La Trobe University ACC5TAX Taxation Case Study Analysis Report

This report analyzes a taxation case study for ACC5TAX, focusing on the income tax implications for Thomas Hawks for the year ending June 30th, 2020. It examines key issues such as personal service income (PSI) versus personal business, cash versus accrual accounting methods, and the deductibility of business expenses, including depreciation of assets like computers and office equipment. The report also addresses the tax treatment of compensation receipts and the classification of activities as either business or hobby. Part A provides advice to Thomas Hawks, while Part B calculates his tax liability, including detailed working notes for business income, other income, and tax liability. The report concludes with strategies to potentially reduce tax liability, such as claiming work-related expenses, utilizing investment bonds, employee training courses, and health insurance cover. This comprehensive analysis provides valuable insights into Australian taxation principles and practices.

ACC5TAX TAXATION

Table of Contents
Part A.........................................................................................................................................3
Part B..........................................................................................................................................6
Calculation of tax liability......................................................................................................7
Ways through which tax liability could be reduced...............................................................9
References................................................................................................................................10

Part A
Advice to Thomas Hawks on income tax consequences of specified activities for the year
ending on 30th June 2020:
Issue 1: PSI or PSB
In accordance with Australian Taxation Office provision Personal service income is produced
from personal skills or efforts by an individual (Personal services income, 2018). Further, the
structure of business does not affect the definition of personal service income. In case more
than fifty percent of your income is received for a contract for your skill and expertise or
labour than the total income is classified as Personal service income. However, assessee is
required to pass one of the PSB (Personal business test) in order to in order to be taxed with
same rules. In present case as Thomas Hawks is operating his business form home office
which is specifically used for business purpose. The decision was provided in case law AAT
Case [2006] AATA 186, Re Dixon Consulting Pty Ltd and FCT (2006) 62 ATR 1104 (see
2006 WTB 10 [423]), in case taxpayer was succeeded in making allegations that business
premises was separate from the residence than it will be deemed that test of ‘business
premises test’ has been passed (SUMMARY OF PSI CASE LAW, 2018.). Even same
decision was provided in case of FCT v Dixon Consulting Pty Ltd (2006) 65 ATR 290 (see
2006 WTB 53 [2406]) that premises is required to used exclusively by the tax payer in order
to satisfy ‘business premises test ’ under PSI rules.
In accordance with judgements made in above case law, it can be concluded that Thomas
Hawk income will be treated as PSB as it satisfies ‘business premises test’ for the year ended
on 30th June 2020.
Issue 2: Cash or accrual method
ATO (Australian Taxation provisions) asserts that business having aggregate turnover of less
than $10 million or applies cash accounting method for income tax can apply either cash
method accounting or accrual based accounting (Business, 2018). However, decision
provided in case of FCT v. Dunn 11 89 ATC 414 asserts that there are no hard and fast rule to
decide which accounting method is more appropriate and each judgement will be taken on the
basis of individual circumstances of each case. Taxation Ruling 98/1 of Income Tax
Assessment Act 1997 provides discussion relation with appropriate method of accounting in

order to ascertain income tax liability. It has specified in Para 18 of stated taxation ruling that
receipt method is appropriate in case business income is derived through exercising skills of
tax payer in the provision of services except for services provided in paragraph 45 of the rule.
Income derived through application of skills in relation with financial and accounting
services is not an exception to stated rule. Thus, business income of Thomas Hawk should be
accounted as per cash basis of accounting.
Issue 3: Business expenses
ATO provision asserts three golden rules to assert that whether business expenditure is valid
business deduction or not which are as follows:
 Expenditure must be done in relation with business not for personal use.
 Records should be available to prove same
 In case expense is mix of personal and private use, claim can be made in respect of
portion which has been used in respect of business.
In present case salaries and wages, office supplies, cleaning and heating and mortgage
interest in respect of office premises have been spend in relation with business, thus
deduction regarding same can be claimed for the year ended on 30th June 2020.
Deduction in relation to interest have been specified in section8-1 of Income Tax Assessment
Act 1997 which asserts that interest expenditure should have sufficient connection with
operations which produce taxpayer’s assessable income (Taxation Ruling 95/25, 2018). The
decision was made in case of Roberts and Smith (ATC at 4386; ATR at 501) that if essential
character of expenditure is having appropriate connection with operations and activities with
which assessee earns income, then specified expenditure is deductible unless same is not of
private or capital nature.
As per ATO provisions, an assessee can choose to self-assess the effective life of computer in
order to ascertain the percentage to which cost is claimable as per prime cost calculation
method or diminishing value method. In case the cost of computer or laptop is not more than
$300 than the full deduction relating to cost of computer can be claimed as deduction in the
year of purchase.

In present case as Thomas Hawks have purchased laptop for business use amounting to
$5000, depreciation will be charged on the basis of effective life i.e. 5 years. Further adjusted
value of assets will be depreciated on the basis of remaining effective life.
Depreciation on office equipments item $15000/5 i.e. 3000 per annum
Depreciation on laptop $5000/5 i.e. 1000 per annum
The calculation of depreciation has been done on the basis of prime cost method on annual
basis.
Issue 4: Compensation
Taxation Ruling 95/35 specifies provision relating to income tax: capital gains and treatment
of compensation receipts of insurance. The ruling asserts that exemption has been provided
under subsection 160 ZB (1) in case compensation amount received by the taxpayer is wholly
in respect with personal injury of taxpayer. The definition of injury has not been defined in
part IIIA but in legislative enactment and in various jurisdiction injury includes ‘disease’. The
conclusion was made in case of Grant v. G&G Kynoch (1919) AC 765 that meaning of injury
includes disease (Income tax: capital gains: treatment of compensation receipts. 2018).
Moreover subsection 160 ZB (1) provides that it is not necessary the injury should result
from accident, it requires the fact of injury.
It has been stated in Para 216 of ruling that compensation of any wrong or injury borne by
organization is not considered within scope of the exemption. Para 217 of specified ruling
provides that exemption is available for undissected lump sum reimbursement amount
received against personal injury of taxpayer (Taxation of Insurance Receipts, 2018). In
present case Thomas received an insurance premium of $5000 as he was injured and lost
some mobility in his right hand from injury. In accordance with above stated provision
insurance premium is exempt and no tax will be paid on same.
Issue 5: Business vs. hobby
Section 995-1 of Income Tax Assessment Act (ITAA) 1997 provides definition of business
which comprises any profession, trade, but not occupation as an employee. However the
variants on the basis of which decision is taken regarding question of business activity is as
follows:

 Whether the activity has major mercantile purpose
 Whether assessee has more than just a purpose to engage in business.
 Whether the assessee has objective of profit as prospect of profit from the operations.
 Recurrence of activity.
 Size and permanent nature of activity.
 Whether activity can be better described as hobby or a form of recreation activity.
Australian Taxation Office specified provision relating to characteristic of business in order
to make decision whether an assessee is doing business or not. The characteristic of business
are specified below:
 Registered as business
 Received an ABN (An ABN is generally provided only in case assessee is conducting
business, it does not manner whether you are providing goods or services as hobby.)
 Repeat similar type of activities
 Having license or qualifications
 Operating from business premises
Income produced by an activity which can be referred as genuine hobby is not taxable neither
the expenses pursued with same can be claimed as deduction (Hobby vs. Business, 2018). In
case an individual is conducting activity as hobby than individual is not required to pay
additional tax or reporting obligations. In case the activities conducted by you are hobby but
you provide goods or services to business that ‘statement of supplier form’ can be used to
ignore the business you are operating having to withhold an amount from their compensation
due to you (Jacob and Jacob, 2013). As Thomas is conducting photography as his favourite
activity and mere entering in informal agreement does not prove the fact that he is doing
business of photography. The activity can be more appropriately defined as hobby or a
recreational activity, thus no tax will be paid on same. An alternative available with Thomas
is that he can seek for ‘private ruling’ from tax office which is not a speedy procedures.
Advantage attached with same is that private ruling will provide shield from penalties and
interest as it is believed that taxpayer is honest and open about the details.
Part B
Income tax liability in Australia is applied by federal government on taxable revenue of
individuals as well as organizations (Faccio and Xu, 2015). The tax liability of individuals is

ascertained on the basis of progressive rates and further Medicare levy of 2% is applied on
taxable income. Income tax is one of the main sources of income for government with
Australian taxation system. The provision relating to calculation of income tax is
providedIncome Tax Assessment Act 1936 and Income Tax Assessment Act 1997. Capital
gains are taxed only at the time when gain is realised and a deduction of 50% is available in
case asset is held for more than twelve months (Alldridge, 2015). Tax rate for individuals for
the year ended on 30th June 2020 are as follows:
Taxable Income Tax on specified Income
0-$18200 Nil
$18201-$37000 19 c for each $ income over $18200
$37001-$90000 32.5 c for each $ income above $37000 plus $3572
$90001-$180000 37 c for each $ income above $90000 plus $20797
Note: Above calculation does not include amount of Medicare levy.
Calculation of tax liability
Statement presenting calculation of tax liability of Thomas Hawks’s for the year ended on
30th June 2020.
Business Income (Working note 1) $448482
Other Income (Working note 2) $5000
Total Assessable Income $453482
Less: Exempt Income $5000
Taxable Income for year ended on 30th June 2020 $448482
Tax liability (Working note 3) $187381.8
Working Note 1
Particular Amount
Fees received $576000
Deductions:
Salaries and wages $93600
Office Supplies 5019
Cleaning and Heating $7413

Mortgage interest $17486
Depreciation Office Equipment : 3000, Computer: 1000 $4000
Net business income $448482
Working Note 2
Insurance Receipt: In accordance with provision of 160 ZB (1), any compensation amount
received in respect of injury is exempted and not taxable. In present case the receipt of $5000
is received against the injury of losing mobility of right hand, thus same will be considered in
assessable income but will not be part of taxable income.
Receipt of photography equipment: The activity conducted by Thomas i.e. photography is his
hobby as per the detail provided in case. Section 995-1 specifies definition of business and it
does not comprise activity which can be referred as genuine hobby, thus the activity of
photography will not be considered as business activity (Taxation of artists, 2016).

Working Note 3
Tax Liability Calculation
Amount Tax Liability
Tax till $18200 0.00
$18201-$37000 3572
$37001- $90000 17225
$90001-$180000 33300
$180000-$448482 120816.9
Total Tax 174913.9
Medical Levy 2% of taxable income 12467.9
Total tax liability 187381.8
Ways through which tax liability could be reduced
 Claiming work relating expense is one of the common methods applied by an
individual to reduce its income. (Barkoczy, 2016). Thomas should reassess the
expenditure and claim deduction respectively.
 Investment Bonds is another option available which is used for wealth-building
strategy (Frecknall-Hughes andMoizer, 2015.).
 Thomas can also claim for employee training courses as he has employed an
administrative assistant and also assisted by an intern. He can claim appropriate
training expenditure and reduce income.
 Depreciation is income tax deduction which is allowed for wear and tear of property.
It allows tax payer to reimburse cost on the basis of specific property (Depreciation of
Computers, 2017.). The same has been applied above in respect of computer and other
office equipments.
 Health insurance cover is an appropriate option to reduce tax liability. Even insurance
relating to spouse can be taken for deduction purpose (Faccio and Xu, 2015). The
specified reason is enough to have your spouse work for your business.

References
Alldridge, P., 2015. Tax avoidance, tax evasion, money laundering, and the problem of
‘offshore.’ Greed, Corruption, and the Modern State: Essays in Political Economy, p.317.
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.New York
Faccio, M. and Xu, J.2015. Taxes and capital structure. Journal of Financial and
Quantitative Analysis. 50(03). Pp.277-300.
Frecknall-Hughes, J.,andMoizer, P., 2015. Assessing the quality of services provided by UK
tax practitioners. eJournal of Tax Research, 13(1), p.51.
Faccio, M. and Xu, J.2015. Taxes and capital structure. Journal of Financial and
Quantitative Analysis. 50(03). Pp.277-300.
Jacob, M. and Jacob, M. 2013. Taxation, dividends, and share repurchases: Taking evidence
global. Journal of Financial and Quantitative Analysis. 48(04), Pp.1241-1269.
Business. 2018. Are you in business?[Online]. Available through
<https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Are-
you-in-business-/>. [Accessed on 22nd September 2019].
Hobby vs Business. 2018. [Online]. Available through <https://www.ato.gov.au/law>.
[Accessed on 22nd September 2019]
Taxation of artists. 2016. What is a hobby, and what is a business? Does it matter?
[Online]. Available through <https://www.artslaw.com.au/article/taxation-of-artists/>.
[Accessed on 22nd September 2019]
Depreciation of Computers. 2017. [Online]. Computers Depreciation. Available through
<https://atotaxrates.info/tax-deductions/ato-depreciation/depreciation-of-computers/>.
[Accessed on 22nd September 2019]
Taxation of Insurance Receipts. 2018. Compensation received in relation to any other act or
event. [Online]. Available through <https://www.hlb.com.au/taxation-insurance-receipts/>.
[Accessed on 22nd September 2019]
Income tax: capital gains: treatment of compensation receipts. 2018. [Online]. Exemption for
personal wrong or injury. Available through
<https://www.ato.gov.au/law/view/TXR/TR9535/NAT/ATO/00001>. [Accessed on 22nd
September 2019]
Taxation Ruling 95/25. 2018. [Online]. Income tax: deductions for interest under section 8-1
of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith.
Available through <https://www.ato.gov.au/law/view/ TXR/TR9525/NAT/ATO/00001>.
[Accessed on 22nd September 2019]

Personal services income. 2018. Working out if PSI rules apply. [Online]. Available through
<https://www.ato.gov.au/business/personal-services-income/working-out-if-the-psi-rules-
apply/>. [Accessed on 22nd September 2019]
SUMMARY OF PSI CASE LAW. 2018. PSI rules - business premises test: [PDF]. Available
through <http://www.professionalsaustralia.org.au/contractors-consultants/wp-content/
uploads/sites/42/2014/07/Summary-of-PSI-case-law_final.pdf>. [Accessed on 22nd
September 2019]
Business.2018. Choosing an accounting method. [Online]. Available through
<https://www.ato.gov.au/Business/GST/Accounting-for-GST-in-your-business/Choosing-an-
accounting-method/>. [Accessed on 22nd September 2019]