HI6028 Australian Income Tax Assignment Sample

• Subject Code : HI6028
• University : Holmes Institute My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Taxation Law

Table of Contents

Introduction.

Question 1.

Question 2.

Conclusion.

References.

Introduction to Taxation Theory, Practice and Law

Taxation law within Australia predominantly comes under the purview of two major enactments, with one being the Income Tax Assessment Act 1936 (ITAA 36) and the other being Income Tax Assessment Act 1997 (ITAA 97). Subsequently, a number of Taxation Rulings, commonly referred to as TRs enforced by the Australian Taxation Office (ATO) are also considered in concurrence with the ITAA 36 and the ITAA 97 to determine the liabilities for individuals and companies along with a number of other taxation and accounting requisites. The current study evaluates two case studies that primarily deal with the concepts of capital and revenue expenses and allowable deductions in the context of travelling expenses from workplace to the place of residence.

Taxation Theory, Practice and Law - Question 1

The facts of the first case present an individual named John, who has been approved a license for a casino in the city of Melbourne. The duration of the license received from the Government of Victoria is for a period of 10 years. Furthermore, John also received an approval for the building of the Casino for a period of 90 years. As per the instruction of the relevant Governmental agency, John was required to pay a sum of $180 million for the approved licence and another $80 million for the rent as a pre payment in order to cover the first 10 years of the Casino’s rental. Subsequently, John managed to negotiate that the rent per year for the remaining 80 years of the license would be payable at $400,000 annually.

The facts as presented are based on recognising a prepaid expense in the books of accounts in accordance to the legislation within Australia along with the acknowledged practises of accounting. It is important to discuss the nature of the expense in order to distinguish between the terms capital expenditure and revenue expenditure. According to the views of Beyer, Herrmann & Rapley (2019), capital expenditures typically tend to be the costs that involve a fixed asset that inherently involve an expectation to be a productive asset for a relatively long period or duration. Contradictorily, revenue expenditures refer to business expenditures that are find a relation to specific revenue transactions. The most prominent examples of a revenue expenditure is the costs involved in selling goods, while an example of a capital expenditure would be the costs involved in acquiring a fixed asset such as land. The differences between capital and revenue expenditures can be established on the basis of three major criteria comprised of the timing of the expense, the nature of consumption and the size of the amount involved in the expenditure.

In terms of the timing, expenditures or costs that are capital by nature are typically accounted for or charged in a gradual manner over a period of time, often through depreciation. Contradictorily, revenue expenditures are charged to the expense within a specific reporting period within which the expense takes place or shortly thereafter. As stated by Plunkett (2017), the nature of consumption of is also a key area of distinction that is assistive towards determining an expense in terms of whether it is a revenue expense or whether it is a capital expense. Capital expenditures are typically assumed to have been consumed over the useful or productive life of the fixed asset. Contradictorily, as Ingles (2016) argues, revenue expenditures are deemed to have been consumed within a comparatively shorter period or within a singular reporting period. Lastly, the size of the monetary consideration may also be beneficial in determining whether an expense is capital or a revenue expense by nature. Capital expenditures typically tend to involve larger amounts of money as compared to revenue expenditures, albeit certain revenue expenses may also be quite large in terms of the thresholds within Australia.

Based on the aforementioned distinctions between capital and revenue expenditures, the $180 million that John was required to pay to obtain the license would entail no deductibility as it would be termed as an expense related to an intangible asset and it would be a necessary expenditure required to initiate the operations of the casino. The prepaid rent amounting to $80 million for the first 10 years of the casino, however, would be considered as a capital expenditure and therefore entail no deductibility. One of the most prominent case laws in this regard that was passed rather recently refers to the judgement of “FCT v Star City Pty Limited [2009] FCAFC 19 (Full Federal Court; Goldberg, Dowsett and Jessup JJ”. The substance of the expenditure was prioritized as opposed to the nature and conditions of the expenditure for the pre payment of the rental pre paid by Star City Casino. Section 51 (1) of the “Income Tax Assessment Act 1936” or Section 8- 1 of the “Income Tax Assessment Act 1997” was referred to in the judgement (Commonwealth Consolidated Acts, 2020).

It highlighted how the pre-payment of the rental amount related to obtaining the advantage of securing the casino license as opposed to quietly enjoying the casino site for a period of 12 years (The Tax Institute, 2020). The case in question is rather similar to the specifications provided within the case study involving John and the Casino East. As provided in the case scenario, Star City Casino were directed to pay $120 million for the first 12 years of the term of the lease, following which the rental amount was reduced to $250,000 for every year.

Another relevant case law in this regard refers to the judgement passed in “City Link Melbourne Limited v Commissioner of Taxation [2004] FCAFC 272; (2004) 141 FCR 69” that was also considered when adjudicating the aforementioned Star City Casino case (McCormack, 2006). While the facts of the case involving City Link Melbourne were related to concession fees that were paid from 1996 to 1998 and considered as allowable deductions, the judgement was important to determine the capital or revenue nature of an expense. The key area of distinction that was made predominantly related to the capital nature of payments where the payment finds a direct link to the seeking of a lasting advantage. It would either be aligned with an advantage of exclusivity or a freedom from competition. Other relevant case laws in this context include the judgements passed in “Jupiters Limited v DFC of T (2002) ATC 4566” and “United Energy Limited v FC of T (1997) ATC4796” that highlighted similar propositions in terms of emphasizing on the nature of the advantage as opposed to the nature of the payment and its associated characteristics.

Taxation Theory, Practice and Law - Question 2

The facts of the second case present Alex Kingsford, a mechanical engineer who works for an organization named ABC engineering located in Melbourne. Apart from his job as a mechanical engineer, Alex also runs a home based catering business from his property located in Dandenong, Victoria where he and his family reside. He usually travels from the ABC Engineering workshop to his home by a car or an Uber, and when he lodged is tax return in 2019, a substantial amount was requested for a deduction for travelling expenses related to the business.

The first area of contention in this regard would be the determination of the nature of expense that Alex spends on travelling from his workplace, which is ABC Engineering to his residence in Dandenong. Section 8- 1 of the “Income Tax Assessment Act 1997” puts forward that a general deduction that is directly relevant to an income producing activity may be deductible when calculating the assessable income for the reporting period (Commonwealth Consolidated Acts, 2020). The general deductions are broadly categorised into three major areas. These included expenses that are directly relevant to personal exertion, such as salaries or wages, personal business expenses and expenses related to investment activities. Furthermore, the expense must not be capital, private or domestic by nature. While Alex had a separate food catering business that was registered at his residential address, it would be important to identify the amount of travel that he engaged in to solely engage in the activities for ABC Engineering. The travel expenses that he had claimed for as a deduction, which related to going to his residence for his catering business purposes would not be a valid deduction and therefore not be allowed for any sort of claims.

It is also important to note that expenses that involve a mix of personal use and business use do not allow the deductibility of the entire expense. For instance, if a laptop was purchased and used only for business purposes, the full purchase price could be claimed in terms of a deduction. Similarly, if the laptop was used 60% for business purposes and 40% for private purposes, only 60% of the amount could be claimed as a deduction when calculating the assessable income (Australian Taxation Office, 2020). Business tax deductions, as those claimed by Alex for travelling to and from ABC Engineering, would also require proper documentation to support the business nature of the expenses.

Evidence to substantiate the claim for deduction is mandatory within the taxation system of Australia, and it may exist in any form including in writing or in an electronic form. The language of the evidence is also important, as it must be in English or in any other language that may be readily accessible and converted into English (business.gov.au, 2020). While the time period for keeping such records by default is the duration of five years, some business expense records may need to be kept for longer.

The judgment passed in the matter of “Commissioner of Taxation v Payne [2001] HCA 3. 202 CLR 93” essentially solidified the general rule that allowed for a deduction under Section 51(1) of the “Income Tax Assessment Act 1936” (Australasian Legal Information Institute, 2020). The key prerogative in this regard was the expense must be directly related to the purpose of gaining or producing income from the business to the extent of which they could be considered as losses or outgoings except of a private, domestic or capital nature. It is relevant to the case involving Alex, since while his residential address was a registered business, it was separate from ABC Engineering and it was the place of his residence. Naturally, any expenses that he incurred when travelling from his home to ABC Engineering would be allowed for a deduction provided that the travel was made for the purposes of ABC Engineering and not his home based catering business.

Another very prominent and interesting case law in this regard relates to the judgement passed in the matter of “Commissioner of Taxation v La Rosa [2003] FCAFC 125”, where the judges held that despite the illegal nature of the source of the income, La Rosa, the convicted heroin dealer, would be entitled to a tax deduction of $220,000 (Shanahan, 2020). The sum was stolen from him during an ongoing drug deal. Subsequent to the decision, amendments were made to the “Income Tax Assessment Act 1997” to prevent similar decision from being taken in the future. As stated by Lund (2003), the key justification that was provided in upholding the general nature of deduction by Justice Peter Hely was that the purpose of the taxation system within Australia was to tax income that was taxable and not punishes criminal or illegal activities. The court was of the opinion that it was solely the responsibility of the criminal legal system to those that engage in unlawful activities.

Conclusion on Taxation Theory, Practice and Law

In conclusion, it was identified that general deductions in terms of business expenses would be allowed if they did not classify as a personal, domestic or capital expenditure as discussed in the case of Alex and ABC Engineering. Similarly, the pre payment of rental expenses for obtaining competition or exclusivity advantages as discussed in the case of John and the Casino East would be classified as a capital expenditure. Relevant legislations and case laws were discussed in relevance to the issues involved in the cases.

References for Taxation Theory, Practice and Law

Australasian Legal Information Institute. (2020). Stewart, Miranda --- "Commissioner of Taxation v Payne; Deductibility of Travel Expenses: Is Australia Moving from a Global to a Schedular Income Tax (2001) 25" [2001] MelbULawRw 17; (2001) 25(2) Melbourne University Law Review 495. Retrieved 6 June 2020, from http://www5.austlii.edu.au/au/journals/MelbULawRw/2001/17.html

Australian Taxation Office. (2020). Deductions. Retrieved 6 June 2020, from https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/

Beyer, B. D., Herrmann, D. R., & Rapley, E. T. (2019). Disaggregated capital expenditures. Accounting Horizons, 33(4), 77-93. Retrieved 6 June 2020, from https://www.aaajournals.org/doi/pdf/10.2308/acch-52475

business.gov.au. (2020). Tax deductions. Retrieved 6 June 2020, from https://www.business.gov.au/Finance/Taxation/Tax-deductions#:~:text=Expenses%20you%20can%20claim%20as%20a%20deduction,-You%20can%20claim&text=they%20relate%20directly%20to%20earning,to%20substantiate%20what%20you%20claim

Commonwealth Consolidated Acts. (2020). INCOME TAX ASSESSMENT ACT 1997 - SECT 8.1 General deductions. Retrieved 6 June 2020, from http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html

Ingles, D. (2016). Taxes on land rent. Tax and Transfer Policy Institute Working Paper, 6. Retrieved 6 June 2020, from http://taxwatch.org.au/wp-content/uploads/2016/09/Taxes-on-land-rent.pdf

Lund, S. (2003). Deductions arising from illegal activities. Revenue Law Journal, 13(1), 6667. Retrieved 6 June 2020, from https://rlj.scholasticahq.com/article/6667.pdf

McCormack, J. (2006). The Full High Court Has Its Say: Citylink Melbourne Ltd Case - Tax - Australia. Retrieved 6 June 2020, from https://www.mondaq.com/australia/income-tax/42220/the-full-high-court-has-its-say-citylink-melbourne-ltd-case

Plunkett, T. (2017). The Capital/Revenue Distinction, Feasibility Expenditure and Trustpower Ltd. v. Commissioner of Inland Revenue. Auckland UL Rev., 23, 364. Retrieved 6 June 2020, from http://www.austlii.edu.au/nz/journals/AukULawRw/2017/16.pdf

Shanahan, M. (2020). Taxation in Australia - Deductions for drug dealers [Commissioner of Taxation v La Rosa [2003] FCAFC 125.] (APAFT) - Informit. Taxation In Australia, 38(2), 63. Retrieved from https://search.informit.com.au/documentSummary;dn=200308194;res=IELAPA

The Tax Institute. (2020). Prepayment of rent for casino site capital - Star City. Retrieved 6 June 2020, from https://www.taxinstitute.com.au/go/news/prepayment-of-rent-for-casino-site-capital-star-city

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