Taxation And Deductions In Australia: Cases And Analysis

Ram’s Taxation Costs and Deductibility

1: As per the constitutions of Australia the main sources of commonwealth parliament power of taxation is derived from the sections 51(ii), 53, 55, 90 and 96. As stated in Section 51(ii) of Australian Constitution, parliament has the power of making laws in regard to the taxation (Pinto, 2011). Subject to the provision the laws does not create discrimination between the states or the parts of the states.

2: Primary source refers to the written documentations that sets out the law. Primary sources comprises of the case laws from court decision, or by laws that is created by the statutory body (Woellner et al., 2016). These primary sources are derived from the institutions or body that created the law and the institutions is responsible for the single authoritative written record of that law. In Australia case laws forms the second source of tax for interpreting the legislation such as court judgement, tribunals etc. The taxation rulings form the third source of taxation defined by the commissioner of taxation.

3: The taxation ruling of TR 98/17 is concerned with the interpretation of the ordinary meaning of the word resides within the definition of the resident defined under subsection 6 (1) of the Income Tax Assessment Act 1936 (Barkoczy, 2016). 

The ruling is applicable to the most individuals that are entering Australia including;

i. Migrants entering in Australia

ii. Academics teaching or studying in Australia

iii. Visitors that are on holiday; and

iv. Workers having pre-arranged employment contracts  

4: Medicare Levy and Medicare Levy Surcharge or any reductions are computed from the information that is provided in the tax return (Snape & De Souza, 2016). The Medicare levy calculations enable an individual to compute the Medicare Levy for the past four income years by taking into the considerations any entitlement to the reduction or exemption. An individual tax payer is required to pay an Medicare levy at the rate of 2 per cent to partially fund for their health care access.

5: As stated under the Schedule 2 of the Competition and Consumer Act 2010, any kind of misconduct, which is descriptive or artificial, will be excluded in Section 18 of the Australian Consumer Law. Prevention of deceptive and artificial demeanour of fiscal service is stated under the Section 12DA of the Australian Securities and Investment Commission Act 2001. The main objective of these principles is to provide protection and security to the customers from being misguided of the misleading trade practices (Braithwaite, 2017).  

Tina’s Residential Status for Taxation

6: As it has been defined under the Section 25-45 of the ITAA 1997, it deals with the loss that originates from the theft (Cao et al., 2015). The section evidently lay down the treatment of loss concerning the loss of money which shall not be regarded for deductions;

i. If a person ascertains the loss in the income year

ii. If the loss that is ascertained is derived from the activities as a theft, defalcation etc.

iii. The amount must be engaged in the chargeable income of the individual or may be in the previous year of income.

7: As defined in the case of W Thomas & Co Pty Ltd v FC of T (1965), it deals with the deductions which can be claimed by the tax payer for the repairs undertaken. From the case study it is understood, the taxpayer is the flour miller and grain merchant that purchases a building and some of the parts that were in broken conditions (Saad, 2014). The taxpayer payer undertook the huge amount of repairs of work which comprised of the roof, walls and floor of the premises. The taxpayer in the present case claimed for the deductions regarding the cost incurred in repairs. Therefore it can be determined that the sum incurred in repairs undertaken cannot be regarded as the allowable deductions because the expenditure was not incurred with the objective deriving chargeable income of the taxpayer.

8: To value stock the taxpayer is required to consider the below stated method of valuing stock at the end of the income year during which it was occurred;

i. The taxpayer will be take on the method of cost price so that they can value the stock by aligning the related stock at the current location and situation

ii. Market selling value that makes the use of the stock if it sold in ordinary course of trade.  

iii. Procedure of substitute cost where the price to purchase is identical

9: A person having a taxable income of $45,000 during the year will be required to pay a tax of $3572. Furthermore, the taxpayer shall be under obligation to pay 32.5 for every $1 over $37,000.

10: The employer and other taxpayers can refer PAYG as “Pay As You Go” which consists of making payment on regular interval to the employee. To collect the PAYG tax an instalment method of tax collection is followed so that a regular payments towards the expected income tax liability of an individual (Dunne et al., 2015). A person that is paying PAYG in instalments will be under obligation to file the return for that year.

Jimmy’s Assessable Income and Deductions

As it has been stated under Division 8 of the Income Tax Assessment Act 1997 it lay down the guidelines which is associated with the deductions of expenses and losses. The division provides assistance in making differentiation in between the usual deductions in regard to the discussion that is made under the section 8-1 of the ITAA 1997 (James, 2016). It also provides guidelines for the particular deductions which can be provided under section 8-5 of the ITAA 1997. An individual taxpayer with reference to section 8-1 of the ITAA 1997 can be to claim for deductions relating to the loss or expenditure that has been incurred relating to the;

1. Deriving any assessable income
2. Expenses that is associated with the trade activities of the individual taxpayers

A taxpayer is provided the opportunity of claiming specific kinds of deductions from the assessable income in reference to section 8-5 of the ITAA 1997. As it is has been observed from the scenario of Ram, he has incurred three types of expenses and characteristics of deductions is explained in the above stated income. An individual taxpayer that have incurred cost in management of tax affairs can be considered as permissible deductions under Section 25-5 of the ITAA 1997. Therefore, an individual taxpayer at the time of filing tax return can claim for the deductions concerning the cost that has been incurred in accounting and fees incurred for the tax agent. As it has been evidently found Ram incurred the solicitor expenditure in order to draft an objection against the assessment.

As it has been understood from the evidence stated under the Para 11 of the Taxation Ruling 2011/5 an individual taxpayer can raise an objection on not being content with regarding tax assessment illustrated in section 175A(1) of the Income Tax Assessment Act 1936. The Interpretive Decision 2002/814 is associated with the issues that is linked with the deductions of allowable expenditure arising from the disagreement of legal or book-keeping expense with the tax authorities (Fry, 2017). Ram in the present situation can claim allowable deductions under section 8-1 of the ITAA1997 for solicitor expenses incurred by him.

Computations of Allowable Deductions of Ram

The term resident has been defined in section 995-1 of the ITAA 1997, that illustrates, a person to be treated as Australian resident for taxation purpose. As it has been defined under the Section 6-1 of the ITAA 1997, it provides explanation of resident and states the primary test in determining the residential status of the person. As it has been defined in Para 32 of the Taxation Ruling 98/17 a person will be treated as resident of Australia in conformity with the section 6-1 of the ITAA 1936.  There are four types of residency test in determining the residential status defined under Section 6-1 of the Income tax Assessment Act 1936. These tests are as follows;

1. Residential status in regard to the ordinary concept
2. Domicile test
3. 183 days test
4. Superannuation test

Josie’s Deductible Home Office Expenses

The taxpayer was the international student arrived in Brisbane for the purpose of study and will be regarded as the Australian occupant for taxation purpose in regard to the ordinary concept. If a person is not treated as an Australian inhabitant concerning the ordinary concept then statutory test is applicable in ascertaining the status of occupancy and on meeting the conditions of primary test an individual will be treated as an Australian occupant (James, 2016).

In accordance with the domicile test a person having a permanent place of dwelling in Australia will be regarded as the occupant of Australia for taxation purpose (Ato.gov.au., 2017). On the other hand, the rule of 183 days laid down that a person to be considered as an Australian occupant, the person must have been living in Australia for a phase of not less than six months either regularly or in breaks.

The superannuation test is applied for the employees of the Australian government that are employed in international service. The law additionally states that a taxpayer will be considered as the occupant of Australia if the person is enrolled in a course that has more than six months of duration (Barrett & Elsayed, 2014). From the current case study of Tina, it has been noticed that she arrived in Australia for education purpose and her period of stay was for more than 183 days. Therefore, as a result of this Tina will be regarded as the Australian occupant for the taxation purpose.

As it has been stated in Section 4-15 of the ITAA 1997, an Australian resident is tax for the incomes derived from everywhere across the world. As explained under the section the taxable income of an individual is computed by subtracting the expenses that are allowed as allowable deductions from the assessable income (Russell, 2016). As it has been noticed categorization of the assessable income as the ordinary income is defined under Section 6-5 of the Income tax Assessment Act 1997. On the other hand, statutory income is defined under the section 6-10 of the Income tax Assessment Act 1997. As per the section 6-10 of the ITAA 97 incomes that dot not fall under the ordinary income are taken into the consideration as the statutory income (Ato.gov.au., 2017). As evident from the current scenario of Jimmy, income that is derived by him from his employment in restaurant will be considered under the ordinary income and will be accountable for taxable purpose with reference to section 6-5 of the ITAA 97.

Tips received by Jimmy from the customers are considered as incentive and has direct relation with his employment income, which will indeed form the part of his assessable income (Barkoczy, 2016). The receipt of sum in the form of gift by a person will not be regarded as taxable purpose. As it has been found from, the case study that Jimmy received a gift of $250 will be regarded as taxable income and will be included in the assessable income of Jimmy. It is noteworthy to denote that there are some types of income that are required to be declared in the assessable income of the taxpayer since they are usually regarded as exempted income and are not considered as income under section 6-20 of the Income Tax Assessment Act 1997.

Gifts does not forms the part of the taxable income but on being received as the portion of business activity or received from the income producing activity then it will form the part of the taxable income (Ato.gov.au., 2017). On the other hand, gifts that are received from parents are not held for taxable purpose because they are not linked with any income of business activities. As it has been defined under the Taxation Ruling TR 97/17 that food and drink, which is offered or provided by the employer to employee, will be regarded as meal entertainment and will be considered for the purpose of fringe benefit taxation.

This states that the benefit provided by Jimmy from his employer will be considered as the fringe benefit and the employer on the other hand would be allowed claim as the allowable deductions for expenses occurred on the employees. The income produced by Jimmy from his employment will be considered as for taxable purpose and the fringe benefit of food and meal will be regarded in the fringe benefit offered to him by his employer. Therefore, it is understood that the fringe benefit of dinner from his employer will be considered in the assessable income. The computation of taxable income are stated below.  

Computation of Assessable Income

Table 3: Assessable Income

(Source: created by Author)

The taxation ruling of Taxation Ruling TR 93/30 is concerned with the deductions that are allowable for home office expenditure. The ruling provides that;

1. When the area of the home is taken into the consideration as a private study
2. When the area of the home is regarded to be a place of business
3. The deductions of repairs under section 25-10

As the general rule of the taxation ruling Taxation Ruling TR 93/30, expenses that is linked with the taxpayers home are considered as private or domestic character and does not qualify in the form of deductions for the purpose of taxation (Ato.gov.au., 2017). However, there is an exception to this rule is that where the part of the home is used for the purpose of generating income and possesses the characteristics of the “place of business”. In such conditions the expenses that is occurred in regard to the home such as rent, interest, repairs house and contents insurance might be partially considered for deduction.

As evident from the present case study of Josie her home office forms the part of most of the work. As held in the case of Swinford v FC of T (1984) if the area of the home has the character of place of business then the expenditure associated with that part of the home can be considered as business like character and are allowable as deductions (Ato.gov.au., 2017). Therefore, Josie can claim the expenditure as the allowable deductions for her expenditure that is occurred by her from home office.  

Computations of Allowable Deductions of Josie

Table 4: Allowable deduction

(Source: created by Author)   

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