Taxation: Deductions, Residency Status, And Assessable Income In Australia

Deductible expenses for Lisa’s office

1: 

Australian taxation has three main functions which is stated below;

1. Economic growth:The government undertakes the policies to prevent the unnecessary variations in economy. The primary function of taxation is applying price controls, implementing policy index for quicker growth of wages. The primary functions of taxation also consists of growth of economy, fiscal and monetary policies as well.
2. Employment growth:The Australian tax policy is implied to manage the demand of goods and service. This helps in lowering the tax rate applied and may result in growth in demand with increase employment opportunities.
3. Stability of price:The primary function of taxation is to regulate price. The estimations states that government multiplier expenditure is positive while the tax multiplier is negative. In the event of price fall in the economy the taxation policies assist in recover of price.

The taxation rulings refers to requisite of declaration made by the commissioner of taxation. The commissioner of taxation is surrounded by rulings which represents that taxpayer being dependent on ruling would not be held wrong in future even though the ruling in future found to be wrong by court. The bindings of the ATO is stated below;

Public ruling: This comprises of applying tax laws on taxpayers namely the TR, TD, GSTD, CR and PR.

Private ruling: This consists of applying of tax laws on specific arrangement where particular taxpayers are required to depend upon.

Oral rulings: This consists of guidance for applying the tax laws on individual taxpayers.

According to the “taxation ruling of TR 98/17” a clarification is provided relating to packaging of items held by wholesaler, retailer of the manufacturer. With respect to “section 70-10 of the ITAA 1997” they are regarded as trading stock. The ruling is applied is items that produced or bought for business activities of taxpayers.

Requirements for registration of tax agents are as follows;

1. A person should not be less than 18 years
2. The person must be proper and fit
3. The person should have sufficient qualification and experience
4. Must maintain the professional indemnity insurance to meet the requirements.  
5. Should provide all the supporting documents and must finish the online application.

Division of ITAA 1997 that provides deductions on capital expenses includes Division 250 and Division 150 of the ITAA 1997.

“Section 25-5 (1) of the ITAA 1997” provides specific deductions relating to;

1. Borrowing expenses
2. Bad debts
3. Repairs
4. Mortgage discharging expenses
5. Expense on parliament election
6. Expenses on pensions, gratuities and retirement allowances
7. Expense on local government election
8. Deductions relating to W-I-P sum

As held in “FC of T v Day (2008)” the court of law held that the legal expenses that was incurred for defending the case of extraneous in carrying out the income deriving activities of the respondents. With respect to section “section 8-1 (1) of the ITAA 1997” the expenses was not occurred in earning the taxable income. The judgement of the court stated the expenses were private expenses and were not allowed for deduction.

A person that receives the amount as compensation for the loss of trading stock, cost involved in acquiring the trading stock is reduced through such compensation. There cannot be any capital gains except the trading stock is sold by the taxpayers.  

A taxpayer with $75,000 taxable income during the year 2017/18 will have an applicable tax rate of $3572 plus 32.5 cents for every dollar over $37,000.

“Section 4-10 (3) of the ITAA 1997” contains the following formula;

Income Tax = (Taxable Income x Rate) – Tax Offsets)

According to “Section 25-10 of the ITAA 1997” a person is entitled to allowable deductions relating to expenses incurred by them on depreciating assets which is held by the taxpayers for  generating taxable income. As defined in “Section 8-1 of the ITAA 1997” a person is entitled to allowable deductions relating to expenses incurred by them in deriving assessable income. Whereas in “section 8-1 (2)(b) of the ITAA 1997” a person is prohibited from claiming deductions on private expenses as these expenses fails to fulfil the criteria of positive limbs. As held in “Federal Commissioner of Taxation v Lunney (1958)” it is vital to ascertain the characteristics of outgoings which is an important prerequisite in deriving the assessable income.

Satya’s residency status and rental income tax consequences

In the present circumstances of Lisa, she occurs expenses relating to office. Lisa reported an outgoings on repairs of leaking roof. This indicates that work carried out to avoid further corrosion represents restoring the efficiency. Hence, the expense of $2400 on repairs shall be classified as permissible deductions. Furthermore, Lisa reports painting expenses of $5,200 that represents reinstating the previous appearance of her office and the same will be held as deductible expenses.

Later it is noticed that Lisa incurs expenses on replacing the wooden flooring and resurfacing of car parking. As stated in “Section 25-10 of the ITAA 1997” an individual taxpayer incurring capital expenses shall not entitled for deductions. As held in “FC of T v Western Suburbs Cinemas Ltd (1952)” the court stated that the cost incurred by taxpayer was improvement and no allowable deductions shall be permitted. Evidently, in case of Lisa, replacement of wooden flooring and restructuring of car parking will be held as expenses of capital nature and represents significant improvement which is non-deductible. Nevertheless, with respect to “section 8-1 of the ITAA 1997” Lisa is allowed to claim allowable deductions immediately relating to gardening expenses.

According to the “taxation ruling of IT 2650” it provides guidelines relating to the ascertainment of whether a person who is leaving Australia on temporary basis to reside in foreign nation shall be held as Australian resident. This comprises of foreign work assignment on temporary basis and for income tax purpose ceases to be held as Australian resident during their overseas stay. As stated under “section 995-1 of the ITAA 1997” resident of Australian usually consists of persons having their domicile in Australia except when the commissioner is satisfied that the permanent place of residence of a person is out of Australia. In the current circumstances of Satya, she was transferred to Hong Kong relating to work purpose for a span of five years. While in Hong Kong, Satya maintained her Australian home and leased the same to generated $40,000 as rental income.

According to “Domicile act 1982” domicile is held as legal concept employed in ascertaining the domiciliary position of a person. The court of law in “Bell v Kennedy (1868)” held that a person holds the domiciliary position of their native country in which they are born except when the person decides to choose domicile in another country. To determine the domiciliary position of Satya reference to “subsection 6 (1)” to consider the intention of Satya where he chooses to make his home indefinitely. A person having the domicile of Australia in spite of residing out of Australia would be able to hold their domicile given the intention of an individual is to return to Australian based on any foreseeable circumstances or after the completion of employment. Similarly in the current circumstances of Satya, none of her residence was abandoned in Sydney and she has neither established residence outside Australia. Presumably, Satya return to Australia at a certain stage of time is held prominent. Hence, Satya will be held as Australian resident for taxation purpose.

Assessable income for Jane

The court of law in “Applegate v FC of T (1979)” stated that the tax liability originates on the circumstances when a person is considered to be Australian resident for taxation purpose. The rental income derived by Satya forms the part of taxable earnings based on income from ordinary concepts.

As stated under “section 6 of the ITAA 1936” an individual deriving income from personal exertion represents, salaries, wages, bonus, gratuities and proceeds derived from the business carried on entirely on their own or through partnerships. As stated in “Section 6-5 of the ITAA 1997” most of the income derived by individual taxpayers are held as income from ordinary concepts. The court of law in “Scott v Commissioner of Taxation (1935)” held that relevant principles are implemented in ascertaining how majority of the receipts are held as income under the ordinary concepts that are in the use of mankind. An item having the nature of income when those income comes home for the taxpayers. An item possess the nature of income when the same is obtained by taxpayers based on realisable value.

In the current situation of Jane, she works as a nurse in hospital and income earned from working in hospital is regarded as income derived from personal exertion. With respect to “section 6-5 of the ITAA 1997” Jane income from working in hospital is referred as the ordinary income and forms the part of taxable income.

Accordingly, a mere windfall is not held as income. This comprises of winnings from gambling except when a person is performing the business of gambling. As understood in the situation of Jane, she received a sum of $20,000 from betting in horse race. Such winnings constitute a mere windfall gain for Jane and cannot be classified as income. Referring to judgement made in “Moore v Griffiths (1972)” the court held that mere prize winnings is not an income.

An important fact to denote is that gains in the form of mere gift is not held as income. As understood from the situation of Jane she received a cash gift of $30,000 in her birthday from her brother which cannot be classified as income and it is not held for tax purpose. The judgement made in “Hayes v Federal Commissioner of Taxation (1956)” stated that receipts of share by an accountant from the previous business owner is not held as income.

Similarly referring to the judgement in “Scott v Federal Commissioner of Taxation (1966)” stated that receiving 10,000 pounds in the form of gift from the wife of a client from her husband estate cannot be classified as income. Similarly, gifts received by Jane on her birthday by her brother will not be held as income. However, Jane derived income from painting sale and the same shall be classified as element of taxable income which would be held liable for taxation.

Allowable deductions for James’ work expenses

Rental income constitute the full amount of rent and the associated payments which a person receives on renting out the property. The rental income derived by a taxpayer must be declared while filing tax return. Similarly in the present circumstances of Jane the rental income received by her from the property that was rented out forms the part of assessable earnings.

The present issue is related to ascertaining the expenditure incurred by James that would be allowed for deductions. As understood from the current circumstances of James, he works in a school and reports some expenses for the year 2016-17. As evident an expenses occurred by James for travelling to Canberra relating to job interview. As stated in the legislative response of “section 25-100 of the ITAA 1997” a person is entitled to allowable deductions for expenses incurred in traveling between two workplaces.

The travel expenses incurred by an individual must be directly associated between two place of work where income is produced and neither of the place is the home for taxpayer. As held in “Lunney v Federal Commissioner of Taxation” travel between home and a person’s work places is held as private and non-deductible expenses. According to “section 8-1 of the ITAA 1997” travel among two unconnected workplaces is non-deductible. Similarly, the traveling expenses incurred by James for interview is a non-deductible expenses.

James reported an expenditure of $3,000 relating to relocation to Canberra. As defined under “section 8-1 (2) (b)” a person is prohibited from claiming allowable deductions relating to expenses that are personal or of domestic nature since these expenses are non-deductible neither under positive limbs non under second negative limbs. Referring to judgement made in “Fullerton v Federal Commissioner of Taxation” expenses occurred by taxpayers in relocating from city to another was held as non-deductible expense because deductions are not allowed for personal or domestic arrangements. Therefore, the expenses of $3,000 incurred in relocating by James is a non-deductible expenses.

“Section 8-1 of the ITAA 1997” allows a person to claim deductions for expenses that are incurred for work purpose. However, an individual is only allowed to claim deductions for such expenses provided the taxpayers has kept appropriate records for work expenditure. James reported expenses on telephone that were related to work and the same is incurred in producing taxable income. With reference to “Section 8-1 of the ITAA 1997” James would be allowed to claim allowable deductions for work purpose expenses.

According to “section 8-1 (2) (b), expenses that are private in nature or possess the characteristics of domestic arrangement that fails meet the eligibility of both the positive limbs or rules of second negative limbs are not allowed as allowable deductions. Similarly, James reported an expenses relating to purchase of meal from school canteen. Therefore, these expenses is classified as personal expenses and no deductions can be claimed in this respect.

In the later part of the case it was found that an expenses on traveling to and from work was reported by James. As stated in “section 25-100 of the ITAA 1997” an expenditure would be only allowed as deductions given the expenditure is occurred between two work places where the activities of generating income is carried on with neither of the places is held as home for the taxpayer. Similarly in the event of “Federal Commissioner of Taxation v Payne” the taxation commissioner denied the taxpayer to claim deductions relating to expenses occurred between home and work place. Referring to “section 8-1 of the ITAA 1997” the taxation commissioner stated that traveling expenditure amongst two unconnected work places is held as non-deductible expenses. As evident in the case of James, the travel expenses occurred to and from work is non-deductible expenses.

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