Taxation Law Assignment on Australian Income Tax System
The questions to be answered in this taxation law assignment are:
With reference to relevant legislation, case law and secondary sources, briefly explain different functions of taxation.
Amandeep born in India and migrated to Australia. He lives in Australia permanently. He still holds Indian passport. Amandeep works with the New Zealand Princess Cruises tours and most of the income year is in New Zealand. He signed an employment contract for this position in the company’s Australian office in Sydney. Amandeep has two kids that are living with his wife Sandeep in Sydney. Three years ago, Amandeep purchased a unit apartment in Sydney. Amandeep and his wife holding dividend yielding shares in an Indian public company called Hindustan Unilever. Amandeep and Sandeep have an Australian bank account as well. Amandeep’s employer pays his salary to this bank account every fortnight. Biannually Amandeep receives a holiday package from his employer, New Zealand Princess Cruises tours and he is using this package with his family traveling in Australia interstates or moves to India to visit his in laws.
Required: With reference to the relevant laws, discuss whether Amandeep is an Australian resident for tax purposes and also critically discuss whether Amandeep needs to pay income tax on his salary and investment income explained above.
Gary owns a commercial building and leased his premises to John to conduct a bakery business. Under the lease contract, John is obliged to repair any modified or damaged parts of the building after the lease term. However, John fails to repair Gary’s building, which was damaged due to machinery and fixtures’ instalments. John agreed to pay Gary $3,100 to cover the repair expenses.
Required: With reference to relevant legislation and case law discuss the tax treatment of this payment for Gary.
John owns a convenience shop called City Conv. The following events occurred for John during 2019- 2020 financial year.
(i) John incurred legal expenses as he was sued for false advertising.
(ii) John purchased new fridge to the shop - $800. In addition, his builder added more space to the shop front. This cost him $22,000.
(iii) John ordered 1000 new T-shirts with printed City Conv’s logos for marketing purposes. These costs him $1,500.
(iv) John received a City of Sydney fine for putting his sales item for display outside his shop without a permit. He required to apply for a permit to use the footpath.
Required: With reference to relevant legislation and case law advise John on the assessability and/or deductibility of above events.
A. Alex purchased a CNC machine on 1st October 2019 at a cost of $110,000 (including GST). This machinery is estimated to have a useful life of seven years.
B. Alex purchased a Holden car on 1 May, 2019 at a cost of $63,000, estimated to have a useful life of five years.
Required: With reference to relevant legislation and case law, discuss and calculate what amount is allowed as a deduction for the decline in value of the machinery and the Holden car discussed above, using both prime cost and diminishing value methods.
According to the research on taxation law assignment, it is stated that the Australian tax law is a vast area to be explored as it covers around 125 types of tax regimes such as Income Tax, Fringe Benefits Tax, GST, tax on Capital Gains, etc. The type of taxation depends upon the type of organisation or individual taxpayer. As the taxation structure is so vast, it involves several organisations and personnel to maintain the integrity of the taxation system and also ensuring that no class of taxpayer is unnecessarily overburdened in the name of taxation (ATO 2020). The Commonwealth has been given the power by the Australian Constitution to make and edit tax laws and it also gives protection rights to the public and the State so that they are not exploited by the Commonwealth. The powers of the Australian Constitution have been distributed under three heads namely- Exclusive Powers which deals with Customs & Excise, Concurrent which deals with the Income Tax matters and Residual which deals in State Tax matters (ATO 2020).
Various principles are treated fundamentally to a taxation system. These principles include- Equity, certainty, simple tax system, efficient tax system and neutrality. Equity means that the tax burden should be fairly distributed among the taxpayers. The taxpayers in a similar position must pay the same tax and there should be a different amount of taxation in case of a change in position of taxpayers about their taxable income. Certainty means that the taxpayers should be aware of how much tax they have to pay. Hence, a structure for taxation is made by the administrators of the tax system (Asher 2016). The tax system should be easy to understand and also efficiency should be there in administering the taxation. Also, the neutrality principle means that the tax system should be neutral for all and should not be affected by choosing alternatives.
Various standards and rules are used by the Australian Taxation Office (ATO) for determining whether an individual is a resident of Australia for tax purpose or not. For this purpose, generally, four tests can be performed for an individual to check whether or not he/she is an Australian Resident. These are the residing test, domicile test, 183-day testing, and superannuation testing (Pratt & Kulsrud 2013). Under resides test, the taxpayer has to prove that he resides in Australia. If it is proved, then he is considered as resident for tax purpose. In case he does not pass the resides test, then he needs to pass any of the other three tests:
a. Domicile test- if the taxpayer has a permanent house in Australia then he will be considered resident, or
b. 183-days test means that the taxpayer should be present in Australia for a minimum 183 days which means at least half of the year, or
c. Superannuation testing- this means that the taxpayer is a government employee and is working overseas, then he shall be considered an Australian resident (Pratt & Kulsrud 2013).
In the case of Amandeep, he shall be considered as a resident of Australia as he fulfils the condition of residency. He satisfies the resides test also, but there may be some possible reasons that he may be denied resides test as he works overseas for most of the year. But, he satisfies the domiciles test as he has a permanent house apartment in Sydney. Although he does not pass the 183 days test, he satisfies one of the three conditions which is the domiciles test. Hence he shall be considered a resident of Australia for tax purposes.
When a person is resident of Australia for tax purposes, he shall be taxed in Australia on the total income that he has earned from anywhere in the world (Nethercott, Richardson, & Devos 2013). Also, if the taxpayer has some foreign income, he shall have to disclose it in his income tax return. In the given case of Amandeep, the salary received in his bank account will be liable to tax. He also receives dividend income from India and thus he will have to disclose this in his Income Tax Return as a foreign income. If the Indian company has charged tax on the said income, then he shall have to pay any tax if due as per the Australian tax treaties signed with India to avoid double taxation.
In the given case, the repair charges that have been paid by John to Gary shall be taxable in the hands of Gary. The reason for the same is that the amount that has been paid to Gary has been paid for the repair work that John was supposed to get done. If John had not to pay for the repairs, it would have been done by Gary which would be his expense. But in the given case, John was supposed to get the repair work done as per the Lease agreement which would reduce the liability of expense of Gary which would ultimately result in more income in his hands that pertains to non-payment of repair expenses.
Now, John has paid that part of the income only to Gary which he would have otherwise saved by not paying for repairs of the building. Hence, this amount would be treated as income in the hands of Gary for tax treatment as per relevant legislation. Further, if Gary gets the repair work done for his building, then he can claim it as an expenditure from the business income and give tax on the net profits earned by him. Hence, if he does not get the damages to the building repaired, he cannot claim the same as expenditure and shall have to pay tax on the total amount received amounting to $3100 which shall be added to the other taxable income and then tax shall be charged on the total income. So if the purpose of the amount received is not served it will be taxed in the hands of the receiver. It will be taxed as income of the receiver.
(i) As John has done false advertising of any of his products, any customer might have sued him for the damage that has occurred due to false advertising, or there may be any other reason. As a consequence, John had to incur legal expenses. As these expenses have been incurred by John concerning the conduct of his business, so he shall be allowed a deduction of such expense from his income to arrive at taxable income (Pratt & Kulsrud 2013).
(ii) As it is given in the question that John owns a Convenience shop, we shall assume that he is the owner of the shop and has not taken the shop on rent. Now, in the given case, he has incurred an expenditure of $800 to purchase a new fridge for the shop. This would be treated as a capital expenditure and the fridge would be treated as an asset and shown in the Balance Sheet. Further, John can claim depreciation expense every year on the asset until its value is depleted, in his Income Statement. The other expense of $22000 was incurred to pay to his builder to enhance his shop front. This shall also be treated as a capital expenditure and shown as an addition to the shop value in assets in the balance sheet.
(iii) The 1000 T-Shirts were printed for marketing purpose of business and thus these expenses are of revenue nature and shall be allowed as a deduction from the Income and will be shown as an expense in the Income Statement.
(iv) Without having a permit, John displayed the items and thus was fined by City of Sydney authorities. The amount of fine that will be paid shall not be allowable as a deduction in the Income Statement as, according to the Australian Income Tax law, those penalties or fines which have been levied by Australian Law or any court order are treated as non-deductible expenses (Smith 2016).
The depreciation as per Prime cost method is as follows:
Depreciation: Asset cost x Number of days held in year/Number of days in years *(100/number of assets life)
Depreciation: 1,10,000 x 270 / 360 x (100% / 7) = 11785.71
The machine is purchased on 1st October and so it has been used for 9 months (270 days) approximately. Depreciation as per Prime cost method is equal throughout the life of the asset.
Diminishing Value method:
Depreciation: Asset cost * Number of days held in year/Number of days in years *(100/number of assets life)
Depreciation: 110,000 * 270 / 360 * (200% / 7) = $23570 (approx.) for the 1st year.
(ii) For CAR (days of use- 60 days)
Prime cost method is as follows:
Depreciation: 63,000 * 60 / 360 * (100% / 5) = $2100 for the 1st year
Diminishing Value method:
Depreciation: 63,000 * 60 / 360 * (200% / 5) = $4200 for the 1st year.
From next year, the depreciation will be calculated on the value of the asset at year beginning less depreciation of the year.
1. The number of days of use of assets in a year is taken as 360 days.
Asher, A. (2016). The justice of Australian tax and redistribution in 2016. St Mark's Review, 235(235), 43.M
ATO. (2020). Australian business taxes. Retrieved from: https://www.ato.gov.au/About-ATO/Who-we-are/Our-history/
Nethercott, L., Richardson, G.,& Devos. (2013). Australian Taxation Study Manual, Oxford university Press
Pratt, J. W. & Kulsrud, W. N. (2013). Federal Taxation. taxation law assignment Penguin Publishers
Smith, N. (2016). Case study: the interaction of Australian and UK tax laws. Ethos: Official Publication of the Law Society of the Australian Capital Territory, 240(240), 50–50.