Question
Part 1
Dale Teal and her husband Trent Teal have the following tax related information
Sole trader Activities
Dale was born on 01/11/1966 and runs a successful holistic health business as a sole trader with the following details
Cash receipts from sale of trading stock for the year 110 000
Cash receipts from holistic health services 100 000
Amounts received in advance as at 30/6 (not included in cash receipts) 15 700
(Dale has a policy of refunding these amounts if clients choose not to go through with the treatment)
Invoices issued but not paid 12 000
Opening trading stock 37 500
Closing trading stock 30 000
Wages paid to part time staff 56 112
Rent expenses paid 15 600
Legal expenses incurred in renewing the lease 1 750
Superannuation Guarantee paid for all employees 5 190
Tax Agent’s Fees 6 50
Bank/Merchant Fees 7 00
Business Insurance (continuity insurance) 2 950
Business Phone 1 780
Scented oils etc used up 11 150
Electricity 4 000
Postage, printing & stationery 1 600
Interest on loan 2 520
(Dale has all of the necessary paperwork to substantiate claims and receipts)
Employee activities
Dale is also a prison guard at a high security facility with Blackhand, a private enterprise noted for its involvement in conflict areas.
Salary 85 000
PAYG withholding 14 200
Other information
Her home phone bills totalled $1,200 with 55% business use.
Dale paid $7,390 during the year for income protection insurance to ensure an income stream if she should be unable to work. She also paid a further $755 for life insurance providing a capital payment on her death or diagnosis of terminal illness.
Dale also had a number of CGT events during the year. She owns all these assets herself.
- She sold a rental property purchased on 15/5/96 for $180 000 on 27/3/17 for $340 000
- She sold a stamp she picked up at a garage sale for $5 on 15/7/17 on 25/8/17 for $25000. Dale has an expert knowledge of stamps and recognised it as a very rare stamp she could quickly sell to a collector.
- She sold a boat acquired on 1/11/04 for $17 500 on 1/4/17 for $9 000.
- She sold 500 shares acquired on 1/4/12 for $10 000 on 1/4/17 for $2 000
- She sold 1000 shares acquired on 3/4/84 for $10 000 on 1/4/17 for $2000
- She sold 2500 shares acquired on 25/5/96 for $18 000 on 1/6/17 for $18 750
Dale and Trent have a shared bank account which paid $2180 interest
Dale and Trent also own a share portfolio of ASX listed shares which paid a fully franked dividend of $14350, 65% partially franked dividend of $9500 and unfranked dividends of $4000.
During the year Dale paid 4 PAYG Instalments to the ATO of $8,500 each
Dale and the family are covered by full private health insurance.
Required
- Calculate Dale’s taxable income
- Calculate the balance of her assessment
- Prepare a statement of advice for Dale explaining your decisions and calculations based on the legislation and relevant case law.
Part 2
Amity has been employed as a tax advisor by the mid-tier private accounting firm YoungPWC and Associates in their Adelaide branch for 7 years. In January 2016 she was selected to be sent to Kiribati for two years to advise the Kiribati government on the design and implementation of a new VAT. The placement was for a 2 year period with an option exercisable by Amity to extend the period for a further 3 years.
Amity jumped at the opportunity and left Australia in January 2016 with her husband Martin. Amity intended to stay in Kiribati for at least the initial 2 years and then make a decision about staying longer if the lifestyle was enjoyable, the work enjoyable and financially rewarding.
On first arriving in Kiribati, Amity and Martin took out a small mortgage on a house on the beach and planned to furnish it with furniture bought from the local furniture stores. However, they underwent extreme culture shock when they discovered there were no local furniture shops selling anything they wanted and the cost of shipping their furniture over was prohibitive. They decided to sell the house after 4 months and take up a serviced apartment in the capital.
This was acceptable accommodation and it worked well enough as there were no children. They were able to take out 12 month rent agreements as there were many expats on one year placements. They made the apartment relatively homely with their few belongings. However, Martin found getting any sort of reasonable employment was essentially impossible and started to get dispirited.
Amity’s salary was paid into an account she opened with the Asia-Pacific Bank. Amity and Martin kept their home in Adelaide and rented it out through agents for 12 month periods.
They discontinued their health insurance membership, however Amity maintained her Chartered Tax Advisor membership. Their only relatives are their elderly parents who resided in Australia.
Martin contracted a form of food poisoning from eating a toxic fish and after only 18 months away the disenchanted couple returned to Adelaide at the beginning of July 2017.
Required
You are required to advise Amity on whether or not she was an Australian resident during the income year ended 30 June 2017 by reference to the relevant legislation and case law.
Answer
Part 1
Computation of Taxable Income
Taxpayer: Dale Teal
For the year ended 2017/18
| Particulars |
Amount |
| Profit (Working Note 1) |
$109,838.00 |
| Salary |
$85,000.00 |
| Interest Income |
$2,180.00 |
| Dividend Income Partially franked |
$3,325.00 |
| Dividend Income Unfranked |
$4,000.00 |
| Net Capital Gains Income (Working Note 2) |
$169,245.00 |
| Total Income |
$373,588.00 |
| Deduction for Income Insurance |
$7,390.00 |
| Taxable Income |
$366,198.00 |
Computation of Taxable
IncomeTaxpayer: Dale Tale
Working 1
| Particulars |
Sections |
Notes |
Amount |
| Cash receipts from sale of trading stock for the year |
Section 6-5 of the ITAA 1997
|
|
$110,000.00 |
| Cash receipts from holistic health services |
Section 6-5 of the ITAA 1998
|
|
$100,000.00 |
| Invoices issued but not paid |
Section 6-5 of the ITAA 1999
|
|
$12,000.00 |
|
|
|
|
$222,000.00 |
| Cost of goods sold |
Section 8-1 of the ITAA 1997 |
General Deduction |
$7,500.00 |
| Wages paid to part time staff |
Section 8-1 of the ITAA 1997 |
General Deduction |
$56,112.00 |
| Rent expenses paid |
Section 8-1 of the ITAA 1997 |
General Deduction |
$15,600.00 |
| Legal expenses incurred in renewing the lease |
Section 8-1 of the ITAA 1997 |
General Deduction |
$1,750.00 |
|
Superannuation Guarantee paid for all employees
|
Subdivision 290-B of the ITAA
|
Specific Deduction
|
$5,190.00
|
|
| Tax Agent’s Fees |
Section 25-5 of the ITAA 1997 |
Specific Deduction |
$650.00 |
| Bank/Merchant Fees |
Section 8-1 of the ITAA 1997 |
General Deduction |
$700.00 |
| Business Insurance (continuity insurance) |
Section 8-1 of the ITAA 1997 |
General Deduction |
$2,950.00 |
| Business Phone |
Section 8-1 of the ITAA 1997 |
General Deduction |
$1,780.00 |
| Home phone for business |
Section 8-1 of the ITAA 1997 |
General Deduction |
$660.00 |
| Scented oils etc used up |
Section 8-1 of the ITAA 1997 |
General Deduction |
$11,150.00 |
| Electricity |
Section 8-1 of the ITAA 1997 |
General Deduction |
$4,000.00 |
| Postage, printing & stationery |
Section 8-1 of the ITAA 1997 |
General Deduction |
$1,600.00 |
| Interest on loan |
Section 25-25 of the ITAA 1997 |
Specific Deduction |
$2,520.00 |
|
|
|
|
$112,162.00 |
| Profit |
|
|
$109,838.00 |
Working Note 2
| Particulars |
Amount |
| Capital Gain on rental property |
$160,000.00 |
| Capital Gain on Stamp |
$24,995.00 |
| Capital Loss on Boat |
-$8,500.00 |
| Capital Loss on shares |
-$8,000.00 |
| Capital Gain on shares |
$750.00 |
| Net Capital Gains |
$169,245.00 |
PAYG Payments Balance
| Particulars |
Amount |
| PAYG Withholdings from Salary |
$14,200.00 |
| PAYG Installments paid |
$34,000.00 |
| Total PAYG Payments |
$48,200.00 |
Statement of Advice:
To: Dale Teal
From: XYZ Tax Consultant
Dear Dale,
We would like to draw your kind attention towards the statement of advice by stating that we are preparing the tax return for the financial year ended 2017-18 based on the information that is provided by you from your sole trading business and from the receipt of salary. As evident the total amount of taxable income from business combined with your salary income stands $366,198. We have prepared the following notes after viewing your transactions which is stated below;
- The transaction standing $15,700 that received in advance is considered for taxation purpose based on the assumption that the taxpayer follows the accrual accounting method. It is assumed that the sum of $15,700 has not been earned yet and no liability of taxation arises. The assumption is based on the regardless of the circumstance that cash has be received.
- “Section 8-1 of the ITAA 1997” explains that a taxpayer is allowed to claim for the deductions from their taxable income for the losses or outgoings up to the extent that it is earned in gaining or generating their assessable income (Barkoczy 2014). Alternatively, the expenses are incurred is necessarily occurred in execution of business with the objective of gaining taxable income. The business expenses reported by you is directly associated or incurred in producing the assessable income. Therefore, all the expenses will be allowed for deduction.
- A taxpayer is allowed to claim to deduction for business related expenses that is incurred for home phone bill (Robin 2017). Similarly, you can claim deduction 55% of the home phone bill expenses since it was incurred for business purpose.
- Life insurance premium would not be allowed as deduction however premium paid for business insurance would be quality for allowable deduction.
- The capital gains reported by you is net amount following the deduction of the capital loss and then net amount is included into your taxable income.
We hope that the statement of advice has been able to meet your anticipation and have provided a clear understanding of the amount that would be included and deducted from your taxable income. We look forward to serve you in future again.
Thank You
Part 2:
According to the definition stated under “section 995-1 of the ITAA 1936” the resident of Australia or the Australian residents includes the person apart from company that resides in Australia and includes the person that has the domicile in Australia, except when the commissioner is content that the permanent place of abode is out of Australia (Braithwaite 2017). Additionally, a person is held as Australian resident if the person has actually been present in Australia either on constant basis or in breaks for no less than six months of an income year (Coleman and Sadiq 2013).
The present case study of Amity is based of determining the residential status who was sent to Kiribati to help the government in designing and applying the new system of VAT. The placement was however for two years and that can be extended to three years. The “taxation ruling of IT 2650” the commissioner views that whether the person has the permanent place of abode out of Australia (Grange, Jover-Ledesma and Maydew 2014). According to the “Domicile Test 1982” a person acquires the domicile of his or her origin or by the country of their choice. The court of law in “FCT v Applegate (1979)” held that the permanent does not represent everlasting and the objectivity is assessed every year (James 2013). The domicile test explains that the intended and the actual length of a person’s stay in the overseas nation can be substantial such as the period of 2 years or more.
The commissioner also views the establishment of home outside Australia or abandonment of any resident that a person has in Australia (Jover-Ledesma 2015). The duration and continuity of a person’s stay in foreign nation contributes in the determination of the Domicile Test. Similarly, in the situation of Amity it explains that she bought a house in Kiribati and affirms that she established a home out of Australia (Kenny 2013). The duration and the continuity of Amity presence in overseas nation is also substantial.
The 183 days’ test explains that person will be treated as the resident of Australia under this test if the person has been present in Australia either on continuous basis or in intermittently for no less than one half of the income year (Krever 2013). An exception to this case is that a person is no held as Australian resident if the person does not intend to take up the residence in Australia or the commissioner is satisfied that the usual place abode is out of Australia.
As evident from the above stated two test Amity during the year 2016 moved to Kiribati for a period of two years. The term of employment mandated her to stay in Kiribati for a period of two years with the exercisable time of another 3 years. Furthermore, she also opened her bank account in Asia-Pacific Bank which required her salary to be paid. Despite the couple went out of Australia to stay in the overseas nation with the original intention of staying for 2 years they had to return following the unforeseen circumstances (Sadiq 2014). The taxpayer formed the original intention of living or residing outside of Australia for an indefinite period without the intention of returning in Australia during the foreseeable future. Referring to the case of “FCT v Applegate (1979)” it is important to determine whether Amity’s intention was to abandoned any of residence of the place of abode that she had in Australia (Woellner 2013).
As understood that Amity went out of Australia to reside for 2 years and stay permanently if things went well. This establishes that she does not has intention of having the permanent place of abode outside Australia (Woellner et al. 2014). Therefore, Amity does not qualify under the Domicile Test and the 183 days’ test to be held as the Australian a resident for year 2017. Hence, Amity will not be considered as the Australian resident for taxation purpose.
Reference List:
Barkoczy, S. 2014. Foundations of taxation law
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Coleman, C. and Sadiq, K. 2013. Principles of taxation law.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. principles of business taxation.
James, S. 2013. The economics of taxation.
Jover-Ledesma, G. 2015. Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.
Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Robin, H, 2017. Australian taxation law 2017. Oxford University Press.
Sadiq, K. 2014. Principles of taxation law 2014.
Woellner, R. 2013. Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law select 2014.
