Taxation Law Assignment: Income, Deductions, and Capital Gains Tax

This taxation law assignment solution addresses several key areas of Australian taxation law. The assignment covers topics such as effective life of depreciating assets, tax offsets, and the highest tax brackets. It delves into Capital Gains Tax (CGT) events, including the treatment of assets exempt from CGT, and provides a formula for determining income tax payable. The solution examines the application of the general deduction clause (s. 8-1 ITAA 1997) and provides examples of deductible and non-deductible expenses, including legal expenses and loan interest. It also clarifies the concepts of marginal and average tax rates, as well as consumption tax. The assignment further analyzes specific scenarios related to deductions, including private expenses, capital expenses, and business losses. Finally, it explores CGT events such as granting a lease, granting an option, and selling shares, including the main residence exemption, and determines the capital gains and tax implications for each scenario. The solution references relevant legislation, case law, and tax rulings to support its analysis.

TAXATION LAW
STUDENT ID:
[Pick the date]

Question 1
a) The topic of effective life pertaining to depreciating assets in the income tax context has
been dealt by TR 2018/41.
b) Division 17 highlights the various tax offsets available to the taxpayer.
c) The highest tax bracket that may be applicable for a resident taxpayer amounts to 45% for
2018-2019.
d) An asset which is exempt from any CGT implications is car whose legislative reference is
indicated though ss. 118-52
e) The outlined CGT event tends to outline the appropriate tax treatment in regards to
enjoying asset without possessing the ownership i.e. legal title.
f) The given section ss. 4-10(3) ITAA 1997 tends to list down the formula which can be
used for determination of income tax payable. The formula essentially has the following
two steps3..
Step 1: Obtain the product of taxable income considering the relevant tax rate applicable
based on the underlying slab in which the taxable income falls.
Step 2: The net tax liability would be derived after deduction of available tax offsets from
the above tax liability.
g) The significance of the case provided pertains to the application of general deduction
clause i.e. s. 8-1 ITAA 1997. The case highlights that deduction of a given expense
essentially would depend on the underlying circumstances and facts as it would determine
the nature of the expenses. A particular negative limb applicable to s. 8-1 is that the
expenditure should not be private or no deduction is available. However, if the legal
expenses are incurred in relation to assessable income production, then the same would be
deductible. In the given case, a custom officer was charged with entering illegally in a
premises owing to which charges were being pressed on him. In this background, legal
aid was assumed by the taxpayer and was declared as deductible by the honourable High
Court4.
1ATO, Taxable Ruling TR 2018/4, https://www.ato.gov.au/law/view/document?DocID=TXR%2FTR20184%2FNAT
%2FATO%2F00001
2ATO, Income Tax Assessment Act 1997 – SECT 118.5, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s118.5.html
3 Austlii, INCOME TAX ASSESSMENT ACT 1997 - SECT 4.10 How to work out how much income tax you must pay, <
http://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s4.10.html>
4 High Court of Australia, COMMISSIONER OF TAXATION v SHANE DAY <
http://www.hcourt.gov.au/assets/publications/judgment-summaries/2008/hca53-2008-11-12.pdf>
2

h) Marginal tax rate is defined as the tax rate levied on the taxable income’s last dollar. For
instance, if the taxable income of the taxpayer is $ 120,000, then any additional income
would be taxed at 37% which would be marginal rate. The average tax rate on the other
hand provides the average taxation that may be applicable on the taxable income as a
whole. The computation of this can also be demonstrated using certain numerical values
which would provide clarity on the underlying concept. Assume that there is individual
taxpayer whose taxable income after deduction is $ 110,000. The computation of income
tax liability and the consequent average rate of tax is shown below.
i) The concept of consumption tax essentially refers to the tax that the government
introduces in order to alter the choices made by the public with regards to consumption of
goods. There are certain goods which have negative externality attached with the
consumption. Some of these products refer to those with high amount of sugar or fat
which is harmful for the health of the consumers. In order top reduce the consumption of
these items, consumption tax is levied so as to discourage the consumers from buying
these products and instead choose healthier products5. The concept is still at a nascent
stage with only a handful of developed countries having implemented the same. There are
issues in relation to efficiency of these taxes along with the freedom of consumers which
may be compromised.
Question 2
(a) Expenditure used in relation to derive assessable income will be deducted as witnessed in
s. 8-1 ITAA 1997. Also, the expenditure would not be taken for deduction under ss. 8-
1(2) ITAA 1997 for the three cases as shown below.
 Expenditure is private expense of taxpayer
5 Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
3

 Expenditure is capital expenses of taxpayer
 Expenditure has used for non-assessable income production
Brett takes loan because he needs to credit the wages to his employees. Clearly, the expense
in terms of loan interest has been used for assessable income generation purpose and thereby,
the deduction will be availed under s. 8-1 ITAA 19976.
(b) There can be a situation where only a part of the private expenditure is used for assessable
income generation and then, in such case the deduction will also be present for that part
only. Julie has net expenditure of mobile balance charge of tune $500. Clearly, mobile
balance recharge is private expenditure for Julie and thus, no deduction may be claimed.
However, it is known that Julie has used the 60% of the expenditure to do work related
calls which means $300 out of $500 has been realised for deriving the assessable income.
Therefore, deduction will be available for $300 only under s. 8-1 ITAA 19977.
(c) Expenditure in relation to paying fees to the babysitter for taking care of children is
clearly personal expense. Also, no deduction will be applicable on the such expenses as
evident from TR 95/9. The relevant case in this scenario is of Lodge v. FC of T8where the
payment for child care will be categorised as personal expenses and no deduction was
available for taxpayer even though without childcare the taxpayer would not be in a
position to attend office. Here, the taxpayer Sally has made a payment of $1200 to
babysitter which is personal nature expenses. She has hired babysitter so that she can go
to work but still the amount would not be available for general deduction as it an expense
of personal nature.
(d) Any business losses in the form of theft is deducted as evident from the verdict of Charles
Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation9 case. This is because it
is a normal risk which any business runs. It is part of the business that losses tend to arise
on account of stealing of inventory by employees or potentially clients. Jerry’s employee
6Austlii, Income Tax Assessment Act 1997- SECT 8.1, http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html
7 Ibid, 5, 493
8Lodge v. FC of T (1972) 128 CLR 171
9Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
4

has stolen the goods which were part of Jerry’s business and thus, the worth of the goods
that is $20,000 will be termed as general deduction on account of losses to the same
extent.
(e) The expenditure would not be taken for deduction under ss. 8-1(2) ITAA 1997when the
expenditure type is not revenue but capital10. Further, the imperative aspect to note is that
the capital expenses will not be deducted despite being realised for assessable income
purposes. The expenditure for contesting in election indicates that this is not revenue but
capital as these are not utilised for discharging the duties but rather to get elected. Also,
there would not be any deduction under s. 40-664 ITAA 1997 as there is no connection
of the expense with any business activity.
Question 3
(a) Transaction in relation to the granting lease or renewing a lease is called as Type F1 CGT
event under the provisions of ss. 115-511. This type of transactions attracts the CGT
implications on the taxpayer on the account of derived capital gains. The two key
elements are pivotal for determining the capital gains for the transaction of sale of TypeF
1 CGT event.
 Premium (received)
 Incidental costs
The difference between the premium received and incidental costs would be the capital gains
derived.
In present case, Andy has owned a land which he now leased to Brian and the premium
received is $5,000. From the information, it is apparent that there is zero incidental cost and
therefore, the difference between these two would be the capital gains from the lease. Capital
gains = $5000. Further, discount method cannot be used for determining the CGT liability of
capital gains derived from the transaction of Type 1 CGT event.
Transaction Type Capital gains Discount method
Type 1 CGT event $5000 No
10 Ibid 6, 354
11Austlii, Section 115-5<http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.5.html>
5

(b) Transaction in relation to the granting option in exchange of certain assets is covered
under D2 CGT event12. This type of transactions attracts the CGT implications on the
taxpayer on the account of derived capital gains. The two key elements are pivotal for
determining the capital gains for the transaction of sale of D2 CGT event as evident from
the formula stated in ss. 104-40 ITAA 1997.
 Proceeds received through grating option
 Incidental costs
The difference between the proceeds received through grating option and incidental costs
would be the capital gains derived.
In present case, John has owned a land which he now granted to Farm Ltd and the proceeds
received is $40,000. From the information, it is apparent that there is zero incidental cost and
therefore, the difference between these two would be the capital gains from granting option.
Capital gains = $40,000. Further, discount method cannot be used for determining the CGT
liability of capital gains derived from the transaction of D2 CGT event.
Transaction Type Capital gains Discount method
D2 CGT event $40,000 No
(c) According to the exemption clause of the Subdivision 118-B,no CGT liability is imposed
on the taxpayer on the capital gains derived from the selling of the main residence place.
Therefore, it is become imperative to find whether the dwelling of the taxpayer is his/her
main place of residence or not. It is importance to note that the dwelling would still be
categorised as the main residence of the taxpayer for a max period of six year when the
taxpayer has not stayed in the dwelling due to any reason. Further, it is essential that for
this duration when the taxpayer has not lived in the home then there is no other factor
which shows that the taxpayer has made his main residence place anywhere else.
In given case, Olivia and Jamie did not stay on their main residence for 2 year and also, there
is no information which shows that they have shifted their main residence anywhere else.
Therefore, the conclusion can be drawn that the dwelling would be the main residence place
of Jamie and Olivia. Further, the capital gains obtained from the sale of the main residence
will not attract any CGT liability under Subdivision 118-B. Further, if there would have some
12Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)
6

capital gains that would be taken for CGT implication then the applicable method would be
discount method as the asset is a long-term asset.
(d) Transaction in relation to the selling of shares assets is called as Type A1 CGT event13.
This type of transactions attracts the CGT implications on the taxpayer on the account of
derived capital gains. The two key elements for capital gains stated in formula given in ss.
104-10 ITAA 1997.
 Income from sale
 Cost base
The difference between the income from sale and cost base would be the capital gains
derived.
Transaction Type Capital gains Discount method
Type A1 CGT event $2180 No (Not long-term asset)
Question 4
a) The key issue is to opine on the assessability of the $ 2,000 prize money that has been
derived by the taxpayer. In context of receipts from award or prizes, the relevant factor is
whether these are linked to the underlying skills of the taxpayer or attributed to mere
chance. If the prize or award is based on chance, then the proceeds are exempt from tax.
However, the prize money arising from assessable income related skills would lead to
assessable income especially if such awards are not rare as explained in TR 1999/1714. In
the given case, the prize money is related to skill of the taxpayer who is in advertising and
also such prices are announced on annual basis. Therefore, the proceeds would be
assessable income.
b) For business expenses which the employee incurs, the employer may provide
compensation through allowances or reimbursement. There is a fundamental difference
13 Ibid, 7, 632
14ATO, Taxation Ruling TR 1999/17, https://www.ato.gov.au/law/view/document?Docid=TXR/TR199917/NAT/ATO/00001
7

between the two since the former is not linked to the actual expense and is essentially a
lump sum form of payment. In relation to reimbursement, the employer provides
payments for the actual expenditure. Thereby, economic benefit for the employee can
potentially arise only in case of allowance sine actual expenditure may be lesser than the
lump sum payment15. For the case under consideration, a lump sum payment of $ 500 is
provided to the employee for Sydney Trip which is an allowance As a result, this amount
would be assessable income and any actual expenditures would be deducted from this.
c) The client and taxpayer tend to share a professional relation and an iPhone has been given
by the client. The only arrangement where this would not lead to assessable income is
where this is a gift. In this regards one of the key impediments is that there is a
significant likelihood that future expectations would be there on the part of client having
given the phone. Also, the phone may be given as a compensation for previous services.
Also, it is unlikely that the gift would have been given in the absence of the professional
relationship. Thus, in accordance with the relevant discussion in TR 2005/1316, the given
gesture would lead to realisation of assessable income by taxpayer which would fall
under statutory income17.
d) The taxpayer has received compensation payments which are on account of personal
injuries and possibly relate to compensation of underlying medical expenses incurred. As
demonstrated in TD 93/58, the nature of payments received as compensation would be
assessable only when they seek to replace any loss in assessable income. For instance,
any compensation which is given for loss of salary would comprise assessable income.
However, the current compensation payments seems linked with the medical expense and
would not result in any assessable income.
e) A key requirement for the capital gains calculation is that a trigger ought to be present in
the form of CGT event . Only when such events are triggered on account of a transaction
would the capital gains or loss computation be carried out. In context of CGT asset (such
15 ATO, TR 92/15 <https://www.ato.gov.au/law/view/document?docid=txr/tr9215/nat/ato/00001>
16 ATO TR 2005/13, <https://www.ato.gov.au/law/view/document?DocID=TXR/TR200513/NAT/ATO/00001>
17 ITAA 1997
8

as shares) any losses or gains before the liquidation of asset are essentially notional in
nature and thereby do not require to be reported. Once these assets are liquidated, a A1
type CGT event is triggered which would require computation in relation to capital gains
or losses., In reference to the above, it is clear that rise in the price of the shares asset
would not lead to any assessable income till the sale of shares.
Question 5
In order to determine the tax residency of individual taxpayers, tax ruling TR 98/17 is pivotal
as the various tests available in this regards are outlined in this ruling18. Considering the
different types of tests available, the pivotal factors in regards to determining Nisu’s tax
residency for 2018-2019 are listed below.
1) Country or origin – This is pivotal since for one of the tests i.e. Domicile test, it is
essential that the taxpayer must have Australian domicile19. This is not the case for Nisu
whose country of origin is Nepal. As a result, domicile test would not be applicable
whereas the 183 day and ordinary residency test would be applicable.
2) Employment with Federal Government – Nisu is not employed on behalf of the Federal
government of Australia and not stationed outside Australia. As a result, the
commonwealth superannuation test would not be relevant for Nisu.
3) Duration of stay during current year – This is relevant for the 183 day test where a
necessary condition is that the taxpayer should have been physically present in Australia
for a period of 183 days. This is satisfied for Nisu who has arrived on December 29, 2018
and left on June 30, 2019.
4) Intention to stay in Australia – This is a secondary condition which is relevant for tax
residency under 183 day test since it is essential that besides 183 day condition, the
taxpayer must intent to settle in Australia. This is not true for Nisu who has permanently
returned to Nepal thereby not satisfying the 183 day test.
5) Purpose of visit – This aspect is pivotal for the ordinary residency test. Reasons such as
employment and study for over six months are considered significant reasons and thereby
lead to the taxpayer being considered tax resident of Australia.
6) Behaviour while in Australia – This is a factor under the ordinary residency test. The
chances of Australian tax residency is strengthened if there are significant professional
18ATO, Taxation Ruling TR 98/17, https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001
19 Ibid, 11, 962
9

and personal ties with Australia20. This is true for Nisu who professionally had joined a
three year study course and also has friends in Australia.
7) Social arrangement in Australia – If the taxpayer tends to have a healthy social life in
Australia which can be compared to that in country of origin, then it makes a strong case
for Australian tax residency along with other factors21. This is true for Nisu considering
his friend circle and participation in the football club.
Based on the above factors, it is correct to conclude that for the tax year 2018-2019, Nisu
would be an Australian tax resident despite going back permanently to Nepal.
Bibliography
ATO, Taxation Ruling TR 1999/17, https://www.ato.gov.au/law/view/document?
Docid=TXR/TR199917/NAT/ATO/00001
ATO, Taxation Ruling TR 98/17,
https://www.ato.gov.au/law/view/document?Docid=TXR/TR9817/NAT/ATO/00001
20Peel v. The Commissioners of Inland Revenue (1927) 13 TC 443
21 Ibid, 12, 862
10

Austlii, Income Tax Assessment Act 1936 – SECT 6,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html
Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press
Australia, 2017)
Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344
FC of T v. Pechey75 ATC 4083
Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company,
2017)
Lodge v. FC of T (1972) 128 CLR 171
Mc Laurin v. FC of T (1961) 104 CLR 381
Peel v. The Commissioners of Inland Revenue (1927) 13 TC 443
Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
Austlii, Income Tax Assessment Act 1997 – SECT 104.5,
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html
Austlii, Income Tax Assessment Act 1997 – SECT 104.10,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.10.html
ATO, Income Tax Assessment Act 1997 – SECT 118.5,
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.5.html
ATO, Taxable Ruling TR 2018/4, https://www.ato.gov.au/law/view/document?DocID=TXR
%2FTR20184%2FNAT%2FATO%2F00001
11