Extension Request Procedure for Assignments
As per “section 6-5 of the ITAA 1997” a business that derives is regarded as ordinary income. In order to characterize the receipts as the ordinary income derived from the business activities involves ascertaining whether a business is being carried on by the taxpayer or whether the receipts are treated as the normal proceeds of the business activity (Pinto 2013). The legislative response of “section 995-1 of the ITAA 1997” defines business as carrying on of any profession or trade but does not comprises of any occupation as the employee.
In the existing case of Bruce, assessment of receipts and expenses would be conducted to determine the tax liability for the income year ended 2017. In order to characterize the receipts as the normal proceeds of the business the receipts must hold necessary nexus with the identified business activity (Woellner et al. 2016). A receipts obtained through the normal proceeds of the business constitutes ordinary income under “section 6-5”.
Quoting “section 6-1 of the ITAA 1936” personal exertion income obtained through the proceeds of the business conducted by the taxpayer either alone or with partner it is treated as assessable income under the ordinary concept (Edmonds 2018). As obvious the facts obtained from the situation of Bruce reveals that he obtained receipts from the legal fees. The receipt of legal fees by Bruce amounts to receipts obtained from the normal proceeds of the business. The receipts hold sufficient nexus with the identified business activities of Bruce and would be held ordinary income under “section 6-5”.
An individual that earns income through the personal services will be treated as the ordinary income based on “section 6-5”. Citing the case of “Kelly v FCT (1985)” nexus is not effected on receipt of lump sum or any one-off receipts and it is irrelevant who pays or when it is paid (Burton 2017). “Section 6-5” states that a taxpayer deriving receipts from the investment property is treated as income.
A gain which is most likely to be periodic or regular in nature is most likely to be treated as the ordinary income. In “Black v FCT (1984)” receipts that are regular are characterised as income (Peiros and Smyth 2017). Bruce reported the receipts of rental income derived through rental property. The receipts constitute regular or periodic receipts and will be considered taxable under the ordinary concepts of “section 6-5”. Bruce received a sum of $10,000 as the rental income. The lease rental income by Bruce is an ordinary receipts and should be included in determining the tax liability.
Step by Step Guide to Calculate Tax Liability
As defined by the Australian Taxation office notwithstanding of whether the taxpayer is engaged in one or more than one service or working in a full time or part time, it is obligation of an individual taxpayer to include those incomes from the employment at the time of filing tax return. Citing the reference of “Dean v FCT (1997)” taxpayer receiving employment receipts attracts tax liability (Buchanan and Consett 2016). Therefore, the part time employment receipts obtained through part time university lecture is treated as employment receipts. Referring to “section 6-5” these receipts would be taxable as ordinary income.
“Section 44 (1)” requires a taxpayer to declare dividend income while filing tax return. A taxpayer obtains dividend from listed firms, publicly trading trust and corporate trust unit. There are few dividends in which franking credits is attached and a tax offset can be claimed while filing return (Brydges and Yuen 2018). The receipt of dividends from the investment made by Bruce will be is a taxable earnings and the franking credits attached to the dividends can be used to reduce the tax liability.
An Australian resident that obtains income from the financial bank or term deposits should be held as income. Interest income that is obtained from bank or any term deposits should be held as assessable income (Saad 2014). The tax liability arises when an individual taxpayer is obligatory required to include into their tax return the interest income. As obvious, interest income that is obtained by Bruce from the bank account is held as the chargeable earnings and attracts tax liability.
The general deduction provision of “section 8-1” provides the taxpayer with the deduction for the expenditure. “Section 8-1” is applied on any taxpayer. An expense on loss will be held deductible under “section 8-1” and under specific provision (Maley 2018). An expenditure that is private or domestic in nature will not be considered as allowable deductions since it does not satisfy either of the positive limbs and not deductible under the second negative limb of “section 8-1 (2)(b)”.
An expense associated to office rent, cleaning contractor and salary of employee was reported by Bruce. Denoting the judgement of “FCT v Amalgamated Zinc Ltd (1935)” expenses occurred for generating assessable income is allowed for deductions under positive limbs of “section 8-1” (White and Townsend 2018). The incurrence of office rent, cleaning and staff salary are business expense occurred in producing the chargeable income inside the scope of positive limbs of “section 8-1”.
Understanding Different Types of Income
According to the Australian Taxation Office outgoings that are occurred for the purchase of equipment or tools and any other assets which is directly related to producing income, the taxpayer in such circumstances can claim deductions either full or in parts of the equipment purchased (Faisandier 2018). The Australian taxation office states that an item of equipment with a cost base of less than $300 is liable for deductions immediately. The calculator was purchased for business use with the cost base of less than $300. Therefore, Bruce can claim allowable deduction for the same.
As per ATO, meals and food to clients are observed as business entertainment expense. Correspondingly, Bruce reports an expenses for meal of his client. The expenses on client meal will be treated as the business deductions (Burton 2018). Conversely, Bruce reports expenses of food and meal on himself. Under “section 8-1” these expenses will not be allowed as deductions since it is personal expense.
The court in “FCT v Lunney (1958)” held that it is necessary to recognize the crucial character of outgoings or losses that forms a vital prerequisite in obtaining assessable income. The travel between home and the taxpayers usual place of work is usually not allowed for deductions (Swan 2018). Referring to the legislative response of “section 25-100 of ITAA 1997” permits the taxpayer to claim deduction relating to expenses of travel amid the workplace. The travel should be directly amid the two places where the income generating activities are performed with none of the place is home for taxpayer.
The court in “Payne v FCT (2001)” denied the taxpayer with the deduction for travel expense amid his home and the workplace (White and Townsend 2018). Travelling between two unconnected workplaces is not allowable deductions under “section 8-1”. Bruce occurred expenses for travelling between home and his workplace. The expense constitutes private in nature and no dedications can be claimed by Bruce under “section 8-1”.
“Section 8-1 (2)” denies the taxpayer from claiming deduction for any loss or outgoing under this section if the expenses are of capital or domestic in nature (Peiros and Smyth 2017). Expenses that are not incurred in gaining the assessable income is not allowed for deductions as they fail to meet the deductibility criteria defined under the positive limbs. Bruce reports an expense on electricity and rates for his family home. These are domestic expenses and not deduction is permitted because it fails to meet either of the positive limbs and non-deductible under the second negative limbs of “section 8-1 (2) (b) of the ITAA 1997”.
Claiming Deductions
“Section 8-5 of the ITAA 1997” provides that a taxpayer can claim specific deductions when the provision of the income tax legislation enables the taxpayer with the deduction (Saad 2014). Taxpayer’s that incurs expenses for managing their tax affairs are allowed to claim deduction under “section 25-5 of the ITAA 1997”. Bruce reports expenses on tax agent fees. The expenses incurred is allowed for specific deductions under “section 25-5”.
Expenses incurred on the rental property is allowed for deductions when the property is let out for rent or available for rent. An expenses relating to rates was reported by Bruce on the rental property (Blakelock and King 2017). Furthermore, interest on loan was also incurred by Bruce for rental property. Quoting “Amalgamated Zinc Ltd v FCT (1935)” Bruce can claim deduction for the rental property expenditure under “section 8-1” as these expenses are occurred while generating the assessable income.
As per “Section 25-10 of the ITAA 1997” cost incurred for notional repair is not deductible expenses. Referring to “Inland Revenue Commissioners v Shipping Co Ltd (1923)” the court denied the taxpayer for undertaking initial repair on the property acquired since these expenses amounted to capital expenses and non-deductible in nature (Peiros and Smyth 2017). Bruce incurred costs repainting the property that was initially acquired. The costs should be treated as capital in nature since it is occurred in remedying the defects in the investment property before sub-letting. The initial repair expenses did not arise from Bruce own use of property. Therefore, a deduction is not allowed to Bruce for repainting the property.
“Section 25-10” allows the taxpayer to claim deductions that is occurred in replacing a part of the investment property damaged in storm. Bruce occurred an expense for replacing a portion of the roof that was damaged from storm (Brydges and Yuen 2018). With reference to “section 25-10” Bruce will be allowed to claim deduction for cost incurred in replacing the roof of the property as the investment property was held for producing assessable income.
A taxpayer is not allowed to claim deduction where an improvement made surpasses the character of repair and changes the original nature of an item. Where work results in substantial improvement, addition or alteration cannot be held as repair as and deductions are not permitted under “section 25-10” (Peiros and Smyth 2017). Cost incurred in extending bathroom on the rental property give rise to substantial improvement. Hence, a deduction in this regard is not allowable under “section 25-10”.
As obvious from the computations performed above Bruce total taxable income stands $302,010 with total tax payable of $99606.85. A carry forward of loss incurred in previous year and can be bought forward to offset the tax liability. As Bruce has no private health insurance therefore a Medicare levy surcharge of 1.5% will be added to overall taxable income.
References:
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Brydges, N. and Yuen, K., 2018. A matter of trusts: Trusts, income tax, CGT and foreign residents. Taxation in Australia, 53(2), p.80.
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.
Burton, M., 2018. Extending the tax expenditure concept in Australia.
Edmonds, R., 2018. Resource Capital Fund IV LP: the issues on appeal?. Taxation in Australia, 53(1), p.22.
Faisandier, A., 2018. Consolidation, deductible liabilities and meat loaf-style reform. Tax Specialist, 21(3), p.125.
Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor’s commission. Taxation in Australia, 51(7), p.394.
Pinto, D., 2013. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Swan, P.L., 2018. Investment, the Corporate Tax Rate, and the Pricing of Franking Credits.
White, J. and Townsend, A., 2018. Deductibility of employee travel expenses: The ATO’s guidance. Taxation in Australia, 52(11), p.608.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue
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