Thomas More Law: LEGL300 Taxation Law - Income and Trust Analysis

This report provides an analysis of taxation law, focusing on income, deductions, and trust implications. It addresses the tax obligations of the XYZ Family Trust, offering advice on reducing tax liability through strategic income distribution to beneficiaries in lower tax brackets and utilizing the 65-day rule. The report also examines the income tax consequences of receipts from business and profession, allowable deductions under ITAA 1997, and the treatment of various income sources, including business profits, dividends, and gambling winnings. The analysis includes computations of assessable income, taxable income, and total tax payable for Kevin, a partner in a retail electronic goods business, referencing relevant case laws and sections of the ITAA 1936 and ITAA 1997. Desklib provides access to similar solved assignments and study tools 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:............................................................................................................. 4
Issues:................................................................................................................................ 4
Laws:.................................................................................................................................. 4
Application:......................................................................................................................... 4
Conclusion:......................................................................................................................... 6
Reference List:....................................................................................................................... 8

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Answer to Question 1:
A trust can be defined as the obligations that are enforceable in terms of equity that
rests on the person, the trustee as the owner of certain specific property. “Division 6 of the
Part III of the ITAA 1936” includes the principle rules for imposing tax on the trusts1. In
wider terms the rules assesses the trust net income relating to the trust estate of the
beneficiaries. However, if there are certain amounts that are the part of net income and are
not assessed to the beneficiary it might be assessed to the trustee.
The present question is associated in providing advice to the XYZ family trust relating
to the income derived during the financial year of 2017. The issue here is based on providing
advice to the XYZ family to so that they can reduce their tax liability relating to the income
derived from trust. An important aspects of the family trust can be forwarded is the
distributions relating to the trust income2. Initially, all the trust distributions should be made to
the people that qualify for the distributions under the trust deed to the beneficiaries of the
trust. Secondly, a recommendation can be provided to the trustee that distributions should
be made only to the beneficiaries of the trust that fall within the family group.
Nevertheless, when the beneficiaries that receive the distributions from the trust, it is
the beneficiary that would be required to pay the tax on the income3. As a consequence, to
reduce the tax liability of the trust an additional distribution can be made by the trustee in this
situation to the beneficiaries that are in the low bracket of tax than the trustee itself. The
practice of splitting the income or streaming can be considered as the beneficial method for
XYZ trustee.
The trustee of XYZ should apply the 65-day rule that would provide the trustees with
additional time following the end of the tax year to evaluate the income and tax liability of the
trust and make additional discretionary distributions as this will help in shifting the income of
the beneficiaries4. The trusts with the calendar year end of March 2018 should elect to have
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014
2 Brokelind, Cécile, Principles Of Law: Function, Status And Impact In EU Tax Law (IBFD,
2014)
3 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
4 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of
Business Taxation

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the income distributed on September 30. This will help in shifting the income out of the trust
and to the beneficiary.
The trustee of XYZ would be able to receive the deductions relating to the
distributions that is made and the beneficiary would identify the income and their individual
tax return. This would in turn lower the income that is taxed within the trust5. Nevertheless,
an important consideration can be bought forward by stating that any form of distributions
that is aimed to reduce the income tax liability of the trust should be made inside the
distribution parameters established inside the trust agreements and applicable ATO laws.
The trustee can aim to reduce the trust income to the beneficiaries that are within the low
bracket and are not subjected to surtax. The trustees of XYZ are also advised to shift the
trust investments in order to reduce the taxable income.
5 James, Malcolm, Taxation Of Small Businesses 2014/15

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Answer to question 2:
Issues:
The current issue is based on determining whether the income tax consequences of
receipts obtained from business and profession will be liable for taxation? Will the taxpayer
be allowed deductions for expenses incurred under the provision of section 8-1 of the ITAA
1997?
Laws:
a. “Ronpibon Tin NL v Federal Commissioner of Taxation (1949)”,
b. “Herald & Weekly Times v Federal Commissioner of Taxation”
c. “Scott v Commissioner of Taxation”
d. “section 6-5 of the ITAA 1997”
e. “Moore v Griffiths”
Application:
According to the Australian taxation office an individual at the time of determining the
assessable income of their business is required to include the all the gross amounts receipts
or proceeds that results from the ordinary business course and not simply the profit6. As
evident in the current situation of Kevin who is carrying on a business in partnership for retail
electronic goods receives a gross amount of $200,000 from the trading activities.
Additionally, Kevin also received a bad debts recovered amount of $20,000.
Therefore, under “section 6-5 (1)” the receipts from the gross trading amount will be
included in the assessable income of Kevin the same results in the ordinary course of
business7. According to “subdivision 20-A”, the assessable income includes amounts that
is received as recoupment for loss. This means that amount received is to reverse the
impact of deductions. Additionally the bad debt recovery amount would be included in the
assessable income since it represents income from to reverse the previous deductions.
Kevin reported certain payments that were related to the trading stocks. According to
“section 8-1 (1)” purchase of trading stock are allowed for deductions8. The payments
6 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
7 Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
8 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)

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incurred by Kevin for the purchase of trading stock can be claimed as allowable deductions
for Kevin. Additionally a partner’s salary of $40,000 was reported. The partner’s salary
cannot be allowed as deductions since salary constitute the business distributions and the
same is not included for deductions.
According to “section 8-1 of the ITAA 1997” an individual is allowed to claim
deductions for expenses that are incurred in producing the taxable income or the same is
necessarily incurred in generating the assessable income9. Similarly the interest expenses
incurred forms the part of business expense that are incurred in producing the taxable
income. Therefore, the interest expenses will be considered as allowable deductions.
For an expense to qualify as allowable deductions must meet incidental and relevant
test. As held in “Ronpibon Tin NL v Federal Commissioner of Taxation (1949)”, for an
expenses to be allowed as deductions in the form of outgoings, should be incurred in
producing the taxable income10. The expenses should be incidental and relevant to that
extent. The expenses incurred by Kevin for the payment of salaries to employees will be
considered as business expenses and the same can be considered as allowable general
deductions under “section 8-1 of the ITAA 1997”.
Kevin reported a legal expenditure that was incurred in recovering the bad debt.
According to the decision held in “Herald & Weekly Times v Federal Commissioner of
Taxation” the taxpayer was allowed to claim deductions relating to cost incurred in settling
or defending the action for alleged defamation. Therefore, the expenses on bad debt
recovery will be allowed deductions for Kevin.
Apart from the business activities Kevin also derived income from the person
sources. According to “section 6 of the ITAA 1936” income from personal exertion
represents income from salaries, wages, bonuses, or the proceeds from the business that
are carried on the by the taxpayer either alone or in the form of partnership. Similarly the
share of profits derived by Kevin from the partnership business along with the receipt of
salary from the part time instructor forms the part of income from personal exertion and the
same will be included in the taxable income.
According to “section 6-5 of the ITAA 1997” usually most of the income that comes
in for a taxpayer is held as ordinary income. As held by the court of law in “Scott v
9 Sadiq, Kerrie et al, Principles Of Taxation Law 2014
10 Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

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Commissioner of Taxation” income as per ordinary concepts applies to in compliance with
the ordinary concepts of the mankind11. Similarly, the receipt of dividend income by Kevin will
be considered as income from ordinary sources. With respect to “section 6-5 of the ITAA
1997” the dividend income will be included in determining the tax liabilities.
A meagre windfall gain cannot be held as having the character of income. The
winning from gambling are not held as income unless the taxpayer is not carrying on the
business of the gambling. As held by the court of law in the case of “Moore v Griffiths” a
mere prize wining does not holds the character of income12. Similarly, the winning from
gambling by Kevin is not held as the assessable income and the same is not included in the
taxable income.
According to the Australian taxation Office an individual taxpayer can claim
deductions for expense related to subscriptions given the same is predominantly used in
earning the taxable proceeds which is not an income from the carrying on of the business.
Similarly in the current instances of Kevin, an expense on subscription to professional
journals was incurred and the same will be allowed for deductions.
Conclusion:
As evident from the computations, the total amount of taxable income for Kevin
stands $95,000 with tax on taxable income consisting of $22,782. The total tax liability for
the year ended 2017 for Kevin stands $16,382.
Computation of Assessable Income:
11 Woellner, R. H et al, Australian Taxation Law 2014
12 Robin, h. Australian taxation law 2017. Oxford University Press, 2017.

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Particulars Amount ($) Amount ($)
Assessable Income
Profit (Working note 1) 30,000
Kevin Partnership Salary 40000
Partime Instructor salary 5000
Australian Sourced Dividend Income
Fully Franked Dividends (Net) 14700
Gross up franking credits 6300 21000
Total Assessable Income 96,000
Allowable Deductions
Subscription to Professional Journals 1000
Total Allowable deductions 1000
Total Taxable Income 95,000
Tax on Taxable Income 22782
Add: Medicare Levy 1900
Less: Franking Credit 6300
Less: PayG 2000
Total Tax Payable 16382
Computation of Assessable Income
In the Books of Kevin
For the year ended 2017
Working Note:
Working Notes 1
Descriptions Amount Sections Included in Net Income
Receipts
Gross Receipts from Trading Stock 2,00,000 Assessable 6-5 of the ITAA 1997 2,00,000
Add: Additional Receipts for bad debts recovered 20000 Assessable 6-5 of the ITAA 1997 20,000
Total Revenues 2,20,000 2,20,000
Payments
Cost of goods sold {(Opening stock +
purchases) – Closing stock} 70000 Section 8-1 of the ITAA 1997 70,000
Interest 20000 Section 8-1 of the ITAA 1997 20,000
Salaries to employees 60000 Section 8-1 of the ITAA 1997 60,000
Legal expenses 10000 Section 8-1 of the ITAA 1997 10,000
Total Expenses 160000 1,60,000
Profit 60,000 60,000
Kevin Share 30000 30,000
Ian Share 30000 30,000

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Reference List:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Brokelind, Cécile, Principles Of Law: Function, Status And Impact In EU Tax Law (IBFD,
2014)
Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
James, Malcolm, Taxation Of Small Businesses 2014/15
Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
Robin, h. Australian taxation law 2017. Oxford University Press, 2017.
Sadiq, Kerrie et al, Principles Of Taxation Law 2014
Woellner, R. H et al, Australian Taxation Law 2014
Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)