LAWS20060 Taxation Law: Comprehensive Analysis of Australian Tax

This report provides a comprehensive analysis of key concepts in Australian taxation law. It addresses various aspects including the purpose of taxation, equity in taxation, calculation of taxable income, progressive tax systems, and the treatment of allowances. The report also examines the residency test for taxation purposes, determining whether an individual is considered an Australian resident based on factors such as physical presence, family ties, and intention to reside. Furthermore, it delves into the calculation of income tax, assessable income, and deductible expenses, referencing relevant sections of the Income Tax Assessment Act and relevant case law. The analysis extends to the characteristics of a business for tax purposes and the deductibility of various business expenses. The document is available on Desklib, which provides a platform with past papers and solved assignments 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 1....................................................................................................................................2
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................5
Answer 4....................................................................................................................................7
Answer 5....................................................................................................................................8
Answer 6....................................................................................................................................9
References................................................................................................................................12

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Answer 1
Answer A
Tax is considered to be compulsory contribution towards supporting the government to
operate. This is levied on property, persons, commodities, transactions and income. Thus the
primary purpose of taxation is to provide financial resources to the government so that it can
operate efficiently (Barkoczy 2016).
Answer B
Equity with respect to the discussion of a good taxation system does not signify treating
equally. This means that person having the higher income has to be taxed more as compared
to a person having a lower income so as to maintain a social balance in society. If all incomes
are equally taxed it would be unfair on the part of those who have a lower income (Becker,
Reimer and Rust 2015).
Answer C
According to section 4-15 of the Income Tax Assessment Act 1997 taxable income can be
worked out in three steps. The first step include adding all assessable income for the year.
Step two includes adding all the applicable deductions under division 8 and the final step is to
deduct from the assessable income the deductions unless they exceed (Devos and Zackrisson
2015).
Answer D
A progressive tax system aims at achieving equality with respect to the taxes imposed onto
individuals. In this system more tax is imposed in the persons who have a higher income as
compared to those who have a lower income. This reduces the burden of taxation from low
income groups and trigger income equality (Becker, Reimer and Rust 2015).

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.
Answer E
Section 15.2 of the Income Tax Assessment Act 1997 includes the value of allowances in
assessable income.
Answer F
Taxation Ruling TR 2004/15 deals with the question that whether a company which has not
been incorporated in Australia is a resident for taxation purpose of Australia
Answer G
The two divisions which provides for deduction of capital expenditure in the ITAA 97 are
Subdivision 40H and Subdivision 40I
Answer H
The applicable tax rate for a taxpayer who has $80,000 of taxable income in 2017/18 is 0%
till $18200, 19% till $37000 and 32.5% for income above $37000 till $87000. Thus his tax
would be $3572+ (80000-37001)*32.5 which is $17546.68
Answer I
Sub-divisions of Income Tax Assessment Act 1997 list the provisions that treat amounts as
Non Assessable Non Exempt income are subdivision 50A and 50B
Answer J
The applicable rate for motor vehicles with an engine capacity over 2500cc is 63 cents
(Becker, Reimer and Rust 2015).
.

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Answer 2
Issue
The issue in the situation is to determine whether Martelle is an Australian resident for tax
purpose or not.
Rule
There are various tests which are applied in situations to identify whether a person is an
Australia resident for tax purpose or not. These tests include the resides test and the
permanent place of abode test (TR 98/17 and TR IT 2650). The test analyzes the physical
presence of the person in Australia, presence of family or economic tie, duration and
frequency of visit, intention of visit, location and maintenance of assets, permanent home and
employment ties (Evans, Lignier and Tran-Nam 2016). The 183 day test states that if a
person stays in Australia for more than 183 days they are considered to be residents. However
the ATO will not hold such person as a resident of Australia for taxation purpose if such
person has a place of abode outside Australia and does not have the intention to take up
residency (Becker, Reimer and Rust 2015).
The definition or resident has been provided by ITAA 1936 via section 6(1). A person will be
a resident if he or she resides in Australia with respect to the general meaning of reside. Any
single factor is not enough to prove the residency of a person. In FC of T v. Pechey 75 ATC
4083; (1975) 5 ATR 322 it had been stated by the court that a person will have the intention
to stay in Australia if they reside for a time which is more than the time required to do the
work.
It has been provided by s 6-5 and 6-10 that resident tax payers are to pay taxes on all incomes
made by them irrespective of from where they have been sourced.
Application

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In the given situation whether Martelle is a resident of Australia for taxation purpose depends
upon analyzing the factors such as physical presence of the person in Australia, presence of
family or economic tie, duration and frequency of visit, intention of visit, location and
maintenance of assets, permanent home and employment ties.
In the given situation although Martelle is physically present in Australia, has family ties and
owns assets it would be stated that she is not a resident for taxation purpose as she is has
employment ties outside, she does not intend to stay in Australia, she has a permanent place
of abode outside Australia and her assets are to be maintained by her father. Thus she is not a
resident for taxation purpose.
If a person is a resident for taxation purpose they have to pay taxes for all income which they
have earned. A non resident will be charged tax only n income which has been sourced in
Australia. They do not have to pay Medicare levy under section 251U(1)(d) of the ITAA 36
and have to pay CGT on real property assets in Australia.
Conclusion
Martelle is not a resident for tax purpose in Australia.
Answer 3
The 9000 which has been paid directly into his Westpac bank account will be considered as
ordinary income under the provisions of s6-5 of the ITAA 97.
$425 interest which has been received by her on her Westpac bank account would also be
considered as ordinary income under the provisions of section 6-5 of the ITAA 97.
Prize received by him worth $6500 would not be treated as an assessable income because it
has been provided by the case of Scott v. Federal Commissioner of Taxation (1966) 117 CLR
514 that prize or gift would be considered as income inc case it is a common incident for the

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tax payers occupation. It has been further stated by ATO ID 2002/644 that Prize in ordinary
sense would not be an income unless it is in relation to an income producing action of the
taxpayer. The whole circumstances needs to be taken into consideration as per the Squatting
Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570 case. Thus as
this is a isolated event it would not be considered as an assessable income.
In the case of Paykel v FC of T 94 ATC 4176 it had been stated that an income which has
been received as a lump sum in lieu of a restrictive covenant would be capital in nature and
not be considered as assessable income as it is not incidental to normal activities of earning
income. This is a one off payment and would not be repeated. Thus the $10000 would not be
considered as assessable income.
In case heath insurance is withdrawn it leads to the payment of Medicare Levy surge charges.
Calculation of Income Tax for the tax year ending 30 June 2018
PARTICULA
RS
AMOU
NT
AMOU
NT
Amount Received in
Bank
9000
Amount Received as
Interest
425
Total
Assessable
Income
9425 9425
Income Tax
Payable

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Till 18200 Nil
Medicare Levy not applicable
as assessable income below
threshold
NIL NIL
Total Tax to
be Paid
NIL NIL
Answer 4
Under division 40 of the ITAA 97 an amount can be deducted which is equal to the
depreciation or decline in value with respect to an income year for a depreciating asset which
is held anytime in the year, however the asset has to be used for the purpose of deriving the
assessable income as under s 40-25(7). These income include business income, salary and
wages and investment income. There are two methods of calculating deduction which are
Primary cost method and Diminishing value method which is used post 9th May 2006 (Saad
2014).
The amount of deduction for the decline in value in relation to Primary cost method
Section 40-75(1) Asset’s Cost x (Days held/365) x (100%/Asset’s effective life)
ITEM COST LIFE DEPRECIATIO
N
HAIR DRYER 8000 7 1142.857
SOFTWARE 295 3 98.33333
AUDI 85000 6 14166.67
Total 15407.86

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The amount of deduction for the decline in value in relation to diminishing value method
Section 40-75(1) Asset’s Value x (Days held/365) x (200%/Asset’s effective life)
ITEM COST LIFE DEPRECIATIO
N
HAIR DRYER 8000 7 2285.714
SOFTWARE 295 3 196.6667
AUDI 85000 6 28333.33
Total 30815.71
Answer 5
As provided by TR 97/11 the factors which are taken into consideration in relation to the
characteristics of a business are as follows
 There must be intention to engage in the business
 There must be intention of making profit
 There must be repetition of regularity of the operations
 It has to be in businesslike manner such as systematic activities , methods, standards
and structure
 It must have activities of the same kind which are carried out by businesses in the
same line generally
 It must be permanent in nature
According to s 995-1 a business is any trade, employment, vocation, calling or profession not
including work as an employee. The identification of a business is a considered as a matter of
fact (Endres and Spengel 2015). A person indulging in primary production activity after

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retirement is considered to have been carrying out a business even where he was a naval
officer in the case of FC of T v Ferguson 1979.
Thus in the given situation the above factors needs to be taken into consideration by Julie if
she wants to ensure that her ‘new business’ is interpreted as such by the ATO. For example in
the case of Case P67 82 ATC 317 stated in Taxation Ruling TR 2005/1 a person was held to
be carrying out a business of photography where he gave 12% of his total time in clicking
photos for the purpose of making a profit.
Answer 6
a) The salary cost of $300000 will be a deductible expense under the provisions of s 8-1
general deductions as it has been used for the purpose of gaining the business
assessable income.
b) This expense is subjected to the discretion of the ATO to be regarded as reasonable or
not as it is a expense which has been paid to a relative. It has been provided by section
26-35(1) of ITAA 1936 that the deduction of an amount made to a related entity can
be done as far as the commissioner considers it reasonable taking into consideration
age, nature if duty, hours word, total remuneration and wages claimed as deduction.
In this case also the amount of $4000 would be subjected to the consideration of the
commissioner. It is likely that $4000 is excessive for nine hours of work for a person
studying graphic designing.
c) The general rule under div 32 and section 32-5 state that a loss or outgoing for
providing entertainment is nit generally deductible with respect to s 8-1 of the ITAA
97. These expenses can only be claimed if they are for the purpose of gaining the
assessable income such as advertisement cost. Thus in the given situation the $900 on
membership to the local bowls club where he entertains clients is not deductible.

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d) Non-Deductible- this income would be not be deductible under the provisions of
section 8-1 of the ITAA 97 as it has no nexus of earning the assessable income. The
expenditure is not satisfying the positive limb as it is not incidental or relevant to gain
the assessable income.
e) Non-Deductible this income would be not be deductible under the provisions of
section 8-1 of the ITAA 97 as it has no nexus of earning the assessable income. The
expenditure is not satisfying the positive limb as it is not incidental or relevant to gain
the assessable income.
f) Deductible – this interest would be deductible as under the provisions of section 8-1
of the ITAA 97 as it has nexus of earning the assessable income and the interest is
paid in relation to it. The expenditure is satisfying the positive limb as it is not
incidental or relevant to gain the assessable income and no negative limb is trigged.
The provisions have also been discussed by the case of FC of T v. Smith 92 ATC
4380; (1992) 23 ATR 494.
g) Non-Deductible- This is because Travelling form home to work is considered an
expense of domestic or private nature and thus it would trigger the negative limb of
section 8-2 of the ITAA 97. The provisions had also been discussed in the case of FC
of T v. Lunnet 1958 where the court stated that traveling expenses for and two work
cannot be claimed as deductable as they do not have any nexus or perceived
connection with gaining the assessable income.
h) 80% deductible – Phone call expenses are considered to be of a private and domestic
nature and thus not deductible under section 8-2 of the ITAA 97. However if there is
evidence that such expenses have been incurred in relation to work then proportion to
which they have been used for work is deductible. Thus here as the phone is claimed
to be used 80% for work related issues, the expenses would be 80% deductible.

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i) Deductible, this is because the expenses have been incurred for the purpose of gaining
business income. The marketing conference is associated to business. Therefore the
positive limb if section 8-1 of the ITAA 97 will make the expenses deductible.
j) Deductible- under the provisions of section 25-5(1) of the ITAA 97 expenses incurred
in relation to the management of tax affairs are deductible. Thus $500 would also be
deductible.