Tax Liability Calculation For Bruce Lee

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:

Receipts

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

Payments

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

(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.

REQUIRED

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

Assessable Income and Exemptions

An individual’s assessable income is subjected to income tax since it is added into the taxable income. Income according to the ordinary concepts is taxable under “section 6-5 ITAA 1997”. The court in “Scott v CT (1935)” held that income should be interpreted in terms of the ordinary concepts of mankind. Gains originating from business is an ordinary income under “section 6-5” (Bankman et al. 2017). The case study of Bruce provides that he carries on the profession of lawyer and receipts a total sum of $340,000 during the year from his profession. “Section 995-1” provides the legislative definition of business which includes the profession, trade or employment. With respect to “section 995-1” receipts of legal fees from the practice of professional lawyer constitutes business receipts. The receipts are assessable according to the ordinary concepts of “section 6-5 ITAA 1997”.

“Section 6-20 of the ITAA 1997” explains that there is certain income that are exempted from taxation (Murphy and Higgins 2016). A receipt of $8,000 was reported by Bruce. The sum is a non-taxable exempted income under “section 6-20”. 

The description given in “Section 44 (1)” held that dividends obtained by taxpayer from the listed companies are required to be declared in taxable income (Buenker 2018). Bruce earned a fully franked dividend income of $7,000 from the Australian resident company. Denoting the description of “section 44 (1)” Bruce must include the dividend income in his assessment for taxable purpose while the franking credits that is attached to it can be allowed for claiming tax offset.

An item having the character of income which is derived will be regarded as income up to the amount of the realisable value. The Australian taxation office requires a taxpayer to include in their taxable earnings the interest obtained from the financial institutions such as bank deposits or term deposits (Woellner et al. 2016). Those interest receipts constitute ordinary income under “section 6-5” and attracts tax liability. The receipt of $5,000 as the interest income from bank deposits by Bruce would be treated as ordinary income and would be considered liable for taxation.

Receipts that are obtained from employment and offering personal services might be subjected to income tax for an employee. Employment income may be paid directly in the bank account of an individual or in any alternative way. Notwithstanding of the fact that whether a person has one or greater than one employment or whether the person is employed in the full or part time employment (Robin 2017). Income received from the employment would be considered for taxation. “Section 6-1 of the ITAA 1936” held that amount that are obtained from the personal exertion might be considered for assessment as either statutory or ordinary income. The receipt of salary by Bruce from the part time lecture in the university would be considered for assessment under “section 6-1” as the income from the employment.   

Income from Legal Practice and Part-time Lecturing

Receipts of rent is regarded as ordinary income since under the flow concept, the rent flows from the investment in the property. The judgment of court in “FC of T v Blake (1984)” held that regular receipts are held as income in nature. Bruce earned a rental income of $10,000 from the investment property (Maley 2018). Under the ordinary concepts of “section 6-5” the rental income from investment property would be held taxable.

The two positive limbs of “section 8-1” allow the taxpayer to deduct from their taxable income the losses or outgoings till the extent that it is occurred in producing the taxable income or it is incurred necessarily in performing business activities for gaining the taxable income (Blakelock and King 2017). While the negative limbs of “section 8-1 (2)” disallows a person to deduct outgoings if they are capital in nature or the expenses are private or domestic in nature.

Bruce reported an expenditure of office rent, cleaning contractor and salary of employee during the year. According to judgment noted in “Amalgamated Zinc (De Bavay’s) Ltd v FCT (1935)” expenditure occurred for gaining or producing the taxable income or in the course of producing the taxable income will be considered allowable deduction under the general provision of “section 8-1” (Miller and Oats 2016). Cost of office rent, cleaning contractor and payment of employee salary would be held as allowable as general deduction. This is because these expenses are incurred in course of producing the taxable income for Bruce and qualifies under the positive limbs of “section 8-1 of the ITAA 1997”.

The description of Australian Taxation Office includes that purchase of business tools, equipment or any alternative assets for obtaining business income will be allowed as deductions for the entire costs of the tool or the partial cost. The form of deduction that is allowed to a taxpayer is reliant on the asset cost (Lang 2014). Where any tools or equipment that does not forms the part of the any set or cost base of the asset is less than $300 then a deduction for the same can be claimed for the same immediately. A calculator was purchased by Bruce for business purpose having a cost base of $290. Since the cost of asset is less than $300, Bruce can immediately claim deduction for the calculator.

The Australian taxation office explains that cost that is occurred on the food and entertainment of business clients are held as business expenditure and deduction for the same can be claimed by the taxpayer (Burton 2017). Bruce incurs cost on food and meal for one of his business client. Since the expenses are for business purpose therefore, a deduction can be claimed in this respect. Conversely, Bruce reported the expenses on food and meal for himself as well. Referring to “section 8-1 of the ITAA 1997” Bruce will not be allowed claim deduction for food and drinks expenses upon himself as this constitute a private expense.

Fully Franked Dividend Income

The court in “Lunney v FCT (1958)” held that the travel between home and an individual workplace is usually not allowed for deductions. A taxpayer is allowed deduction under “section 25-100 of the ITAA 1997” for the travelling costs between the workplace. The court in “Payne v FCT (2001)” disallowed the taxpayer to claim deduction for the cost incurred in travelling between his home and workplace (Jones 2017). Travel between two unrelated workplaces is non-deductible under “section 8-1”. The travelling cost of $1,200 would not be allowed for deduction under “section 8-1” since it constitute travel amid two unrelated workplaces by Bruce.

Any loss or outgoing that are private or domestic in character might not be held as deductible expenditure because these expenses does not meet the principles of positive limbs or the same is not allowed as deduction under the second negative limb of “section 8-1 (2) (b)” (Somers and Eynaud 2015). An expense of 2,200 on family home and 900 for electricity was incurred by Bruce during the year. Bruce cannot claim an allowable deduction since these expenses are private or domestic in nature and the same is not permissible as deduction under the second negative limb of “section 8-1 (2) (b)”.

“Section 8-5” states that a taxpayer is allowed to claim deduction of specific nature when the specific provision of the legislation permits the deduction to the taxpayer. “Section 25-5” enable an individual taxpayer to claim deduction for certain costs together with the expenditure incurred in managing the tax affairs (Barrett and Elsayed 2014). A tax agent fee of $1,000 for preparing the tax return was reported by Bruce during the year. Bruce can claim deduction for the same under “section 25-5 of the ITAA 1997”.

When a taxpayer sub-lets the rental property for deriving assessable income, expenses incurred in gaining the taxable income from that property would be allowed for deductions. Nevertheless, expenditure of private or capital nature is non-deductible. Citing the case of “Amalgamated Zinc Ltd v FCT (1935)” expenditure that carries adequate relation between the outgoings and losses or occurred in producing the taxable income is allowed for deductions (Walsh 2018). The loan interest expense and rates on rental property would be allowed for deduction under “section 8-1” since it was occurred in producing rental income.

While acquiring investment property notional repairs of capital nature are not allowed for deduction under “section 25-10 (3)”. The court in “Inland Revenue Commissioners v Shipping Co Ltd (1923)” disallowed the taxpayer from claiming initial repair deduction on the investment property since it was capital in nature (Woellner et al. 2016). Bruce reports a cost of $5,000 for repainting the property soon after acquisition and the same is non-allowable deduction under “section 25-10 (3)”.

A deduction is allowed to taxpayer under “section 25-10” for damage on the investment property originating from storm. Bruce incurs an expense of $1,000 for replacing the tiles of roof on investment property that was damaged by storm. Under “section 25-10” the expense is eligible for deductions.

Improvement that surpasses the repair such as changes in the character of original item are capital in nature. In “FCT v Western Suburbs Cinemas Ltd (1952)” a deduction was denied to taxpayer for repairing the ceiling with new material since it was not a repair (Robin 2017). Similarly, the expenses incurred by Bruce in extending the bathroom of investment property is work carried on of significant nature and not allowed for deduction under “section 25-10”.

A carry forward loss of 12,000 was reported by Bruce and the same is considered for deduction for the present income year of 2018. Bruce has no private hospital insurance therefore a Medicare levy surcharge of 1.5% is applied on Bruce assessable income with total tax payable amounting to $105,293.55 for the year ended 30 June 2018.

References:

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Barrett, J. and Elsayed, A., 2014. Deductibility of employer contributions to employee remuneration trusts-where are we at?. Governance Directions, 66(5), p.307.

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

Buenker, J.D., 2018. The Income Tax and the Progressive Era. Routledge.

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.

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

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

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

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

Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.

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

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.

Walsh, M., 2018. Tax deeds. Tax Specialist, 21(5), p.211.

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