Answers To Taxation Questions – ITAA 1936 & 1997

1. The primary source of the Commonwealth Parliament’s Taxation can be found under section 51(ii) of the Australian Constitution (Chordia, Lynch, & Williams, 2013).
2. The primary source of Australia’s taxation laws is roughly, the parliament, courts and government departments or statutory authorities. The taxation laws are derived from   the Commonwealth Constitution and the rules and regulations of its international treaties, as well as many Double Tax Agreements (DTAs) done with foreign countries (Whait, 2012).
3. Taxation Ruling TR 98/17 discusses essentially the meaning of the word resides, in respect to the definition of the word resident in the Income Tax Assessment Act, 1936 under subsection 6(1). This ruling applies to probably all the individuals visiting Australia including students living in Australia for academic purposes or migrants residing in Australia or contractual employees. The ruling however is not applicable for residents of Australia who have been living overseas for a temporary period of time. The word resides generally means a person dwelling in a particular place for a considerable amount of time (Kobetsky et al., 2012). However under the definition of this ruling, the period of stay of a single individual is not the determining factor in regards of he or she being the resident of Australia.  An individual is considered a resident of Australia on the grounds of quality, character, behavior and habit of that particular individual. Furthermore the living and social standards, business links, location and preservation of assets, are also monitored and evaluated. The consistent maintenance of behavior along with the residing status is the determining factor for an individual to gain residential status of the country. Now to explain the meaning of the term resident or resident of Australia in legal terms, a resident is a person who is living in Australia continuously or intermittently for a part or half of the income year and has an intention to take up resident status in Australia. An individual’s purpose or reason of stay in Australia also acts as a determining factor in ensuring whether he or she resides in Australia or not (Harding, 2012).
4. Medicare levy is a service provided by the government of Australia which lies in the domain of public health care. A resident, who pays the taxes regularly and has an annual income of $26,668 per year, he or she has to pay a Medicare levy of two percent which is always calculated on the respective taxable income of the taxpayer. For an instance if the total taxable income of an individual is $60000, then the Medicare levy of two percent that is $1200 will be payable by him. Therefore any resident having taxable income that is greater than or equal to $26,668 will have to Medicare levy will be reduced and earnings below the minimum level will have zero Medicare pay a Medicare levy of two percent. In case the taxable income is below the limit then the levy applied on it (Taylor, 2012).
5. The Division of the Income Tax Assessment Act 1997 that denies a company that has been fined under Commonwealth consumer legislation for engaging in misleading and deceptive conduct from deducting the costs of the fine is 3(G)5 (Taylor & Richardson, 2012).
6. A specific deduction is an expense or loss which can be deducted under a specific or a particular provision of the Tax Acts except section 8-1 of the ITAA 1997. Now Section 25-45 ITAA97 specifically involves deduction in respect to a loss due to events such as embezzlements, theft, larceny or defalcation on the part of the stakeholders or taxpayers. Thus the deduction under Section 25-45 ITAA97 is a specific deduction (Boccabella, 2012).
7. The significance of  the High Court case, W Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58, in the topic of deductions is that in this case as it can be observed, deductions regarding repair of walls, roof and floor of the building, was considered a capital expenditure. The entire point of the case law lies in determining whether a particular renovation is a repair or maintenance, meaning whether a particular repair is required for the property to function properly or is it just needed for the maintenance of the appearance of the property. Thus the expenditure incurred in this situation is of a capital nature. It therefore will be not deductible under subsection 53(1) (Maples, 2012).
8. The three ways that a taxpayer can choose to value each item of stock on hand at the end of the income year are the cost price method, market selling value method and the replacement value method. The cost price method roughly involves bringing the stock to its present location and value. The market selling value method involves usage of the current stock when it is sold normally, in a particular financial year.The replacement value method involves the cost of the stock to retrieve an almost identical item on the ending day of the financial year.

1. The applicable tax rate for a taxpayer whose taxable income is $45000 is $3572 plus 32.5c for each $1 over $37000. Therefore the tax rate would be [$3572 + 32.5c*($45000 – $37000)]  $6172.
2. PAYG stands for pay as you go. PAYG tax collection system refers to the process where an employer helps his employees or payees in meeting up to their tax liabilities at the end of the financial year by withholding some amount of their respective payments (Kaganovich & Zilcha, 2012).

According to the question, the first cost is payment to tax advisor to complete previous year’s income tax return ($1000) which will be deductible as it is included in the preparation and lodging of the tax return and related activities. The next cost is the amount paid by Ram to his solicitor to draft an objection to an ATO assessment that he received two years ago, which will not be deductible as the maximum time limit within which the objection should be registered with the ATO has passed. Had the payment been done by Ram within the prescribed time limit then the transaction would have been counted under the deductions (De Mooij, 2012). The third cost is the total income tax paid by Ram that is $50000. As nothing is mentioned in the question, it may be assumed that the income tax paid by Ram is of the current financial year. Thus after reducing the total assessable income by the deductions, the amount of tax payable or income tax is arrived at. Therefore no deduction will be applicable for the third cost (Harding, 2013).

According to the given question, on November 11 Tina a twenty year old international student arrives in Brisbane to study at university. Here the key points vital for arriving at a decision in regards to the residency status of Tina is that she is more than eighteen years old and arrives in Australia. Then the next statement mentioned in the question is that she works part time in a local supermarket to help with living expenses and study fees. Her earnings to 30 June are $12,000. Hence the key points that can be inferred from this statement is that she has visited Australia for academic purposes and in order to support her expenses, she has taken up a part time job that which has fetched her $12,000 on 30th June (Shaw, 2012). The last statement is that she does not do well in the assignments and exams and fails all subjects and therefore she returns to her home country. Thus the only key point in the last statement is the total time period for which she stays in Australia that is 11^th November to 30^th June (8 months and 19 days). Though there are many perks of being a resident in Australia like applying for an Australian passport and to travel in and out of Australia without being applied for a resident return visa, participating in elections, and applying for a job in armed forces. But unfortunately Tina will not be able to be a resident of Australia because in order to be a permanent resident of Australia the person applying for being a resident in Australia should stay in Australia for four consecutive years immediately before applying for the same. The person should also be a permanent resident of Australia for twelve months and must not be absent from Australia for a period not more than twelve months before applying. Thus Tina cannot be a resident of Australia because her total stay in Australia is only for 8 months and 19 days. Neither does she satisfy any of the conditions in terms of tenure of stay in Australia nor does she have any intent of continuing her association with Australia as unfortunately she has failed her subjects and returned to her home country. Tina will also have to pay foreign tax as she has earned a certain sum of money in Brisbane (Mabaso, 2012).

In this question, it has been asked to calculate the assessable income of Jimmy who is an Australian single full-time university student and works part time in a restaurant. It has been asked in the question to calculate the assessable income of Jimmy.

Assessable income is any income which is obtained through business or service, even foreign income is also included in assessable income. Essentially assessable income is the income or amount that is considered while calculating taxable income payable by an individual for a particular financial year (Higgins & Sinning, 2013).

 Now the first point that has been given about Jimmy’s income is that the income earned from working in restaurant is $27,000. This entire amount will be counted in assessable income as this is the direct income earned by Jimmy. As mentioned in the question Jimmy also has received tips from customers for $750 cash which will also be included in the assessable income calculations. The third point is that Jimmy gets a bottle of alcohol as a gift from one of the customers worth $250 but Jimmy does not drink so he gives away the bottle to Eva. Now this income will not fall under assessable income as the item of income that is the bottle is passed on to Eva. Had Jimmy accepted the bottle of scotch, then the income would have been included in assessable income because it is a gift related to the work that Jimmy does. The fourth point is that Jimmy receives a gift worth $15,000 for Christmas from his parents. This will not be included in assessable income because the nature of the gift received by Jimmy from his parents is personal (Rahman & Harding, 2014). A personal income is not included in assessable income. The last point is that each month Jimmy’s employer at the restaurant takes all staff including Jimmy out for dinner and the total expense of the food that Jimmy eats on these nights is $645. This will not be included in assessable income because there is no mention of payment of $645 as an allowance to Jimmy by his employer. Therefore without any recorded bill or receipt this income cannot be included in assessable income (Menezes, 2012).

Now the total assessable income is:

In this question it has been asked whether Josie who is a single Australian mortgage broker and arranges for loan from her clients. As it can be understood from the question Josie does most of her work from home. It is also mentioned that home office occupies only 15 percent of the total space in her home (Taylor & Richardson, 2013). The outgoings incurred by Josie are council rates which is a deductible item. The next outgoing is interest on her home loan for 18,900$ which is also a deductible item but not totally, that is, as Josie works from home and only fifteen percent of the total space in her home is occupied by her home office  that is why only fifteen percent of 18,900$ will be deductible (Tran-Nam & Evans, 2012). The next outgoing is electricity and heating costs for $6,800 of which only fifteen percent will be taken into account. The daily wages for cleaning lady will also be deductible but again only fifteen percent of it will be taken into account as only fifteen percent of the total home space constitutes of her office (Kobetsky., 2012). The next outgoings are home telephone and mobile bill, percentages of which are given as to how much are the phone used for business purposes (Whait, 2012).

Calculating Assessable Income for a Full-Time University Student

Therefore the total outgoing that is a deductible expense for Josie is:

The total deductible amount is $17635.

References:

Boccabella, D. (2012). An ordered approach to the tax rules for problem solving in a first Australian income taxation law course can improve student performance. eJournal of Tax Research, 10(3), 621.

Chordia, S., Lynch, A., & Williams, G. (2013). Williams v. Commonwealth: Commonwealth Executive Power and Australian Federalism. Melb. UL Rev., 37, 189.

De Mooij, R. A. (2012). Tax biases to debt finance: Assessing the problem, finding solutions. Fiscal Studies, 33(4), 489-512.

Harding, C. (2012). Who is a resident of Australia?. Concise Collection of Tax Fundamentals, A, 181.

Harding, M. (2013). Taxation of dividend, interest, and capital gain income.

Higgins, T., & Sinning, M. (2013). Modeling income dynamics for public policy design: An application to income contingent student loans. Economics of Education Review, 37, 273-285.

Kaganovich, M., & Zilcha, I. (2012). Pay-as-you-go or funded social security? A general equilibrium comparison. Journal of Economic Dynamics and Control, 36(4), 455-467.

Kobetsky, M., O’Connell, A., Brown, C., Fisher, R., & Peacock, C. (2012). Income Tax: Text, Materials and Essential Cases. The Federation Press.

Mabaso, N. D. (2012). An international comparative study of the effect of personal income tax on labour migration (Doctoral dissertation).

Maples, A. J. (2012). A Super Massive Black Hole: The Tax Treatment of Seismic Strengthening Costs. J. Australasian Tax Tchrs. Ass’n, 7, 123.

Menezes, F. M. (2012). The Business Tax Reform Agenda. Economic Papers: A journal of applied economics and policy, 31(1), 3-7.

Rahman, A., & Harding, A. (2014). Spatial analysis of housing stress estimation in Australia with statistical validation. Australasian Journal of Regional Studies, 20(3), 452.

Shaw, A. (2012). ‘Tax files: Wherever I lay my hat’: That’s my place of domicile. Bulletin (Law Society of South Australia), 34(2), 16.

Taylor, G., & Richardson, G. (2012). International corporate tax avoidance practices: evidence from Australian firms. The International Journal of Accounting, 47(4), 469-496.

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.

Taylor, M. (2012). Is it a levy, or is it a tax, or both?. Revenue Law Journal, 22(1), 188.

Tran-Nam, B., & Evans, C. (2012). Tax policy simplification: An evaluation of the proposal for a standard deduction for work related expenses.

Whait, R. B. (2012). Developing risk management strategies in tax administration: the evolution of the Australian Taxation Office’s compliance model. eJournal of Tax Research, 10(2), 436.

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