Income Tax Assessment Act 1997 - Case Study

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Ordinary Income

Any kinds of gains from carrying on of the business is regarded as ordinary income under “section 6-5”. In order to illustrate the receipts as the ordinary income obtained from the activities of business there are two steps involved in it (Sadiq et al. 2013). Firstly, it is necessary to determine whether the taxpayer is conducting the business. Secondly whether the consideration of receipts is held as the normal proceeds of that business activity. The legislative definition of business under the “section 995-1” includes carrying on of profession, trade or employment but not in the capacity of an employee.  

The case facts reveal that Bruce carried on the business of lawyer and obtained a sum of $340,000 as the professional legal fees. The receipts of $340,000 will be characterised as carrying on business of professional lawyer under “section 995-1”. The amount would be treated as income under the ordinary concepts of “section 6-5” as it amounted to carrying on of business and the legal fees are receipt normal proceeds of that business.

Denoting the explanation of “section 6-20 of the ITAA 1997”, exempted income are non-assessable income (Woellner et al. 2016). Bruce reports a receipts of $8,000 from the part-time military service. The receipts would be characterized as exempted income under “section 6-20”.

Bruce reports a receipt of $7,000 as the fully franked dividend from the Australian resident company. Quoting the explanation of “Section 44 (1)” income from dividends are held as assessable income and the taxpayer is obligatorily required to declare such income while filing return (Robin 2017). With respect to “Section 44 (1)” Bruce should declare the dividend amount in his tax return as the ordinary income however he can claim the tax offset for the franking credits that is attached to it.

A taxpayer is required to declare the interest income earned from term or bank deposit. An Australian occupant that derives interest income should be treated as taxable component within the ordinary scope of “section 6-5” (Miller and Oats 2016). An interest of $5,000 is received by Bruce from bank deposit. As the general rule of “section 6-5” the interest income from bank deposit is an ordinary receipt which is held liable for assessment.

According to the Australian taxation office employment income represents the money that is received from working. An individual may be paid directly in their bank account or in any other manner. Irrespective of whether a taxpayer as one or more job, or whether the job is full time or part time, the taxpayer is required to assure that all the income from employment is included in the tax return. A salary of $34,000 is received by Bruce after rendering the service of part-time lecturer in the University. As per “section 6-1 of the ITAA 1936” any service and employment income received in respect of any employment or service rendered by the taxpayer is held as ordinary income (Burton 2017). The receipt from the part-time lecturer at the university by Bruce is an employment income from personal service which is taxable under “section 6-1”.

Exempt Income

A gain that are regular or periodic in nature or more probably in the nature of ordinary income. The court in “Blake v FCT (1984)” held that regular receipts are treated as assessable income (Jones 2017). Rental income amounting to $10,000 from the investment property received by Bruce will be treated as assessable income under the ordinary meaning of “section 6-5”.

There are two positive limbs under “section 8-1” where a taxpayer can deduct losses or outgoing from their taxable income till the extent that it is sustained in producing the taxpayer’s taxable income (Edmonds 2018). Secondly the taxpayer under the second positive limbs can deduct expenses till the extent that it is necessarily sustained in performing the business with the objective of gaining or generating the assessable income. While under the negative limbs of “section 8-1 (2)” a taxpayer is prohibited from deducting any losses or outgoings that are capital, domestic or private in nature.

An expense on cleaning, office rent and employee salary was occurred by Bruce. The commissioner in “Amalgamated Zinc (De Bavay’s) Ltd v FCT (1935)” held that expenses that are incurred “in gaining or producing” or in the course of gaining or producing are allowed for deductions under “section 8-1 of the ITAA 1997” (Peiros and Smyth 2017). The expenses reported by Bruce on office cleaning, rent and employee salary is a business expense that are incurred “in gaining or producing” income. Therefore, a general deduction will be allowable to Bruce.

As per the Australian Taxation Office a taxpayer that purchase the tools, equipment’s and any other assets that helps in earning the assessable income can be claimed as deductions for some or for the full cost. The type of deduction that can be claimed is dependent upon the cost of the asset (Jones 2017). An item that does not forms the part of the set and cost lower than $300 or less can be allowed as immediate deductions for the taxpayer. Bruce purchased a new calculator for $290. The cost base of the tool is below $300 and an allowable deduction for the same can be claimed by Bruce.

Later Bruce reports costs of meals and entertainment for himself and clients as well. The definition of ATO states that cost incurred on client’s food and meal should be viewed as business expense (Somers and Eynaud 2015). The expenses can be claimed as deductions for Bruce since it is incurred in gaining the assessable income. On the other hand, Bruce also incurs the expense of food and meals upon himself. With reference to section 8-1 the expenses on food and meal for Bruce is a personal expense and no deductions is allowable in such situation.

Employment Income

The court of law in “Lunney v FCT (1958)” held that travel between home and a person’s usual place of work is treated as non-deductible. “Section 25-100 of the ITAA 1997” allows a taxpayer to claim deductions for travelling expenses between two workplaces with none of the place being taxpayers home (Buchanan and Consett 2016). A travelling expense of $1,200 is reported by Bruce. The expenses will be held as non-allowable deductions under “section 8-1” since it fails to meet the criteria or positive limbs.

Losses or outgoings of domestic type is non-deductible because it does not meet the eligibility of positive limbs and prohibited from deductions under the second limb of “section 8-1 (2) (b)” (Murray and Wright 2015). A cost of 2,200 and 900 is incurred for rates and electricity of family home. The expenses are non-deductible under “section 8-1” because it is private expense and it is neither relevant nor incidental in the derivation of assessable income.

“Section 8-5” allows a taxpayer to claim specific deductions when the specific provision in the income tax regulation allows with the deduction. As stated by “section 25-5”, an individual is allowed with the deduction of certain costs including the expenditure on managing the tax affairs (Somers and Eynaud 2015). Cost of $1,000 for the tax agent fees incurred in relation to the preparation of filing returns for 2016/17 will be considered allowable specific deduction under “section 25-5”.

A taxpayer can claim deductions for the certain types of expenditure that is incurred for the period when the property is rented out or available for rent. However, a taxpayer is not allowed for deductions that are capital or private in nature. As held in “Amalgamated Zinc Ltd v FCT (1935)” expenses that holds sufficient connection among the loss or outgoings or incurred more directly in gaining the taxable income then it is allowed as deductions (Miller and Oats 2016). The expenses of rates and interest paid on loan incurred by Bruce on rental property is an allowable deduction under “section 8-1 of the ITAA 1997”.

As stated under the “section 25-10 (3) of the ITAA 1997” capital works cost or notional repair upon the acquisition of investment property expenditure are non-deductible expenditure. A taxpayer was not allowed to claim deduction in “Inland Revenue Commissioners v Shipping Co Ltd (1923)” since the expenses incurred were of initial repair on the property and were capital expenses of non-deductible type (Woellner et al. 2016). Therefore, cost occurred in repainting the property by Bruce is an initial repair following the acquisition and non-deductible under “section 25-10 (3) of the ITAA 1997”.

“Section 25-10” enables the taxpayer to claim deductions originating from damage by severe storm (Sadiq et al. 2013). A part of the investment property roof was damaged by storm and Bruce can claim a deduction for the replacement cost since the property was entirely directed towards earning assessable income.

Repairs that goes beyond the nature of repair and leads to change in original character of an item is non-deductible. The court in “Western Suburbs Cinemas v FCT (1952)” held that expenditure of capital nature is non-deductible (Robin 2017). Cost of extending the bathroom on the investment property is work done of substantial nature and the same is non-deductible under “section 25-10”.

Bruce has reported a carry forward of loss for $12000 from earlier year. The loss can be claimed for deduction in the income year ended 30 June 2018. He has no private hospital insurance therefore a Medicare levy surcharge of 1.5% is applicable on Bruce. The total amount of tax liability stands $105293.55 for the year ended 30 June 2018.

References: 

Buchanan, R. and Consett, E., 2016. Section 974-80 ITAA97: The current state of play. Tax Specialist, 19(5), p.217.

Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. J. Austl. Tax'n, 19, p.50.

Edmonds, R., 2018. Resource Capital Fund IV LP: the issues on appeal?. Taxation in Australia, 53(1), p.22.

Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.

Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.

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

Murray, I. and Wright, S., 2015. The taxation of native title payments for Indigenous groups and resource proponents: convergence, divergence and reform. UW Austl. L. Rev., 39, p.99.

Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor's commission. Taxation in Australia, 51(7), p.394.

Robin, H., 2017. Australian taxation law 2017. Oxford University Press.

Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst, W. and Ting, A., 2013. Principles of taxation law 2012. Thomson Reuters.

Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO's proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.

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