LEGL300 Taxation Law: Income Analysis and Tax Consequences Report

This assignment provides detailed solutions to two questions related to Australian taxation law. The first question involves analyzing the impact of various items such as exempted income, depreciation, bad debt, long service leave, cash dividend, borrowing costs, donations, capital gains/losses, cost of goods sold, prior year tax loss and repairs on a company's taxable income. The second question explores the tax consequences of different scenarios for an individual, including interest on a loan, local council fines, carpet replacement, an antique desk, travel expenses, sale of a house, and the sale of an antique. Relevant sections of the ITAA 1997 and case laws are referenced to support the analysis and conclusions. The document is available on Desklib, a platform offering study tools and solved assignments for students.

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:............................................................................................................. 7
References:.......................................................................................................................... 13

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Answer to question 1:
Description Impact on taxable income Reasoning
Net exempted income and
non-assessable non-exempt
income
Less: $100,000 and $50,000 The sum of $100,000 is an
Exempted income under the
“section 6-20” 1and it is not
included for assessment.
While the amount of
$50,000 as the non-
exempted non-assessable
income is not considered for
tax treatment2. However, it
is not held as exempted
income while computing or
deducting tax loss under the
division 36.
Depreciation Less: $30,000 It is an expenses that is
charged to the profit. It is not
occurred because it is
associated to the
expenditure that is
considered as capital in
nature. However, the
provision relating to capital
allowances may be
applicable.
Bad debt Less: $20,000 Under section “25-35 (1A),
of the ITAA 1997” the bad
debt will be considered
deductible because it is
occurred in the financial
year3. The taxpayer has
1 “section 6-20”
2 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
3 Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).

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written off the expenses
from the creditor that was
unable to pay from last year
and it is understood that the
company accounts for the
taxable income on accrual
receipts4.
Long service leave paid Less: $10,000 With respect to “section
26-10 of the ITAA 1997”,
taxpayer can claim
deduction for annual leave
or long service leave if the
4 “25-35 (1A), of the ITAA 1997”

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taxpayer pays the amount
during the income year to
the person to whom the
leave is associated5.
Referring to the case of
“Development Pty Ltd v
FCT (1981)” the provision
for long leave is only
deductible until it is paid in
5 Sadiq, Kerrie. Australian Taxation Law Cases 2019. Thomson Reuters, 2019.

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the financial year6.
Cash dividend Add: $50,000 The dividends that are
earned by the taxpayer are
included in to the
assessable income under
“section 44 (1) of the ITAA
1936”. The court in “FCT v
McNeil (2007)” held that
other gains derived from the
shares will be considered as
the ordinary income7. The
6 “section 26-10 of the ITAA 1997”
7 Middleton, Tom. "Banning, disqualification and licensing powers: ACCC, APRA,
ASIC and the ATO–regulatory overlap, penalty privilege and law reform." Company
and Securities Law Journal 33 (2015): 555-580.

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dividend of $50,000 will be
included to the profit as it is
an increase in profit.
Borrowing cost Less: $833 The borrowing cost is an
expense that is spread over
five years or the till the term
of loan which ever less. As
the if a borrowing cost is
greater than $100 then it is
spread over five years or the
till the term of loan which
ever less. The taxpayer can
here claim deduction by
$833 per year till the term of
loan because the borrowing
cost is greater than $100 for

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the current year.
Donation Less: $1,000 and $5000 Generally, a gift or
contribution of higher than
$2 given to the deductible
gift recipient is considered
deductible under the division
30. As held in “FCT v
McPhail (1968)” gift or
contribution as donation is
deductible because there is
no expectation of material
advantage in return8. The
gift and donation of $1,000
and $5,000 respectively is
considered deductible under
division 309.
8 Davison, Mark, Ann Monotti, and Leanne Wiseman. Australian intellectual property
law. Cambridge University Press, 2015.
9 “FCT v McPhail (1968)”

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Capital gains – shares Add: $30,000-$10,000 =
$20,000
As per the quarantined rule
the capital loss can be only
offset against the capital
gains10. The capital loss
from the sale of shares has
been offset against the
capital gains made from the
sale of shares that is
purchased 13 months
earlier.
Capital loss – Antique Carry forward - $10,000 “Section 108-10 (4)”
explains that net capital loss
should be carry forwards
and can only be offset
against the capital gains
made from the collectibles11.
As not capital gains have
been reported from by the
company from the sale of
collectibles therefore the
capital loss should be carry
forward to next year12.
10 Morgan, Annette, Colleen Mortimer, and Dale Pinto. A practical introduction to
Australian taxation law 2018. Oxford University Press, 2018.
11 Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary
Schools." J. Australasian Tax Tchrs. Ass'n 13 (2018): 307.
12 “Section 108-10 (4)”

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Deduction for services Less: $30,000 A deduction for services
rendered by the non-
employee members will be
treated as employee
allowable deduction13.
Therefore, the company is
allowed to claim deduction
for the sum of $30,000
relating to payment made to
director’s husband.
Cost of Goods sold Less: $30,000 Under “section 70-35” the
taxpayers are provided with
the option of valuing stock in
hand at the end of the year
to reduce the taxable
income14. Therefore,
company is permissible to
obtain deduction for the cost
of goods sold of $30,000
being the lowest value
under the LIFO method to
minimise the taxable
income.
Prior year tax loss Less: $50,000 With respect to the division
36 the net exempted income
of $50,000 has been used
for offsetting the prior year
tax loss to minimise the tax
liability while the remaining
amount of $70,000 can be
carried forward to the
13 Barnes, Jeffrey. "On the ground and on tap—law reform, Australian style." The
Theory and Practice of Legislation 6.2 (2018): 193-224.
14 Robin, H. Australian Taxation Law 2019. Oxford University Press, 2019.

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subsequent year15.
Repairs Less: $5,000 The repairs to second hand
packing machine has been
allowed as deduction under
“section 25-10, ITAA
1997”. The repair expenses
have been incurred by the
company to remedy the
defect or damage that is
caused to the asset16.
Answer to question 2:
Description Tax Consequences Reasoning
Interest on Loan Less 15% of 34,000 is
deductible
As per the “taxation ruling
of TR 93/30” where the
home office forms the place
of business a applicable
portion of both the running
and occupancy
expenditures is allowed for
deduction. This includes the
interest on loan or running
expenses such as lightning
or depreciation. Only work
portion deductions are
allowed to claim by
taxpayers. As held in
“Swinford v FCT (1984)” a
self-employed script writer
was allowed deduction for
home office expenses17.
15 Campbell, Sam. "Personal liability of a trustee to tax on trust income: Part
1." Taxation in Australia 53.5 (2018): 263.
16 “section 25-10, ITAA 1997”.
17 White, Andrew, Cameron Blackwood, and Graeme Cooper. "Taxing private trusts-

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Therefore, John will be
permitted to claim deduction
for 15% of the $34,000
interest on loan because it is
related to work purpose.
$34,000 x 15% = $5,100
Local council fined $1000 (Non-deductible) According to the section 26-
5, ITAA 1997 deductions for
penalties or fines that is
imposed on the taxpayers
due to the breach of
Australian law is non-
deductible. The fine of
$1,000 by local council to
John is non-deductible
because it is breach of
law18.
Carpet $6000 (Non-Deductible) As per “taxation ruling of
TR 97/23” if the work done
by the taxpayer goes
beyond the word repair and
the entire cost of capital is
considered as expenditure
then no part of the amount
is allowed for deduction
under section 25-10 for
notional repairs. As held in
“FCT v Western Suburbs
A moving target." Taxation in Australia53.7 (2019): 372.
18 “section 26-5, ITAA 1997”