Taxation Law Assignment: Income, Deductions, And Tax Liability

Taxable Income and Non-Cash Business Benefits

1. Income should come in and it should be money or it must be convertible in money. To classify anything as income, it should “come in” to the taxpayer and it needs to be received by taxpayer as money or it is received in a form which can be converted in money otherwise it cannot be considered as gain for tax purpose. As per the “sec 21A of ITAA 1936”, it provides that any sort of non-cash business benefits should be treated as convertible in cash in order to determine the assessable income of taxpayer from carrying on a business activity (Barkoczy, 2016). As defined in “sec 21A (5) of ITAA 1936” the non-cash business benefits involve a property and services that is provided in regard to business relationship.

As per the “sec 21A of ITAA 1936” it does not consider any benefit received as property or services to be income (Sadiq, 2020). The main effect is that the non-cash benefit is already treated as income which is obtained from doing any business. Accordingly, “subsection 21A (2)” states that the amount which should be taken into consideration must be the amount that the taxpayer would have paid the provider for property or services on the basis of arm’s length transaction.

The client in the current circumstances has received a holiday trip that involves airfares and hotel accommodations worth $20,000 from his supplier after selling huge amount of shirts. The holiday trip of $20,000 received by the client will be considered as a “non-cash business benefit” which is delivered in respect of professional relationship. Therefore, in “sec 21A of ITAA 1936”, the sum of $20,000 will be included in the client’s assessable income.

2. Interest is regarded as the return that simply runs from lending the cash and it is considered as the reward regarding the loss of usage of that sum (Shome, 2021). Accordingly, “Riches v Westinster Bank Ltd (1947)” receiving of interest is regarded as an ordinary income within “sec 6-5 ITAA 1997” (Anderson et al., 2016). Interest is normally derived when it is received.

As evident in present circumstances, David reports receiving interest of $257.50 in August 2022. The taxpayer in the current situation follows cash basis and hence the interest is derived only when it is received. Therefore, the interest is not derived by him for the year income year ended 30^th June 2022. Hence, he must include the sum of $257.50 for the income year ended 30^th June 2022 because it was derived by him in that year only and he is not required to pay income tax for 30^th June 2022.

3. As mentioned under the “sec 25-35 of ITAA 1997” a debt is “written off” as a bad assuming that the official accounts provide a suggestion that the amount will not be any more recovered (Kenny & Devos, 2018). Provisions for doubtful debts that might be recoverable cannot be considered as an allowable deduction. The debt ought to be “written off” as a “bad debt” in the current “income year” and the amount is contained within in the assessable earnings. The taxpayers are only permitted to claim deductions for bad debt when an accrual method is followed by them.

Interest and Tax Liability

Similarly, in case of Fincorp Ltd, the doubtful debts and estimated bad debts are not permitted for deductions. While under “sec 25-35 ITAA 1997”, the bad debts amounting of $17,000 that is written off by Fincorp Ltd in the financial year ended 30^th June 2022 will be allowable for tax deduction within “sec 25-35 ITAA 1997”.

4. 

As per the ATO, a person that is living out of Australia with income from Australian sources may not be required to make application for TFN (Barkoczy, 2022). In other words, an individual does not need to have TFN, if he or she is a foreign resident of Australia for tax purpose and they only get interest, dividends or royalty payments from sources within Australia.

In the current case of Andrew, he is a non-resident or foreign resident living outside Australia. It is recommended to Andrew that he is not required to apply for TFN for tax purpose since he has only received interest. While the rent cannot be considered as the subject of withholding tax and the taxpayer is needed to have TFN and should pay income tax on the basis non-resident rates.  

5. As per the “sec 40-295 of ITAA 1997” the taxable income of taxpayer gets adjusted where a balancing adjustment event takes place (Phillips, 2016). When the termination value is greater than the adjustable cost, the difference gets contained within in the “assessable income”. Whereas, when the termination worth is less than the “adjustable worth”, the variance is allowed as deductions.

As evident from the calculations done above, Theo reports purchasing photocopier for $8,700 om 1^st July 2020 and sold it for $3,750 on 30^th June 2022. A balancing event adjustment needs to be made by Theo under “sec 40-295”. The termination value of photocopier ($3,750) is much greater than closing adjustable value ($2,175). Therefore, the difference in amount of $1,575 must be included in his assessable income.

6. Travel expense that is incurred throughout the course of work is allowable as deduction. As noted in the case of “FCT v Wiener (1978)” the taxpayer in this case was teacher that was employed by Education Department (Robin, 2021). The taxpayer was needed to teach amid five different schools all through the week. The law court noted that the taxpayer’s employment was itinerant in nature and the taxpayer was travelling to perform her employment duties starting from the time when she left home till the moment she came back (Hildreth & Richardson, 2019). The tax commissioner permitted deductions for travel expenses incurred by taxpayer between schools and also for travel expense that is incurred between home, first and last school that she attended every day.

In the current case Mary is employed as an accountant during day time and at night she works as a part-time teacher in accounting studies. She reports incurring travel expense for travel between her jobs by car and does not stops on the way. The travel made by Mary should be classified as travel in the course of work. Referring to “FCT v Wiener (1978)” in the current circumstances of Mary, the travel expense that is incurred by her for travelling between her accounting job during and her part-time employment at night (Wollner et al., 2020). The expense incurred by car is a permissible deduction within “sec 8-1 ITAA 1997”.

Bad Debt Deductions and Tax Liability

7. 

8. Self-assessment cannot be considered as a tax, in fact it is considered as the way of paying tax. The idea concerning self-assessment is that an individual is considered accountable for completing the tax return every year if they are needed to and for paying any amount of tax that is due for that year (Payne, 2018). If an individual completes the self-assessment tax return, he or she is needed to include all in their taxable income and also any amount of capital gains. The taxpayer is permitted to claim tax allowance or deductions to which they are considered entitled to while preparing their tax return. The information furnished by taxpayer in tax return is used in calculating the tax return.

The income tax system of Australia works on self-assessment. This implies that ATO accepts the information that an individual give is complete and accurate. This means that ATO will review the information that is provided by taxpayers if it has reason to consider it otherwise (Sadiq et al., 2018). The self-assessment system simply assigns responsibility on taxpayers to make sure that their tax return and other types of tax forms adhere with tax laws. The taxpayers should report all their assessable income and they can only claim deductions and offsets to which they are considered entitled.

9. A progressive tax system is one where the average burden of tax increases with income. Families that earn higher income are found paying uneven burden of tax share whereas people that have low and mid income have small burden of tax. A progressive system of tax can be referred as a “tax system” which increases rates as the chargeable income goes up (Sawyer et al., 2021). The instances of “progressive tax system” comprise of “investment income taxes”, tax on credit earned, income from “rental property” and “tax credits”. The actual philosophy concerning the progressive tax system is that people that have higher income can simply afford and must be anticipated to provide much greater share of public services than those people that are able to pay less tax.

The income tax system of Australia is considered progressive in nature. It means that people that have higher income are required to pay more amount of tax. An individual can earn up to $18,200 in a financial year and are not required to pay tax. This is regarded as a tax-free threshold and any income beyond this threshold attracts tax liability (Sadiq et al., 2021). The lowest amount of tax rate is 19% and the highest amount of tax rate is 45%, which is imposed only when income surpasses more than $180,000. A large number of Australians are found to be placed under middle tax bracket.

10. A person that is considered as an Australian resident are considered subject to income tax in Australia on worldwide basis. In other words, an individual tax resident of Australia is considered taxable on income derived from both sources in Australia and from foreign as well. As it is mentioned under “sec 6-5 (2) of ITAA 1997”, the assessable income of Australian resident includes the “ordinary income” which is obtained from every sources (Saad & Ariffin, 2019). Accordingly, under “sec 6-10 (4)” it states that the “assessable income” of an Australian inhabitant involves the statutory income from all the sources.

A person that is an Australian occupant is held liable to pay tax on income and is irrespective of sources. There are numerous exemptions as well such as income tax offsets and specific rules relating to foreign income which might be available for income that are sourced in foreign nation (Kiprotich, 2016). As quoted in “Nathan v FCT (1918)”, the source relating to income is something that a practical person would take into account as the actual source of income. It means that sources of income are dependent on individual facts.

References:

Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role does it play in anti-phoenix activity?. Insolvency Law Journal, 24(2), 127-140.

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Barkoczy, S. (2022). Foundations of Taxation Law 2022. Cambridge University Press.

Hildreth, W. B., & Richardson, J. A. (2019). Economic principles of taxation. Taylor and Francis.

Kenny, P., & Devos, K. (2018). Australian Small Business Taxation. LexisNexis.

Kiprotich, B. A. (2016). Principles of taxation. governance, 5(7), 341-352.

Payne, K. (2018). Taxation: Fix it up or trade up?. Company Director, 34(6), 52-53.

Phillips, B. (2016). Distributional modelling of proposed negative gearing and capital gains taxation reform.

Robin, H. (2021). Australian Taxation Law 2021. OXFORD University Press.

Saad, N., & Ariffin, Z. Z. (2019). Principles of Taxation (UUM Press). UUM Press.

Sadiq, K. (2020). Australian Taxation Law Cases 2020. Thomson Lawbook Co.

Sadiq, K., Black, C., Hanegbi, R., Krever, R. E., Jogarajan, S., Obst, W., & Ting, A. K. F. (2021). Principles of Taxation Law 2021 (No. 14th). Thomson Lawbook Co.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., … & Ting, A. (2018). Principles of taxation law 2018. Thomson Reuters (Professional) Australia Limited.

Sawyer, A., Oats, L., & Massey, D. (2021). Contemporary Issues in Taxation Research Volume 4.

Shome, P. (2021). Principles of Taxation. In Taxation History, Theory, Law and Administration (pp. 53-61). Springer, Cham.

Wollner, R., Barkoczy, S., & Murphy, S. (2020). Australian Taxation Law 2020 30e Ebook. Oxford University Press Australia & New Zealand.

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