Tax Liability Calculation For Bruce Lee For The Year Ended 30 June 2018

Bruce Lee is a Lawyer with his own legal practice and registered for GST His receipts and payments (not including GST) for the year ended 30 June 2018 are as follows:

340,000 Professional legal fees
8,000 Income from part-time military service (note 1)
7,000 Dividends received from an Australian resident company fully franked
34,000 Salary received from part-time lecturing at the University

($6,000 in PAYG W)
5,000 Interest on Bank Deposits
10,000 Rental income from an investment property

14,000 Office rent
10,000 Payment to the cleaning contractor
50,000 Salary paid to employee secretary
290 Purchase of new calculator

1,400 Cost of meals and entertainment for himself and clients
1,200 Train fares for travel to and from work
2,200 Rates on family home
900 Electricity for family home
1,000 Tax agent’s fees for preparing tax returns for 2016/2017
2,000 Rates paid on abovementioned investment property
15,000 Interest paid on loan to acquire the investment property
5,000 Cost of painting the investment property immediately after purchasing the property
1,000 Cost of replacing roof tiles on the investment property after the roof was damaged in a severe storm in February 2018
15,000 Cost of extending the bathroom in the investment property.

Notes
(1) The part-time military income is exempt.
(2) Bruce has a carry forward past year tax loss of $12,000.
(3) Bruce does not have private hospital insurance. 

Bruce would like to minimise his tax liability for the year. Calculate Bruce’s tax liability for the year ended 30 June 2018.

Receipts included in assessable income

The existing case study takes into the considerations the tax liability for Bruce Lee. The case study would have considered the taxability of transactions reported by Bruce during the income year and the deductions that can be claimed by Bruce to reduce his tax liability. According to “section 6-1 of the ITAA 1997” proceeds obtained from the private exertion or revenue obtained from the private exertion represents the earnings that comprises of salaries, wages, fees, bonus allowances and the gratuities received in capacity of the employee (Barkoczy, 2014). Earnings from private exertion also comprises of the incomes from any trade that is carried on by the taxpayer either alone or as the partner.

According to the ordinary concept of “section 6-5 of the ITAA 1997” income that comes in to the taxpayer is observed as ordinary earnings (Grange et al., 2014). The legal notion of earnings in “Scott v CT (1935)” held that the receipts should be considered as the earnings and should be determined in accordance with the usage and ordinary conceptions. As evident Bruce reported the receipt of professional fees. Therefore, under “section 6-5 of the ITAA 1997” the legal fees represent income under ordinary concepts and would be considered for assessment.

“Section 6-5 of the ITAA 1997” states that gains derived from the property is regarded as income. The court in “Hochstrasser v Mayes (1960)” held that in order to consider the nature of earnings the item is ought to be gain for the taxpayer that obtaines it (Jover-Ledesma, 2014). Similarly, Bruce receives a one-off receipt from the 10-year lease. The receipt would be classified as the ordinary income and would be included in determining the tax liability.

The Australian taxation office explains that regardless of an individual has one or more job or whether the person works full time or part time, the person is required to include their employment in their tax return. The high court of law in “Dean v FCT (1997)” held that the payment derived in capacity of employee is treated as taxable income (Kenny et al., 2018). Receipts from part-time military service and salary from part-time lecturing at University would be treated remuneration from employment. These receipts would be treated as income and will be included in determining the tax return.

“Section 44 (1) of the ITAA 1997” states that dividends should be included into the taxable income. Dividend income is generally paid from the listed investment company, trust trading publicly or corporate unit trust (McCouat, 2018). There are dividends that have imputation or franking credits attached to it and the same is required to be declared in the tax return. If an individual receives dividends that have franking credits attached to it, then the taxpayer would be entitled to obtain the franking tax credit. The receipt of Australian sourced dividend by Bruce would be included into the assessable income however, Bruce can claim a tax offset for the franking credits attached to it.

Deductions claimed under section 8-1 of the ITAA 1997

A gain which is even or episodic is probable to be held as ordinary earnings than the gain that is paid as the lump sum. The court of law in “Federal Commissioner of Taxation v Black” held that regular receipts is characterised as income (Sadiq et al., 2018). The rental income obtained from the investment property would be considered as the taxable income since it holds sufficient nexus with the income generating activity.

An Australian receiving interest from the financial bank accounts and term deposits is treated as income (Taylor et al., 2018). The taxpayer is required to declare such income and should include them while filing tax return. The receipt of interest on bank deposit by Bruce would be treated as income and would attract tax liability.

According to “section 108-5 of the ITAA 1997, CGT” asset represent any kind of property (Pinto, 2013). Profit made by Bruce from the sale of office equipment represents capital gains. Therefore, the profit would be included in determining the tax return for Bruce and establish earnings under ordinary concept of “section 6-5 of the ITAA 1997”.

As per “section 8-1 of the ITAA 1997” an individual is permitted to an entitlement of deductions from their chargeable earnings for any losses or costs up to the level that it is arisen in creating and producing the taxable income (Braithwaite, 2017). An individual tax payer is allowed to claim deductions given the outlays are sustained essentially in conducting commercial activity with the objective of producing assessable income. While under the negative limbs of “section 8-1 (2) of the ITAA 1997” prohibits a person to claim deductions if the losses or outgoings are capital in nature.

As obvious from the existing case of Bruce the taxpayer reported an expense relating to office rent, payment of cleaning contractor and salary to employee staff. The expenses holds sufficient connection with the taxpayer’s income generating activities. Therefore, Bruce under the provision of “section 8-1 of the ITAA 1997” can claim general deductions.

According to the Australian taxation office if an individual purchases tools, equipment or any other assets that helps in earning income, the person can claim deduction for some or the entire cost (Robin, 2017). For an item that does not form the part of set or costs less than $300 can be claimed immediately as the allowable deductions. As evident the cost incurred by Bruce for calculator can be immediately allowed as deductions since the calculator costs less than $300.

Deductions for other expenses

According to the Australian taxation office providing clients with meals amounts to entertainment. Business lunches and drink to the staff or clients are held as entertainment expenses. As evident Bruce incurred costs on meal for himself and clients. However, the cost incurred for himself is private expense which cannot be allowed as deductions but a part of such expenses incurred on client can be claimed as the allowable deductions under the general provision of “section 8-1 of the ITAA 1997”.

According to the legislative response of “section 25-1 of the ITAA 1997” a deductions is allowed to a taxpayer relating to the costs incurred in travel between workplaces. The travel should be directly associated amid two places where the activities of revenue generation is carried on and not any place is taxpayers home. The Federal Court in “Lunney v FCT (1958)” held that travel amid home and an individual workplace is not allowable for general deductions (Blakelock & King, 2017). The cost incurred by Bruce to travel from home and workplace is not allowable deductions under “section 8-1 of the ITAA 1997”.

The second negative limb of “section 8-1 (2) (b) of the ITAA 1997” explains that losses or costs that are private or domestic in character are not allowed as deductions since it fails to fulfil the principles of positive limbs (Braithwaite, 2017). Similarly, rates and electricity on family home does not qualify for deductions since these expenses fails to satisfy the principles of positive limbs stated under “section 8-1 of the ITAA 1997”.

“Section 8-5 of the ITAA 1997” states that a taxpayer is allowed to claim specific deductions when the specific provision under the income tax legislation enables the taxpayer with the deduction (Maley, 2018). “Section 25-5 of the ITAA 1997” enables taxpayer with deductions relating to costs incurred in managing tax affairs. Similarly, Bruce can claim deductions for expenses incurred on tax agent in preparing tax return under the specific provision of “section 25-5 of ITAA 1997”.

A person can claim permissable deductions for certain expenditure that is incurred for the period when the investment property is rented out or is available for rent (Blakelock & King, 2017). As evident Bruce incurred expenses on rates investment property and interest on loan for acquiring the property. Therefore, with reference to “Amalgamated Zinc Ltd v FCT (1935)” a deduction is permitted under “section 8-1 of the ITAA 1997” as the expenses incurred on investment property is in the way of gaining or making earnings.

Calculation of tax liability

According to “section 25-10 of the ITAA 1997” initial repair constitutes capital in nature and no deductions are allowed. Referring to “Shipping Co Ltd v Inland Revenue Commissioners (1923)” initial repairs undertaken to remedy the defects that existed during the acquisition are held as capital expenditure which is non-deductible (Robin, 2017). Cost incurred on painting the investment property by Bruce is a notional repair and cannot be allowed as deductions since these costs were sustained to make the investment property appropriate for renting out and did not arise from Bruce’s usage of investment property to derive rental income.

“Section 25-10 of the ITAA 1997” allows a taxpayer to an entitlement for deductions for expenses incurred replacing a part of rental property damaged in storm (Pinto, 2013). Similarly Bruce can claim deduction on cost of replacing the roof tiles of the investment property damaged in storm since the property was held for income purpose.

An improvement that exceeds a repair in a manner that it alters the character of the actual item are regarded as capital in nature and no deductions are allowed. If a work results in substantial improvement, addition or alteration it is not classified as repair and no deductions are allowed under “section 25-10” (Chardon et al., 2017). The expenses incurred by Bruce on extending the bathroom in investment property involves substantial improvement and no deductions are allowed under “section 25-10”. Therefore,

As evident from the above stated computation the total taxable income for Bruce stands $430,000. As Bruce does not have private hospital insurance he would be liable to Medicare levy surcharge of 1.5% on total assessable income with total tax liability standing $116,096.85.

References:

Barkoczy, S. (2014) Foundations of taxation law.

Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.

Braithwaite, V. (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Chardon, T., Brimble, M., & Freudenberg, B. (2017). Tax and superannuation literacy: Australian and New Zealand perspectives [Part 1]. Taxation Today, (102), 17-25.

Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.

Jover-Ledesma, G. (2014). Principles of business taxation 2015: Cch Incorporated.

Kenny, P., Blissenden, M., & Villios, S. (2018) Australian Tax.

Maley, M. N. (2018). Australian Taxation Office Guidance on the Diverted Profits Tax.

McCouat, P. (2018) Australian master GST guide.

Pinto, D. (2013). State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

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

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., & Obst, W. et al. (2018) Principles of taxation law.

Taylor, C., Walpole, M., Burton, M., Ciro, T., & Murray, I. (2018) Understanding taxation law.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2018) Australian taxation law.