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Classification of Assessable Income

Issue: 

The main issue is determining what amounts will be included in her assessable income and amounts that will be permitted as an allowable deduction within the “sec 8-1 ITAA 1997”. The issue will also determine the net amount of Nadine tax liability and any tax offsets and levies.

Rules: 

The below given following procedure have been adopted while computing the taxable income of Nadine

Step 1: Classification of assessable income

Step 2: Classification of allowable deductions

Step 3: Separation of items that can be apportioned

Step 4: Computation of taxable income

If Nadine is operating an unincorporated business of selling painting as the sole trader, she is not needed to lodge any separate tax return for her business. Hence, income and expenditure that is produced from her employment and business is listed altogether.

Income:

To determine whether the income produced by Nadine needs to be categorized as assessable, non-assessable or apportionable, it is necessary to take into account below given considerations.

a): Nadine is selling her paintings at local market every Saturday in the form of business and her activities has below given characteristics as mentioned in the case of “Ferguson v FCT (1979)”;

  • There is an intention to produce profit
  • Commercial approach has been adopted
  • The method as well as the characteristics that is adopted is in agreement with particular type of business
  • The type as well as frequency of activity such as every weekend on Saturday.

Therefore, it is understood that Susan is doing business and the proceeds that is obtained from selling her paintings is an assessable income within “sec 6-5 of ITAA 1997”.

b): The employer of Susan has given wedding gift and it should not be classified as ordinary income. Referring to “Hayes v FCT (1956)” the wedding gift is given due to personal relationship and it is not an assessable income to Nadine.

c): Nadine has reported receiving bonus of $15,000 from her employer after completing a project successfully. Referring to “Brent v FCT (1971)” the bonus received by Nadine amounts to an “incident of employment” and it is an ordinary income under “sec 6-5” (Barkoczy 2016). 

d): Nadine has received salary of $155,000 from her employment and it should be categorized as a personal exertion income within “sec 6 ITAA 1936”. Citing “Dean v FCT (1997)” the salary received by Nadine satisfies the prerequisites of ordinary income and also meets the flow concept as explained in “Eisner v Macomber (1920)” (Sadiq 2020). Therefore, it is an ordinary income to Nadine under “sec 6-5 ITAA 1997”. While the PAYG withholding can be claimed as tax offset by Nadine.

e): Nadine has received interest from bank deposit. Citing “Eisner v Macomber (1920)” the interest received satisfies the characteristics of ordinary income and it is taxable within “sec 6-5 ITAA 1997”. 

f): Nadine has won $8,000 at casino and the casino winnings does not have any relationship with her employment or business. Referring to “Evans v FCT (1989)” Nadine is classified as a lucky gambler and under “sec 118-37 (1) of ITAA 1997” it is classified as a windfall gain and not an assessable income (Barkoczy 2022).

g): Nadine has received award for making contributions in her legal profession. Citing the case of “Kelly v FCT (1985)” the award that is received by Nadine will be considered as an assessable income (Lymer 2019). This is because the amount of $1,000 is an income which was incidental to her work and it was associated to her use of skills.

Classification of Allowable Deductions

f): Nadine reports selling a block of land for $300,000. The sale of block of land is considered as a capital gain and Nadine is required to pay a capital gains tax on the value of gains. In accordance with the “sec 115-1 of ITAA 1997”, Nadine is considered eligible for 50% CGT discount on the capital gains since the asset was held by her for more than 12 months (Morgan and Castelyn 2018). A sum of $50,000 will be included in her assessable income.

g): Nadine sold a sculpture for $10,000 that she bought for $300. The sculpture is classified as collectable within “sec 108-10 (2)”. However, Nadine needs to disregard the capital gains from her assessable income because the cost base of asset was $300 and this is less than the first element cost of $500.

Nadine’s, assessable income is classified below;

Item No.

Income

Non-Assessable

Assessable

Assessable Income

Wedding Gift

$500

2

Bonus received

15000

1

Gross Salary

155000

Winnings at Casino

8000

10

Interest on Bank Deposits

2500

15

Sale of Paintings

20000

Receipt of Award

1000

18

Capital Gain/Loss on Sale of Land

Sales Proceeds

300000

Cost Base

200000

Capital Gains on Sale of Land

100000

50% CGT Discount

50000

50000

Total Assessable Income

243500

a): As noted in “sec 8-1 of ITAA 1997”, Nadine is permitted to claim deduction for expenditure from her assessable income that she has incurred while earning assessable income and incurred while doing her business activities.

b): The expenses incurred by Nadine towards work boots and protective glasses meets the criteria given in positive limb of “sec 8-1 (1) of ITAA 1997”. Referring to “Morris v FCT (2002)” a sum of $500 can be claimed as an allowable deduction by Nadine under sec 8-1 (Robin 2021). Whereas, the evening dress bought by her is not an allowable deduction since it is not an occupation specific clothing and it falls under negative limbs of “sec 8-1 (2)” as a private expense.

c): The cost of meals and entertainment that is reimbursed to Nadine should be considered as an expense payment fringe benefit. The expense is an allowable deduction to her employer under “ss22A (4) and sec 23”.

d): Travel expense that is incurred during the course of work is an allowable deduction under “sec 8-1”. As found in “FCT v Wiener (1978)” the tax commissioner gave permission to a taxpayer teacher for travel expenses incurred to travel between schools because was inherently itinerant part of her employment duties (Sadiq et al. 2018). Similarly, the taxi travel expense incurred by Nadine to travel from her office to client premises and from her office to court is an allowable deduction under sec 8-1.

e): The taxi fares incurred by Nadine to travel from home to office in suburbs is not incurred while earning or generating her assessable income. Referring to “FCT v Hayley (1958)”, the taxi expense of $450 is a private expenditure and non-deductible under negative limbs of “sec 8-1 (2)” (Sadiq et al. 2021).

f): The membership fees of $530 relating to law society was incurred by Nadine during the process of gaining her assessable income. Therefore, it is an allowable deduction within “sec 8-1 (1)”. While the membership fees of $200 for real estate institute does not have any nexus with the income earning activity of Nadine and she is only permitted to claim deduction of $42 within “sec 25-55 of ITAA 1997”.

Computation of Taxable Income

g): Nadine reports paying rates for her family home. She reports using the home for work as convenience only and did not used as genuine home office. Citing “FCT v Faichney (1972)” the rates paid on family home is not permitted as deduction to Nadine under the “sec 8-1 (2)” since it is a private expense (Shome 2021).

h): Nadine reports incurring electricity expense on her family home and reports working for around 4 nights per week all through the year after her dinner. Referring to “Handley v FCT (1981)”, Nadine is required to apportion a part of electricity expense up to taxable purpose to claim deduction.

i): The purchase of artwork materials by Nadine is an allowable deduction under “sec 8-1 (1) of ITAA 1997”. This is because the expense is incurred in deriving her assessable income. While as mentioned within “sec 70-35 ITAA 1997”, the difference that arise between the opening and closing stock is an allowable deduction when the value of opening stock is more than the closing stock (Saad and Ariffin 2019). Therefore, a sum of $4,500 is an allowable deduction to Nadine under “sec 70-35 ITAA 1997”.

Step 2: Classification of allowable deductions

Item.No

Expenses

Non-Deductible

Deductible

Apportionable

Total

D3

Safety Boots, protective glasses and evening dress

800

800

Reimbursement of Meals and entertainment

400

400

D3

Taxi Fares

500

500

Taxi Fares from Home to Office

450

450

D5

Membership Fees of law society

530

530

D5

Membership fees for real estate institute

42

42

Rates on Family Home

3200

3200

D5

Electricity

900

900

D15

Purchase of Artwork

7500

7500

D15

Excess of Opening Stock over Closing

4500

4500

Total Allowable Deductions

18822

Step 3: Separating the apportionable items

Item.No

Expenses

Non-Deductible

Deductible

Total

D15

Purchase of Stock

7500

7500

D3

Work boots and sunglasses

300

500

500

D5

Membership fees

158

572

572

D5

Electricity(Notes)

814

86

900

Total

1272

1158

1972

It is assumed that Nadine works 4 nights a week

Electricity

Rent Per Day (900/337)

2.67

Rent 4 days a week (0.45x4)

1.8

Rent 4 hours a week [(2.67/24)x4)

0.45

Rent for the year (1.80 x 48)

86.4

Total electricity approx

86

Step 4: Computation of Taxable Income

Conclusion: 

With respect to computations done above it is understood that Nadine has total tax liability of $60,140, rounding up any decimal figures.

Issues: 

Is Nadine an Australian resident for the time span of three years if she moves to London?

Rules: 

As mentioned under “sec 6 (1) of ITAA 1936”, the residency status of a person can be determined by using below given four tests;

  1. Resides Test
  2. Domicile Test
  3. 183-Day Test
  4. Superannuation Test:

Application: 

Whether or not a person’s ordinary earnings will attract tax liability is dependent on residency position of that taxpayer and sources of income. The concepts relating to residency and sources has been used in case of Nadine to ascertain whether or not she is liable for tax in Australia.

1: Resides Test: This test involves “residence in agreement with ordinary concept” (Norbury 2019). Common factors considered by law court are as follows;

  1. Physically existent in Australia
  2. Citing “IRC v Lysaght (1928)”if an individual is a visitor, the duration of visit is important.
  3. The motive of coming to Australia and going overseas
  4. An individual’s business and family ties.

Accordingly, in case of Nadine she does not resides in Australia for three-year period and no taxes will be levied on her income.

2: Domicile Test: A person is considered as Australian resident if they have domicile in Australia unless it is satisfied that he or she has fixed home outside Australia and has no intention to live in Australia (Villios, Blissenden and Kenny 2019). As understood, Nadine has intention to live in London for three-year period. Citing “FCT v Applegate (1979)” in case of Nadine her permanent location of abode is out of Australia in London.

3: The 183-Day or Superannuation Test: This test is not applied in case of Nadine because it is not relevant in her current circumstances.

Conclusion: 

Conclusively, Nadine will not be treated as an Australian resident for the time period of three years as her domicile is out of Australia. She is not liable to income tax in Australia.

References:   

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Barkoczy, S., 2022. Foundations of Taxation Law 2022. Cambridge University Press.

Lymer, A., 2019. Contemporary issues in taxation research. Routledge.

Morgan, A. and Castelyn, D., 2018. Taxation education in secondary schools. J. Australasian Tax Tchrs. Ass'n, 13, p.307.

Norbury, M., 2019. Mr Harding's residence reconsidered. Taxation in Australia, 53(9), pp.497-500.

Robin, H., 2021. AUSTRALIAN TAXATION LAW 2021. OXFORD University Press.

Saad, N. and Ariffin, Z.Z., 2019. Principles of Taxation (UUM Press). UUM Press.

Sadiq, K., 2020. Australian Taxation Law Cases 2020. Thomson Lawbook Co.

Sadiq, K., Black, C., Hanegbi, R., Krever, R.E., Jogarajan, S., Obst, W. and Ting, A.K.F., 2021. Principles of Taxation Law 2021 (No. 14th). Thomson Lawbook Co.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A., 2018. Principles of taxation law 2018. Thomson Reuters (Professional) Australia Limited.

Shome, P., 2021. Principles of Taxation. In Taxation History, Theory, Law and Administration (pp. 53-61). Springer, Cham.

Villios, S., Blissenden, M. and Kenny, P., 2019. Residence Tests for Individuals: Impact of the Harding Decision. Taxation in Australia| December, pp.2020-112.

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