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Purpose

Purpose:

This assignment is designed to assess your level of knowledge of the key topics.

1.Demonstrate an understanding of the Australian income tax system, the concepts of income and deductions, CGT, FBT, GST general anti-avoidance provisions and income tax administration;

2.Identify and critically analyse taxation issues;

3.Interpret the relevant taxation legislations and case law;

4.Apply taxation principles to real life problems.

Each week students were provided with three tutorial questions of varying degrees of difficulty. Your task is to answer a selection of tutorial questions for weeks 1 to 5.

Week 1

With reference to relevant legislation, case law and secondary sources, briefly explain different functions of taxation.

Week 2

Amandeep born in India and migrated to Australia. He lives in Australia permanently. He still holds Indian passport. Amandeep works with the New Zealand Princess Cruises tours and most of the income year is in New Zealand. He signed an employment contract for this position in the company’s Australian office in Sydney. Amandeep has two kids that are living with his wife Sandeep in Sydney. Three years ago, Amandeep purchased a unit apartment in Sydney. Amandeep and his wife holding dividend yielding shares in an Indian public company called Hindustan Unilever. Amandeep and Sandeep have an Australian bank account as well. Amandeep’s employer pays his salary to this bank account every fortnight.

Biannually Amandeep receives a holiday package from his employer, New Zealand Princess Cruises tours and he is using this package with his family traveling in Australia interstates or moves to India to visit his in laws.

With reference to the relevant laws, discuss whether Amandeep is an Australian resident for tax purposes and also critically discuss whether Amandeep needs to pay income tax on his salary and investment income explained above.

Week 3

Gary owns a commercial building and leased his premises to John to conduct a bakery business. Under the lease contract, John is obliged to repair any modified or damaged parts of the building after the lease term. However, John fails to repair Gary’s building, which was damaged due to machinery and fixtures’ instalments. John agreed to pay Gary $3,100 to cover the repair expenses.

With reference to relevant legislation and case law discuss the tax treatment of this payment for Gary.

Week 4

John owns a convenience shop called City Conv. The following events occurred for John during 2019-2020 financial year.

(i) John incurred legal expenses as he was sued for false advertising.

(ii) John purchased new fridge to the shop - $800. In addition, his builder added more space to the shop front. This cost him $22,000.

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

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

With reference to relevant legislation and case law advise John on the assessability and/or deductibility of above events.

Week 5

  1. Alex purchased a CNC machine on 1st October 2019 at a cost of $110,000 (including GST). This machinery is estimated to have a useful life of seven years.
  2. Alex purchased a Holden car on 1 May, 2019 at a cost of $63,000, estimated to have a useful life of five years.

With reference to relevant legislation and case law, discuss and calculate what amount is allowed as a deduction for the decline in value of the machinery and the Holden car discussed above, using both prime cost and diminishing value methods.

Purpose

The basic functions of taxations are as follows;

Funding government expenditure: The most important vital function of tax is to fund the expenditure of government. It provides varying amount of justifications and explanation for taxes that has been offered all through the history. Previously, taxes were used in supporting the “ruling classes”, increase armies and create defences (Saez and Stantcheva 2018). Later explanations have been offered across the utilitarian financial or the moral contemplations. The advocates of high income earners have argued that taxes helps in encouraging a highly reasonable society. Imposing higher duties on specific goods and services namely tobacco or petrol have vindicated as the preventive on consumption.

Redistributive function: Taxes have redistributing function as helps in lowering the unequal distribution of income as well as health which results in normal operations of market-based economy. Taxes has the regulatory component which is used in steering the activity of private sector in the desired government directions. Taxes have been built and used largely for the redistribution of income in the society.

Welfare function: The taxes has social welfare functions as well. It aims to simply increase the overall welfare of the members in society (Fleurbaey and Maniquet 2018). This function requires the government to weigh poor more heavily than the rich. The view of social policies should be measured based on the perspective of changes in the individual welfare.

Controlling: With the help of controlling functions, the state imposes controls on the financial as well as social economic activity of juridical as well as natural persons. This further helps in imposing controls on the sources of income and direction of spending.

Replication: This function of taxes involves imposing tax on use of natural resources, minerals, roads and primary resources. The state uses these proceeds to reproduce the exploited resources.

“Sec 6 (1) ITAA 1936” says that an individual is said to “Australian resident” if they live in Australia physically and have their domicile in Australia unless it is proven to tax commissioner that the taxpayer has perpetual “place of abode” in foreign (Biørn 2017).

The circumstance provides that Amandeep migrated from India to Australia and lives permanently with his family in an apartment in Sydney. Amendeep is employed with New Zealand Princess Cruise tours and in majority of the income year he lives in New Zealand. As per the “Domicile Test” if an individual that is domiciled in Australia then they will be considered Australian occupant even though they are living in foreign except the ATO is content that a person has domicile out of Australia. Relevant consideration given in “IT 2650” involves that the intended length of a person’s stay in overseas nation. It also includes leaving of home in Australia. As held in “Boer v FCT (2012)” the taxpayer was considered to be Australian throughout his stay in foreign because the taxpayer did not established permanent home outside Australia (Berliant and Gouveia 2018).

Week 1

Likewise, in case of Amandeep, even though he toured and worked in New Zealand, he did not abandoned his residence in Australia. By quoting the example of “Boer v FCT (2012)” Amandeep should be considered Australian inside the sense of “sec 6 (1) ITAA 1936” throughout his stay in overseas because the taxpayer did not set up fixed home outside Australia.  

The “sources of income” is fundamental in levying taxes. As found in “FCT v French (1957)” employment salaries are taxable where the services are performed. As noted in “sec 23AG ITAA 1936” foreign employment earnings earned by Australian resident for providing services in foreign is excluded from tax in Australia (Farhi and Gabaix 2020). Quoting “FCT v French (1957)”, the salary earned by Amandeep from his overseas service will be excluded from duty in Australia “sec 23AG ITAA 1936”.

Dividends are usually taxable where it is sourced. In “Esquire Nominees v FCT (1973)” the court of law held that dividends taxable where the profits out of which dividend is paid are earned (Jones and Rhoades-Catanach 2015). Amandeep reports receipt of Dividend from Hindustan Unilever an Indian company. Quoting “Esquire Nominees v FCT (1973)” the dividends are sourced in India and hence it is excluded from tax in Australia.

According to “sec 15-25 ITAA 1997” the amounts that is received by a lessor arising from the lessee because of failure to adhere with the obligations relating to lease to repair the premises is considered as assessable income (Miller and Oats 2016). The taxpayer should denote that the lessee has made use of the premises for generating assessable income and the payment cannot be considered as ordinary income.

The case study provides that Gary an owner of commercial building provided John his premises for carrying on his bakery business. The lease obligations contained that John must modify or repair the damaged parts of building following the lease term. Nevertheless, John was unable to repair the damaged within the stipulated lease agreement and paid Gary with a sum of $3,100 for covering the repair expenditure. With regard to “sec 15-25 ITAA 1997” the amount of $3,100 that is received by Gary from John because of failure to abide by with the obligations relating to lease to repair the premises will be considered as assessable income. This is because John has used the premises of Gary for generating assessable income and the payment is not treated as “ordinary income” with “sec 6-5 ITAA 1997”.

Week 2

4: 

(i): 

Usually legal spending that happened by taxpayer because of income generating activities are permitted for deduction given that the payments is not capital in type. As noted in “Herald & Weekly Times v FCT (1952)” the taxpayer and their spouse were permitted for deduction under “sec 8-1 ITAA 1997” regarding the legal expenditure that were incurred in defending the claims for damages (Sadiq et al. 2020).

The legal expenditure incurred by John for false advertisement will be allowable for deduction under “sec 8-1 ITAA 1997”. Quoting “Herald & Weekly Times v FCT (1952)” the expenditure were incurred in his income generating activities and no enduring benefit is produced by the expenditure.

(ii): 

“Division 40” deals with the capital allowance regime. Under the “sec 40-25 (1)” a person can claim deduction for a value equal to “decline in value” relating to an income year regarding “depreciating asset” which is held during the year (Woellner et al. 2016). John purchased a new fridge to shop. The fringe can be refereed as a depreciating asset under “sec 40-30 (1) ITAA 1997”. John under “sec 40-25 (1)” can claim deduction for a value equal to “decline in value” relating to an income year regarding refrigerator which is held by him during the year.   

A repair which amounts to capital expenditure is not permitted for deduction in “sec 25-10 (3) ITAA 1997”. Improvement usually involves improvement of effectiveness character of the property. In “FCT v Western Suburbs Cinemas Ltd (1952)” the reparation of ceiling with new solid material was not considered as repair (Christie 2015). Likewise, the adding up of more space on the shop front is regarded as enhancement of efficiency character of property. Quoting “FCT v Western Suburbs Cinemas Ltd (1952)” John will be denied deduction “sec 25-10 (3) ITAA 1997”. relating to an expense of $22,000 because it is capital spending and constitute improvement to the property.  

(iii)

As per the “ATO ID 2005/284” a taxpayer is permitted to get deduction for outgoing incurred in sponsorship under “sec 8-1 ITAA 1997”. As noted in “FCT v Snowden & Wilson Pty Ltd (1958)” the expenditures incurred for advertisement was allowed for deduction since it was directed towards income generating activities of the taxpayer (Sadiq et al. 2020).

Likewise in case of John, the printing of company long on 1000 new T-Shirt for marketing purpose is an ordinary business expense which is identical to advertisement. Quoting “FCT v Snowden & Wilson Pty Ltd (1958)” the expenditures incurred for marketing purpose John is allowed for deduction since it is directed towards income generating activities of John’s business.

(iv): 

No deduction for penalties is given under “sec 26-5 ITAA 1997”. As per “sec 25 (1)” a person is denied deduction for amount which is to be paid as penalty within the Australian law or foreign law. John received a penalty for putting is item on display outside his shop with any permission. Under “sec 26-5 ITAA 1997” John cannot deduct the fine imposed on him because it is a penalty within Australian Law.

Under the “sec 40-25 (1)” a person can claim deduction for a value equal to “decline in value” relating to an income year regarding depreciating asset which is held during the year. Under “sec 40-60 ITAA 1997” the “decline in value” of depreciating asset starts from when the asset is installed as ready for use. An entity is permitted to choose under “sec 40-65” to compute the depreciation of depreciating asset by using “diminishing method under” “sec 40-72” or “prime cost method” under “sec 40-75”.

Requirement A:

 

Requirement B:

 

Alex is advised to use diminishing value method under “sec 40-72” as this will result in highest deduction for tax purpose.

References:

Berliant, M. and Gouveia, M., 2018. On the political economy of income taxation.

Biørn, E., 2017. Taxation, technology, and the user cost of capital. Elsevier.

Christie, M., 2015. Principles of Taxation Law 2015.

Farhi, E. and Gabaix, X., 2020. Optimal taxation with behavioral agents. American Economic Review, 110(1), pp.298-336.

Fleurbaey, M. and Maniquet, F., 2018. Optimal income taxation theory and principles of fairness. Journal of Economic Literature, 56(3), pp.1029-79.

Jones, S. and Rhoades-Catanach, S., 2015. Principles of taxation for business and investment planning. McGraw-Hill Higher Education.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Sadiq, K., Black, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A.K., 2020. Principles of Taxation Law 2020.

Saez, E. and Stantcheva, S., 2018. A simpler theory of optimal capital taxation. Journal of Public Economics, 162, pp.120-142.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

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