Taxation Law Assignment: Residency, Income, and Deductions Analysis

This taxation law assignment addresses the tax residency of an individual, Arun Sharma, and his tax obligations in Australia. It analyzes the relevant factors for determining residency based on the common law reside tests, including physical presence, social and economic ties, and intentions. The assignment then assesses Arun's assessable income, including salary, car allowance, and business income from partnerships, while excluding gifts and non-business related income. It details various deductions, such as those for property expenses, accounting fees, and donations, while disallowing non-deductible items like travel expenses and entertainment. The assignment provides a calculation of Arun's taxable income and net tax payable, including Medicare levy and offsets. Part 2 discusses the deductibility of expenditure, focusing on the Sun Newspapers case and the principles of capital versus revenue expenditure, including the 'once and for all' and 'business entity' tests. The assignment demonstrates an understanding of the Income Tax Assessment Act 1997 and relevant case law.

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

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Part 1
Issue
The issue is to determine the tax residency status of Arun Sharma. Whether he is to be
considered as a resident for tax purpose in Australia for the FY 2018-1019 is the first issue.
Rule
There are 4 types of test which can be deployed to analyze the residency status of a person.
The common law resides tests is an appropriate way to analyze the Tax residency of a person
who has come to Australia from a foreign country. A person is to be treated as an Australian
resident for tax purpose if he resides in Australia under the ordinary meaning of the word
reside. A person is residing in Australia depends on certain factors established in Taxation
Ruling 98/17. These factors include, physical presence of the person in Australia, the
existence of social, economic and family ties, regularity and frequency of visits, the intention
and purpose of being in Australia, employment ties, and permanent being present in
Australia.
Application
It has been provided through the facts that Arun Sharma, originally a student from India,
graduated in Accounting from the University of Sydney at the end of 2007. He is married on
20 December 2008 with another young Indian who graduated in accounting from the
University of New South Wales Mr Sharma is a financial controller with Bell Computers Pty
Limited with operations in 15 different locations around Sydney. These facts signify that the
above factors are satisfied. This is because he is being living and working in Australia for a
significant time which means that he has the intention of staying in Australia. He is also
having his wife in Australia which means that he is having social and family ties in Australia.
He is working for with Bell Computers Pty Limited with operations in 15 different locations

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around Sydney, which means that he also has employment tie in Australia. Thus he is an
Australian resident for tax purpose and has to pay tax on income earned world-wide to the
ATO.
Conclusion
he is an Australian resident for tax purpose and has to pay tax on income earned world-wide
to the ATO.
Net Tax Payable for Arun Sharma
Gross salary has been received by Arun for working for the employer. This is a form of
income which is earned from an ordinary source of income which is employer. As stated in
section 6-5 of ITAA97 income earned from ordinary sources is ordinary income. Thus the
gross salary of $85000 is assessable.
Car benefit for work purpose is given to Arun by the employer which is worth $2190. This is
assessable income under section 15-2 as it is an allowance. An allowance is not considered as
a fringe benefit so the amount will also not fall under the ambit of the FBTAA 1986.
The gift of the Sony TV worth 6000 not assessable income as it is a gift and has no nexus
with income producing activity scott v FCT. If an income is not gained in relation to the
employment or services provided by the employee it is to be considered as a wind fall gain
and not an ordinary income which is not assessable.
The Gift for wedding anniversary worth $2000 is not assessable income as it is a gift and has
no nexus with income producing activity scott v FCT. If an income is not gained in relation to
the employment or services provided by the employee it is to be considered as a wind fall
gain and not an ordinary income which is not assessable.

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The token honourarium for the year worth $880 is not assessable income as it is a gift and has
no nexus with income producing activity scott v FCT. If an income is not gained in relation to
the employment or services provided by the employee it is to be considered as a wind fall
gain and not an ordinary income which is not assessable.
The $12750 – Work related travel expenses is not deductible under section 8-1(1) and 8-1(2).
This is because travel expenses are considered to be private in nature and are therefore not
deductible expenditure.
Investment property –
The $850000 in relation to the purchase of the property is Cost base element 1 section 110-
25(2) as the property is a Capital asset for section 108-1. Stamp duty 33740, 2500, 3000 –
element 2 110-25(3)- all this not deductible expenditure.
Rest all expenses deductible expenditure as property is producing income. This is in relation
to section 8-1(1) and 8-1(2). These sections provided that any expenses which have been
gained in relation to production of the assessable income are deductible expenses if they are
not for a private use or capital in nature (Woellner et al. 2010).
The $2500 advise deductible under section 40-88. This is because the section allows for
deductibility of expenditure incurred gaining the assessable income by forming a business.
$12000 from ABC is Income from business. This is a form of income which is earned from
an ordinary source of income which is employer. As stated in section 6-5 of ITAA97 income
earned from ordinary sources is ordinary income. This income is half assessable as the
business is in partnership.
$12000 from SIR is Income from business. This is a form of income which is earned from an
ordinary source of income which is employer. As stated in section 6-5 of ITAA97 income

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earned from ordinary sources is ordinary income. This income is half assessable as the
business is in partnership.
$15000 from ABC is Income from business. This is a form of income which is earned from
an ordinary source of income which is employer. As stated in section 6-5 of ITAA97 income
earned from ordinary sources is ordinary income. This income is half assessable as the
business is in partnership. However, the income is yet to be received as per the cash method
of accounting, this receipt is to be included in the next year.
All outgoing deductible other than entertainment as it is not necessarily incurred to produce
assessable income the donation of 500 is also a deductible expenditure as it is a statutory
deduction under ITAA97. $1000 and 1500 deductible under section 25-5 therefore they are
deductible expenditure. This is because the expenses have been borne to manage tax affairs.
Estimate given not deductible as it has not been incurred yet under section 8-1. $350
reimbursement will be assessable as have already been deducted
The calculations for the tax are as follows:
Particulars Amounts References
Salary 85000 S6-5 of Income Tax
Assessment Act 1997
Allowance for Car 2910 s15-2 of Income Tax
Assessment Act 1997
Television

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Gift for wedding
anniversary
Honorium for business council
Income from rent 9750 s6-5 of Income Tax
Assessment Act 1997
Business income
ABC 6000 s6-5 of Income Tax
Assessment Act 1997
SIR 6500 s6-5 of Income Tax
Assessment Act 1997
XYZ -
Accounting Fees
Reimbursement
350
Total assessable income 110510
Deductions
Car Allowance 4850 3201
Indian Business council 12750
Deduction for property
Expense on borrowing 2500 125
Agent 975 488
council 450 225
Interest 12000
other expenses 1750 875
Travel expenses 200

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Business Deductions
Advertising 450 225
Stationary 1240 620 s40-88 of Income Tax
Assessment Act 1997
Entertainment 250
Accounting expense 2018 1500 750 s25-10 of Income Tax
Assessment Act 1997
Accounting expense 2019
Formation expenses 2500 1250
Private deduction
Donation 500
Tax management 2018 1000 s25-10 of Income Tax
Assessment Act 1997
Tax management 2019
Total Deduction 9259
Taxable Income 101252
Net Tax Payable 24960.24 20797+((101252-
90000)*37%)
Medicare Levy
2%
2025.04
Medicare Levy Surcharge -
Tax and Medicare Levy 26985.28
Tax offset
LMITO 361.23
Tax after offset 26624.05

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Less PayG 30000
Net tax
refundable
3375.95
Part 2
(a) In this case very appellant had claimed deduction in relation to their assessable
income with respect to money paid for agreement between the appellant and Messrs.
E. G. Theodore and D. F. H. Packer and Sydney Newspapers Ltd. The issue was in
relation to deduction of expenditure with respect to a particular accounting period.
Both the companies had claimed deductions. Sun Newspapers had made an attempt to
prevent a competitor from introducing a more competitive newspaper in Sydney
(Sadiq et al. 2012). This was done by effectively having an agreement with $865000.
In this case the court had made a rule that the expenditure was not deductible as the
company had made their business structure stronger by purchasing the rights of the
competitors. The primary rule in relation to deductions is that any expenses which
have been gained in relation to production of the assessable income are deductible
expenses if they are not for a private use or capital in nature. Thus any expenses
which are incurred in relation to business activities but are also having a capital nature
which means that they are not associated with day to day operations of the business
cannot be deducted. The primary notion raised by the case was that if the expense is
of a capital nature it cannot be deducted. The first negative limb of s 8-1 denies a
deduction for a loss or outgoing to the extent that ‘it is a loss or outgoing of capital or
of a capital nature’. ‘Capital’ losses or outgoings need to be distinguished from
‘revenue’ losses or outgoings. Only revenue losses or outgoings may be deducted

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under s 8-1. Over the years, the courts have spent considerable time and effort in
distinguishing between ‘revenue’ and ‘capital’ losses or outgoings and they have
developed various judicial tests to assist them in this process. The three leading tests
(discussed below) are the ‘once and for all’ test, the ‘enduring benefit’ test, and and
the ‘business entity’ test
(b) The principles discussed above have been used repeatedly in various cases in
Australia to determine the deductibility of expenditure. Dixon J’s comments in both
Sun Newspapers and Hallstroms have since been widely accepted and endorsed by the
Australian courts. The business entity test is now the leading Australian
pronouncement on the distinction between capital and revenue expenditure and it has
been relied on in many subsequent important cases discussed further on in this
chapter. The once and for all test can be traced to the United Kingdom decision in
Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529, which concerned a taxpayer
that owned and operated a rubber estate in Malaya. The taxpayer had claimed
deductions for its ‘general expenditure’ relating to the estate. Such expenditure
included expenditure on weeding, pest control and superintendence of the estate.
However, as only one-seventh of the trees on the estate were producing rubber at the
time, the Inland Revenue Commissioners only allowed the taxpayer deductions for
one-seventh of its general expenditure (Barkoczy 2016). According to the
Commissioners, the remaining six-sevenths of the expenditure was capital in nature.
In the sun case it was stated that the expenditure was not deductible as the company
had made their business structure stronger by purchasing the rights of the competitors.
The primary rule in relation to deductions is that any expenses which have been
gained in relation to production of the assessable income are deductible expenses if
they are not for a private use or capital in nature. Thus any expenses which are

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incurred in relation to business activities but are also having a capital nature which
means that they are not associated with day to day operations of the business cannot
be deducted. This is also known as the business entity test. In applying the business
entity test, the Australian courts have taken a broad view of capital expenditure and
have been prepared to treat as capital in nature expenditure that protects the
taxpayer’s business entity even though it may not result in the taxpayer acquiring a
new asset or altering an existing asset. This principle is illustrated in cases such as
Broken Hill Theatres Pty Ltd v FC of T (1952) 85 CLR 423 and PBL Marketing Pty
Ltd v FC of T 85 ATC 4416.

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References
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Broken Hill Theatres Pty Ltd v FC of T (1952) 85 CLR 423
PBL Marketing Pty Ltd v FC of T (1985) ATC 4416
Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst,
W. and Ting, A., 2012. Principles of taxation law 2012. Thomson Reuters.
Sun Newspapers Ltd v FC of T (1938) 61 CLR 337
Taxation Ruling 98/17
The Income Tax Assessment Act 1936 (Cth)
The Income Tax Assessment Act 1997 (Cth)
Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation
law. CCH Australia.