Taxation Law Assignment: Exploring Australian Taxation Laws

This Taxation Law assignment provides comprehensive answers to several key questions. The assignment begins by outlining the main functions of taxation in Australia, the principles of equity in a good tax system, and the process of calculating taxable income. It delves into progressive tax systems ...Read More

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

1TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................2
Answer A:..............................................................................................................................2
Answer B:...............................................................................................................................2
Answer C:...............................................................................................................................2
Answer D:..............................................................................................................................3
Answer E:...............................................................................................................................3
Answer F:...............................................................................................................................3
Answer G:..............................................................................................................................4
Answer H:..............................................................................................................................4
Answer I:................................................................................................................................4
Answer J:................................................................................................................................4
Answer to question 2:.................................................................................................................4
Answer to question 3:.................................................................................................................6
Answer to question 4:.................................................................................................................8
Answer to question 5:...............................................................................................................10
Answer to question 6:...............................................................................................................11
References:...............................................................................................................................15

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Answer to question 1:
Answer A:
The main functions of taxation in Australia is to administer and shape the taxation,
excise and superannuation system that helps in funding the services for the Australians,
providing effects to the social and economic policy1. The main functions of taxation in
Australia is to manage the legislations for taxation, superannuation and excise. By doing this
the taxation system addresses the wide issues that impacts the revenue system of Australia.
Answer B:
While designing the good tax system equity consists of distributing the burden of
taxation fairly among the populations. The principles of equity consists of two basic elements
namely the horizontal and vertical equity2. Horizontal equity represents that the taxpayers
must pay the similar amount of tax while vertical equity represents that taxpayers that are in
different position must pay different sum of tax.
Answer C:
“Section 4-15” requires an individual to work out their assessable income during the
income year
Taxable Income = Assessable Income – Deductions
Step 1 – The taxpayer should add up all the taxable income for the income year
Step 2 – The taxpayer must add the deduction for the income year
1 Barkoczy, Stephen, Australian Tax Casebook 2018 14E Ebook (OUPANZ, 2018)
2 Oishi, Shigehiro, Kostadin Kushlev, and Ulrich Schimmack. "Progressive taxation, income
inequality, and happiness." American Psychologist 73.2 (2018): 157.

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Step 3 – The taxpayer should subtract from the taxable income the total deductions to get the
taxable income3.
Answer D:
A progressive tax refers to the rate which increases the assessable value. It is
generally segmented in the tax brackets that progress successively into the higher rates.
Progressive tax system aims in achieving stronger purchasing power. Under this tax system
the demand for certain commodities are either subsidized or a portion of the basic
commodities are increased. Progressive tax system aims in promoting growth and
development in those areas which could have been difficult without the intervention of
government.
Answer E:
“Section 15-2 of the ITAA 1997” includes the value of the allowances into the
assessable income.
Answer F:
The “taxation ruling of TR 2004/15” provides guidance in ascertaining whether the
company that is not incorporated in Australia will be considered as the Australian occupant
under the second statutory test of the meaning of “Resident of Australia” stated in
“subsection 6(1) of the ITAA 1936”4.
3 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
4 James, Simon, The Economics Of Taxation 2014

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Answer G:
Two division of ITAA 1997 that provides deductions for capital outlay are;
a. Division 40 Uniform capital allowances
b. Division 43 Capital works allowances
Answer H:
The appropriate tax rate for the taxpayer that has the assessable earnings of $80,000 in
2017/18 is stated below;
Taxable Income = 80,000 (Marginal tax rate 32.5% with 3,572 plus 32.5 cents for every
dollar over $37,000)
Answer I:
“Sub-Division 11-B of the ITAA 1997” list down the provision for treating the
amounts as the Non Assessable Non Exempt Income.
Answer J:
Under the “Tax Determination TD 2017/4”, 53 cents per kilometre is applicable for
motor vehicles with the engine capacity of 2500 cc.
Answer to question 2:
The “taxation ruling of TR 98/17” is related with the residency status of a individual
that arrives to Australia5. The ruling provides the taxation commissioner with the
understanding regarding the ordinary meaning of the word resides inside the meaning of the
“subsection 6(1) of the ITAA 1936”. The ruling is mainly applied on individuals that enters
to Australia.
5 Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

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The current case study is based on advising Martelle regarding her residency status
while present in Australia. She arrived in Australia for work-purpose though she intends to
return to country of her domicile. When an individual that comes to Australia with no
intention of residing here on permanent basis, then all the factors regarding the person’s
presence should be considered in ascertaining the residency status. The quality and an
individual’s behaviour while in Australia aids in determining whether an individual resides in
Australia. The following factors that are considered by ATO in determining the residency
status includes;
a. The intention or the objective of existence
b. Family and service or business relations
c. Maintenance as well as location of assets
d. Societal and living arrangements
When an individual’s behaviour is consistent with that living in Australia over the
considerable time, then the person would be held as the Australian resident. The viewpoint of
commissioner is that the time of six months is sufficient to decide whether an individual
behaviour is constant with existing in Australia. The meaning of the term reside was
considered in “Reid v The commissioner of Inland Revenue (1926)” where the quality of
existence as well as the time are considered in ascertaining whether the person lives in the
place where they spend a portion of their lives6. However, the court in “Miesegaes v
Commissioner of Inland Revenue (1957)” held that a person that enters to Australia to take
up the pre-arranged service opportunities may be held as occupant given their stay complies
with residing in Australia.
6 Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018

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As evident Martelle opened an Australian bank account that stipulated her salary to be
paid in that account. She even bought a boat to use it for enjoying the Island during the
weekends with her friends. This additionally adds to the weight that Martelle has established
behaviour which is consistent with residing here. Martelle exhibits the characteristics of
residing in Australia over the entire period. With reference to the judgement made in “Reid v
The commissioner of Inland Revenue (1926)” Martelle will be regarded as Australian
resident inside the connotation of “subsection 6(1) of the ITAA 1936”7. Therefore, the salary
income that is paid into Martelle’s bank account in Australia will held liable for taxation
since she is an Australian within the sense of the Act.
Answer to question 3:
“Section 6-1 of the ITAA 1936” explains that income from person exertion represents
the income that is obtained from salaries, wages, fees, allowances or gratuities that is
received in the capacity of employee in respect of any services provided. A taxpayer that
receives receipts from employment would be subjected to income tax. “Section 6-5 of the
ITAA 1997” states that customarily, majority of the income that is received by the taxpayer is
treated as the ordinary income. The law court in “Scott v CT (1395)” held that receipts must
be considered as income based on ordinary concepts8. Similarly the receipts of salary by
Ellen constitutes income from personal services or employment. The receipts would be
taxable under the ordinary concepts of “section 6-5 of the ITAA 1997” as ordinary income.
7 McCouat, Philip, Australian Master GST Guide 2018
8 Burton, Mark. "A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes
of the Australian Income Tax." J. Austl. Tax'n 19 (2017): 50.

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Ellen reported a receipt of $425 from the Westpac bank account. The receipt should be
characterised as income which is assessable within the ordinary sense of “section 6-5 of the
ITAA 1997”.
The court of law in “Moore v Griffiths (1972)” held that mere winning from prize is
not an income. However, the prize winnings might be considered as income if an adequate
“nexus” exists with the taxpayer’s income generating activities. As held in “Kelly v FC of T
(1985)” the skilled footballer was awarded as the best and fairest player9. The amount that
was received as award will be held taxable since it was incidental with the taxpayer work and
employment which was also related to his use of skills. Denoting the above judgement, the
receipt of $6,500 by Ellen for “Queensland Designer of the Year” will be held as taxable
income since it incidental to the taxpayer work and employment.
Payments received for relinquishing or restricting right is not regarded as income. For
example, payments received for assenting not to do something are not classified as income.
Perhaps under “(section 104-35 (1)” relinquishing or restricting right results in CGT event
D1. A CGT event D1 occurs when the taxpayer creates any contractual right to another
entity. For examples restraint of trade where the taxpayer agrees of not operating any similar
business inside a particular radius or any exclusive trade agreements. As held in “Higgs v
Oliver (1951)” the taxpayer was paid a lump sum for agreeing not produce, act or direct any
films for a period of eighteen months was not held as income10. Similarly the receipt of
10,000 by Ellen for signing the restrictive covenants cannot be held as income. Instead under
“(section 104-35 (1)” the restrictive covenant constitutes CGT event D1.
9 Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
10 Taylor, C. J et al, Understanding Taxation Law 2018

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The Australian taxation office allows an individual taxpayer to claim private health
insurance rebate as the refundable tax offset while filing their tax return. The sum of $500
incurred by Ellen for private health insurance can be claimed as tax offset.
The net amount of income tax payable by Ellen for the year ended 30 June 2018 is
stated below;
Answer to question 4:
According to “section 40-25 (1)” a taxpayer is allowed to claim deduction for the sum
which is equivalent to the amount of decline in value for the income year of the depreciating
asset that is held for the year. “Section 40-25 (2)” allows the taxpayer to claim reduced
deductions where the decline in value of the asset is entirely attributable to is use for a
purpose apart from the assessable purpose11. “Section 40-30 of the ITAA 1997” states that an
asset having the restricted actual life can be rationally expected to fall in value over the time.
According to “section 40-60” The decline in value of the depreciating asset starts when the
11 Woellner, R. H et al, Australian Taxation Law 2018

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taxpayer uses the asset or has installed the asset for use12. A taxpayer under section 40-65 can
compute the decline value of the depreciating asset by using the following methods
a. Diminishing value method (section 40-72) or
b. Prime cost method (section 40-75)
Prime Cost Method “Section 40-75 (1)”
Prime Cost Method
Asset Name
Asset
Cost
Days
Held
Effective
Life
Deductions for Decline
in Value
Hairdryer 8000 365 7 1142.86
Computer Software 295 365 3 98.33
Audi Q5 85,000 365 6 14166.67
Total deductions for
Decline in Value 15407.86
Formula = Asset Cost x Days Held / 365/365 x 100% / Effective Life
Diminishing Value Method “Section 40-72”
Diminishing Value Method
Asset Name
Asset
Cost
Days
Held
Effective
Life
Deductions for Decline
in Value
Hairdryer 8000 365 7 2285.71
Computer Software 295 365 3 196.67
Audi Q5 85,000 365 6 28333.33
Total deductions for
Decline in Value 30815.71
Formula = Base value x Days Held / 365/365 x 200% / Effective Life
12 Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)

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Based on the above stated calculation Jenifer should choose diminishing value
method as under this method she can claim a maximum deduction of $30,815.71 from her
assessable income.
Answer to question 5:
Gains that originates from the carrying on of the business is regarded as usual income
under “section 6-5 of the ITAA 1997”. However gains originating from the hobby or
pleasure are not treated as income unless the gains are specifically made taxable by the
legislation13. As understood in the present situation of Julie who is a keen photographer and
carried on the hobby of photography is now considering setting up her own business.
According to Australian Taxation Office it is necessary to understand the differences between
the hobby and business for taxation and other purpose. Similarly for Julie her tax obligations
commences soon when she is in the business of photography. It is essential to understand
when the hobby or recreational activities turns out to be business.
The legislative definition of “section 995-1” defines business as any profession, trade
or service but not in the capacity of employee. The court of law in “FC of T v Ferguson
(1979)” used numerous indicators that reflects the existence of business. The court of law in
“Stone v FC of T (2005)” have considered common indicators of business whether the profit
making intention is existent14. The extent of events together with the nature and kind of
capital are some of the factors that is considered by the ATO. As held in “JR Walker v FC of
13 Pinto, Dale. "State taxes." Australian Taxation Law. CCH Australia Limited, 2011. 1763-
1762.
14 Braithwaite, Valerie. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.

11TAXATION LAW
T (1985)” small operations undertaken by the taxpayer can still continue as the business
given there are sufficient other characteristics15. As evident in the current situations of Julie a
commercial approach has been taken to commence the business of photography which she
carried out as hobby for several years. As Julie intends to set up the business of photography
she must register the business name or obtain the ABN for her business. Other factors
includes;
a. Keeping the records of the business and accounts books
b. Having the separate business bank account
c. Having the registered name of business
d. Having necessary qualification or licence
The receipts that would be obtained by Julie from such business of photography
would be held as ordinary income under the normal proceeds of the business activity.
Answer to question 6:
As per “section 8-1” a person is permitted to claim deduction for expenditures that
are occurred in gaining the assessable income given the expenses are occurred in producing
the taxable earnings or occurred necessarily in making the taxable income16. In the present
situation Change runs a marketing business and incurs certain business costs for the income
year ended. A salary cost of $300,000 is occurred by Chang. He also reports a salary cost of
$4,000 that was paid to his son who carried out graphic design. “Section 8-1” has the
potential to be implemented on any taxpayer. The salary cost of $300,000 that is incurred by
15 Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
16 Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

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Chang will be permissible for deduction under the provision of “section 8-1” since these
costs were necessarily incurred by Chang in conducing the business for the gaining the
taxable income.
Chang incurs an expense of $900 to local bowls club for entertaining his clients. The
Australian taxation office provides that a taxpayer is allowed to claim deductions for
entertainment expenses incurred on clients by way of food, drink or recreation. With respect
to the general provision of “section 8-1” Chang can claim deductions for client entertainment
expenses.
Costs incurred in acquiring ordinary items of clothing such as suit are usually not
considered as deductible under “section 8-1”. The court in “Mansfield v FCT” held that
expenditure incurred on ordinary items of apparel is not allowed for deductions, irrespective
of the fact that it ensures an appropriate appearance in a particular job or profession17. The
sum of $2,000 incurred by Chang on smart clothing will not be allowed for deductions since
it is not a compulsory clothing required to carry out his business of marketing.
The ATO defines entertainment as providing entertainment by means of food, drink
or recreation. Chang incurs a cost of $5,500 for meals on his important clients therefore, he
would be allowed to claim deductions under “section 8-1” since the expenses are necessarily
occurred in conducting the commercial activities with the purpose of obtaining the taxable
income.
17 Robin, H. Australian taxation law 2017. Oxford University Press, 2017.

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“Section 8-1” allows a taxpayer to claim deductions for expenses incurred on loan18.
The interest on loan occurred by Chang for starting up the new business will be allowed for
deductions under “section 8-1”.
The court in “Lunney v FCT (1958)” held that travelling between home and
workplace is non-deductible expenses19. The taxpayer in “FCT v Payne (2001)” held that
travelling amid two unconnected workplaces is non-deductible under section 8-1. The travel
expense of $3,000 incurred by Chang is non-deductible under section 8-1.
According to ATO a taxpayer can claim deductions of expenses that are occurred in
running their business. If the taxpayer incurs expenses that was both related to work and
private purpose than a work related portion can be claimed as deductions. Chang can deduct
80% of the telephone bill while the remaining 20% out of $2,500 is a non-deductible private
expense.
According to the general rule of ATO an individual taxpayer is allowed to claim
deduction for their accommodation and travel costs given the taxpayer is required to attend
the work-related conferences and seminars20. Chang can claim deduction on airfares and
accommodation under “section 8-1” for attending the marketing conference.
18 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
19 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
20 Maley, Mr Nicholas. "Australian Taxation Office Guidance on the Diverted Profits Tax."
(2018).

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“Section 25-5 of the ITAA 1997” allows a taxpayer to claim specific deductions for
certain costs such as cost incurred in managing tax returns. Chang can claim deduction under
the specific poison of “section 25-5” for the charges paid to accountant to complete his tax
return.

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References:
Barkoczy, Stephen, Australian Tax Casebook 2018 14E Ebook (OUPANZ, 2018)
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
Braithwaite, Valerie. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.
Burton, Mark. "A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes
of the Australian Income Tax." J. Austl. Tax'n 19 (2017): 50.
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
James, Simon, The Economics Of Taxation 2014
Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)
Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
Maley, Mr Nicholas. "Australian Taxation Office Guidance on the Diverted Profits Tax."
(2018).
McCouat, Philip, Australian Master GST Guide 2018
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.

16TAXATION LAW
Oishi, Shigehiro, Kostadin Kushlev, and Ulrich Schimmack. "Progressive taxation, income
inequality, and happiness." American Psychologist 73.2 (2018): 157.
Pinto, Dale. "State taxes." Australian Taxation Law. CCH Australia Limited, 2011. 1763-
1762.
Robin, H. Australian taxation law 2017. Oxford University Press, 2017.
Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
Taylor, C. J et al, Understanding Taxation Law 2018
Woellner, R. H et al, Australian Taxation Law 2018
Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)