Taxation

Institution Affiliation

Date

Question 1

A)

In the case of Fairmount Construction Ltd., the directors are being sued for breach of work, health, and safety laws for the handling of imported materials and have spent $150,000 on legal advice. Legal expenses are evaluated in terms of their nature. Legal costs can be of capital nature, revenue nature, or private nature. Legal expenses of private nature include legal fees generated from defending family court proceedings. Legal costs of a capital nature are involved in acquiring capital resources such as property, plants, and equipment for the business. Legal expenses of a revenue nature are expenses generated from revenue activities. According to the Income Tax Assessment Act 1997 section 8-1, one can deduct legal fees from the assessable income when the legal expense is incurred to gain or produce your assessable income when incurred in carrying business to acquire or make your assessable income. The legislation also states that the legal expense is not deductible if it is of capital, private, or domestic. In the case of Fairmount Construction Ltd., the legal cost incurred is of a revenue nature. The legal expense is concerned with Fairmount’s business of importing building materials from China. Hence, Fairmount Constructions Ltd. can deduct the legal costs of $150,000 from its taxable income at the end of the fiscal period under tax consideration.

B)

In Philip’s case, the facts are that he wanted to replace a motor of a truck used to collect scrap metal. The truck previously used a petrol motor, which would have cost $18,000 to replace. Due to efficiency and cost issues associated with using the petrol motor, Philip chose to replace the petrol motor with a diesel motor for $25,000. The diesel motor will be cheap and efficient to use. The taxpayer must convince the tax commission that the repair will improve operations’ efficiency to qualify for the deductible repair expense. According to the Income Tax Assessment Act 1997 section 25-10, the deductibility of repairs outlines that if the repair on an equipment increases the equipment’s efficiency, the cost of repair is deductible. If Philip replaced the broken motor with the petrol motor, running the truck would be more expensive. Also, the diesel motor will improve efficiency in scrap metal processing, meaning that Philip will generate more revenue. If the diesel motor’s efficiency increases Philip’s scrap metal business’s revenue, the more the taxable income from the company. The tax commission is focused on maximizing the taxable income of a business, which is more logical if Philip is allowed to deduct the diesel motor’s cost.

C)

Astrid bought a car to use for traveling for her sales work. The car cost $50,000, and she paid $1,500 for insurance and $500 for fuel cost. She has traveled 3,000 km for business use with the car, and she has a logbook. According to the Income Tax Assessment Act 1997 section 28-12, an individual can claim a deduction for car expenses if they own or lease the car. When the vehicle is under hire-purchase, the notional buyer is considered the “owner” of the vehicle. In this section, a car is considered for the claim if it can carry less than a tone and has four wheels. Astrid can claim the car expenses on the period she used the car to identify and justify the percentage of motor expenses used for business and personal use of the car. Astrid has two methods of establishing claims on motor vehicle expenses. She can use the kilometer-based method and the long-book percentage method. If Astrid couldn’t prove the claim using either of the plans, the tax commission would deem it redundant with less evidence to prove its existence. The Australian Tax Office in 2016 set out a claim rate of 68 cents per kilometer traveled for business use. In Astrid’s case, it will be easier to make a claim deduction using the kilometers-based method. She has identified the distance in kilometers traveled for business use. Using the kilometer-based method, Astrid will claim a deduction of $2,040.

D)

Ari stated that in the fiscal period 2018/19, the education expenses he incurred include HELP, $5,000, the textbook expense of $400, and study material of $150. Ari is studying for a bachelor of Early Primary Education. Ari also works as a part time employee as an activities coordinator at an after-school care center. According to the Income Tax Assessment Act 1997 section 8-1, an individual can claim deductions for self-education expenses if the self-education is related to the current work that the taxpayer is doing, besides, if self-education will help the taxpayer move to a higher earning bracket concerning the current employment. According to the Income Tax Assessment Act 1997, self-education expenses eligible for deduction claims include; tuition fees, books, stationery, accommodation, meals, motor vehicle expenses, airfares, interest expenses, and depreciation.

However, the loan amount in terms of HECS/HELP is not deductible for tax purposes. The deduction claims only cover the fees associated with the loan, including application fees and interest charges. However, the net amount of the deduction claim should not exceed $250. In Ari’s case, the Bachelor’s, which he is currently pursuing, is directly associated with the part-time job he is doing hence eligible for the claim. He can make a deductible claim that doesn’t exceed $250. The HELP loan amount of $5,000 is not deductible from his taxable income. Ari can deduce the $150 of other study material and $100 of the expenses related to textbooks.

Question 2

A.

Residential status is used to determine if an individual is considered for tax purposes in Australia. Some factors are put into consideration when determining if an individual is ordinarily resident in Australia. The factors include physical presence, intention and purpose, family, business or employment, maintenance of the place of abode, nationality, social, and living arrangements. In terms of physical presence, the length in which an individual is present in Australia is considered. The individual must reside in Australia for more than half a year (186 days test) to be considered a resident for tax purposes. In terms of family, the individual will be regarded as a resident, and the location of his or her family will provide evidence of residence. The intention of the individual’s visit to Australia is considered for tax purposes.

Also, if a person is a visitor, the frequency, regularity, and duration of the visits are considered for tax purposes. In terms of maintaining the place of abode, for a person to be considered a residence, he or she must have a permanent home in Australia. If its business or employment, the year of income is considered for tax purposes, depending on the number of days the individual generated Australia’s revenue. A person’s nationality is used for tax purposes if only the residence is borderline; otherwise, nationality is not a critical factor in establishing an individual’s home. In terms of social and living arrangements, the individual social ties and living in Australia provide evidence of residence.

B.

Income generated from trading stocks is considered for tax purposes in Australia. However, a taxpayer must satisfy some conditions before he or she can claim a deduction for the value of trading stocks. In Australia, the cost of stock can be claimed as a deduction by cost payers. The taxpayer can only claim a deduction of the trading stock’s value if he or she takes into account all trading stock at the beginning and the end of the year of business. All increments, disposal, or replacement of trading stock should be taken into account by the taxpayer. The trading stock value on hand is considered by the tax commissioner when a taxpayer claims a deduction for trading stock value. If the trading stock value decreases throughout the year of consideration, the decrease in value is considered an allowable deduction. If the trading stock value on hand increases, the increase is regarded as an assessable income. The trading stock on hand is valued in terms of the cost of purchasing the trading stock, the market selling value, or the price at which the trading stock can be replaced according to subsection 31(1) of the Income Tax Assessment Act.

Another condition to be satisfied is that the taxpayer can only claim the deduction for trading stock value if the trading is sold in the same year of the claim. Otherwise, the claimable deductions are deferred until the taxpayer sells the trading stock. Hence, the cost of stock and the level of sales in the same trading period offsets the deduction claim. If the cost of the stock exceeds the level of sales in the same trading period, the taxpayer can claim the deduction, as mentioned earlier, when assessing the trading stock for potential income. The other condition is that the value of trading stock in hand provided by the taxpayer should not be below the lowest amount permitted. The commissioner will only consider the value below the lowest value if the trading stock is affected by other exceptional circumstances or if the trading stock is obsolete.

C.

In the ITAA (Income Tax Assessment Act), an individual can use both cash and accrual basis to account for assessable income. Accrual basis of taxation is appropriate when; accounting for tax for a large firm or business. Large firms or companies offer products or services on a credit basis meaning income is put under consideration when an invoice is sent to a client. This was depicted in Henderson v FCT (1970) 119 CLR 612, the high court established that the appropriate method to be used by large professional firms is the accrual basis of taxation. When the client defers payment in the same period, income generated will be considered for tax purposes in the next period. It is also easier to adjust income for tax consideration on accrual basis as there is an allowance for bad debts that the business faces. In the case of Barratt v FCT (1992) 23 ATR 339, the taxpayer could not sue for bad debt for six months after the provision of the service. The taxpayer used the cash accounting basis instead of using the accrual basis to claim an allowance for bad debts. Accrual basis is also appropriate when a business has an average turnover of above $10 million.

D.

Part IVA of the Income Tax Assessment Act details schemes to reduce income tax. Taxpayers can establish strategies for tax avoidance purposes. The tax commission assesses the scheme to provide penalties, interest charges, or cancel the tax benefit received from the tax avoidance scheme. The tax commissioner will conduct an assessment when certain vital elements are presented before the tax commission. The key elements include the scheme’s form and substance, how the scheme was established and ran, the time which the scheme was launched, and the length which the scheme was running. Also, the benefit generated from the plan, changes in financial position derived from the benefit derived from the scheme. Another consideration is any change in an individual’s financial situation connected to the taxpayer, the nature of the connection, business, family, or other nature. After the tax commissioner has assessed these key elements, the tax commissioner can raise an assessment, which will be forwarded to the taxpayer. If the taxpayer is not satisfied with the tax commissioner’s review, he or she can legally challenge the assessment.

Question 3

A)

1/3 of 98,120 = $32,706.67

B)

$32,706.67/2 = $16,353.34

C)

According to section 102 of the Income Tax Assessment Act 1936, the trustee of the trust will carry the tax burden of a minor beneficiary’s net income. Hence, Arthur will bear the tax burden on the income Jeremy receives from the trust. The income distributed to Jeremy will be added to Arthur’s taxable income for the year 2019/2020. This will move Arthur to a higher tax bracket. Arthur should have only distributed Fiona’s income to avoid paying more tax after distributing the income to both Jeremy and Fiona.

D)

The remaining amount in the trust fund is $65,413.33. The relevant withholding tax was already deducted, making the remaining amount in the trust fund tax-free. Also, distributed income from the trust fund is eligible for taxation when received by the beneficiary. If the beneficiary is not legally able to pay the tax on the distributed income, the tax burden is borne by the trustee of the trust fund. Hence, no tax consequences will be related to the undistributed amount in the trust fund.

Reference

Black, C., Sadiq, K., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., & Ting, A. K. F. (2019). Principles of Taxation law. Thomson Reuters.