Overview of the Australian Taxation Office
The purpose of taxation is to raise revenue in order to meet government expenditure. The Tax office is Australia administers taxes, excise ad superannuation legislations. The broad issues which are faced by Australian revenue system is addressed by the tax office. These issues include persistent tax debtors aggressive tax planning, the cash economy and globalization. The Tax office ensures that the tax which is levied in the society is balanced according to the needs of the society and government expenditure.
Rulings are the authoritative interpretative guidance which are regularly provided by the Australian Taxation office. It is a form of advice which the ATO issues to explain tax law applications to tax payers. Rulings can also be described as a written interpretation of tax laws which a tax player may legally rely upon.
The Taxation Ruling TR 98/7 deals with the question that whether packaging goods like labels and containers which are in possession of the manufacturer, retailer or wholesaler are trading stock. The ruling provides an explanation in relation to the situation in which items which the manufacturer, retailer or wholesaler holds are trading stock within the meaning of section 70-10 of the Income Tax Assessment Act 1997.
An individual who is seeking registration as a tax agent in Australia must have the following requirements
- They must be of a minimum age of 18 years
- they have to be fit and proper individuals
- the qualification and experience requirements has to be satisfied by them
- a personal indemnity insurance according to requirements has to be maintained
- all supporting documents in relation to the online applications must be available
The divisions of the ITAA 1997 which provide for deduction in relation to capital expenditure are division 43 and divisions 416.
Section 25-5(1) of the ITAA provides that expenditure which is incurred in relation to the management of tax affairs or acting in accordance with an obligation which is imposed through a commonwealth legislation to the extent the obligation is related to tax affairs of a entity are to be deducted. This section also includes general interest charge, Penalty under subdivision 162-D of the GST Act, obtaining valuation as per section 30-212 or 31-15 or medical levy under Major Bank Levy Act 2017.
In this case it had been provided by the court that legal expenses which a taxpayer has incurred in order to defend a disciplinary proceeding initiated by the employer is not to be considered as a an outgoing which is of a domestic or private nature. This will happen when the expenses are incurred by an individual for the purpose of producing or gaining his assessable income and which would satisfy paragraph 8-1(1)(a) of the ITAA 1997.
Provisions in relation to receipt of compensation payments for the loss of trading stock have been provide through the case of Federal Commissioner of Taxation v Wade – [1951] HCA 66. It had been ruled in this case that any compensation which is received for loss of a trading stock is of an income character as it is a revenue asset.
Importance of Tax Rulings
The applicable tax rate for tax payers who have $75,000 taxable income in 2017/18 is as follows
Till 18200-NIL
Till 37000- $3572 @ 19% over 18200 till 37000
Till 75000- 3572+32.5 (37001-75000)
The formula under 4-10 provides for calculating Net Tax Payable. The formula provides that income tax is equal to the net taxable income (As per section 4-15) multiplied by rate of tax and then deducted by tax offsets.
The provisions in relation to whether a repair would be included as a deduction are provided through the provisions of section 25-10 of the ITAA 1997.
In the case of W. Thomas & Co. v Commissioner, 14 ATD at p.87it had been held by the court that the cost of repairing a roof was an expenditure of capital nature. However in the given situation it has been providing that a leaking room is repaired which would be a maintenance and not capital expenditure. Thus the expenses of $2400 are deductible under section 25-10 of the ITAA 1997.
In this case it has also been held by the court that the painting of rooms would be of a capital nature as it is not a regular maintenance which is cause of use for revenue. The rule is also provided by TR 97/23. If the painting of wall worth $5200 is for the first time it would be a capital expenditure and if not than it would be a revenue expenditure which is deductible.
In the case of Lurcott v. Wakely & Wheeler [1911] 1 KB 905 it has been stated by the court that the repair to the property may include replacement or renewal of subordinate parts. Whether the replacement is in relation to a change of defective part or substantially the whole is analyzed to determine the difference between revenue and capital replacement. In the same way if the replacement of the wooden flooring is for remedying a defect that it is deductible and not otherwise.
According to TR 97/23 example 14 the resurfacing of the parking would be considered revenue expenditure and thus be deductible for income tax purpose as the parking is used by clients who provided for the assessable income of the business.
The expenses incurred in relation to gardening expenses would be regarded as capital expenditure as they do not directly result in acquiring the assessable income as per section 25-10 of the ITAA 1997.
Key Provisions and Formulas in the ITAA 1997
Whether a person is an Australian Resident for Tax purpose is determined by applying legal tests. These are commonly the Domicile test, the ordinary concept test and the 183 day test. However all these test depends upon the fact that whether the person is physically residing in Australia or not. Even if the person is a visitor as the duration regularity and frequency of visit is analyzed as per IRCN v Lysaght [1928] case. In the given situation it has been provided that Satya had been transferred to Hong Kong on 23rd July and thus he has been in Australia only for less than a month for financial year 2016/17. This means that for this year his primary place of adobe is not in Australia and he is not an Australian resident for tax purpose within the meaning of section 6(1) of the ITAA 1936 and also as per the application of the different test.
However it has been provided through s6-5(3) of ITAA97 that a foreign resident in relation to tax purpose will be taxed on income which is generated from Australian sources only. Satya derives rental income of $40,000 from his house in Australia and thus this income would be taxable in Australia. Thus any income which is gained for renting out a property in Australia is to be assessed for the purpose of calculating the income tax of a person. In this situation Satya not being an Australia resident for tax purpose is liable to pay tax on $40000 earned by him as rent from his Sydney home under the provisions of s6-5(3) of ITAA97.
- In the givens situation the income which has been earned by James for working in the hospital is an ordinary income and thus assessable for tax purpose as provided by the case of Brent v FCT (1971). This is because there is a clear nexus between the services of James and the income received by him. Thus $7000 would be assessable income for James.
- It has been provided by the court in the case of Kelly v FCT (1985) that chance winning and prizes are not assessable income if they are a result of a windfall gain and have been derived by luck. However they will constitute an ordinary income of they are derived by use of a degree of skill which overlaps luck. The provisions were also discussed by Vandenberg v Federal Commissioner of Taxation (NSW) (1933) 50 WN (NSW) 238 case. It has been provided in the scenario that James bets on horse racing every weekend however there is no skill involved in the given situation thus his income of $20,000 would not be assessable income.
- In the case of Laidler v Perry (1965) it had been ruled by the court that a gift would be considered as an ordinary income where it arises from the taxpayers’ ability to work or from employment contract and thus gifts for personal qualities are not to be considered as ordinary income. However it has been added by the ATO that gifts of a large amount are taxable but what is the large amount has not been specified. This in the given situation as James has received a gift of $3000 from his brother for his birthday it is for a personal quality and not an assessable income.
- It has been stated through section 6-5 of the ITAA 1986 that any income in relation to business is an ordinary income. Income from a hobby is not considered as an ordinary income unless it has a business purpose. Whether the activity is done for the business purpose is determined through the application of tests provided in Ferguson v FCT (1979). Where there is an intention of making profit the hobby is regarded as a business as per Stone v FCT (2005). In the given situation where James has sold his paintings it can be stated that he had a commercial intention of making them. Thus the income would be assessed for the year.
- Rent which has been received by a party is treated as an ordinary income even where it is provided in a lump sum under section 6-5 of the ITAA 1986. Thus the rent received by James from the rental property worth $20800 would be a taxable even where it is received in lump sum.
It has been provided through the provisions of section 8.1 of the ITAA 97 that expenses which are incurred for the purpose of gaining are the assessable income are deductable against the income for tax purpose unless such expenses is of a private nature.
- Traveling for the purpose of giving an interview which was worth $800 cannot be considered as a deductible expense as it is not in relation to an employment activity. This is because he was not an employee when he was traveling and deductions can only be claimed for work related issues
- It has been provided by Tax Ruling TR 2017/D6 that the expenses which have been incurred by the employee in relation to relocation for working and residing away from home to work are not considered as deductible expenses. Thus the relocation cost which has been incurred by James of $3000 to relocate to Canberra from Sydney is non-deductible.
- According to the provisions of section 8.1 of the ITAA 97 expenses which are incurred for the purpose of work related activities by the employee are eligible for deductions. Thus the use of phone calls by James worth $700 for the purpose of work related issues is also eligible for being deducted from his assessable income.
- As per According to Taxation Ruling TR 2017/D6 in order to claim meal expenses the employees need to show that they has to travel overnight for work purpose. In the given situation as James has purchases the meal from office canteen worth $1000 it cannot be a deductible expense.
- According to Tax Ruling TR 2017/D6 the expenses which have been incurred by an employee in relation to travelling from their home to a regular location of work are not deductible expenses. Thus the expenses incurred by James for traveling to and from work worth $480 are non-deductible.
Thus form the above analysis it can be states that the total deductible expenses from James assessable income for the year are as follows:
|
Total Deductions of James |
|||
|
Particulars |
Amount |
||
|
Telephone expenses |
$700 |
||
|
Total Deductions |
$700 |
References
Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).
Brent v FCT (1971)
Federal Commissioner of Taxation v Wade – [1951] HCA 66
Ferguson v FCT (1979)
Income Tax Assessment Act 1986 (Cth)
Income Tax Assessment Act 1997 (Cth)
IRCN v Lysaght [1928]
Kelly v FCT (1985)
Laidler v Perry (1965)
Lurcott v. Wakely & Wheeler [1911] 1 KB 905
Robin & Barkoczy woellner (stephen & murphy, shirley et al.). australian taxation law 2018. oxford university press, 2018.
Stone v FCT (2005)
Taxation Ruling 97/23
Taxation Ruling TR 2017/D6
Vandenberg v Federal Commissioner of Taxation (NSW) (1933) 50 WN (NSW) 238
Woellner, Robin, et al. Australian taxation law. CCH Australia, 2012.
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