Taxation Law Assignment: Zara's Tax Liability and ATO Measures

This report analyzes the tax liability of Zara Smartman, focusing on her income from employment and a home-based business. The report examines whether Zara's employment income and business receipts are considered taxable under the Income Tax Assessment Act 1997 (ITAA 1997). It also covers allowable deductions for work-related expenses, such as interstate travel and conference fees, and disallows deductions for personal expenses like clothing and fitness. The report includes a calculation of Zara's income tax liability for the year ended 30 June 2020. Furthermore, the report explores IT and regulatory measures introduced by the Australian Taxation Office (ATO), including digital initiatives and risk-based approaches to compliance. The report also discusses stakeholder responses to recent developments in Australian taxation, highlighting concerns about consultation processes and the representation of different stakeholder groups.

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

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Table of Contents
Task A:.......................................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................6
Part B:.........................................................................................................................................7
Answer to Requirement (i):....................................................................................................7
Regulatory Measures:.............................................................................................................7
Answer to Requirement (ii):...................................................................................................8
References:...............................................................................................................................10

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Task A:
Issues:
a. Whether the receipts made from employment services will be considered as taxable
earnings based on the ordinary conceptions of “sec 6-5 ITAA 1997”?
b. Whether the business receipts amounts to taxable business income under the “sec 6-5
ITAA 1997”?
Rule:
As defined in the “sec 6-5 ITAA 1997” the “ordinary income” of the taxpayer covers
income made from the “ordinary conceptions” that is known as ordinary income. Most
notable in “sec 6 (1) ITAA 1936” income earned from the personal exertion includes the
rewards that is received for execution of any services and payments which is considered
incidental to employment (Barkoczy 2016). In order to treat a payment as the income of the
employee, it is not important that the payment should be paid by their employer. Payments
received by third party will be held as income for employee if it has satisfactory nexus with
the employment of taxpayer. In “McNeil v FCT (2007)” whether the sum is regarded as
“income” is subject to the quality of receipts in the recipient hands and not the character of
expenditures by other person.
As per the ATO, travel expenses occurred by taxpayer as the employee then it is
allowed for tax deduction. The expenses mainly include meals, accommodation and
incidentals while travelling away from the work such as the interstate work conference
(Braithwaite 2017). The travel expenses that is allowed for deduction also include air, bus
and taxi fees as well. While the taxpayers are also required to denote that they are not to
claim deduction for private portion of their trip.

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The interpretation of “sec 8-1 ITAA 1997” denotes that expenditures that are
happened in the course of gaining or generating assessable income are acceptable for “tax
deduction”. An expense will only be acceptable for “tax deduction” if meets the necessary
character of positive limbs such as either “working” or “business expenses”. As such, cost
occurred in buying the “ordinary clothing items” are not permitted for “tax deduction” in
“sec 8-1 ITAA 1997” (Murphy 2019). In “Mansfield v FCT (1996)” the tax commissioner
stated that expenses occurred on ordinary clothing articles is “non-deductible” because it is a
private expenditure and has no relation to the production of assessable income.
During the absenteeism of any kind of unusual features, it is understood that no tax
liability arises where a person of the general public participates casually in the competition
and wins a prize. A simple windfall gains do not hold the characteristics of income. To
support the statement the decision held in “Moore v Griffiths (1972)” stated that a general
“prize winnings” is not regarded as taxable pay.
Gains which happens from the conducting any kind of trading transaction or if it
signifies the “ordinary incidents” of a commercial activity then it is regarded as ordinary
income under the “sec 6-5 ITAA 1997”. The law court in “FCT v GP International
Pipecoaters Pty Ltd (1990)” stated that a taxpayer that carries on a business is normally
considered chargeable “ordinary proceeds” derived from the business (Sadiq 2019). The
ATO states that an instant write off up to $30,000 is allowed to businesses that are having the
turnover of less than $10 million. This is normally applicable on the assets that costs lower
than $30,000 and purchased or installed as ready for used.
Application:
Zara in the current case is found to have received an employment income from
American Express. She earned a gross salary of $225,000. The employment income will be

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classified as income earned from the “personal exertion” under “sec 6 (1) ITAA 1936”.
Mentioning “McNeil v FCT (2007)” the payments holds adequate nexus with the
employment of Zara. As a result it will be contained within in Zara’s tax return as “ordinary
income” which is assessable in “sec 6-5 ITAA 1997”.
Zara incurred expenditures on “interstate” travelling for work purpose that included
outgoings on air ticket, other transportation, food and accommodation. Within “sec 8-1 ITAA
1997” Zara can get a permissible “tax deduction” for the interstate travel expenditures
occurred as employee (Woellner et al. 2016). The expenses were related directly to the
employment of Zara and derivation of assessable income.
Zara reports outgoings of $10,000 on “dresses, jewellery and personal fitness”
because she aspires high living. The cost occurred by Zara in purchasing the ordinary
clothing items are not acceptable for “tax deduction” in “sec 8-1 ITAA 1997”. Mentioning
the example of “Mansfield v FCT (1996)” the expenses occurred on ordinary clothing
articles such as jewellery, personal fitness and dresses is not permitted for deduction because
it is a personal outgoing and does not relate to the production of assessable income (Taylor et
al. 2017). The expense fails to meets the necessary character of positive limbs such as either
“working” or “business expenses”.
In the later part of year Zara is found to be attending an IT Conference from 10-13
January 2020 in the Silicon Valley. She incurred expenditures on “conference fees, air
ticket”, accommodation and food. Zara also accompanied her husband as well. Zara in this
situation will only be permitted to claim a full deduction for outgoings occurred on
conference fees (Arnold et al. 2019). While she is only allowed to claim a partial deduction
on air tickets on her part, food and accommodation while the remaining portion of expenses

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incurred for her husband amounts to a private in nature. Therefore no deduction can be
claimed.
She also reported the receipt of Rolex watch from the lucky draw a prize winnings
which carried a worth of $35,000. Citing “Moore v Griffiths (1972)” the Rolex watch is a
simple prize winnings and do not hold the characteristics of income. Zara also carried on a
home based business of computer software for pharmacy industry in Australia. The business
for the first three years starting from 2017 to 2019 incurred loss. However in the year 2020,
Zara however reported gains from business in 2020. She reported a business income of
$80,000 while the business expenses stood $40,000. Gains earned by Zara from the trading
transaction of Pharmacy Hero represents the “ordinary incidents” of a business activity.
Referring to “GP International Pipecoaters Pty Ltd v FCT (1990)” the sum of $80,000 is
regarded as “ordinary income” under the “sec 6-5 ITAA 1997” (Braithwaite and Reinhart
2019).
Zara purchased a car for business use that costs $30,000. With regard to the guidelines
of ATO, the car has been instantly written off since its value is less than prescribed limit of
$30,000 and the total revenue of the business is less than $10 million any given income year.
Computation of Income Tax Liability
For the year ended 30 June 2020
In the books of Zara Smartman
Particulars Amount ($) Amount ($)
Assessable Income
Gross Salary 225000
Income from business 80000
Total Assessable Income 305000
Allowable Deductions
Interstate travel 20000
Conference fees 5000
Air Ticket 2000
Food and Accommodation 750

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Instant write off (car) 25000
Business Expenses 40000
Tax return expenses 1100
Accounting and Business Service 3300
Tax return expenses 2750
Total Allowable Deductions 99900
Total Taxable Income 205100
Tax on Taxable Income 63392
Add: Medicare Levy 4102
Less: PayG Withholding 75000
Total Tax Refundable (7506)
Conclusion:
Conclusively, Zara will be considered taxable under “sec 6-5 ITAA 1997” for the
employment income received in capacity of employee while the business receipts amounts to
ordinary business gain and taxable as ordinary income.

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Part B:
Answer to Requirement (i):
Two main IT and regulatory measures introduced by ATO:
IT measures:
Whole of government digital initiatives: This measure is built on continuous funding
for GovPass which is a trusted digital identity. The internal business stakeholders, designers
and developers at ATO will now be able to draw a well-set, user-friendly approach to design
while forming a novel experience for the consumers. The digitization offers the ATO and
customers to meet the challenges in a new way. The IT measures are taken with the objective
of focussing on improving the digital solutions in order to improve the experience of clients
and make it easy for the taxpayers to satisfy their obligations (Morgan, Mortimer and Pinto
2018). This IT measure is adopted by government to streamline the procedure, to enhance
tailor and targets its services and enforcement. More increasingly, the work done by ATO is
significantly contributing to the whole-of-government digital transformation agenda.
Voice Authentication:
The introduction of voice authentication as an IT measure has created a huge
difference to the manner customers interact with the ATO. This measure helps in saving time
and clients are no longer required to repeatedly offer several forms of information over the
phone (Robin and Barkoczy 2020). This acts as the direct results for clients to increasingly
locate the information and easily through the search engine.
Regulatory Measures:
Applying constant improvement strategies to lower cost of compliance for taxpayers:

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The regulatory measures adopted by ATO involves that the reporting would include
the qualitative assessment for improving the strategies implemented. This type of regulatory
measures are intended to draw the expansion on fairness research and application of
strategies originating from research (Braithwaite and Reinhart 2019). The regulatory
measures adopted helps in promoting engagement with the stakeholders and consultations
with the groups. The regulatory measures are aimed at providing individual with the
assistance to visit the small businesses
Implementation of risk-based propionate approach towards compliance requirements
and regulatory enforcement action: The ATO has adopted this measure as the qualitative
assessment of the policies and process that are in place. This regulatory measures is aimed at
enterprise risk management framework that is directed towards operational and
administrative risks, threats and vulnerabilities. The GST governance and risk management
guidelines are provided to the small-to-medium enterprises as well as large enterprises. The
risk assessment procedure and risk management approach has been adopted to improve
compliance and manage the tax evasion as well as crime.
Answer to Requirement (ii):
Recent development in taxation and response of stakeholders in Australian taxation:
The stakeholders are in the opinion that a greater amount of attention can be given to
the stakeholder’s analysis for every discussion group instead of some cases by remaining
dependent on the stakeholders that have current relationship with the treasury. There are
certain type of stakeholders that view the measures adopted by ATO might be aimed at
increasing revenue. They also felt under-represented as well. The stakeholders also widely
held an opinion that bigger companies and better organized groups are not proportionately
represented in the consultation procedure.

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The external stakeholders have stated that scoping the issues which are considered as
the subject of consultation and setting up the objectives for consultation are considered
important in managing resources and for improved business decision regarding the
involvement in specific consultations (Taylor et al. 2017). The stakeholders are in the opinion
that more could have been done to enhance the clarity and boundaries of consultations as this
will help in making a better informed decision on the resource allocation.
The “external stakeholders” considers that the occasions for early access and input
would help in improving the process of giving expert assistance during the initial stage from
the knowledgeable practitioners and other stakeholders that are acquainted with the needs as
well as requirement of the community. While there are most of the stakeholders that have
expressed their trust in the ATO’s IT and regulatory measures since the process is considered
important in sharing information along with the quality of input.

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References:
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Braithwaite, V. and 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.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The
Australian National University.
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.
Taylor, J., Walpole, M., Burton, M., Ciro, T. and Murray, I., 2017. Understanding Taxation
Law 2018. LexisNexis Butterworths.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.

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