Taxation Law 101 Assignment: Income, Deductions, and Tax

This taxation law assignment addresses several key areas of Australian taxation. Question 1 defines discretionary trusts and their tax implications for beneficiaries, including minors. Question 2 analyzes the assessable income of individuals from partnership and employment, detailing relevant sections of the ITAA 1997 and case law regarding deductions and income characterization. Question 3 examines the tax liabilities of a business, including assessable income from sales and dividends, and allowable deductions for expenses like salaries, council rates, and asset purchases, including the application of the small business asset write-off. Question 4 includes a franking account reconciliation, an analysis of the deductibility of legal expenses, and the non-deductibility of childcare expenses, referencing relevant case law and legislation. The assignment provides detailed calculations and conclusions for each scenario, offering a comprehensive overview of tax principles and their practical application.

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
Answer to question 1..................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer to question 3:.................................................................................................................6
Answer to Question 4.................................................................................................................8
Answer to 4 A:...........................................................................................................................8
Answer to 4 B:...........................................................................................................................8
Answer to 4 C:...........................................................................................................................9
Answer to D:............................................................................................................................10
Reference List:.........................................................................................................................12

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Answer to question 1
The term discretionary trust can be defined as the trust which is usually used to
ascertain where the trustee has the discretion as how the income of the trust or the capital of
the is distributed between the benefits that are named of the classes of beneficiaries (Woellner
et al. 2016). According to the Australian taxation office the net income of the trust is taxable
income during the year in which it was earned based on the assumptions that trustee is the
resident. The beneficiary of the trust is entitled to trust income during the year of income
where they have been or by the end of year with the immediate right to demand for the
payment.
According to the Australian taxation office trustee pays the tax on behalf of the noon-
resident beneficiaries and those that are minors depending upon the share of the trust net
income (Barkoczy 2016). As evident from the case study it can be stated that the Steve and
Suzy are the beneficiaries of the trust while the John and Michelle are minor of the trustee.
As evident the beneficiaries of the trust Steve and Suzy derived net income from trust that is
taxable in the hands of the beneficiaries depending upon the share of the company.
Additionally, the minor of the trustee are John and Michelle that are aged below the 18 years.
As Michele and John are minors of the trust, in that case Steve and Suzy the trustee of
the trust would be required to pay the taxes on their behalf based on the share of the trust net
income (Basu 2016). The beneficiaries would be required to pay the taxes by declaring the
share of the trust’s net income in their own tax return. Additionally, the trust of the trust
namely Steve and Suzy would be levied taxes based on the trust income at the highest
marginal tax rate which is applicable to the individuals of the trust. Following the principles
of “Federal Commissioner of Taxation v Bamford (2010) ATC 20-170” it is understood that

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the income of the trust is in accordance with the trust estate based on the trust law principles
(Jones and Rhoades-Catanach 2015).
Answer to question 2:
Issues:
The present issue is associated with the determination of the assessable income of the
taxpayer from the income derived through partnership and income from employment as well.
Laws:
 “Section 6-1 of the ITAA 1997”
 “Scott v Federal Commissioner of Taxation (1935)”
 “Section 6-5 of the ITAA 1997”
 “Lunney v Federal Commissioner of Taxation”
 “section 8-1 of the ITAA 1997”
 “Section 25-10 of the ITAA 1997”
 “Rhodesia Railways v Federal Commissioner of Taxation”
Application:
As per “section 6-1 of the ITAA 1997” an individual deriving income from personal
exertion refers to the income that are obtained through the salaries or wages, allowances of
any form of money that is derived from the business that are carried on by the taxpayer either
along through the partnership (Miller and Oats 2016). As held in the case of “Scott v Federal
Commissioner of Taxation (1935)” income that are obtained from the personal sources or
through the ordinary concepts would be considered taxable. Similarly, an individual under
“section 6-1 of the ITAA 1997” is allowed to claim deductions relating to the expenses that

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are occurred in producing the taxable income (Christie 2015). As evident in the situation of
Jenny and Robert the income that are obtained from the partnership business would be
considered for assessment based on “section 6-5 of the ITAA 1997”. The receipts of
partnership would constitute ordinary income and would be included for assessment purpose.
An instances was reported where the partnership incurred a bank fees of $2,000 in
order to discharge the bank mortgage. According to “Lunney v Federal Commissioner of
Taxation” it is necessary to determine the character of the outgoings that is sufficient in
determining the necessary prerequisite of the derivation of the taxable income (Becker,
Reimer and Rust 2015). Similarly, under “section 8-1 of the ITAA 1997” the bank interest
that is incurred by Jenny and Roberts would be held as allowable deduction since it was
incurred in gaining the taxable income.
On the other evidences gained from the case study suggest that the Roberta obtained
income from clerk. With reference to “Section 6-5 of the ITAA 1997” the receipt from
employment of clerk by Roberta would be held for assessment.
“Section 25-10 of the ITAA 1997” an individual is allowed to deduct expenditure that
they incur for the purpose of repair to the depreciating assets that is entirely used for the
purpose of generating income (Bankman et al. 2017). However, the section does not allow a
person to obtain deductions relating to the capital expenses that are occurred.
According to the “taxation ruling of TR 97/23” repairs that involves significant
replacement are not allowed as deductions. The court of law in “Rhodesia Railways v
Federal Commissioner of Taxation” explained that expenses that are in the nature of capital
are not allowed as deductions (McDaniel 2017). Similarly, in the situation of partnership
business carried on Jenny and Roberta expenses of $500 that were incurred in replacing the
part of the machinery cannot be allowed as deductions since was capital in nature.

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In the Books of Jenny
For the Year ended June 2018
Particulars Amount ($) Amount ($)
Assessable Income
Income from Partnership Salary 70000
Jenny share of Partnership Income 26500
Total Gross Income 96500
Allowable Deductions Nil
Total Assessable Income 96500
Tax on Taxable Income 23337
Add: Medicare Levy 1930
Total Tax Payable 25267
In the Books of Roberta
For the Year ended June 2018
Particulars Amount ($) Amount ($)
Assessable Income
Employment income from bank 60000
Roberta share of Partnership Income 26500
Interest on loan 2000
Total Gross Income 88500
Allowable Deductions Nil
Total Assessable Income 88500
Tax on Taxable Income 20377
Add: Medicare Levy 1770
Total Tax Payable 22147
Working Note:
Calculations of Partnership Net Income
For the Year ended June 2018
Particulars Sections Amount ($)
Partnership Assessable Income Section 6-5 of the ITAA 1997 350000
Receipts from Clients Section 6-5 of the ITAA 1997 5000
Total Receipts 355000
Less: Deductions
Allowable Deductions Section 8-1 of the ITAA 1997 300000
Bank Fees Section 8-1 of the ITAA 1997 2000
Total Allowable Deductions 302000
Net Income from Partnership 53000
Partners Share's

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Jenny (1/2) 26500
Roberta (1/2) 26500
Conclusion:
It can be concluded by stating that the expenses such as bank fees paid to discharge
the partnership borrowings would be allowed as deductions under “section 8-1 of the ITAA
1997”. On the other hand, the income that are derived by the partners will be held taxable
under “section 6-5 of the ITAA 1997”.
Answer to question 3:
Issue:
The current issue is based on determining the deductibility of the expenses incurred
and the income that is earned by the Kustom Kitchens during the course of business.
Laws:
 “Section 6-5 of the ITAA 1997”
 “Section 6-1 of the ITAA 1997”
 “Section 8-1 of the ITAA 1997”
Applications:
With reference to “section 6-5 of the ITAA 1997” income derived from the ordinary
sources are held taxable (Murphy and Higgins 2016). Similarly, the receipt from the sales that
are derived would be considered taxable based on the ordinary concepts of “section 6-1 of
the ITAA 1997”. According to “section 8-1 of the ITAA 1997” an individual is allowed to
claim deductions under the positive limbs given the expenses are incurred in gaining the
taxable income (Wilson 2015). The council rates that are paid by the business forms the part
of deductions and will be allowed as deductions “section 8-1 of the ITAA 1997”. The

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payment that was received by the company as the part of sale agreement would be
considered for assessment under “section 6-5 of the ITAA 1997”.
The salaries that are paid by the company the employees are allowed as deductions
under “section 8-1 of the ITAA 1997” since it is incurred in producing the assessable income
(Schmalbeck, Zelenak. and Lawsky 2015). The case study provides that Kustom Kitchens
purchased an asset of $15,000. According to the Australian taxation office a business is
allowed to write off the assets that are bought for less than $20,000 and can claim deductions
in the same year when it is bought. With reference to “section 8-1 of the ITAA 1997”
Kustoms Kitchens can claim an allowable deduction for the same.
In the Books of Kustom Kitchens Pty Ltd
For the year ended 30 June 2018
Particulars Amount ($) Amount ($)
Assessable Income
Receipts from Sales 2050000
Receipts for selling electrical fittings 50000
Australian Sourced Dividend Income
Fully Franked (Net) 12000
Gross up franking Credits 8000 20000
Total Assessable Income 2120000
Allowable Deductions
Council Rates 3500
Salary Paid employees 500000
Salary paid to bills son 30000
Payment to retired employee 5000
Purchase of Computer 15000
Sponsorship Expenses 10000
Other deductions 925000
Total Allowable Deductions 1488500
Total Taxable Income 631500
Tax on taxable income (27.5%) 173662.5
Less: Franking Credit 8000
Total Tax Payable 165662.5

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Conclusion:
Conclusively the income that are obtained by the taxpayer will be held assessable
under “section 6-5 of the ITAA 1997” and the expenses incurred would be allowed for
deductions under “section 8-1 of the ITAA 1997”.
Answer to Question 4
Answer to 4 A:
Franked Account Balance
Date Description Dr Cr Balance
01-07-
2017 Balance Forward $ 10,000
21-07-
2017 PayG Instalment Payment $ 15,000 $ 25,000
31-07-
2017 Fully franked dividend $ 7,350 $ 32,350
31-08-
2047 Interim dividend paid $ 21,000 $ 53,350
28-10-
2017 Payment of PayG Tax Instalment $ 7,000 $ 60,350
28-02-
2018 Payment of PayG Tax Instalment $ 7,000 $ 67,350
31-03-
2018 Payment of Final Dividend
$
28,000 $ 39,350
31-03-
2018 Distribution of franking credit $ 7,200 $ 46,550
28-04-
2018 Payment of PayG Tax Instalment $ 7,000 $ 53,550
05-06-
2018 Payment of Income Tax $ 2,000 $ 55,550
Answer to 4 B:
Issue:

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Are the taxpayer allowed to claim deductions for legal expenses that are incurred in
producing the taxable income under “section 8-1 of the ITAA 1997”.
Laws:
“Section 8-1 of the ITAA 1997”
“Herald Weekly Times v FCT (1932)”
Applications:
Usually “section 8-1 of the ITAA 1997” legal expenses are incurred in gaining or
producing the taxable income or incurred relation to any business activities are held as
allowable deductions (Schmalbeck et al. 2015). Referring to the case of “Herald Weekly
Times v FCT (1932)” the legal expenses incurred by Amusement Pty Ltd would be allowed
as deductions under “section 8-1 of the ITAA 1997” since it was incurred in gaining or
producing the taxable income.
Conclusion:
The legal expenses incurred by Amusement Pty Ltd is related to the derivation of
business income and would be considered as assessable income under “section 8-1 of the
ITAA 1997”.
Answer to 4 C:
Issue:
Is the taxpayer allowed to claim deductions relating to the expenses occurred for the
childcare under “section 8-1 of the ITAA 1997”?
Laws:
 Lodge v FCT

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 Section 8-1 of the ITAA 1997 Section 8-1 (2) of the ITAA 1997
Applications:
“Section 8-1 (2) of the ITAA 1997” explains that expenses that are private or domestic
in nature are non-allowable under both the positive and second negative limbs. The court of
law in “Lodge v FCT” denied the taxpayer to claim deductions for expenses incurred in
childcare expenses (Wilson 2015). Similarly, the child care centre expenses incurred by Eve
will not allowed for deductions under “section 8-1 of the ITAA 1997” since it was private in
nature.
Conclusion:
On a conclusive note the child care expenses incurred by Eve are non-allowable
deductions under “section 8-1 of the ITAA 1997” since it was private in nature.
Answer to D:
Issues:
Is taxpayer allowed to claim deductions for expenses paid for subscription to trade
union under “section 8-1 of the ITAA 1997”?
Laws:
F.C of T v Gordon
“Section 8-1 of the ITAA 1997”
Applications:
“Section 8-1 of the ITAA 1997” provides that subscriptions to trade unions are
allowed as deductions since it is incurred in gaining the assessable income. The law court in

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“F.C of T v Gordon” stated that subscription paid by the taxpayer to trade union are
considered for deductions (McDaniel 2017). The subscriptions paid by the manufacturers to
the Australian Manufacturer Worker Union will be allowed as deductions under section
“Section 8-1 of the ITAA 1997”.
Conclusion:
On a conclusive the expenses of the trade union subscriptions are in the course of
gaining assessable hence it would be allowed for taxation.

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Reference List:
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation.
Wolters Kluwer Law & Business.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International.
Christie, M., 2015. Principles of Taxation Law 2015.
Jones, S. and Rhoades-Catanach, S., 2015. Principles of Taxation for Business and
Investment Planning. McGraw-Hill Higher Education.
McDaniel, P., 2017. Federal Income Taxation. Foundation Press.
Miller, A., and Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage
Learning.
Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters
Kluwer Law & Business.
Wilson, J.D., 2015. 11. Tax competition in a federal setting. Handbook of Multilevel Finance,
p.264.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.

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