Taxation Law Assignment: Francis and Tom's Tax Implications

This assignment analyzes Australian taxation law through two case studies. The first case study focuses on Francis, a businessman who recently purchased a restaurant and needs to repair the kitchen. The analysis covers the deductibility of expenses related to replacing the kitchen and repairing appliances, referencing ITAA 1997 and related sections. The second case study examines Tom, a businessman and guitar teacher, and involves calculating his business income, taxable income, and tax payable for the year 2019-20, based on various income sources like sales, salary, and dividends. The assignment provides detailed calculations and explanations, considering relevant tax rules and regulations and provides a comprehensive understanding of tax implications for both individuals and businesses. It highlights key aspects of Australian taxation, including deductions and tax calculations.

Taxation Law

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Question 1....................................................................................................................................1
Questions 2..................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERNECES................................................................................................................................6

INTRODUCTION
Tax is a type of liability of every individual as well as a business because for all of them
it is very important to pay right amount of taxation on the income which is generated for the
year. If companies or entities are not able to pay the tax properly then it may result in legal
actions of the government. In Australia taxation rules are very strict and for all the individuals as
well as companies it is very important to make sure that they are following all of them pay tax
(Allen, 2018). Present report is based upon analysis of taxation laws so that understanding of
them could be enhanced. This assignment is segregated in tow parts first one is based upon
analysis of taxation rules for a commercial kitchen. The second part of the report is based upon
calculation of total and taxable income along with the total tax payable on the same. For this
purpose, different factors are focused in this project these are ITAA, 1936, ITAA 1997, their
sections, income tax rules and regulations etc.
MAIN BODY
Question 1
Francis is a business man who has bought a restaurant recently. The kitchen in it is not in
good condition and for Francis it will be very important to repair it so that all the activities in
future could be performed systematically. If the whole kitchen will be replaced then cost of it
will be around 23000 dollars and the appliances which are used in it will be replaced then the
cost of them will be 4900 dollars. Francis have decided to replace the whole kitchen with new
appliances as they are having better features and durability (Barkoczy, 2017).
All the expenses which will be made by Francis are deductible to a limit but all of them
could not be deducted. As these will be made for the purpose of repair so according to taxation
law of Australia if a restaurant which is small in size purchase business assets up to 20000
dollars then it will be deductible immediately (Australian taxation laws for deduction, 2020). If
the value of the asset will be less than this amount then the cost will be deductible from the tax
and the cost of asset will be high then it will not be deductible only 20000’s deduction will be
allowed. As Francis has planned to replace the whole kitchen with a new one and the cost of it is
23000 so the amount which will be deductible under the taxation law of Australia will be 20000.
Remaining 3000 will be deductible under the taxation rules. Francis cannot get deduction of
3000.
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Francis has also determined that repair of old appliances will cost around 4900 dollars
and willing to get deduction for the same. The repair of the commercial kitchen appliances could
be deducted from the total taxable income under section 25 – 10 of the Tax assessment Act 1997.
According to ITAA 1997 repair is a capital expenditure and it could be deducted from the total
taxable income so Francis will be able to get the rebate of 4900 dollars which will be made for
the repair of appliances of kitchen (ITAA 1997, 2020).
The section 25 – 10 of the ITAA 1997 states that when the property is bought from
another party and the new owners have decided to spend some money on the repair then it will
be allowed to deducted form the total taxable income. This section states that initial repair which
will be made by the tax payer that remedies some defects in the property of reduce the damage to
it could be deducted from the total income. Initial repair is the repair which is made to the
property for the first time but the kitchen appliances in the commercial kitchen of the restaurant
would have repaired by the old owner. This tax consequence could be faced by Francis because
the repair will not be made for the first time. In order to deal with it, Francis will be required to
be aware of all the rules of section 25 – 10 of ITAA 1997. According to 5th regulation of the
section if the property is bought recently and the repair will be made after acquisition then it will
be treated as initial repair because it will be made by new owner for the property. When a newly
bought property is damaged and require repair then all the expenses which will be made by the
new owner are deductible under the taxation law as it will be treated as initial repair (Haines,
2017).
While planning to get the rebate of 4900 dollars which will be spent by Francis for the
repair of old appliances it will be very important to make sure that these expenses are not
covering maintenance. According to Section 8 – 1 and 42 – 15 of ITAA 1997 the repair may
include the expenses of maintenance but it will be allowed for deduction when it is done in
conjunction with the work which is repair. Only maintenance expenses could not be included in
the repair cost and if it will be done by an entity then it will be treated as legal offence and no
deduction will be allowed to the tax payer (Hobson, 2019).
In order to get the deductions, it will be very important for Francis to have detailed
information of all the laws or hire a tax consultant who can provide appropriate information of it.
The material facts which are required to be focused by Francis for the commercial kitchen are as
follows:
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 The total cost of repair does not include only the maintenance amount as maintenances
are not allowed to be deducted from the taxable income according to section 8 – 1 and 42
– 15 of ITAA 1997.
 If the maintenance is included in the cost of repair then it should be made in conjunction.
In this case the total amount of repair will be deducted from the taxation liability.
 The total deduction related to the replacing the whole kitchen will be limited to 20000
dollars according to Australian taxation law. Francis cannot claim the total value of
replacement which is 23000 dollars (Hodgson, Castelyn and Marriott, 2019).
In order to ignore the potential implications of all the above described material facts
Francis will be required to claim the appropriate deductions. It can help to comply with all the
Australian Taxation laws.
The taxation rule which was required to be followed by all the companies which are
operating business in Australia was ITAA 1936 (ITAA 1936, 2020). There were some specific
amendments were made in it and ITAA 1997 was launched. According to the old rule all the
expenses which will be made for replacement by small restaurants will be allowed for deduction
but in the new rule some changes were made in context to it and the limit for 20000 dollars was
made. It was made because if small restaurants can make replacements of over 30000 or 50000
then they will not be treated as small. They will have to follow the taxation rules that are made
for medium sized or large entities. One of the key issues which may take place for Francis in
future in context of tax is lack of awareness of amendments in ITAA 1936. If the new owners
will file the taxation law by deducting the total cost of replacement which is 23000 then it will
not be allowed. It may also result in legal actions. In order to ignore this consequence Francis
will be required to follow the taxation rules that are amended under ITAA 1997. There are
various new matters are now added in it so that accurate tax liability could be analysed.
Questions 2
Tom is a business man and owns a business named Tom’s Band. It is established in
Westfield and musical instruments are sold by it in the market. Tom is also a guitar teacher.
There are several incomes were received by Tom for year ending 2019 – 20. It has been
proposed that no deductions will be allowed to Tom for the year and the business income,
taxable income, tax and tax payable on the same is require dot be calculated (Kenny, Blissenden
and Villios, 2017). The calculations of the same are as follows:
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Calculation of Tom’s business income:
Particulars Workings Amount
Sales 220000
Less: sale of last year 2500
Add: sales for the year 3200
Total sales for 2019 - 20 220700
Salary from Sydney Guitar School 53000
Less: Advance salary 4200
Salary for the year 2019 - 20 48800
Interest upon the invested money 20000 * 5% 1000
Fully franked dividend 12000
Unfranked dividend 4000
Total income of Tom 286500
Calculation of taxable income:
Particulars Amount
Total sales for 2019 - 20 220700
Salary for the year 48800
Unfranked dividend 4000
Total taxable income of Tom 273500
Calculation of tax on taxable income of Tom along with net tax payable:
Particulars Amount
Total taxable income 273500
Tax on first 18200 0
Tax on 18201 to 37000 @ 19% 3572
Tax on 37001 to 90000 @ 32.5% 17225
Tax on 90001 to 180000 @ 37% 33300
More than 180001 @ 45% 42075
Total tax payable 96172
Net tax payable 96170
In order to understand the tax implications for the taxation rules that are applied while
calculating the net tax payable following notes are generated:
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 Sales for last year us deducted from the total value of sales because the income of past
years would have taxed in the same year. If the income for the year in received in
upcoming year then also it is taxed in the same year when it was generated.
 The sale of 3200 which is made for current year but the amount of it is not recovered is
added to the present year’s sales because it is income of present year and it is also taxable
for the same year (Trad and Freudenberg, 2018).
 Tom has received advance salary for the July Month for the long leave. As it is not
related to current year so it is deducted from the income of year 2019 – 20. This step is
taken to analyse the actual income for the year.
 Fully franked credit of worth 5143 were not deducted from the dividend as these were the
part of income and it will be treated as the income for Tom so it is not deducted from the
total dividends (Wu and Tran-Nam, 2017).
 While calculating the taxable income for Frank fully franked dividends were not taken in
to consideration because all the dividends which are received as fully franked are taxable
for the companies not investors. On the other hand, dividends which are not fully franked
are taxable foe the investors so the amount of 4000 is considered as the part of taxable
income for Tom for year 2019 – 20.
 The total tax on the income of Tom is calculated according to taxation rules and
regulations of Australia (Australian tax percentage for business, 2020).
CONCLUSION
From the above project report, it has been concluded that for all the individuals as well as
the businesses it is very important to pay the appropriate tax on income. It can help to ignore the
legal consequences that may take place in future. There are various taxation rules that are
required to be followed by all the individuals as well as entities operating business in Australia.
These are ITAA 1936, ITAA 1997, Australian taxation rules etc. By complying with all of them
all the business can pay the appropriate tax on the income.
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REFERNECES
Books and Journals:
Allen, C., 2018. Potential failure of the Australian CFC rules in the digital economy. Australian
Tax Review. 47(2). pp.114-127.
Barkoczy, S., 2017. Core tax legislation and study guide. OUP Catalogue.
Haines, A., 2017. Rio Tinto to challenge A $447 million Australian tax bill. International Tax
Review.
Hobson, K., 2019. 'Say no to the ATO': The cultural politics of protest against the Australian Tax
Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences,
The Australian National University.
Hodgson, H., Castelyn, D. and Marriott, L., 2019. Income equalisation: is all fair in primary
production and tax law?. In Australian Tax Forum: a journal of taxation policy, law and
reform (Vol. 34, No. 2).
Kenny, P., Blissenden, M. and Villios, S., 2017. Wine options of Australian tax
reform. eJTR. 15. p.22.
Trad, B. and Freudenberg, B., 2018. A Dual Income Tax System for Australian Small Business:
Achieving Greater Tax Neutrality. J. Austl. Tax'n. 20. p.93.
Wu, H. and Tran-Nam, B., 2017. Estimating Aggregate Tax Complicate Costs: A New Approach
Using a State Space Model. Austl. Tax F.. 32. p.197.
Online
ITAA 1997. 2020. [Online]. Available through:
<https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/ato/00001>
ITAA 1936. 2020. [Online]. Available through:
<https://www.legislation.gov.au/Details/C2009C00176>
Australian taxation laws for deduction. 2020. [Online]. Available through:
<http://rca.asn.au/magazine/get-deductions-right/>
Australian tax percentage for business. 2020. [Online]. Available through:
<https://www.canstar.com.au/calculators/income-tax-calculator/>
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