Contents

Answer 1.

Introduction/Identification of material facts in the case.

Discussion.

Identification of legal issues in the case.

Analysis of legal issues for Francis.

Conclusion on the tax deductibility of the expenditure.

Answer 2.

Introduction/Issue.

Legal rules applicable to computation of Tom’s business income, taxable income, tax payable and net tax payable.

Computations.

Computation of business income.

Computation of taxable income.

Computation of tax payable and net tax payable by Tom...

Conclusion.

References

Taxation Law - Answer 1

Introduction/Identification of material facts in the case

The issue here is to advise Francis with reference to relevant legislation and principles of tax law in connection with the deductibility of the initial repair or replacement option available to him in the context of an Old restaurant and its commercial kitchen purchased by him in Australia.

Discussion of material facts in the case

Identification of legal issues in the case

With reference to ruling TR 97/23 and Section 25-10, ITAA 1997; it may be important to consider that an 'initial repair' is not necessarily in the nature of first repair on the acquisition of a property, It is normally done at the time of the acquisition due to defects or damage to make the property suitable for use. Most importantly, it exists at the time of acquisition and does not arise due to the operation of the taxpayer. The initial repair may also relate to the profit-yielding structure of the business and is capital in nature.

Section 25-10 also provides in order to claim the deduction; the repair ought to have restored the efficiency of the property without any change in its character considering original appearance or condition of the property. It these conditions are not met; the expenditure cannot be held to be tax deductible.

Another legal issue to consider is the difference between capital and revenue outgoings as laid down in Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 5 ATD 87where it was held that expenditure incurred for establishment or replacement of the business is not an operating expense. The expenditure in this case even if not for restoration is in the nature of renewal expense for the reconstruction of the entirety. Therefore, property purchased for being used as a capital asset which is not suitable and in good order for use; expenditure incurred for making it suitable or usable is a part of the cost of acquisition and capital in nature (Legal Database, 2020)

Reference is also directed to ruling TD 98/19 which provides that an 'initial repair' is not essentially a first repair after acquisition. It is a repair driven by defects or damage to make the property suitable or usable as intended. Initial repair must also have the effect of rectifying the defects of the property to the original efficiency without changing its character; and does not result in improvement, alteration, renewal or restoration of the entire asset (Legal Database, 2020)

The definition of 'entirety' is case specific. The courts normally warrant it as something 'separately identified as main part of capital equipment (Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), which makes up substantially the whole of the property.

Where the work done on the property involves technological advancement; it has more probability of going beyond the meaning of repair as it may have enhanced the original efficiency of the property and may not be deductible under Section 25-10 notwithstanding meeting the general deduction criteria under Section 8-1, ITAA 1997 .

However, where the advancement may have brought about a minor or incidental improvement to the property; or was caused by using modern component parts often precipitated by the non-availability of original materials; which incidentally enhances the overall efficiency of the property; or where the work in effect did not end up changing the character of the property; it may meet the deduction criteria for repair expenditure under Section 25-10.

Difference between 'repair' and an 'improvement' is normally considered on the basis of the effect of the work done on the efficiency of the property. Where the work in effect repaired or restored the defect or damage; the effect on efficiency may be ignored by the Courts. The initial repair expenditure incurred on the other hand is often reflected in the asset value at the time of the CGT event. It is the onus of the taxpayer to prove that the initial repair expenditure in effect helped to prevent deterioration of the asset or had an equating effect. It is not required to be proved that the expenditure reflected the capital proceeds for the CGT event.

If substantial improvement occurred to the property on incurring the replacement expenditure; the expenditure in effect enhanced the operating efficiency of the property and changes its character. No deduction was thus allowable in such cases by the Courts. Hailstorms Pty Ltd v. FC of T (1946) 72 CLR 634

The high replacement cost compared to the repair cost may not always be tenable for disallowing the Section 25-10 and is dependent on the effect on the in efficiency of the asset (Ato.gov.au, 2020)

Analysis of Legal Issues for Francis

Applying the legal issues identified in the case of Francis with reference to his decision to replace the commercial kitchen of the Old restaurant purchased by him with brand new modern appliances due to better features and durability and non-availability of some parts in the market driven by reasons of being obsolete and old may involve consideration of the following:

Firstly, it is evident that the advancement brought about a minor or incidental improvement to the commercial kitchen property; or was caused by using modern component parts precipitated by the non-availability of original materials; which incidentally may have enhanced the overall efficiency of the property; without changing the character of the property thereby meeting the deduction criteria for repair expenditure under Section 25-10.

Section 25-10 also provides in order to claim the deduction; the repair ought to have restored the efficiency of the property without any change in its character considering original appearance or condition of the property. It these conditions are not met; the expenditure cannot be held to be tax deductible.

It is also relevant to note that the issue of difference between 'repair' and an 'improvement' is normally considered on the basis of the effect of the work done on the efficiency of the property. Where the work in effect repaired or restored the defect or damage; the effect on efficiency may be ignored by the Courts.

The fact that the replacement expenditure was to the tune of $23,000 while the repairs summed up to a mere $ 4,900 may therefore be ignored on the basis of the effect of the work done on the efficiency of the property. Where the work in effect repaired or restored the defect or damage; the effect on efficiency may be ignored by the Courts. The high cost of replacement compared to the repair cost is therefore insufficient for disallowing the Section 25-10 as in this case the possibility of the increase in efficiency is remote and may be ignored.

It may also be comprehended that no substantial improvement to the Commercial kitchen took place on the incurrence of the replacement expenditure. The expenditure in effect restored the operating efficiency of the commercial kitchen without changing its character.

Conclusion on the Tax Deductibility of The Expenditure

Francis is advised with reference to ruling TR 97/23, TD 98/19, Section 25-10, and Section 8-1, ITAA 1997 in connection with the deductibility of the replacement option exercised by him to the tune of $23,000 in the context of the Commercial kitchen of an Old restaurant purchased by him to claim it as an allowable deduction while filing his taxes.

Taxation Law - Answer 2

Introduction/Issue to Tom's Issue

The issue here is to advise Tom on his total computed business income, taxable income, tax on taxable income and the net tax payable for the financial year 2019/20. Tom is a resident running his musical instruments business in Westfield Sydney and teaches guitar at a local College. He has provided details of his receipts during the year.

Legal Rules Applicable to Computation of Tom’s Business Income, Taxable Income, Tax Payable and Net Tax Payable

As per relevant ATO guidance in this behalf, for the purpose of making business income computations; it has been assumed that Tom follows the Accrual method of accounting for his business income wherein all income for the year will be accounted for irrespective of whether it has been received or not. It may also be relevant to note that the method adopted needs to be followed for all transactions for the income year. The other method available is the Cash method of accounting where all income and expenses are accounted on the basis of receipts during the relevant year (Accounting methods, 2020)

It may be noted that Long service leave is a part of the assessable salary income of the tax payer only where it is an accrued leave transfer payment in respect of the income year concerned as per Section 26-10, ITAA 1997. Since Tom received $ 4,200 long service leave payment in the current income year; it will be his assessable income notwithstanding that he plans to use it in the next income year. This is again based on the assumption in absence of given information that the payment represents accrued leave payments (INCOME TAX ASSESSMENT ACT 1997 - SECT 26.10Leave payments, 2020)

ATO guidance for bank withdrawals provides that the bank interest earned on a Savings bank account has to be separately disclosed. It may be inferred from the guidance that the entire withdrawal is not taxed; only the interest portion is assessable as income of the taxpayer. Tom should therefore disclose interest for the income year @ 21,000*5%=1,050 as part of his taxable income. The interest paid in the previous year is not included as part of this year’s assessable income as it is presumed to have been taxed in the previous year when it was earned (Declare interest correctly, 2020)

ATO guidance in respect of franked dividends provides where tax paid by an Australian resident Company has been allocated to the tax payer through attached franking credits implying that Company has already paid tax in respect of these dividends and has credited the shareholder accordingly; a franking tax offset is allowed to the taxpayer for the tax payable on such dividends. Tom should therefore claim $5,143 as a franking tax offset on total taxes payable by him. No tax credit is available on un-franked dividends (You and your shares 2019, 2020)

Tax has been calculated on the basis of the applicable tax slab for residents for financial year 2019/20 (Individual income tax rates, 2020) No other levy, offset or surcharge is applicable to Tom except Medicare levy @ 2% of taxable income and Medicare levy surcharge @ 1.5% of taxable income as Tom’s income exceeds $ 90,000. Tom does not have a1 owable deductions (Medicare levy, 2020)

Computations of Tom's Issue

Computation of Business Income

Income Category

Amount in AUD

Net

Income from sales of business

2,20,000

 

Less:

   

Sales of last year already adjusted in that year

(2,500)

 

Sales of this year of $3,200 will not be deducted as these will be accounted in this year based on the accrual method of accounting

-

 

Total business Income

 

2,17,500

 

Computation of Taxable Income

Income Category

Amount in AUD

Net

Income from salary received from Sydney guitar school

53,000

 

Less:

   

Long service leave due next year

-

 

Total income from Salary

 

53,000

     

Bank Withdrawals

22,050

 

Total income from bank interest

 

1,050

Fully franked dividends

12,000

12,000

Un-franked dividends

4,000

4,000

Total income from investments

 

17,050

Total taxable income

 

287,550

Computation of Tax Payable and Net Tax Payable by Tom

 

Amount in AUD

Net

Total taxable income

287,550

 

Tax @ 54,096+45%*(287550-180000)

=54096+107550

=161646

161,646

 

Add:

   

LITO

-

 

LAMITO

-

 

SAPTO

-

 

Medicare levy@ 2%

5,751

 

MLS @1.5%

4,313.25

 

PHIO

-

 

LHC

-

 

Total tax payable

 

171,710.25

Less:

   

Franking tax offset

5,143

 

Net tax payable

 

166,567.25

Conclusion on Taxation Law

Tom is advised on the basis of his total computed business income, taxable income, tax on taxable income and the net tax payable for the financial year 2019/20 as per the tabulated computations above to file and pay a net tax of $ 166,567.25 for the financial year 2019/20. The Computations have been done on the basis of relevant ATO guidance in respect of franked dividends, un-franked dividends, method of accounting and bank withdrawals and Section 26-10, ITAA 1997 related to long leave payments. The tax slab as applicable to resident individuals for the year was used for the computations.

References for Taxation Law

Ato.gov.au. 2020. Accounting Methods. [online] Available at: <https://www.ato.gov.au/Business/Income-and-deductions-for-business/Assessable-income/Accounting-methods/> [Accessed 12 May 2020].

Ato.gov.au. 2020. Declare Interest Correctly. [online] Available at: <https://www.ato.gov.au/Individuals/Data-matching-letters/Types-of-letters/Interest-income/Declare-interest-correctly/> [Accessed 12 May 2020].

Ato.gov.au. 2020. Individual Income Tax Rates. [online] Available at: <https://www.ato.gov.au/rates/individual-income-tax-rates/> [Accessed 12 May 2020].

Ato.gov.au. 2020. Legal Database. [online] Available at: <https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/ato/00001> [Accessed 12 May 2020].

Ato.gov.au. 2020. Legal Database. [online] Available at: <https://www.ato.gov.au/law/view/document?DocID=TXD/TD9819/NAT/ATO/00001&PiT=99991231235958> [Accessed 12 May 2020].

Ato.gov.au. 2020. Medicare Levy. [online] Available at: <https://www.ato.gov.au/Individuals/Medicare-levy/> [Accessed 12 May 2020].

Ato.gov.au. 2020. You And Your Shares 2019. [online] Available at: <https://www.ato.gov.au/Forms/You-and-your-shares-2019/?page=4> [Accessed 12 May 2020].

Classic.austlii.edu.au. 2020. INCOME TAX ASSESSMENT ACT 1997 - SECT 26.10Leave Payments. [online] Available at: <http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s26.10.html> [Accessed 12 May 2020]

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Taxation Law Assignment Help

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