LAWS19033 Taxation Law And Practice

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?

In 2016, Julia Jenkins, a citizen of England, arrives in Australia for a long-awaited holiday. She arrives on 1 September 2016 and departs on 30 October 2016. During this time Julia travels extensively throughout Australia, as she wishes to see as many different elements of the country as she can. She also works for one week of her stay picking fruit in Bowen, for which she earns $1,000. Upon return to England, Julia misses the sunny weather in Australia and decides to return there on a permanent basis. She gives up her job, sells her family home, settles her affairs and moves to Australia permanently on the 7 January 2017.

Julia has approached you for preparation of her 2016/2017 tax return, and determination of her tax liability. Julia has been meticulous in keeping records, and provides you with the following information. It should be noted that the information provided represents her understanding of what may be relevant for income tax purposes, and you will need to form your own judgement on various matters based on your knowledge of Australian income tax law. If any doubt arises on a particular point, or further information would normally be required, you may assume such further details as are necessary to complete the return.

All such assumptions, and the basis of any decisions you make in various matters, must be made clear by full discussion where appropriate.

While the assignment is largely calculation based, there are some matters which you will need to consider and decide upon before you can proceed with the calculations. You should include your discussion of these matters, and any conclusion you reach, as part of your assignment.

On arriving back in Australia, Julia used the money from the sale of her house to purchase a corner store in Mackay, North Queensland. Julia owns the store as a sole trader but she has a store manager who looks after the day-to-day running of the store. The store has a residence attached where the manager lives, which was originally built in July 2001. Settlement took place on 12 February 2017.

The purchase price of $500,000 included:

 

The equipment consists of:

 

Diminishing value method was used to calculate depreciation.

 

Trading figures for the business from 12 February 2017 to 30 June 2017 include: Gross Sales of $450,000

Consisting of: Cash sales $300,000

Credit sales $150,000 (of which $18,000 is still outstanding)

 

As at 30 June 2017, trading stock on hand (at cost) is valued at $28,000. However, $8,000 of this amount represents the cost of items which are past the expiry date and so cannot be sold in the course of the business. Julia plans to send these items to developing countries where they can be used. Julia seeks your advice on valuing closing stock for the best tax advantage. The manager of the store was also selling illicit drugs through his contacts in the industry.

Monies from this practice amounted to $100,000 and were not included in the store accounts.

In March 2017 Julia and the store manager attended a buyer’s conference in Melbourne, which ran for one week. Following the conference they stayed on in Melbourne for 2 weeks to enjoy a short holiday. The manager’s wife accompanied them on this trip. One third of the cost of accommodation and airfares cited above relate to the manager’s wife.

Julia also owns a motor vehicle for which she has maintained a log book. This log book shows she has travelled 8,000km to 30 June 2017 of which 4,000km were in connection with her business.

Of the $15,000 of debt outstanding at 12 February 2017, $8,000 was written off as bad debts, the remainder having been collected.

1. The inspector general for the taxation is an independent officer for the statutory office who recognizes the concerns related to the law management. Generally, they are concerned regarding the management issues that are not in favour for managing the administration of good tax. The inspector general provides an independent suggestion to the government officials.

2. The following legislation governs the authority of the taxation authority general:

• The Ombudsman Act 1976 – this law covers the engagement of overseas student’s ombudsman, commonwealth ombudsman and the postal industry (Stuhmcke, 2016).
• Inspector general of taxation act 2003 – It manages the engagement of taxation inspector general

3. Taxation ruling TR 2016/3 portrays regarding the commissioner who is concerned about the deductions of expenses that takes place in the process of adapting, maintaining, development and acquisition of the the website to be used while performing the business activities along with the expenses that are related to the name of the domain. The ruling depicts that at the time of performing the business activities associated with the taxpayer will incur the expenditure that are linked with the websites that are used during procedures of the business.

4. Division 328 and division 40 contains the definitions associated with the act contains the definitions of Income Tax Assessment Act 1936.

5. Based on the definition of the taxation ruling under 2005/13, the deductibility of gifts are discussed in Division 30 of Income tax assessment Act 1997.

6. Section 15-45 under the Income Tax Assessment Act 1997 covers the deductions related to the loss that may arise due to misappropriation or theft that are caused by the employees and the taxpayer is the sufferer (Binning & Young, 2015).  

7. Based on the definition of section 25-55 and 8-1 under the Income Tax Assessment Act 1997, deduction is allowed for the association membership. When an individual pays for the association membership but not satisfy the requirements as per section 8-1 under the Income tax assessment act 1997, then the individual or the taxpayer can claim a deduction amounting to maximum amount of $42 in an income year in which the payment is made for the association membership.

8. When payment is received owing to the compulsory destruction or acquisition or any loss that are related to the GST asset, can cause the CGT event. It shall be noted that the amount received on account of loss owing to the trading stock will be accounted as the form of capital proceeds that will arise from the asset disposal.

9. The taxpayer with $30,000 taxable income during 2016/17 will have to pay the tax at the rate of 19c till $18,200 and over $18,200 at the rate of $1. 

10. As per the taxation rule, the income year is portrayed as the year in which the taxpayer earns the income. For instance, if the financial year for the taxpayer is considered as from 1^st April 2016 to 31^st March 2017, then this period will b e considered as his year of income. Moreover the assessment year for the year in which the income is earned will be considered as from 1^st April 2017 to 31^st March 2018 (Rimmer, Smith & Wende, 2014).

a. Under Section 4-1 of the income tax act 1997, an organization, entity or person will be under obligation for payment of tax based on the taxable income on the taxable income that are earned by them during the previous year. As per the regulation of Income tax assessment act (ITTA) 1997, the taxable income is calculated through deduction of allowable expenses from the taxable income. Assessable income of the taxpayer is classified as the statutory income and ordinary income. As per the section 6-5 of the ITTA 1997, the ordinary income is the the income that is earned through ordinary conception and as per the section 6-10 of the IITA 1997, the statutory income is the income that do not fall under the category of ordinary income (Fenech, Fang & Brown, 2016).

As per section 6-10 (4) and section 6-5 (2) of the ITTA 1997, the income earned through all the sources are considered as the part of income. Apart from this, if an individual, who is not the resident of Australia, if earns any income from Australia will also be under obligation to pay tax. Further, as per the taxation rule 98/17, Para 9, the residential status of the taxpayer also plays plays an important role in determination of the tax liability. As per section 995-1 of ITTA 1936, the person who lives in Australia is considered as the resident of Australia (James, 2016).

As per Taxation rulings 98/17, Para 11, for determination of the residential status of an individual residing in Australia, he must be confirmed with the residential concept. As per Para 15 of Taxation Rulings 98/17, the persons living in Australia on permanent basis are considered as the residents under the ordinary concept of resident. From the given case study, it is identified that Julia came to Australia on 7^th January 2017 to reside there permanently. Therefore, under the ordinary concept of resident, she will be considered as the Australian resident under the taxation rules and the income derived by her from all the sources will be taken into account (Burnett, Taylor & Wong, 2015).

Further, as per Section 6-5 of ITAA 1997, the earning generated from the food picking occupation is based on the stay of two-weeks and shall be considered as assessable income under the ordinary income. However, the amount paid by her amounted to $500,000 for various items will not be considered under the assessment of ordinary income (Eccleston & Warren, 2015).

It is mentioned in Section 40-30 of the ITTA 1997 that the assets which are having the remaining useful life and there is an expectation of falling of value if the asset then those assets are considered as the depreciating assets. The amount of depreciation can be calculated based on the written-down value method or the straight-line method. In the given case study the written-down value method is used for the charging the depreciation. The depreciation is calculated as per Section 8-1 of the ITTA 1997 s follows:

As per section 6-5 of ITTA 1997, gross sales are part of ordinary income and shall be considered while calculating the assessable income. Based on the Section 8-1 of the ITTA 1997 expenses incurred for obtaining income are allowed as deduction. Therefore, expenses and salaries shall be allowed as normal deductions. Further, as per section 25-25 under the ITTA 1997 expenses of borrowings must be ducted up to a specific amount that are utilised for income generation (Robin & Barkoczy Woellner 2016).

Apart from the above mentioned costs, the other costs shall be treated as follows:

• Expenditure for conference that are attributed to generation of income will be allowed as deduction under section 8-1 of ITTA 1997
• Expenditure for vehicle management shall be regarded as perquisites offered to the managers and therefore allowed as deduction under section 8-1 of ITTA 1997
• Borrowings are related to the business and therefore shall be allowed as deduction
• Available stock are normally valued at cost or valued based on the replacement value or valued at selling price. As the replacement cost or the  selling price is not available from the given case study, it shall be valued at cost as per section 70-45 (1) of ITTA 1997 (Taylor & Richardson, 2013).
• The expenses for the wife of manager will not be allowed for deduction.
• Loss from theft will be allowed as per the special provision of section 25-45 of ITTA 1997.
• Amount of $10,000 will not be allowed for deduction as it was not considered under the accounts of the store.
• The expenses related to car will be allowed as deduction as the calculation is made through considering the logbook method after multiplication of the amount as a percentage for business use using the section 28-90 of ITTA 1997 (McLaren, 2014).
• The bad debt is allowed as deduction if the amount was taken into consideration as income previously. Therefore, here in the given case study, the amount will be allowed as deduction as per section 25-35 of ITTA 1997.

Considering the above treatment of income and expenses of Julia, her taxable income are stated as below:

Binning, C., & Young, M. (2015). Talking to the taxman about nature conservation_Proposals for the introduction of tax incentives for the protection of high conservation value native vegetation.

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

Eccleston, R., & Warren, N. (2015). The devil is in the detail: the distributional consequences of personal income tax sharing in the Australian federation.

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.

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.

McLaren, J. (2014). A uniform land tax in Australia: what is the potential for this to be a reality post the Henry Tax Review. Austl. Tax F., 29, 43.

Rimmer, X., Smith, J., & Wende, S. (2014). The incidence of company tax in Australia. Economic Round-up, (1), 33.

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

Stuhmcke, A. (2016). Australian Ombudsmen: A Call to Take Care. Fed. L. Rev., 44, 531.

Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.