Taxation Theory, Practice and Law - Tutorial Questions Solution

This document provides a comprehensive solution to tutorial questions from a Taxation Theory, Practice and Law unit. It covers various aspects of Australian taxation law, including the functions of taxation, residential status and income tax liability, tax treatment of payments, assessability and deductibility of events, and the calculation of depreciation using both prime cost and diminishing value methods. The solution incorporates relevant legislation, case law, and practical examples to illustrate the application of tax principles. Specific topics include the Income Tax Assessment Act 1997, residency tests, capital versus revenue receipts, and work-related expenses. The document aims to provide a clear and concise understanding of the complex tax concepts through detailed explanations and calculations.

TAXATION, THEORY
PRACTICE AND LAW

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
WEEK 1...........................................................................................................................................1
Functions of Taxation..................................................................................................................1
WEEK 2...........................................................................................................................................2
Residential status and income tax liability of Amandeep............................................................2
WEEK 3...........................................................................................................................................2
Tax treatment of payment for Gary.............................................................................................2
WEEK 4...........................................................................................................................................3
Assessability or Deductibility of the events................................................................................3
WEEK 5...........................................................................................................................................4
Deduction for decline in value using prime cost and diminishing value method........................4
REFERENCES................................................................................................................................6

WEEK 1
Functions of Taxation
Tax is defines as the charge over the organisations and individuals by statutory
authorities on the product, services or income. Taxation is governed by the Income Tax
Assessment Act, 1997 that requires the individuals to pay tax on their income above the
threshold limit. Tax in Australia is collected by the Australian taxation office that also guides
about the taxability of events and payments of tax. Tax is collected by the government for
running the economy of country. Government uses the tax collected for the development and
upliftment of the society. It undertakes various plans and projects for developing the
infrastructure and increasing the growth rate of economy. There are number of functions to be
performed by the taxation.
 It functions as the body having charges of imposing tax over the individuals equitably on
the basis of their earnings and income. Earning capacity and assets of the individuals are
sued for measuring the earning ability. It ensures that taxes are charged from the people
on progressive basis.
 Taxation has the function of ensuring that taxes are increased in manner that decreases
economic costs that is created by the bias or distortions from various tax implications.
These are evaluated on the basis of revenues generated as rise in overall taxes (Murphy,
2019).
 Taxation performs the function of raising revenues from the incomes and services of
individuals for satisfying increasing needs of society. This is essential for public to earn
adequate level of incomes for taxation purposes.
 It has established age neutrality between the age group of different generations. It ensures
that there is uniform taxation system for people belonging to same age group in the
country.
 The taxation ensures community is consulted and engaged in the process of making
taxation reforms with diversity, interests and views. Big reforms brought immediately
don not get much acceptance as in the case where the problems are defined and solutions
are searched for getting more acceptance.
 It functions as a body to make system of Australian taxation simple as well as
predictable. It pays attention towards framing structure of tax systems in ways that
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minimise the compliance costs. it also ensures that the possibilities of tax avoidance are
mitigated and reduced to minimum.
WEEK 2
Residential status and income tax liability of Amandeep.
In Australia taxability is dependent over the residential status of the tax payer. Before
charging tax residency tests are to be checked of the individuals coming from abroad in
Australia. There are three test given under the residency tests
Resides Test – In this test individual is regarded as Australian resident for the tax purposes in
person resides in Australia. Residency status of the person is determined on the basis of various
criteria like intention of purpose, physical and family presence, business or employment ties,
social & living arrangements.
Domicile Test – It is done if resides test is not satisfied. If the person is having domicile in
Australia it is considered as Australian resident except when on satisfaction that permanent place
of abode is out of Australia.
183 Day Test - It is applied over people visiting from outside in Australia. According to the test
if an individual is present in Australia above half of income year, is considered as Australian
resident. Person could be having constructive residence if the adobe place is outside Australia
and the intention is not to live in Australia (Hobson, 2019). Those individual that have taken
residence are considered as Australian citizen.
In this case Amandeep has satisfied the resides test as place of residence is already taken
in Australia Amandeep is living in the residence along with the family and has also opened
Australian bank account. From these actions it could be clearly identified that the Amandeep
intends to reside in Australia and also domicile test is satisfied as residence unit has been
purchased in Australia. Therefore from the above tests it could be identified that Amandeep is an
Australian resident for the tax purpose. Tax will be paid in Australia on Salary and not on
investment incomes.
WEEK 3
Tax treatment of payment for Gary
In the present case Gary has leased premises and commercial buildings for conducting
bakery business. John has received 3100 to recover the repair expenses. Compensation has been
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received by the Gary for because of the breach of the terms of lease. In this case contract is
breached by John for whom compensation has been paid by John of 3100.
As per rule TR 95/35 it is required to identify that the receipts whether are income or
capital. Damages had been made by John to the underlying asset of the property (Mackie and
et.al., 2019). The receipts are received due to the damage to capital assets therefore they are
considered as capital receipts. As per the taxation department compensation receipts are taxable,
revenues receipts are allowed as deduction in the year in which they are received and capital
receipts are amortised over 5 years or useful life whichever is shorter. Applying the provisions of
the above compensation it could be compensation received for the damages are charged as
capital receipt and is taxable in capital gain tax of the income tax returns.
WEEK 4
Assessability or Deductibility of the events
i) In the present case legal expenses are incurred for false advertising. Expenses incurred
for producing assessable income are allowed for deduction under ITAA, 1997. Fines or penalties
are not allowed to be claimed as deduction as per section 25.5 of ITAA, 97. Legal expenses for
fighting suit for false advertising and these are not related to the work for producing assessable
income. Therefore, deduction over legal expenses is not allowed as deduction.
ii) Under the taxation systems tax payers are not allowed for deduction on immediate basis
over capital expenditures or the capital assets. On the capital expenditures deduction is allowed
to the tax payers in form of depreciation (Braithwaite, ed., 2017). Constriction expenditure is
incurred by John after February 26, 1992 and they are allowed as deduction under section 43.210
of the ITAA, 97. John can claim deduction for capital expenditures of $22000 by adding it to
building cost as depreciation.
iii) Income tax provides for deduction for work related expenses to produce assessable
income. In present case John has incurred expenses on T shirts with logo of company to market
the business that means for producing assessable income. According to section 900 of he ITAA,
97 work related expenses could be claimed as deduction as they related with producing
assessable income. Expenditures incurred other than related to the work are not allowed for
deduction.
iv) Taxation department of Australia has specified that deduction could not be claimed for
the expenditures that are related with fines or penalties. In this case John is fined for putting the
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items on display without receiving proper permit for the same (ITAA, 1997. 2019). John cannot
claim deduction for payment of fines in the tax return in accordance with the section 26 of ITAA,
1997.
WEEK 5
Deduction for decline in value using prime cost and diminishing value method
Prime cost method Diminishing method
Prime cost is a depreciation method which
assumes assets value is decreasing at uniform rate
over the life of asset.
Diminishing value method is also a
depreciation method which is based
on the concept that asset value
decreases more in starting years of the
useful life.
A Deduction under prime cost method for
Machinery.
Deduction under Diminishing value
method for Machinery.
Prime cost method =
Asset’s cost*(days held/365)*(100%/asset’s
effective life)
= 110000 * ( 273 / 365) * 14.28%
= 82273 * 14.28%
= 11748
Diminishing method =
Base value * ( days held / 365 ) *
(200% / asset’s effective life)
= 110000 * (273/365) * (200% / 7)
= 82773 * 28.57%
= 23505
B. Deduction under prime cost method for Car. Deduction under Diminishing value
method for Car.
Prime Cost method = Asset’s cost * ( days held /
365) * (100% / asset’s effective life)
Year 1 = 63000 * (61/365) * 20%
= 10528 *20%
= 2105
Year 2 = 63000 * (365/365) * 20%
= 63000 * 20%
Diminishing method = Base value * (
days held / 365 ) * (200% / asset’s
effective life)
Year 1 =63000 * (61/365)* 40%
= 10528 * 40%
= 4211
Year 2 = 63000 – 4211
= 58789 * 40%
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= 12600 = 23516
According to section 40 of ITAA, 1997 deduction for capital expenditures allowed as
deduction in the form of depreciation over the useful life of asset. In the present case claims
could be made as deduction under the income tax return (Biddle, Fels and Sinning, 2017). In
the present case machine is purchased on October 1, 2019 and from this date it is held for 273
days in the income year. on the depreciation over car will be charged for full year as it was
purchased last year.
Asset Prime Cost Method Diminishing value Method
Machine 11748 23505
Car 12600 23516
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REFERENCES
Books and Journals
Murphy, K., 2019. Moving towards a more effective model of regulatory enforcement in the
Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Hobson, K., 2019. 'Say no to the ATO': The cultural politics of protest against the Australian Tax
Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The
Australian National University.
Mackie, R.S., and et.al., 2019. Trends in nicotine consumption between 2010 and 2017 in an
Australian city using the wastewater-based epidemiology approach. Environment
international. 125. pp.184-190.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Biddle, N., Fels, K. and Sinning, M., 2017. Behavioural insights and business taxation: Evidence
from two randomized controlled trials. Tax and Transfer Policy Institute-Working
Paper, 2.
Online
ITAA, 1997. 2019. [Online]. Available through :
<http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/>.
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