Taxation Law: Exploring GST, Income Tax, and Legal Frameworks

This report provides a detailed analysis of various aspects of taxation law in Australia. It addresses restrictive covenants, deductible gifts, and the process of tax assessment. It explains the implications of late tax payments and tax shams. Furthermore, the report examines GST adjustments related to returned goods and the imputation system of company taxation, including franking credits and their impact on different entities. The report also includes a calculation of the decline in value of an asset for a small business and discusses CGT concessions. Desklib offers a wide range of solved assignments and past papers for students.

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

1TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................2
Answer I:................................................................................................................................2
Answer II:...............................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer I:................................................................................................................................3
Answer to question 3:.................................................................................................................4
Answer I:................................................................................................................................4
Answer II:...............................................................................................................................5
Answer to question 4:.................................................................................................................5
Answer to question 5:.................................................................................................................6
Answer to question 6:.................................................................................................................8
References:...............................................................................................................................10

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Answer to question 1:
Answer I:
A restrictive covenant or the arrangement is better understood as an activity that is
undertaken by one party to another party for doing trade in certain line of products or not to
directly or indirectly compete against one another (Woellner et al. 2016). Restrictive
covenant should be considered as the agreement that is entered by the party that imposes
restrictions on the other person’s trading activity or other revenue generating rights or
activities. The payments that are received from entering into the restrictive covenants are
treated as capital in nature.
As held in “Dickenson v FCT (1958)” the taxpayer was the proprietor and had the
service station (Braithwaite and Reinhart 2019). The taxpayer formed an agreement with the
Shell Oil Company that restricted the sales of the taxpayer to their product only for a specific
period of time and not to operate another service station inside the radius of five miles of his
parent’s business without forming any kind of identical trading activity. The amount that was
received for entering in the agreement was considered as capital in nature because the
payment portrayed the character of compensation for the taxpayer as he gave up or restricted
a portion of his trading activity.
Similarly, in the situation of George the payment of $40,000 that was receive for
entering into the agreement of not revealing or using their private information and also
limiting his ability of not working for a competitor for the remaining period of the
employment contract should be considered as capital in nature. This is because the payment
portrayed the character of compensation for George as he gave up and restricted his income
producing activities.

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Answer II:
a. As stated under the “division 30, ITAA 1997” an income tax deduction might be
claimed by the taxpayers for gift or donations of property or money that has the value
of $2 or greater than that which is made to the gift deductible recipient, given that
certain conditions are met (Barkoczy 2016). Cheryl made a donation of $300 to the
building fund of local public primary school. The donation that is made by Cheryl
will be allowed as deduction under the “division 30, ITAA 1997” because the local
public primary school is considered as deductible gift recipient.
b. The donation of $50 that is made to the local public library will be considered as
deductible under the “division 30, ITAA 1997” because the public library is an
Australiana fund and meets the requirements of section 30-17 (Morgan, Mortimer and
Pinto 2018). The library is an eligible gift recipient and Cheryl will be permitted to
claim income tax deduction for the same.
c. An individual taxpayer is permitted to claim deduction for the entire amount of
payment that is made to the membership of trade, business or professional association
that is directly associated to the derivation of taxable income (Freudenberg et al.
2017). A taxpayer is permitted to claim up to $42 per annum in relation to the
subscription made for any membership of trade, business or professional which is not
directly associated to the income producing activities of the taxpayer. Cheryl has paid
$700 as the membership fees to the real estate agent association. Though she has not
been working for couple of years following the birth of her child but intends to return
to work someday. With respect to this, Cheryl is only permitted to claim deduction of
$42 for the membership subscription since it is not directly associated to the income
generating activities of the taxpayer.

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Answer to question 2:
Answer I:
Tax assessment can be defined as the work of ascertaining the value and at times it is
associated to the determination of the use of property generally to compute the taxable
income (Middleton 2015). This generally conducted by the office named assessor or the tax
assessor. An assessment is regarded as the end result relating to the procedure of determining
the taxable income of the taxpayer and computing the total amount of tax to be payable on
that income.
The process of tax assessment is considered important because it helps the Australian
taxation office to ascertain the necessary rate of tax that will support yearly public budgets.
The primary objectives of the Australian tax system as a whole is to effectively raise the
revenue for the purpose of redistribution to the community with the respect to the government
priorities (Murray et al. 2018). The main focus of this system administration is to collect
revenue with minimum supervision and cost of compliance.
Answer II:
By introducing the self-assessment system, the ATO has changed the way it carried
out the compliance activities. Under the previous system, a significant amount of ATO
resources were focused on the assessment procedure. however, when the emphasis shifted
from assessment, ATO formed more refined compliance model that are aimed at assisting the
taxpayers to adhere with and recognize those that does not pay tax (Morgan, Mortimer and
Pinto 2018). Resources from the assessment widely went to taxpayer’s assistance and
improvement of compliance, which permitted the ATO to collect more amount of tax revenue
from those that have under-assessed their liability of tax. The ATO has designed a tax system
that mainly involves minimal administration and cost of compliance.

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Answer to question 3:
Answer I:
If the taxpayers are late in paying tax, then the ATO imposes general interest charge
as well as short fall interest charge for the amounts that are unpaid. This genially comprises
of the shortfall amounts, late payment of tax and outstanding tax debts. The interest charges
are applicable whether or not the penalties are applicable.
Answer II:
Tax sham is referred as transaction that does not serves any kind of business purpose
and provides the economic benefit (Morgan and Castelyn 2018). The transaction is entered
with the objective of deceiving primarily to evade the tax liability.
Sham transaction generally happens when there is no kind of considerations are
involved in transfer process. The effect of tax sham is that it practically effects the economy
and contributes to the creation of income tax.
Answer to question 4:
According to the ATO when the customer returns the goods to the retailers that is sold
it will be considered as the cancellation of the actual sales (Cavenagh et al. 2018). As the
retailer has paid GST on sale and the customer has claimed a CGT credit both the parties will
be required to make adjustment.
Similarly, in the situation of Surfs Up P/L a national retailer sold goods to Billapong
P/L. However, it was noted that 14 surfboards were faulty and were returned to the Surfs Up
P/L. As Surfs up has refund the money of faulty goods to Billapong P/L it will be entitled to
GST credit relating to the GST component of goods that was included in the earlier activity
statement. For Surfs Up P/L the credit will be reflected in the next activity statement in the
form of decreasing adjustment.

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While for Billapong P/L who as actually claimed the GST credit relating to the GST
paid in the price of goods returned, the company will be required to make an increasing
adjustment in its next activity statement which it is liable to pay.
Answer to question 5:
Australia has the imputation system of imposing company taxation. In other words, it
means that the company pays the tax on the taxable income and attaches the tax credit which
is known as franking credit or imputation credit to the dividends that is paid to the
shareholders. The dividends that are received by the individual taxpayer are required to be
included into the assessable as statutory income based on the provision of “section 44(1),
ITAA 1936” (Robin 2019).
Scenario 1:
Tom who is a resident with the gross salary income of $60,000. Tom is paid a sum of
$7000 fully franked dividend during the year. Tom is required to include the following sum
into his taxable income.
Dividends = $7,000 (section 44 ITAA 1936)
Franking Credit = $7,000 x (30/70) = 3000 under section 207-20 (1).
Computation of Assessable Income
Particulars Amount ($)
Assessable Income
Gross Salary $ 60,000
Australian Sourced Dividend Income
Fully Franked Dividend $ 7,000
Gross up Franking Credits $ 3,000
Total Assessable Income $ 70,000

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On assuming that the taxpayer has the marginal rate of tax 32.5%, the tax on
dividends and franking credits will be for Tom is computed below;
7000 + 3000 = 10,000
10,000 x 0.325 = $3,250
The effect of franking credit;
Net tax payable on the dividend = $3,250-$3,000 = $250
Scenario 2:
In the second scenario it is noticed that Teresa is the resident and she is paid with
fully franked dividend of $7,000. As she does not have no other source of income at the time
of tax Teresa must declare the $7,000 along with the franking credit of $3000 in her taxable
income. If her marginal tax rate is 19% then she would normally be required to pay a tax of
$570 on the dividend. Since the company has already paid $3000 in tax and Teresa will
obtain the refund for the difference amount that stands $2,430.
Scenario 3:
R Co is the resident private company that has the tax loss of $1,000. The company is
paid with the dividend of $7,000. The dividends that is received by the R Co can be used to
offset the tax loss of $1,000 from the total dividends.
Scenario 4:
The dividends that is paid to Super Co who is a trustee of the complying superfund
would be liable for tax. The Super Co is assumed as the beneficiary of the trust and the

8TAXATION LAW
company will be entitled to franked distribution from the dividend. As super co is a
beneficiary it will be only taxed on the franked distribution.
Scenario 5:
F Co being the non-resident of Australia is paid with the dividend of $7,000. As the
company is the non-resident the franked amount of dividends that is received or paid will be
considered exempted from Australian taxation and withholding taxation. While the unfranked
amount for F Co will be considered for withholding tax.
Answer to question 6:
Calculation of the decline in value of Machine for Acme Pty Ltd:
Depreciation Schedule
Asset
Type
Base
Value
Days
Held
Days in
Year
Percent
age
Effectiv
e life
Decline in
Value
Closing
Balance
Machin
e
$
5,00,00
0 334 365 200% 8
$
1,14,384
$
3,85,616
According to the Australian Taxation Office small business are allowed to obtain
CGT concessions. The small business concessions are available when the taxpayers dispose
the active asset and any of the below stated are applied;
a. Small business entity with the aggregate turnover of less than $2 million
b. The asset was used closely in relation with the small business
c. Having asset of not greater than $6 million.
“Subdivision 152-C” explains that an individual is allowed to a 50% of the active
asset reduction. A business is only allowed to reduce the net capital gains on the active asset
by 50% if the business has owned the asset for a minimum of 12 months in the income year
(Robin and Barkoczy 2019). As evident in the situation of Acme Pty Ltd the business sold the

9TAXATION LAW
machine which it held from 1st January onwards till 1st December in the current tax year was
sold for $400.000. The machine was held for less than 12 months before it was sold. Acme
Pty Ltd will not be allowed to claim 50% active asset deduction under “subdivision 152-C”
because the asset was not held by the business for 12 months or more to be considered
eligible for deduction.
Computation of Capital Gains/Loss
Particulars Amount ($)
Sales Proceeds $ 4,00,000
Cost Base $ 5,00,000
Less: Depreciation $ 1,14,384
Adjusted Value $ 3,85,616
Net Capital gains $ 14,384

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References:
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.
Cavenagh, J., Matley, H., Burke, L., Castles, S., Chesterfield, T., Clare, G., Fitzgerald, C.,
Grant, S., Kluckow, T., Lewis, A. and Norris, A., 2018. Australian legislation concerning
matters of international law 2016. Australian Year Book of International Law, 35, p.353.
Freudenberg, B., Chardon, T., Brimble, M. and Isle, M.B., 2017. Tax literacy of Australian
small businesses. J. Austl. Tax'n, 19, p.21.
Middleton, T., 2015. Banning, disqualification and licensing powers: ACCC, APRA, ASIC
and the ATO–regulatory overlap, penalty privilege and law reform. Company and Securities
Law Journal, 33, pp.555-580.
Morgan, A. and Castelyn, D., 2018. Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murray, I., Taylor, J., Walpole, M., Burton, M. and Ciro, T., 2018. Understanding Taxation
Law 2019.

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Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.), 2019. Australian Taxation
Law Select 2019: Legislation And Commentary. Oxford University Press.
Robin, H., 2019. Australian Taxation Law 2019. Oxford University Press.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.