TAXATION LAW Assignment (LAW300): Residency, Income and Deductions

This assignment solution addresses key aspects of Australian taxation law. Part A focuses on determining Arun Sharma's tax residency based on the provided facts, applying the 'resides test' and relevant case law. It then calculates his assessable income, allowable deductions, and net tax payable for the 2018-2019 year, including salary, allowances, gifts, and business income, and deductible expenses. Part B analyzes the Sun Newspapers Ltd v FC of T case, discussing the deductibility of expenses and the distinction between revenue and capital expenditure, and the impact on claims for deduction of expenses from taxable income. The solution references the Income Tax Assessment Act 1997 (Cth) and relevant taxation rulings and case law to support its analysis.

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

1TAXATION LAW
Part A
Whether Arun Sharma is to be treated as a resident for tax in Australia
Rules
The Basis of determining the tax residency of a person lies on 4 primary test. These tests are
namely Resides Test, Permanent place of Adobe test (Domicile Test), the 183 day test and
the superannuation test. The rules for the resides test have been given under Taxation Ruling
98/17. The ATO states that this is an appropriate test to analyze whether a person who is a
resident of another country and have been residing in Australia is a resident for tax purpose in
Australia or not. The ruling lays down a few indicators to make the analysis. These indicators
are detailed below
 The intention and purpose of presence of the Tax Payer
 The Family, Employment or Business ties of the Tax Payer
 The taxpayer maintaining and having assets in Australia
 Tax payer having living and social arrangement in Australia
 The Time of presence for the TP in Australia
If the resides test has been satisfied the TP is considered as a resident for tax and no other test
needs to be referred.
It needs to be noted that time is not a decisive factor. However, if the individual is present in
the country for more than 2 years, it is generally consider that the person is residing in
Australia ordinarily.
Application
The facts of the case study provide that, Arun is an Indian citizen who has come to Australia
for study and work. He has been staying in Australia for about 8 years. As discussed above,
the Commissioner will also examine the period the taxpayer is physically present in
Australia, although this by itself will not be determinative as stated in Joachim v FC of T
2002 ATC 2088. The case stated that a period of two years is enough to state that a person is
residing in Australia with the ordinary meaning the term reside. In addition the facts of the
case also state that the TP in context has married in Australia. This means that the TP also has
domestic ties in Australia and the above requirements have been satisfied. It further needs to
be noted that he is also employed in Australia with an Australian company thus signifies that

2TAXATION LAW
he has employment ties with the country. The facts of the case and the rules discussed above
therefore predict indicate towards the conclusion that he is a resident for tax in Australia.
Conclusion
Arun Sharma has to pay tax on all income earned world-wide to the Australian Tax Office.
Section ii
This section determines the Assessable Income, Allowable deductions and Net Tax payable
or refundable for Arun Sharma in the year 2018-2019
The rules
There are two kinds of income for a person in Australia. One is ordinary income and the other
is statutory income. ordinary income is as defined through the text of Income Tax
Assessment Act 1997 (Cth) s6-5 is the income which a person earns under the ordinary
concepts. As this definition is very wide, case laws are used to analyze the assessability of a
receipt as an ordinary income. Income works as per the flow concept. This means that income
is the fruit which is flowing out of the tree which is its source as highlighted by United States
Supreme Court in Eisner v Macomber (1920) 252 US 189.
It needs to be noted that if an income is not ordinary income , it can still be assessed as
statutory income such as stated under section 15-10 where allowance given by the employer
to the employee in terms of employment is assessable.
A gift to a person is not assessable income as highlighted in the case of Scott v. Federal
Commissioner of Taxation. [1966] HCA 48. However, the case of Kelly v. FC of T (1985) 80
FLR 155
stated that where the gift to the employee has sufficient nexus with the income producing
activity, employment or services rendered, it is to be treated as assessable income for the TP.
There are two limbs for this section which is the positive limb and the negative limb. The
expenses fall within the positive limb if they are incurred for the assessable income. The
expenses fall within the negative limb if they are capital or private nature or used for gaining
exempt income. There are a few statutory deductions as well such as borrowing expenses
under s40-88 of the ITAA97 and expenses incurred in relation to taxation management of the
TP as provided under s25-10 of the ITAA97. A property related expenditure where the
property is not a investment property becomes a cost base under s110-25. The tax payer gets

3TAXATION LAW
to pay tax on the Taxable income which is (AI-D). The TP also needs to pay Medicare Levy
of 2%. The TPs are also entitled to a few offsets such as the LIMITO. PayG is the tax
withheld by employer and can be used to reduce the tax by the taxpayer.
Application
As per the case of Dean & Anor v FC of T 97 ATC 4762, the $85000 Arun has got as gross
salary is his assessable income.
The car allowance in relation to work related use will also be assessable income. This is
because although getting a car from the employer will be considered as fringe benefit, but as
the employer provides as allowance it is to be assessed under s15-10.
The Sony TV of $6000 as a gift is assessable income as it has nexus with income producing
activity. The same can be illustrated with the case of Kelly v FC of T. The 2000 cash in the
gift box is not assessable income as it is a gift and has no nexus with income producing
activity. The same can be illustrated with Scott v FCT. $880 as a token honourarium for the
year is assessable income as it has nexus with income producing activity. $12000 from ABC
is Income from business. $12000 from SIR is income from business. They are assessable as
per above rules. $15000 is Income but not to be added in this year according to cash method
of accounting. The $350 is reimbursement is income as it is a real gain. The rent from the
investment property from Jan- June is also income from property according to fruit and tree
flow concept. Thus 26 weeks getting $750 is income.
Assessable Income A
Particulars Amount
s
Reference
s
Salary 85000 S6-5
Car Allowance 2910 s15-2
Television
Gift of TV 6000
wedding anniversary
Gift
2200
Honorium for business council 880
Rent Income 9750 s6-5
Business
income
ABC 6000 s6-5
SIR 6250 s6-5

4TAXATION LAW
XYZ -
Accounting
Fees
350
Total assessable income 119340
Total Deductions
Although travel expenditure to work is not deductible, work related travel expenses for work
can be deductible under section 8-1(1) and 8-1(2). The same can be illustrated with the case
of Taylor v Provan [1975] AC 194. Thus $12750 is deductible expenditure.
Investment property expenses
Cost base element 1 section 110-25(2) is $85000 purchase price. 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. $2500 advice for setting up business is
deductible under section 40-88. However they are to be deducted over a period of 5 years.
All outgoing deductible other than entertainment as it is not necessarily incurred to produce
assessable income. Donation of $500 is also a deductible expenditure. $1000 and 1500
deductible under section 25-5 as tax matter help in the year is taken. Estimate given for 2019
is not deductible as it has not been incurred yet under section 8-1
Deductions
Car Allowance 4850 3201
Indian Business council 12750
Deduction for property
Expenses on borrowing 2500 125
Agent 975 488
council 450 225
Interest 12000
other expenses 1750 875
Travel expenses 200
Business Deductions
Advertising 450 225
Stationary 1240 620 s40-88
Entertainment 250
Accounting expense 2018 1500 750 s25-10
Accounting expense 2019
Formation expenses 2500 1250
Private

5TAXATION LAW
deduction
Donation 500
Tax management 2018 1000 s25-10
Tax management 2019
Total Deduction 22009
Net Tax Payable refundable
Particulars Amount
Assessable
Income
119340
Deductions -22009
Taxable Income 97331
Net Tax Payble 23509.4
7
20797+((97331-
90000)*37%)
Medicare Levy 1946.62 2%
No Surcharge Needed
LIMITO till
90000
530
LIMITO on
7331
0.015 109.965
Total 639.97
Total Tax
Payable
25456.0
9
-639.97
24816.1
2
Less PayG -30000
Net Refund 5183.88
Part B
Sun Newspapers Ltd v FC of T (1938) 61 CLR
(i) This case has been initiated with respect to a claim for deduction of a payment made by
the Sun Newspaper Ltd from their taxable income. The Sun Newspaper Ltd had been selling
an evening newspaper, which has been proposed to be sold by a competitor for a price lower
than the newspaper sold by the Sun Newspaper Ltd. For the purpose of removing the
competition a payment has been made by the company to the other on under an agreement to
refrain from publishing such a newspaper in Sydney including the three hundred miles
surrounding Sydney for a period of three years. This payment has been claimed as a

6TAXATION LAW
deduction from the taxable income of the Sun Newspaper Ltd. The claim has been based
upon the provisions of section 23(1)(a) the Income Tax Assessment Act 1922-1934. Under
this section, there are certain expenses that are to be permitted as a deduction from the total
assessable income of a taxpayer. This form of expenses includes all the losses as well as the
outgoings that might have incurred in the process generating the income, which will be
assessable in the hands of the taxpayer for the purpose of taxation. However, for the purpose
of claiming such a deduction it needs to be established by the taxpayer that the expense does
not imply a loss or any outgoings that has been incurred against the capital or has been
accrued as a loss of capital nature. Any such loss of capital nature will not be allowed as a
deduction under this provision. The Sun Newspaper Ltd has based their claim upon the fact
that the expense that they have incurred has been made for the purpose of generating the
revenue, which has been supposed to be affected by the publishing of the competitive
newspaper for a lower price than that of the newspaper published by the Sun Newspaper Ltd.
However, the court has rejected this contention based on the fact that competitive newspaper
has been barred from being published for a period of three years, which cannot be treated as
revenue in nature and more points towards being capital in nature as it has been affecting the
revenue for more than one year.
(ii) This decision has an impact upon the claims for deduction of expenses from the
taxable income of individual taxpayer. In this context, the establishment of an expense to be
that of a revenue nature is to be permitted as a deduction. An expense of capital nature will
not be allowed as a deduction. For the purpose of determining the nature of the expenditure
period for which its effect will prevail is required to be taken into consideration. The
expenses, which has been objected to have an effect within a period of one accounting year is
required to be treated as revenue expenditure. On the other hand, the expenditure, which has
an objective of affecting the business for a period of more than one accounting year has been
admitted as a capital expenditure. This has further been extended in the case of PBL
Marketing Pty. Ltd. v. Federal Commissioner of Taxation[I9851 2 A.T.C. 4416; 16 A.T.R.
679.

7TAXATION LAW
References
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Dean & Anor v FC of T 97 ATC 4762
Income Tax Assessment Act 1997 (Cth)
Joachim v FC of T 2002 ATC 2088.
Kelly v. FC of T (1985) 80 FLR 155
PBL Marketing Pty. Ltd. v. Federal Commissioner of Taxation [I9851 2 A.T.C. 4416; 16
A.T.R. 679.
Scott v. Federal Commissioner of Taxation. [1966] HCA 48
Sun Newspapers Ltd v FC of T (1938) 61 CLR
Taxation Ruling 97/11
Taylor v Provan [1975] AC 194
United States Supreme Court in Eisner v Macomber (1920) 252 US 189.