Graduate Accountant Interview Questions And Answers - Taxation Deductions And Assessable Income

You have just started a new job as a graduate accountant. Your managing partner has to do a media interview and he asks you to provide answers to some questions that will be asked. He has given you a list of questions that he has to address in his interview and he needs you to provide him with short answers to these questions and provide references so that he can check the answer if required.

1. Who is the Inspector-General of Taxation?
2. What legislation governs the powers of the Inspector-General of Taxation?
3. What topic does Taxation Ruling TR 2016/3 discuss?
4. Which Division of the Income Tax Assessment Act 1936 contains the definitions related to the Act?
5. Which Division of the Income Tax Assessment Act 1997 discusses the deductibility of gifts?
6. Which section of the Income Tax Assessment Act 1997 allows a taxpayer to deduct a loss caused through theft by an employee?
7. Is a deduction allowable for membership of an association? If so, are there any limits to such a deduction?
8. How are compensation amounts for loss of trading stock treated?
9. What is the applicable tax rate for a taxpayer who has $30,000 taxable income in 2016/17?
10. For tax purposes, what is considered to be the ‘income year’ for most taxpayers?

A. Set down in statement form full details of Julia’s assessable income and allowable deductions for the 2016/2017 year of income and determine her taxable income for that year. In doing this you also need to discuss and justify the inclusion/non-inclusion of all items of income and expenditure.

B. Determine the net amount of income tax payable by Julia for 2016/2017. In completing this assignment assume that there are no further items of income or expenses that are relevant other than those mentioned here. You can also assume that Julia has no dependants and that she has private health cover for the year that cost her $2,300.

The inspector general of taxation is an independent statutory office, which recognises the issues relating to the administration of law. They review the elements relating to the administration against the principles of good tax administration (Barkoczy, 2016). The inspector general of taxation provides an independent advice to the government.

The functions and the powers of the inspector general of taxation are governed under the following legislations, which are as follows;

1. Inspector general of taxation Act 2003
2. Ombudsman Act 1976

The inspector general of taxation act 2003 provides the appointment of the inspector general of taxation whereas the ombudsman Act 1976 provides for the appointment of the commonwealth ombudsman, defence force ombudsman, postal industry ombudsman and the overseas students ombudsman (Woellner et al., 2016).

The taxation rulings of TR 2016/3 discusses the views of the commissioner regarding the deductibility of the expenses that is incurred at the time of acquiring, developing, maintaining or modifying the website for use in carrying out the business activities along with the expenses related to the domain names (Morgan et al., 2016). The ruling provides that at the time of carrying on the business the taxpayer will regularly incur expenditure, which is related to the website that is used in the business process. The rulings states that a website is considered in the form of intangible software and includes software, which is integrated into the websites for online use by the user of website.

Division 40 and division 328 of the Income tax assessment act 1936 contains the definitions relating to the act.

Under the Taxation rulings of 2005/13, Division 30 of the Income Tax Assessment Act 1997 discusses the deductibility of gifts (Robin et al., 2016).

“Section 25-45 of the Income Tax Assessment Act 1997” provides for the specific deductions relating to the loss incurred by the taxpayer arising out of theft, stealing embezzlement or misappropriation caused by an employee (Braithwaite & Braithwaite, 2016).

Yes, an individual can claim deductions for membership of an association under section 8-1 and 25-55 of the Income Tax Assessment Act 1997 (James, 2016). Where an individual makes a payment to the membership of an association and is unable to satisfy the requirements of section 8-1 of the income tax assessment act 1997, the taxpayer is allowed deduction up to the maximum amount of $42 during the income year for the payments in relation to each association to which an individual belongs.

A compensation payment received for the loss, destruction or compulsory acquisition relating to the CGT asset will give rise to the CGT event. If the taxpayer receives compensation amount for the loss of trading stock, the payment will be treated in the form of capital proceeds from the disposal of assets (Tran-Nam & Walpole, 2016).

If a taxpayer, having a taxable income of $30,000 in the taxation income year of 2016-17 a tax rate of 19c with $1 over 18,200 will be applicable on his or her taxable income.

From the perspective of taxation, income year is the year in which the taxpayer earn an income. For instance if the taxpayer financial year commences from 1^st April 2015 to 31 march 2016 it is regarded as an income year (Tan et al., 2016). Hence, the assessment year for income earned by the taxpayer during this period would commence following the end of the financial year that ends until April 2016 until March 2017.

Answer to part A

As stated under section 4-1 of the income tax assessment act 1997 an individual, entity or a company is liable to pay tax based on their taxable income. The amount of taxable income is calculated by subtracting the amount of allowable deductions from the sum of income that is assessable stated under section 4-15 of the ITAA 1997 (Fenech et al., 2016). Assessable income can be classified under two heads namely ordinary income and statutory income. According to section 6-5 of the income tax assessment act income 1997 as per the ordinary concept can be defined as the ordinary income. On the other hand as defined under section 6-10 of the income tax assessment act income 1997 income that does not forms the part of ordinary income are known as statutory income.

As defined under section 6-5 (2) and section 6-10 (4) of the Income Tax Assessment Act 1997 income derived from all the other sources must be included in the assessable income. Furthermore, for non-resident individual taxpayer only that income should be considered for assessment that are derived from the Australian sources (Russell, 2016). Hence, it can be said that the residential status of the taxpayer forms the vital aspect in determining the assessable income along with the computation of the income tax payable. As stated under Para 9 of the taxation rulings 98/17 an individuals residential status must be ascertained based on the fact and it forms one of the most vital element in the determination of the income tax liability. As defined under section 995-1 of the Income Tax Assessment Act 1936 Australian resident means those individual that resides in Australian (Anderson et al., 2016).

As stated under para 11 of the taxation rulings 98/17 one of the primary test of ascertaining the status of residency is to determine whether the person lives in Australia in accordance with the ordinary concept of the term residence. As defined under para 15 of the taxation rulings 98/17 the term ordinary resident represents that an individual residing in Australia on permanent basis. Under the current study it is evident that Julia Jenkins came to Australia so that she settle permanently on 7 January 2017. Hence, it is understood that Julia Jenkins can be considered to an Australian resident for the purpose of taxation in accordance with the ordinary concept of the term resides (Bond & Wright, 2017). This represents that income derived by Julia shall be held for taxation from the all the sources received by her.

As defined under section 6-5 of the ITAA 1997 income generated from the work of food picking based on her two-week stay must be taken into consideration in the assessable income in the form of ordinary income. The purchase price of $500,000 is paid by Julia for several items and they are not included under the heads of ordinary income since they does not represents income according to the ordinary or statutory concept. As defined under section 40-30 of the Income Tax Assessment Act 1997 assets having an effective useful and are anticipated to fall in their value must be regarded as the depreciating asset (Clark & Maas, 2016). The depreciation upon those assets can be computed by either making the use of straight-line method or by diminishing value method. Under the current case study, referring to section 40-70 of the Income Tax Assessment Act 1997 diminishing method of depreciation is used for the purpose of taxation. Referring to under section 8-1 of The Income Tax Assessment Act 1997 computation of depreciation is stated below;

Answer to question 1

According to the section 6-5 of the ITAA 1997, gross sales forms the part of the ordinary income and it should be included under the assessable income. As defined under section 8-1 of the Income Tax Assessment Act 1997 the expenditure that is incurred in the production of the assessable income or executing the business activities relating to the production of assessable income can be allowed in the form of deduction (Hua et al., 2016). Therefore, salaries and expenditure are allowed in the form of general deductions. As stated under section 25-25 of the Income Tax Assessment Act 1997 expenditure relating to borrowing can be deducted to a certain extent of the amount that is used in the production of the assessable income (Sharkey, 2015).

As evident in the current case study, borrowing done by Julia forms the part of business hence it is allowed in the form of deduction. The expenditure incurred for the management of the vehicle must be treated in the form of perquisite provided to the manager and must be allowed in the form of deduction defined under section 8-1 of the ITAA 1997 (Trakman, 2015). The occurring of expenditure associated with the conference for the production of assessable income must be allowed for deduction under section 8-1 of ITAA 1997. According to section 70 -45 (1) all the Income Tax Assessment Act 1997 stock in hand is usually valued at cost, selling value or replacement value at the end of the year. As evident in the current case study the market price or the replacement value is not provided and the inventory is valued at cost after the end of the year. Furthermore, the expenses incurred for the manager’s wife cannot be claimed as deductions (Brand, 2014). It is also noticed that loss noticed in the current year along with the loss arising out of the theft or stealing is generally allowed for deduction under section 25-45 of the ITAA 1997 given the money forms the part of the assessable income.

As evident from the current scenario the sum of $10,000 was not taken into considerations in the store accounts hence it is not included in the assessable income. As stated under section 28-12 of the Income Tax assessment Act 1997 there are two methods of computing car expenditure and one of the two methods of estimating car expenses can be allowed as deductions (Thampapillai, 2016). Referring to section 28-90 of the Income Tax assessment Act 1997 car expenditure can be computed based on the log book method by multiplying the sum of car expenditure with the percentage of business use. In the current case study the car expenditure deductions is computed by making the use of cents per kilometre method in accordance with section 28-25 of the Income Tax Assessment Act 1997. As held under section 25-35 of the Income tax assessment Act 1997 the taxpayer can deduct the sum of bad debt, given the amount was previously included in the assessable income for the current year or for the previous year (Burnett et al., 2015). In the current case, the sum was included in the assessable and hence deduction was allowed. Below stated are the statements for taxable income of Julia;

Reference list: 

Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role does it play in anti-phoenix activity?. INSOLVENCY LAW JOURNAL, 24(2), 127-140.

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

Barkoczy, S., Nethercott, L., Devos, K., & Richardson, G. (2016). Foundations Student Tax Pack 3 2016. Oxford University Press Australia & New Zealand.

Bond, D., & Wright, A. (2017). A Snapshot of the Australian Taxpayer.

Braithwaite, V., & Braithwaite, J. (2016). Managing taxation compliance: The evolution of the ATO Compliance Model.

Brand, R. A. (2014). Understanding Judgments Recognition. NCJ Int'l L. & Com. Reg., 40, 877.

Burnett, C., Taylor, C. J., & Wong, J. (2015). Qualification of Taxable Entities and Treaty Protection: National Report for Australia.

Clark, W., & Maas, R. (2016). Spatial mobility and opportunity in Australia: Residential selection and neighbourhood connections. Urban Studies, 53(6), 1317-1331.

Fenech, J. P., Fang, V., & Brown, R. (2016). How Accurately Can Convertibles be Classified as Debt or Equity for Tax Purposes? Evidence from Australia. Review of Law & Economics, 12(1), 153-164.

Hua, Y., Oliphant, M., & Hu, E. J. (2016). Development of renewable energy in Australia and China: A comparison of policies and status. Renewable Energy, 85, 1044-1051.

James, K. (2016). The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), 345-362.

Morgan, A., Mortimer, C., & Pinto, D. (2016). A practical introduction to Australian taxation law 2016.

Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al). (2016). Australian Taxation Law 2016. Oxford University Press.

Russell, T. (2016). Trust beneficiaries and exemptions from CGT: reflections on the Oswal litigation. Taxation in Australia, 51(6), 296.

Sharkey, N. (2015). Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), 10.

Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), 329-344.

Thampapillai, D. J. (2016). Foreign Employment Income and Double Tax Avoidance Agreement: Australia's Possible Governance Failure. Browser Download This Paper.

Trakman, L. (2015). Domicile of choice in English law: an Achilles heel?. Journal of Private International Law, 11(2), 317-343.

Tran-Nam, B., & Walpole, M. (2016). Tax disputes, litigation costs and access to tax justice. eJournal of Tax Research, 14(2), 319.

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