Upon successful completion of this subject students should be able to:
1. Understand and determine the taxable income of taxpayers and correctly calculate the tax payable thereon.
2. Critically analyse and appreciate the economic, social and legal issues arising from differing taxes.
3. Understand the differences between: allowable and non-allowable deductions, different capital gains events and the effect of rebates on taxable income.
4. Identify the impact of taxation on different forms of business structures.
5. Communicate knowledge of taxation law clearly, both in writing and orally, and be open to critical analysis of own and others’ ideas.
6. Interpret relevant taxation legislation and rules accurately and apply to problem scenarios.
Understand and determine the taxable income of taxpayers and correctly calculate the tax payable thereon
The following problem statement brings forward the provision of “Section 6-5 and 8-1 of the ITAA 1997” in understanding the assessable nature of income and expenses reported by an individual taxpayer.
The following issue brings into the context of determining the tax assessment of Bridget relating to the income and spending that is occurred during the income year. The issues circles around the determination of the assessable nature of income derived and outgoings incurred under “section 6-5 and 8-1 of the ITAA 1997”.
As the overall rule an individual generating the taxable income from the salaries, retirement, grant and gratitude would be considered as the taxable income under provision of “section 6-5”. An individual taxpayer making salary from employment is regarded as income from personal exertion. According to the court judgement in “Calvert v Wainwright (1937)” the earnings must be having sufficient connection with the income generating capacity of the taxpayer.
Any form of periodic payment such as rent that is made to the property owner associated with the use of property is held assessable in the hands of recipient. According to the court judgement in “Dixon v F.C of T (1952)” any amount that is received by taxpayer is held taxable given the money received in the hands of recipient is a periodic payment. However, expenditure sustained in generating rental income can be claimed as allowable deductions under “section 8-1 of the ITAA 1997”.
An individual receiving sum from prize winning is not considered assessable income under both the ordinary and statutory meaning. This is because money from prize winning is a windfall gain.
The character of income is determined relating to the situation in which the person derives the income. Sum that is received by an individual from prize winning will be taxable under the situation when the prize winning forms the part of taxpayer’s income generating activity. The verdict passed in “Stone v FCT (2005)” states the situation where the policewoman received income from salaries and endorsement. The policewoman used the winning from prize in executing the profession of athlete. As a result, the sum that is received is taxable earnings for the reason that it was associated to service related work. Another example of “Moore v Griffiths (1972)” where the prize winning is not regarded as income since it lagged associated with employment related activities.
An individual taxpayer receiving money for relinquishing the right of doing any thing will not be regarded as income. The primary reason for not considering such receipts as income is for the reason that the taxpayer earn those sums of money as the agreement for not indulging in any certain activity. An example of “Pritchard v Arundale (1972)” where money received by an bookkeeper for relinquishing the practice of accounting and working in a firm for six months is not an revenue.
Critically analyse and appreciate the economic, social and legal issues arising from differing taxes
An instances of self-education expenditure is explained under taxation ruling of TR 98/9 where the taxpayer incurs any expenses related to the self-expenses and the expenses being related to the current employment or for improving the prospect of future income is permitted for claiming deductions. According in “Studdart v F.C of T (1991)” where the taxpayer was able to claim an allowable deductions for self-educations since the spending was for improving the skill and was additionally related to the taxpayer current employment.
An individual is allowed to claim an allowable deductions related to expenses of protective clothing or occupation specific clothing. Referring to “section 8-1” the law court in “F.C of T v Mansfield (1996)” defined that the flight attendant will be able to claim the cost of protective clothing since it was occupation specific.
“Section 8-1” outlines that a person can claim for travel expenses given the expenses is related to employment. A demonstration of court’s verdict is stated in “Payne v FCT” where the taxpayer was not allowed for claiming travel expenditure since they did not had any connection with the work.
The case study of Bridget provides that Bridget was engaged in both the part time and short time employment. In respect of the “section 6-5” the earnings of Bridget is associated with the income from the personal exertion. In accordance with the rule of “calvert v wainwright (1937)” the income from private exertion of Bridget from both the part time and full time employment will held taxable under the “section 6-5”. An instance has been found where Bridget often worked late in her office and her employer often reimbursed the taxi fare that was incurred by Bridget. In compliance with the “FBTAA 1986”, the reimbursement of taxi fare by Bridget employer will be considered as the exempted fringe benefit.
Bridget derived an Australian sourced rental income, which will be treated as taxable earnings of Bridget under “section 6-5”. Apart from the receipt of income, she incurs expenditure when the property was laid out. Therefore, Bridget can bring forward the claim for allowable deductions under “section 8-1 of the ITAA 1997” relating to the expenses occurred when the property was rented.
As evident, Bridget won cash prize of $3000. The prize winning of $3000 is a windfall gain since she did not received that sum as the part of her employment. Citing the case of “Moore v Griffiths (1972” the receipt of $3000 constituted a windfall gain and cannot be held as taxable income.
Understand the differences between: allowable and non-allowable deductions, different capital gains events and the effect of rebates on taxable income
As observed in the later part of the case study where Bridget received a sum of $30,000 with an equipment of $10,000 from the cooking TV show. With respect to section 6-5, the sum of $30,000 constitute a chargeable income and the same will be included in determining her tax liabilities. Moreover, she received from the same cooking TV show a sum of $20,000 as the agreement for not make her appearance in similar cooking show for time of two years. Referring to “Pritchard v Arundale (1972)” the receipt of $20,000 constituted a payment for giving up the right of appearing on similar television cooking show and the money received is not a taxable income under “section 6-5 of ITAA 1997”.
Bridget in the later part occurred self-education expenses as she underwent the course of Masters in professional accounting. In compliance with the section 8-1 Bridget will be able to claim the expenditure on self-education since these were related to her current employment where she is employed. According to the verdict of court in “Studdart v F.C of T (1991)” the self-education expenses occurred by Bridget was improving the employment skill and income prospect in future therefore she can claim an allowable deduction in that respect.
The case study also brings forward the scenario where Bridget received an award for being the best accountant in Sydney. Bridget was awarded with the cash prize of $5000. Citing the judgement of the full federal court in the case of “Stone v F.C of T (2005)” the receipt of cash prize by Bridget will be included as the part of assessable income since the money received is directly having association with Bridget employment and the same will be held taxable income.
An instances was noted where Bridget incurred a spending on contemporary suits with the anticipation of looking more experienced. By referring the court verdict in “F.C of T v Mansfield (1996), the taxpayer is allowed to claim deductions only for occupational related clothing. Spending by Bridget on contemporary suits will not be held as allowable deductions since it has no relation with the employment and not an occupational specific clothing. Therefore, she cannot claim deductions for contemporary suits.
Bridget incurred a traveling expense on airfare and accommodations for attending an interview in Melbourne. The Australian taxation office defines the circumstances that the taxpayer is permitted to claim deductions for travelling between two places of work having no connection with taxpayers home. Citing to the “Payne v F.C of T (2001)” Bridget is not permitted for claiming deductions on flight travel expense and accommodation expenses since they were not in the course of income making undertakings.
The case study can be concluded with the opinion that Bridget can claim deductions for self-education expenses and rental income expenses but she cannot claim deductions relating to travel and contemporary suits under “section 8-1”. Her income from both part time and full time employment, rental income, appearance on television show and award for best accountant will taxable under “section 6-5” of the act.
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