. (2019). Retrieved from
https://www.ato.gov.au/law/view/view.htm?docid=EV/1013118164096&PiT=99991231235958
Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?locid=
%27JUD/78CLR47%27

Foundation of Taxation 15
Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=TXR/TR200418/NAT/ATO/00001
Legal Database. (2019). Retrieved from https://www.ato.gov.au/law/view/document?
DocID=ITR/IT2650/NAT/ATO/00001&PiT=99991231235958
Modified active asset test for CGT event D1. (2019). Retrieved from
https://www.ato.gov.au/General/Capital-gains-tax/Small-business-CGT-concessions/Basic-
conditions-for-the-small-business-CGT-concessions/Active-asset-test/Modified-active-asset-test-
for-CGT-event-D1/
Residency tests for tax purposes. (2019). Retrieved from
https://www.ato.gov.au/Tax-professionals/Prepare-and-lodge/Tax-Time-2018/Before-you-
lodge/Residency-tests-for-tax-purposes/
Work out your tax residency. (2019). Retrieved from
https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/#Residencytests
Work out your tax residency. (2019). Retrieved from
https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/#Residencytests
Waight, P. (1964). A Commentary on Section 260 of the Income Tax and Social Services
Contribution Assessment Act 1936—1965. Federal Law Review, 1(2), 292-305. doi:
10.1177/0067205x6500100204

Foundation of Taxation 16
Your main residence. (2019). Retrieved from
https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-
residence/
(2019). Retrieved from https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-
you-can-claim/Gifts-and-donations/
Woellner, R. H., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2010). Australian taxation
law. CCH Australia.
Valuing trading stock. (2019). Retrieved from https://www.ato.gov.au/Business/Income-and-
deductions-for-business/Reconciliation-activities/Accounting-for-trading-stock/Valuing-trading-
stock/

Foundation of Taxation 17