Taxation Law Assignment Examining Case Scenarios Based on Tax System
Prepare a taxation law assignment evaluating the following case scenarios:
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. (10 marks)
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. (10 marks)
John owns a convenience shop called City Conv. The following events occurred for John during 2019- 2020 financial year.
- John incurred legal expenses as he was sued for false advertising.
- John purchased new fridge to the shop - $800. In addition, his builder added more space to the shop front. This cost him $22,000.
- John ordered 1000 new T-shirts with printed City Conv’s logos for marketing purposes. These cost him $1,500.
- 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. (10 marks)
- 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.
- 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. (10 marks)
- Each question should have 250 to 300 words with at least three referencing in each questions
- Referencing Style Harvard Referencing
The Australian taxation system concerned in the present taxation law assignment aims to fulfil the following three functions as per the various the tax laws prevalent (Barkoczy, 2018).
- It provides revenues to the government which are pivotal for the functioning of the government especially with regards to providing services such as law & order along with social security. Without taxation, the welfare state concept adopted by the government would not be fulfilled.
- Another function of taxation is that it allows for wealth redistribution which is enabled by the progressive tax system that Australia follows. The taxation burden is higher for the rich and this money through targeted flows can then be directed to the poor thereby reducing inequality and disparity.
- The tax system is also a means used by the government to influence the resource allocation and consumption decision taken by consumers. This is primarily through taxation policies whereby goods with negative externality are usually taxed heavily whereas goods with positive externality are provided subsidy to aid higher production (Reuters, 2017).
The key objective is to ascertain the tax residency status of Amandeep (individual taxpayer) considering the given information and available residency tests.
In order to check for tax residency of individual taxpayers, ss. 6(1) ITAA 1936 provides three specialised residency tests besides one ordinary residency test (Austlii, 2019a). In accordance with TR98/17, the specialised residency tests are as follows (Coleman, 2016).
- Domicile Test' Not applicable for Amandeep since he is not Australian domicile holder
- 183 day test' Not applicable for Amandeep since he is mostly in New Zealand where he is professionally employed
- Superannuation Test' Not applicable for Amandeep since he is not a federal government employee serving abroad.
Thus, the residency status for Amandeep would be determined based on the ordinary residency test. This considers the following factors.
- Reason for visit to Australia' Amandeep has come to Australia for job and has subsequently settled in Australia which implies that there are high chances of Amandeep being categorised as an Australian tax resident.
- Professional and personal ties' His wife stays in Australia and also his employment contract was executed in Australia thereby indicating strong ties both personally and professionally. Also, the frequently travels to Australia whenever he gets some holidays.
- Fixed asset investment in Australia-Amandeep has bought a house in Sydney which would be indicative of the intention of taxpayer to settle in Australia.
- Social Life' Amandeep has a normal social life compared to what he would be living in India (country of origin).
Based on the above aspects, it can be concluded that Amandeep would have Australian tax residency for the current tax year as per the ordinary residency test.
The key issue is to outline the appropriate taxation implications for the $ 3,100 payment that Gary has obtained from John.
With regards to payment received by the taxpayer in context of an expense incurred, there are two possibilities namely allowance payment or reimbursement of expenses. In accordance with tax ruling TR 92/15, an allowance is a payment received in context of a particular expense without any reference to the actual amount incurred on the same. This would imply that allowance receipt could potentially lead to economic benefit being derived by the taxpayer owing to which these are categorised as assessable income (Reuters, 2017).
Reimbursement on the other hand involves that the amount received is the equal in magnitude as that spent on a particular item. The net effect is that there is no economic benefit for the recipient. This understand has been upheld in the Case 15310 TBRD 480 and as a result, no reimbursement is considered to be assessable in nature (Barkoczy, 2018).
In the given situation, the contractual agreement stated that the legal responsibility for any repair was on John. However, John did not fulfil his contractual obligation owing to which Gary had to reluctantly carry out the repairs for which he spent his own money. Later, John has given the same amount of money to Gary as the expense should have been incurred by John. Thus, payment of $ 3,100 is reimbursement and would not contribute to assessable income.
The tax treatment for revenue and capital expense tends to differ owing to which appropriate determination of the type becomes important. A useful case in this regards is Sun Newspapers Limited v Federal Commissioner of Taxation  HCA 73 where Dixon J emphasised that capital expense tend to be associated with long term advantage (extending more than a year) while revenue expense is associated with short term advantage (less than a year) (Coleman, 2016).
- The legal expenses by John in context of false advertising would be categorised as capital expenses as the case can potentially hurt the business reputation. As a result, the impact could be felt over the years. Thus, s. 8-1 ITAA 1997 deduction would not apply. Instead, deduction as per s. 40-880 ITAA 1997 needs to be availed in regards to this capital expenditure (Austlii, 2019b).
- The impact on sales from the fridge purchase and additional space would be realised over a long time period which would stretch in years and hence the associated expenses is capital in nature. Thus, s. 8-1 ITAA 1997 deduction would not apply. Instead, deduction as per s. 40-880 ITAA 1997 needs to be availed in regards to this capital expenditure (Austlii, 2019b).
- The marketing expense using T'shirt would result in incremental sales over a short period of time which should not be felt over years. Thus, the type of expense is revenue and general deduction as per s. 8-1 ITAA 1997 will be available for the company (Austlii, 2019b).
- The additional footpath usage would provide an advantage to the business which would last for the duration of the permit. Assuming that the permit has been granted for a period extending in excess of year, the underlying expense would be capital in nature. Thus, s. 8-1 ITAA 1997 deduction would not apply. Instead, deduction as per s. 40-880 ITAA 1997 needs to be availed in regards to this capital expenditure (Austlii, 2019b).
For decline in value computation, there are two methods namely the prime cost method and diminishing value method (Reuters, 2017).
The prime cost method is outlined in s. 40.75 ITAA 1997. This is indicated as follows.
Decline in asset value = Base Value*(Days of business usage/365)*(100%/Effective life)
The diminishing value method is outlined in s. 40.72 ITAA 1997. This is indicated as follows.
Decline in asset value = Base Value*(Days of business usage/365)*(200%/Effective life)
- Asset 1: CNC Machine
Effective life of CNC machine = 7 years
Since the machine has been purchased on October 1, 2019, hence the number of days for business use till March 31, 2020 is 183 days.
The machine has been bought for a consideration of $ 110,000. The computation of decline in value on machine based on both the methods is shown below.
Decline in value of CNC machine as per prime cost method = $110,000 * (183/365) *(100%/7) = $7,878.67
Decline in value of CNC machine as per diminishing value method = 110,000* (183/365)*(200%/7) = $15,757.34
Assuming the CNC machine usage is 100%, the above decline in value can be deducted in accordance with general reduction rule specified as per ss. 8-1 ITAA 1997 (Coleman, 2016).
- The decline in value of the car has been computed assuming that it is meant for complete business usage. In case of partial business usage, suitable adjustment needs to be made (Barkoczy, 2018).
Effective life of the car = 5 years
Since the machine has been purchased on May 1, 2019, hence the number of days for business use till March 31, 2020 is 336 days.
The car has been bought for a consideration of $ 63,000.
Decline in value of Holden car as per prime cost = $63,000*(336/365)*(100%/5) = $11,598.9
Decline in value of Holden car as per diminishing value = $63,000*(336/365) *(200%/5) = $23,197.8
Austlii (2019a) Section 6-1, [Online] Available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.1.html
Austlii (2019b) Section 8-1, [Online] Available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html
Barkoczy,S. (2018), Foundation of Taxation Law 2018, taxation law assignment 9thed.,NorthRyde: CCH Publications,
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia,
Reuters, T. (2017) Australian Tax Legislation 2017,4th ed. Sydney. THOMSON REUTERS,