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Taxation Theory, Practice and Law - Question 1

The primary function of taxation laws is ensuring that sufficient revenues have been raised by the governments to spend for public goods. The secondary function of taxation laws is to modify taxpayer behavior. Both the above main functions of taxation are complied under the Commonwealth taxation framework which is discussed as under:

  • Income Tax – tax is levied on the taxable income of a range of entities including individuals, companies and trustees. A flat rate of tax is imposed for companies and superannuation funds, whereas progressive rates of tax are imposed for individuals. The Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (Braithwaite 2017).
  • Goods and Services Tax (GST) – a broad based indirect tax imposed at the rate of the taxable value of most goods and services. Goods and Services Tax is governed mainly by A New Tax System (Goods and Services Tax) Act 1999.
  • Fringe Benefits Tax (FBT) – a tax payable by employers imposed at the rate of 47% of the taxable amount of certain benefits provided to employees in connection with their employment. Fringe Benefits Tax is governed mainly by the Fringe Benefits Tax Assessment Act 1986.
  • Customs and excise duties: is a tax on the importation of goods into Australia and is payable by the importer. Generally, taxed at the rate of 5% (ATO 2020).
  • Medicare levy and Medicare levy surcharge – Medicare levy is a flat rate of tax payable by individuals at the rate of 2% of taxable income. The tax is designed to fund the public health care system. The surcharge is an additional amount payable by those earning in excess of certain thresholds that do not have private health insurance.

Taxation Theory, Practice and Law - Question 2

As per ATO, for taxation purposes, the definition for an Australian individual to be a resident is specified u/s 6(1) ITAA 36. That means an individual is a resident if they (as per sec 6(1) ITAA 36):

1. ‘Reside’ in Australia (Levene v IRC [1928] AC 217) (the common law test)

2. Have a ‘domicile’ in Australia (domicile test)

3. Have been in Australia, continuously or intermittently, for more than half the year (183 day test), or

For the case study of Amandeep, two problems have been identified:

1. Whether Amandeep is an Australian resident of Australia as per tax laws?

2. Is his income taxable by ATO?

As per various residence tests u/s 6(1)(a) ITAA36 as discussed above, there are reasonable evidences to prove Amandeep to be an Australian resident because:-

  • Amandeep seems to be migrated to Australia and lives there permanently.
  • Also his immediate family including his wife (Sandeep) and two children lives in Sydney, Australia (ATO 2020).
  • Both Amanadeep and Sandeep maintain an Australian bank account in which he receives his periodical salary.
  • Amandeep also bought a home in Sydney, Australia.

However, Amandeep still holds Indian Passport, but common law test of s 6(1)(a) ITAA36, allows taxpayers to be resident in more than one jurisdiction. That means Amandeep can hold his Indian citizenship, but remain resident of Australia accountable under ATO.

Also Amandeep’s connection with New Zealand is purely based on employment (Pillay v FC of T 2013 ATC). The fact that he spent most of his financial period in New Zealand due to the nature of his job cannot dilute the facts discussed above that prove Amandep to be a resident of Australia. The 183 day test is one of the various tests for the residency proof (ATO 2020).

The tax rules for sources of incomes:

  • Amandeep works with the New Zealand Princess Cruises tours, thus it can be stated that he has a foreign primary source of income (income from salary and wage). The source of income from services is basically the place where services are delivered (FC of T v Esftathakis 79 ATC 4256, French). However, Amandeep signed the employment contract in the Australian office of the company situated in Sydney. Therefore, the source of income to be New Zealand can be challenged (FC of T v Mitchum (1965) 113 CLR 401).
  • As per the case law of Esquire Nominees Ltd (as Trustee of Manolas Trust) v FC of T 73 ATC 4114, the source of income from dividend is the place where profits have been generated to pay such dividends. Therefore, the dividends income from share of Indian based HUL has an overseas source.

Being an Australian resident, all sources are assessable income for Amandeep under ATO, including salary income and dividend income. However, if some overseas tax is paid then foreign income tax offsets can be availed (ATO 2020).

Taxation Theory, Practice and Law - Question 3

Income Tax Assessment Act 1997 - SECT 15.25: As per the prevailing section of ITAA, the amount received against repairs of lease obligation can be considered to be assessable income if it includes an amount received from an entity if:

a. The amount has been received as a lessor or former lessor of the leased premises.

The amount in the given case has been received by Garry, the lessor (owner) of the commercial building who leased his premises to John to conduct a bakery business.

b. The amount has been paid by the lessee against failure to comply or noncompliance of a lease obligation to required repairs to the leased premises at the end of leased period.

John under the lease contract was obliged to make repair to the modifications or damages occur in the building at the end of lease period. However, John failed in repairing the building, which got damaged during installation of machinery and fixtures (Income Tax Assessment Act-1997 2020).

c. The lessee is using or has used the premises for the purpose of producing assessable income.

John took the leased premises to conduct a bakery business.

d. The amount is not assessable as ordinary income under section 6-5.

As per the case study, Gary will receive a lump sum amount of $3100 at the end of lease term. The amount cannot consider being ordinary income u/s 6-5 ITAA97. However, u/s 15-25 ITAA97, the amounts received from John (the lessee) against failure to comply with lease obligations to make repair in the premises that have been used by John for income-generating activities and that such income (to Gary) is not assessable as ordinary income under u/s 6-5 is considered to be accessible statutory income. Therefore, the amount of $3100 will be assessable to Gary as statutory income u/s 15-25 ITAA97.

Taxation Theory, Practice and Law - Question 4

1. John incurred legal expenses as he conducted false advertising and was sued for the same.

No deductions are allowed for penalties and fines that are imposed on the tax payer in result of breaching some Australian law or foreign legislation. However, this rule is not applicable on penalties imposed by administration like general interest charge (which the ATO levies against unpaid taxation liabilities) and penalties or fines for underestimation of GST installments. However, when all the penalties and fines are specifically disallowed by ATO, the costs that incurred due to defending the legal action may be deductible.

As per section 26-5(1) ITAA97, John cannot claim any deduction for:

a) An amount that is payable as penalty, under some Australian law or foreign legislation.

b) An amount to be paid on a conviction as ordered by a court for an offence against some Australian law or foreign legislation (Income Tax Assessment Act-1997 2020).

Considering all the legal expenses to be fine or penalty ordered by the court of law for breaching the Australian Competition and Consumer Act 2011 (Australian Law), John is not allowed to claim any tax deduction against the fine (legal expenses).

2. John purchased a new fridge for the shop that costs him $800. In addition, his builder added more space to the shop front. This cost him $22,000.

AS per special conditions in Div 50 ITAA97, if tools, equipment or other assets have been bought that helps in earning income, therefore, the cost to fridge is deductible.

As outlined in the case study of John, for repairs or renovations to be deductible, it is required that they are not be related to asset’s acquisition costs associated or costs related to convert a asset that is recently acquired to make it able to use for earning assessable income (W Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58). In this case law, taxpayer could cot claim deductions for any renovation cost incurred on a dilapidated premise which was recently acquired.

Therefore, John cannot claim a deduction under the provisions of repairs, but deduction cane be claimed under Div 43 ITAA97 for the cost of adding additional space to shop front which can be considered as cost to get the shop in a condition that it can earn assessable income.

3. John ordered 1000 new T-shirts with printed City Conv’s logos for marketing purposes. These costs him $1,500 (ATO 2020).

Work related expenses are deductible

4. John received a City of Sydney fine for putting his sales item for display outside his shop without a permit. He required applying for a permit to use the footpath.

John is in breach of city law, hence will not be allowed for deductions for fine

Taxation Theory, Practice and Law - Question 5

Alex purchased two assets (the CNC machine and the Holden car). A taxpayer has two methods to choose for depreciating the assets including the prime cost method and the diminishing value method (Income Tax Assessment Act-1997 2020).

1. Diminishing value method: the depreciation expense a financial year using the diminishing value method can be calculated as follows (u/s 40-72(1) ITAA97):

2. Prime cost method: the depreciation expense a financial year using the prime cost method can be calculated as follows (u/s 40-75(1) ITAA97):

Calculation of amount allowed as a deduction for the decline in value for:

A. CNC Machine: purchased in the FY 2019-20

  • Days held from October 2019 to June 2020 = 273 days
  • Base value = Assets Cost

1. Diminishing value method:

110000∗ 273365∗ 200%7

=> $ 23506

2. Prime Cost

110000∗ 273365∗ 100%7

=> $ 11753

B. Holden car: purchased in the FY 2018-19

  • Days held from May 2019 to June 2019 = 61 days
  • Days held from July 2019 to June 2020 = 365 days

1. Diminishing value method:

a) For FY 2019

63000∗ 61365∗ 200%5

=> $ 4211

Base value = 63000 – 4211

=> $ 58789

b) For FY 2020

58789∗ 365365∗ 200%5

=> $ 23515

2. Prime Cost method:

63000∗ 365365∗ 100%5

=> $ 12600

(ATO 2020)

Reference for Taxation Theory, Practice and Law

ATO. 2020. Deductions you can claim. https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/

ATO. 2020. General Depreciation rules – capital allowances. https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/General-depreciation-rules---capital-allowances/

ATO. 2020. Legal Fees. https://www.ato.gov.au/Individuals/myTax/2018/In-detail/rent/?anchor=Legalfees ATO. 2020. Work out your tax residency. https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. London: Routledge.

Income Tax Assessment Act 1997. 2020. Act No. 38 of 1997 as amended. https://www.legislation.gov.au/Details/C2006C00472/d6093a59-8622-46b1-8d5b-6575302e5592

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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