FNSACC522 Prepare Tax Documentation for Individuals
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FNSACC522 Prepare Tax Documentation for Individuals
Assessment questions:
1.
Income according to ordinary concepts’ is not defined in ITAA97 or ITAA36, so it is necessary to apply common law concepts in determining whether an amount earned is ordinary income. Explain “income according to ordinary concepts” under common law and its relationship with “assessable income”. In your response, reference any relevant ITAA36 and/or ITAA97 provisions.
Answer – Reference Book 1.4 – Income Tac Basic Principles and https://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/
itaa1997240/s6.5.html–
Income according to ordinary concepts: This includes ordinary income. Note: Some of the provisions about assessable income listed in section 10-5 may affect ordinary
income treatment.
(2) If you are an Australian resident, your assessable income includes the
* ordinary income you * derived directly or indirectly from all sources, whether in or
out of Australia, during the income year.
(3) If you are a foreign resident, your assessable income includes:
(a) the * ordinary income you * derived directly or indirectly from all
* Australian sources during the income year; and
(b) other * ordinary income that a provision includes in
your assessable income for the income year on some basis other than having an
* Australian source.
(4) In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you
direct.
A key idea in Australian tax law is "income according to ordinary concepts," which is
not expressly defined in the Income Tax Assessment Act 1936 (ITAA36) or the Income Tax Assessment Act 1997 (ITAA97), but rather comes from common law principles. This idea is a benchmark for determining whether a taxpayer's receipt of an amount qualifies as assessable income for taxation purposes. Any sum that becomes due to a taxpayer on a regular, periodic, or recurring basis due to their ordinary activities—such as employment, business operations, investments, or other sources—is referred to as "income according to ordinary concepts" under common law principles.
This definition includes a wide range of receipts, including capital gains, dividends, interest, wages, salaries, and profits from business operations. The primary factor in identifying whether a sum of money meets the definition of income under common law is its nature and regularity in respect
to the taxpayer's regular activities. The receipt is probably going to be regarded as ordinary income if it comes from activities that are a regular part
of the taxpayer's routine. However, depending on whether they are of a capital nature or constitute windfall gains that are not the result of ongoing or
regular activity, some receipts might not be considered income under standard concepts. For example, unless they are received in the regular course of the taxpayer's business, proceeds from the sale of a capital asset, gifts, or inheritances typically do not qualify as ordinary income.
Under Australian tax law, all forms of income, including income from statutory and ordinary sources, are considered "assessable income." "Ordinary income derived directly or indirectly from all sources during the income year" is the broad definition of assessable income given in Section 6-5 of the ITAA97. This definition includes income as defined by common law and other
statutory provisions that classify certain receipts as income that must be paid for taxes. In conclusion, although the ITAA36 and ITAA97 do not define the term "income according to ordinary concepts," it nonetheless refers to a fundamental idea of common law-derived Australian tax law. It acts as a standard for determining which receipts, depending on their regularity, recurrence, and relationship to the taxpayer's income, qualify
as assessable income for tax purposes
.
2.
a) Explain the significance of the residency of a taxpayer and the source of income in relation to assessable income.
Answer – Reference Book 1.8 Income Tax Rates – Individuals , https://www.ato.gov.au/individuals-and-families/financial-difficulties-and-
disasters/covid-19/support-for-individuals-and-employees/residency-and-
source-of-income
, https://www.ato.gov.au/businesses-and-organisations/international-tax-for-
business/in-detail/income/tax-on-australian-income-for-foreign-residents
The assessable income for tax purposes is determined in large part by a taxpayer's place of residence and source of income. These components aid tax authorities in defining the range of income subject to taxation as well as the jurisdictional basis for taxation. Let's examine each in detail:
Location of a Taxpayer: Resident Taxpayer:
A resident taxpayer is usually required to declare and pay tax on income earned both inside and outside of the nation in which they are deemed to be a resident for tax purposes. This is because they are subject to tax on their worldwide income.
One's residency is established based on elements including the length and intent of the visit, place of residence, and other connections to the nation's authority. A taxpayer who is not a resident:
Generally, non-resident taxpayers are only subject to taxes on income received from the Determination of
Residency.
Tax residency regulations differ between nations. Certain countries determine residency based on factors like domicile or the location of permanent residency, while others use criteria like the number of days spent
in the country during a tax year. The act of having dual residency or residing in multiple countries can result in intricate tax implications. In order to ascertain the primary tax jurisdiction, tax treaties and tie-breaker rules must frequently be taken into account.
Trade Agreements:
Bilateral tax treaties are a common way for countries to
reduce tax evasion and avoid double taxation. Treaties frequently contain provisions that determine residency status, distribute taxation rights among nations, and offer relief from double taxation by way of tax credits or exemptions. Tax treaties may supersede national tax legislation.
Permanent Establishment (PE)
Understanding the definition of a permanent establishment (PE) is essential for companies that operate internationally to determine their tax obligations in other countries.
In general, a fixed place of business (PE) is where a company conducts its operations. Profits attributable to a PE may be liable to taxation in the nation
in which the PE is situated, frequently in accordance with the income that the PE actually generates or is assumed to generate. Tax Preparation and Adherence: It is crucial to comprehend the income source and residency status for the purposes of tax compliance and planning. By strategically placing their sources of income and utilizing relevant tax treaties or exemptions, taxpayers can arrange their affairs to minimize their tax obligations. adherence to tax laws
b) Identify and describe each of the four residency tests to explain how residency is determined. In your response, make reference to the relevant provisions of the ITAA36 and/or ITAA97.
Answer:- Reference : Book Definition of Assessable Income, https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/
tax-residency/Australia-Residency.pdf
https://taxboard.gov.au/sites/taxboard.gov.au/files/migrated/2018/07/T307956-
income-tax-res-rules.pdf
Australia uses the Income Tax Assessment Act 1936 (ITAA36) and four primary tests, as explained by case law, to determine residency for tax purposes. For tax purposes, these tests assist in determining whether a person is a resident or non-
resident. The descriptions of the four residency tests are as follows: Test of Residences:
The person's behaviour, way of life, and desire to live permanently or indefinitely in Australia are the main topics of the Residence Test. The assessment considers multiple elements, including the person's economic pursuits, social and familial relationships, and the length and consistency of their
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stay in Australia. The ITAA36's Section 6(1) defines a resident as "a person who resides in Australia." The term "resides" is not defined by statute. As a result, the decision is founded.
Domicile Test:
-
The domicile test focuses on an individual’s permanent home, where
they have the most significant connection or legal tie. It considers factors such as the place of birth, family ties and the intention o return to particular jurisdiction. Section 6(1) of the ITAA36 includes provisions regarding the domicile of the origin and the acquisition of a domicile of choice.
183-Day Test:
The 183-Day Test determines if a person has spent 183 days or more in Australia during a specific fiscal year. This is a very simple test that depends only on how many days you have spent in Australia. The ITAA36's Section 6(1) contains provisions pertaining to the 183-day test for determining residency. For tax purposes, a person is usually deemed a resident if they spend 183 days or more in Australia during the fiscal year. Test of Superannuation:
The Superannuation Test is only applicable to Commonwealth government employees who work abroad. For tax purposes, a person is usually regarded as an Australian resident if they are a contributing member of the Australian government's superannuation scheme. ITAA36 Section 6(1).
Each of these residency test provides a framework for determining an individual tax residency status in Australia. The tests may be applied individually or in combination, depending on the circumstances of each case.
3.
a) Give three (3) examples to explain the concept of foreign income.
Answer :- https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-
and-lodge/tax-time/before-you-lodge/foreign-income
https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-and-
lodge/tax-time/before-you-lodge/foreign-income#ato-Reportingforeignincome
Overseas Employment Income: Income earned by an Australian resident individual from employment services performed overseas qualifies as foreign income. For instance, if an Australian citizen works for a multinational corporation in Singapore and receives a salary for their services rendered abroad, that salary is considered foreign income for Australian tax purposes. Foreign Investment Dividends: Dividends received from investments in foreign companies are classified as foreign income. For example, if an Australian investor holds shares in a U.S.-based company and receives dividends from those shares, the dividends are considered foreign income in Australia.
Rental Income from Overseas Properties: Rental income derived from properties situated outside Australia constitutes foreign income. Suppose an Australian resident owns a rental property in the United Kingdom and earns rental income from
tenants occupying the property. In that case, the rental income generated from the UK property is considered foreign income under Australian tax law.
In each of these examples, the income is generated from sources located outside Australia or derived from activities performed outside the Australian tax jurisdiction, thereby meeting the criteria for classification as foreign income. It's essential for Australian residents earning foreign income to comply with Australian tax laws regarding reporting, disclosure, and potential taxation of such income, including any
provisions for foreign tax credits or deductions to avoid double taxation.
b) Explain how international tax agreements might impact on the taxation of foreign income received by Australian resident taxpayers. In your response include an explanation of Foreign Income Tax Offsets and make reference to the relevant provisions of the ITAA36 and/or ITAA97.
Answer:- Reference: https://www.ato.gov.au/individuals-and-families/income-deductions-
offsets-and-records/tax-offsets/claiming-a-foreign-income-tax-offset
https://www.ato.gov.au/individuals-and-families/your-tax-return/instructions-to-complete-your-
tax-return/mytax-instructions/2020/income/foreign-income/other-foreign-income
International tax agreements, also referred to as tax treaties, clarify the tax treatment
of foreign income received by Australian resident taxpayers, thereby reducing the
incidence of double taxation and promoting cross-border trade and investment.
These agreements set forth guidelines for dividing up taxation rights among nations
and offer safeguards against or relief from double taxation of the same income.
Domestic laws, particularly the Income Tax Assessment Act 1936 (ITAA36) and the
Income Tax Assessment Act 1997 (ITAA97), affect tax treaties in the context of
Australian tax law. The provisions of these Acts set forth the guidelines for the taxation of foreign income
received by Australian residents and incorporate the provisions of tax treaties into
Australian law.
The Distribution of Taxing Rights and Tax Treaties: In general, tax treaties distribute taxing rights among nations to avoid double taxation. They outline procedures for figuring out where taxpayers must reside, outline the taxable income in each nation, and offer dispute resolution procedures when two nations want to impose taxes on each other. For instance, a tax treaty may stipulate that, subject to certain restrictions and conditions, income from dividends, interest, and royalties received by an Australian resident from overseas sources will be subject to taxation in Australia.
Foreign Income Tax Offset (FITO): Through the FITO, taxpayers who are residents of Australia may deduct their foreign assets tax payments made on
from their Australian tax obligations. The rules pertaining to foreign income tax offsets, such as the qualifying requirements, computation process, and offset claim limitations, are described in Section 770-10 of the ITAA97. Subject to certain restrictions and limitations outlined by Australian tax law and any applicable tax treaties, taxpayers may claim the Foreign Income Tax Offset (FITO) for taxes paid in foreign jurisdictions on income that is also
subject to Australian tax. In conclusion, international tax agreements, such as tax treaties, have an impact on how foreign income received by taxpayers who are residents of Australia is taxed because they set guidelines for allocating taxing rights and avoiding double taxation.
4.
The following were received by the relevant person or body during the financial year
ended 30 June 2022
. Indicate whether the item is assessable income, exempt income or not income under the Act. Quote the section number for all assessable and exempt amounts.
Receipt
Identify the receipt as As-
sessable income/Exempt in-
come or a non-income receipt
Relevant Section
Example:
Army Reserve wages
Exempt income
S51.5
Insurance receipt $35,000 for stock lost in a fire
Assessable Income Section 6-5
A $5,000 prize to a teacher for the best performance
Assessable Income Section 6-5
Reimbursement to an employee of $150 in private car expenses
Assessable Income
Section 6-5
$15 million income earned by a charitable institute
Exempt Income
Section 50-5
Age pension of $4,000 (no sup-
plementary amounts received)
Exempt Income
Section 52.10
5. The following expenses were incurred by the relevant person or body during the year ended 30 June 2022
. Indicate whether each item is deductible or non-de-
ductible expense under the Act. Quote the section numbers where relevant. Indicate in the ‘Deductible or Non-de-
ductible’ column: ‘Yes’
for deductible OR
‘No’
for non-deductible.
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Note: If only s.8-1 of ITAA applies, explain why the item is deductible or is non-deductible.
Expense
‘Yes’ OR
‘No’
Relevant section
Explanation where appli-
cable
Legal fees for setting up a business, $1,800
No
ITAA 1997 Section 8.1
Legal fees incurred in set-
ting up a business are considered to be a capital nature as they relate to the
creation of the income- producing structure. the business itself, rather than expense incurred in the course of operating the business. Therefore, the legal fees for setting up a business are generally considered non-deductible
expense under the act.
Provision for long service leave, $1,250
Yes
ITAA 1997-
Section 8.1
The section 8.1 which al-
lows deductions for losses or outgoing to extent that they are incurred in gain-
ing or producing assess-
able income. Provisions for employee entitlements like long service leave are considered to meet the re-
quirements of deductibility under section 8.1 because
they represent a liability that the business has in-
curred in the course of car-
rying on its operations. These provisions relate to employee services ren-
dered over time and are integral part of the busi-
ness’s ongoing operations.
Accounting magazine subscription paid by an accountant, $450
Yes
ITAA 1997 Section 8.1
As the subscription is di-
rectly related to the ac-
countant’s professional practice. So is likely to be considered a necessary expense incurred in carry-
ing on their profession and
staying updated with in-
dustry developments, ad-
vancements and regula-
tory changes.
Business paid $2,000 for daily work lunches (food and drink) for employ-
ees at in-house dining facilities
No
ITAA 1997 Section 8.1
Providing daily work lunches to employees in house dining is not de-
ductable under income tax
assessment act 1997. In this case providing meals to employees are typically considers such expenses to be private in nature, rather than being directly related to business’s in-
come producing activities. So they are considered as non-deductable. Exemp-
tions may exist if the meals provided to employ-
ees are part of a contract obligations, related to spe-
cific work related activities.
Employee stole $200 from business till
Yes
ITAA 1997 Section 8.1
In these sections it allows deductions for losses or outgoing to the extent that they are incurred in gain-
ing assessable income or necessary incurred in car-
rying on a business for the
purpose of producing as-
sessable income. Money stolen by employees rep-
resents a loss directly re-
lated to business
Personal superannuation contributions
made by a bank employee, $1,040 Yes
ITAA 1997 Section This section allows individ-
uals to claim deduction s
290.150
for personal superannua-
tion contributions they make to their complying super funds. If Bank em-
ployees satisfied the con-
ditions like notifying of their intention to claim a deduction for the contribu-
tions. They are eligible to claim a tax deduction for the amount of $1040
6. a) In reference to the flowchart in Section 1.6 of the Learning Resources which illustrates the components in the calculation of taxable income, describe each component.
b) Research the ATO website and other reliable websites to identify at least three (3) examples of source documents which could be used to calculate each of the fol-
lowing amounts for a taxpayer:
i.
Assessable income
Answers:- Reference - https://www.ato.gov.au/individuals-and-families/income-de
-
ductions-offsets-and-records/records-you-need-to-keep/documents-to-support-and-
verify-your-claims
https://www.ato.gov.au/individuals-and-families/your-tax-return/instructions-to-com
-
plete-your-tax-return/mytax-instructions/2019/how-to-personalise-your-tax-return/in
-
come
Payment Summaries (PAYG)- Employers' payment summaries show the total gross revenue a worker received in a given fiscal year. They include in-
formation on compensation, bonuses, allowances, salaries, and other bene-
fits obtained through employment. Payment summaries are a useful tool for taxpayers to compute their assessable income from work sources.
Statements from banks:
Deposits and interest made on term deposits, savings accounts, and other financial products are displayed on bank state-
ments. Bank statements can be utilised by taxpayers to discern interest in-
come, dividend payments, and additional investment income that contributes
to their taxable income
.
Rental Statements and Property Income Records: Rental statements give information about the amount of money owners of rental properties re-
ceive from their tenants. These accounts also list deductable charges asso-
ciated with the property, including upkeep, repairs, and property manage-
ment fees. Rental statements are a useful tool for taxpayers to compute
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their rental income, which goes towards determining their assessable in-
come.
It is the responsibility of taxpayers to verify that the data shown in these source papers corresponds to their tax liabilities and truthfully represents their taxable income for the pertinent fiscal year. It's critical to keep these records on file in case the Australian Taxation Office (ATO) conducts an au-
dit or review
.
ii.
Exempt income: - Answer: - https://www.ato.gov.au/individuals-and-families/income-deduc
-
tions-offsets-and-records/income-you-must-declare/taxable-assessable-
and-exempt-income
Dividend Statements: Companies and financial organisations may
offer dividend statements that list dividends paid to shareholders. In
the hands of the recipient, some dividends, such those from Aus-
tralian franked dividends or dividends from specific exempt busi-
nesses, might not be subject to income tax. Dividend statements are a useful tool for taxpayers to identify exempt dividends that they
received during the fiscal year.
Foreign Income Statements: Statements or other documentation pertaining to foreign income tax paid may be sent to taxpayers who receive income from overseas sources. Tax treaties or other ar-
rangements may exempt income generated in some nations from Australian income tax. The amount of a taxpayer's foreign income that is free from Australian tax can be found on foreign income tax statements.
Pension Statements:
Pension payments received by the taxpayer are detailed in pension statements that are given by retirement sav-
ings accounts (RSAs) or superannuation funds. Income tax may not
apply to several pensions, including the Age Pension and disability support pensions. Pension statements are a useful tool for taxpay-
ers to track down exempt pension income they received in a given fiscal year.
These source materials support taxpayers in precisely identifying their exempt income and guaranteeing adherence to Australian tax regulations. It is crucial for taxpayers to keep these records on file in case the Australian Taxation Office (ATO) has any questions or needs proof to support their tax filings.
iii.
Deductions:-
Answer:-Reference https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-
and-records/deductions-you-can-claim
Expense receipts
: - Receipts for different costs brought about all through the monetary year can serve as source reports for conclu-
sions. These may incorporate receipts for work-related costs such as regalia, devices, gear, work-related travel, and proficient im-
provement. Citizens can utilize these receipts to substantiate their claims for conclusions related to work-related costs.
Bank and Credit Card Statements
: Bank and credit card explana-
tions can be utilized to recognize deductible costs related to specu-
lations, rental properties, or other income-producing exercises. Citi-
zens can audit explanations to distinguish intrigued instalments on speculation advances, rental property costs, and other deductible costs related with producing pay.
Medical Invoices and Health Insurance Statements
: Invoices from doctors, drug stores, and wellbeing protections suppliers can serve as source records for conclusions related to therapeutic costs. Citizens can claim derivations for qualified restorative costs that surpass a certain edge. Solicitations and explanations can help
citizens distinguish qualifying restorative costs for conclusion pur-
poses.
These source reports play a vital part in substantiating taxpayers' claims for conclusions and guaranteeing compliance with Australian
charge laws. It's critical for citizens to hold precise records and doc-
umentation to back their finding claims and to supply prove in case of audit or review by the Australian Tax collection Office (ATO).
7. a) Identify and summarise the principle of separation of powers, including the three
(3) types of power.
Answer: Reference –
https://peo.gov.au/understand-our-parliament/your-questions-on-
notice/questions/what-is-an-example-of-the-separation-of-powers-in-australia
https://peo.gov.au/understand-our-parliament/how-parliament-works/system-of-
government/australian-system-of-government
Legislative Power: - This industry is responsible for making laws. It includes a parliament or congress, made up of elected representatives who propose, debate and pass legislation. The legislative body has the power to create, amend or repeal laws and regulations.
o
The legislative branch, often referred to as the parliament, congress, or legislature, is responsible for making laws. Elected representatives within this branch propose, debate, and pass legislation that affects the functioning of society. This includes laws related to taxation, public policy, social programs, and regulations governing various aspects of public and private life.
o
In addition to creating laws, the legislative branch also performs oversight functions, such as scrutinizing the actions of the executive branch, conducting
inquiries, and holding government officials accountable for their decisions and
policies.
o
The legislative process typically involves drafting bills, committee review, debates, and voting on proposed legislation. Once a bill is passed by the legislative body and signed into law, it becomes binding and enforceable within the jurisdiction.
Executive Power:- The task of the executive is to implement and administer laws. It includes the head of state or government and the ministries, agencies and civil servants responsible for enforcing laws, managing public services and implementing policies.
o
The executive branch is responsible for implementing and enforcing laws
enacted by the legislative branch. It includes the head of state or government,
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along with government departments, agencies, and officials tasked with
carrying out the day-to-day operations of the state.
o
The executive branch has broad authority to execute policies, manage public
services, and administer government programs. This includes functions such
as diplomacy, national defence, law enforcement, economic management,
and public administration.
o
The head of state or government, whether a president, prime minister,
monarch, or equivalent, serves as the chief executive officer and is
responsible for overseeing the functioning of the executive branch. The
executive leader is accountable to the legislature and the electorate for their
actions and decisions.
o
Judicial Power:-
The judiciary interprets laws and resolves disputes. It consists of courts whose role is to resolve legal disputes, apply the law in specific cases and ensure a fair and impartial administration of justice. Judges and magistrates, who are independent of the parliament and executive, uphold the rule of law and protect individual rights.
The separation of powers principle aims to establish a system of checks and balances, where each branch acts as a check on the powers of the others, preventing any one branch from exceeding its constitutional authority or infringing on the rights of citizens. By distributing power among distinct branches, the principal fosters accountability, transparency, and the protection of individual liberties within democratic governance frameworks.
b) Relate the separation of powers principle to the Australian Tax system, identifying
how each of the 3 powers (legislative, executive, judicial) is represented in the tax system. Your answer should include reference to the Australian Constitution and how it relates to taxation.
Answer:- Reference - https://www.aph.gov.au/About_Parliament/House_of_Representatives/Powers_prac
tice_and_procedure/00_-_Infosheets/Infosheet_20_-
_The_Australian_system_of_government#:~:text=The%20principle%20of%20the
%20separation,and%20balances%20on%20each%20other
.
https://tticdn.blob.core.windows.net/tti-files/dmfile/
Institutional_Framework_of_Taxation_in_Australia.pdf
In Australia tax system, the principle of separation of powers is reflected through the distinct roles and functions of the legislative, executive and judicial branches of government, as outlined in the Australian Constitution.
Legislative Power:-
The legislative branch, represented by the Australian Parliament, holds the primary responsibility for creating and
amending tax laws. The Parliament, consisting of the House of
Representatives and the Senate, enacts tax legislation through the passage of bills and the adoption of tax laws.
o
The Parliament exercises its legislative authority under Section 51(ii) of the Australian Constitution, which grants it the power to make laws with respect to taxation. This provision establishes the legal framework for the imposition, assessment, and collection of taxes within Australia.
o
The Parliament regularly introduces tax bills and amendments to the tax code, which undergo scrutiny, debate, and approval by both houses of Parliament before becoming law. Tax laws enacted by Parliament form the foundation of the Australian tax system and govern the imposition of taxes on individuals, businesses, and other entities
.
o
Executive Power:- The executive branch, represented by the government of the day and led by the Prime Minister and Cabinet, is responsible for the administration and enforcement of tax laws. The Australian Taxation Office (ATO), as an executive agency, oversees the implementation of tax policies and ensures compliance with tax laws and regulations.
o
The ATO exercises executive authority under the direction of the government to administer various taxation laws, collect taxes, process
tax returns, conduct audits, and enforce tax compliance measures. It also provides guidance and support to taxpayers and administers tax-
related programs and initiatives on behalf of the government
.
o
Judicial Power:- The judicial branch, represented by the independent
judiciary, plays a crucial role in interpreting tax laws, resolving disputes, and adjudicating tax-related matters. Courts and tribunals, including the Federal Court of Australia and the Administrative Appeals
Tribunal (AAT), have jurisdiction over tax cases and legal disputes involving taxation.
o
The judiciary exercises judicial authority to review the legality and constitutionality of tax laws, interpret statutory provisions, and resolve disputes between taxpayers and the ATO. Courts and tribunals ensure
the fair and impartial application of tax laws, protect the rights of taxpayers, and uphold the rule of law within the tax system.
o
Judicial decisions and precedents established by courts and tribunals provide guidance on the interpretation and application of tax laws, shaping the development of tax jurisprudence and influencing future tax litigation and legal proceedings.
In summary, the separation of powers principle in the Australian tax system ensures a balance of authority and accountability among the legislative, executive, and judicial branches of government. By delineating distinct roles and responsibilities, the principle safeguards
against the concentration of power, promotes transparency and accountability, and upholds the integrity of the tax system within the framework of the Australian Constitution.
8. a) Briefly discuss the key features of general deductions, including reference to the relevant sections of the Income Tax Assessment Act
.
Answer:- Reference Paper Back Book Page number 295.Chapter 8 – General Deductions General deductions in income tax refer to expenses that taxpayers can claim against their assessable income to reduce their taxable income. The key features of
general deductions include:
o
Necessary Expenses
: General deductions are expenses that are necessarily incurred in the process of producing assessable income or carrying on a business for that purpose. They must be directly related to the income-earning activities of the taxpayer. o
Allowable Expenses
: To be deductible, expenses must be incurred in the relevant income year and be related to the taxpayer's income-producing activities. They should also not be of a capital, private, or domestic nature.
o
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)
: This section outlines the general principles for allowable deductions. It states that deductions are allowed for losses or outgoings that are incurred in gaining or producing assessable income, except where the expenditure is of a capital, private, or domestic nature.
o
Examples of Deductible Expenses
: Deductible expenses can include employee wages, rent for business premises, costs of goods sold, repairs and maintenance, utilities, insurance premiums, professional fees, and advertising expenses.
o
Substantiation Requirements
: Taxpayers must be able to substantiate their
claims for deductions with appropriate records and documentation. This ensures that the expenses claimed are genuine and directly related to income-producing activities.
o
Anti-Avoidance Provisions:
The tax law includes anti-avoidance provisions to prevent abuse or misuse of deductions. These provisions aim to disallow deductions that are artificially contrived or not incurred for the purpose of producing assessable income.
Understanding these key features helps taxpayers determine which expenses they can legitimately claim as deductions on their tax returns,
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thereby reducing their taxable income and overall tax liability.
b) Explain the concept of specific deductions with reference to a minimum of three (3) different example sections from the Income Tax Assessment Act.
Answer: Reference - https://www.ato.gov.au/forms-and-instructions/deductions-for-prepaid-
expenses-2022/general-deductions-and-research-and-development
https://www.ato.gov.au/forms-and-instructions/deductions-for-prepaid-expenses-2022/
general-deductions-and-research-and-development#ato-
Generaldeductionprovisions
https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/
depreciation-and-capital-expenses-and-allowances/other-capital-asset-and-
expense-deductions
o
In the Income Tax Act, special allowances are expenses that a taxpayer can claim as a deduction for specific purposes or under certain circumstances. These deductions differ from general deductions and are often subject to specific sections of the tax code. Here are three examples of specific deductions that relate to the relevant sections of the Income Tax Act:
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Depreciation Expense (Division 40):
Chapter 40 of the Income Tax Act deals with capital deductions, including depreciation of assets used in income-producing activities.
Section 40-25 sets the rules for reducing the value of depreciable assets.
Taxpayers can claim deductions for the depreciation of assets (such as machinery, equipment, vehicles and computers) used in their business or in earning income.
o
Charitable Donations (Section 30-15):
Section 30-15 of the Income Tax Act allows a taxpayer to deduct gifts made to Deductible Gift Recipients (DGR).
Taxpayers can claim deductions for gifts or donations of $2 or more to eligible charities, educational institutions, hospitals and other approved organizations.
The deduction of charitable donations promotes charity and supports the work of charitable organizations in society.
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Superannuation Contributions (Division 290): Section
290 of the Income Tax Act applies to the deduction of superannuation contributions made by individuals. Section 290-150 allows individuals to claim deductions from their personal pension insurance contributions they make to a regulated pension fund or retirement savings account.
Taxpayers must meet certain eligibility requirements and provide a valid deduction notice to their superannuation fund to claim this
deduction.
These examples illustrate how various sections of the Income Tax Act provide special allowances that allow taxpayers to claim certain types of deductions for expenses or payments. Understanding these special benefits will help taxpayers maximize their tax benefits and comply with the relevant provisions of the tax code.
9. Alan owns an investment property from which he derives rental income. The invest-
ment property was constructed as a main building with a separate garage adjoined to the building.
The current old iron roof on the main building had been repaired several times dur-
ing past years; therefore, Alan has decided to replace the entire old rusty iron roof on the main building only with CHEAPER cement tiles.
Explain, with reasons, whether replacing the rusty iron roof on the main building with cheaper cement tiles is deductible as a repair expense. If available, make ref-
erence to the relevant sections of the Income Tax Assessment Act, relevant Taxa-
tion Rulings, or any common law case in your explanation. Check the ATO Tax Rul-
ing TR 97/23 for additional information.
Answer : Reference- https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/
ato/00001
Topics, What is ruling about?
https://www.bmtqs.com.au/bmt-insider/taxation-ruling-97-23/
The replacement of the old rusty iron roof on the main building with cheaper cement tiles
would likely be treated as a capital improvement rather than a repair expense for tax pur-
poses. This means that Alan may not be able to deduct the full cost of replacing the roof im-
mediately, but he may be able to claim deductions for the depreciation of the new roof over
time. Here are the reasons why the replacement of the roof would likely be considered a
capital improvement rather than a repair expense: Nature of the Work: The replacement of
the entire roof with a different material (from rusty iron to cement tiles) represents a signifi-
cant alteration to the property. It goes beyond mere repair or maintenance of the existing
structure.
Capital Nature of Expenditure:
Expenditures resulting from roof replacement are likely
to bring permanent benefits to the property beyond the current income year. This in-
creases the
value, functionality and
longevity
of
the
property.
ATO Tax Ruling TR 97/23:
This Rule provides guidance on the deduction of re-
pairs and capital improvements. It states that expenditure is generally capital in na-
ture when it involves the acquisition, construction or extension of capital, or improve-
ments, replacement or alteration of capital.
Income Tax Assessment Act:
Although there is no specific section directly applicable
to this scenario, the general principles of deduction under the Income Tax Assessment
Act are likely to apply. Section 8-1 of the ITAA 1997 allows a deduction for losses or ex-
penses incurred in obtaining or earning assessable income, but does not include capital ex-
penditure.
Common Law Case
: This law also supports the view that capital improvement or improve-
ment costs are generally not deductible. Case in question is Sun Newspapers Ltd Vs. Fed-
eral Commissioner of Taxation (1938) 61 CLR 337, in which it was held that the cost of im-
proving or changing
fixed
assets is
not
deductible
as repairs.
Therefore, Alan should consult a tax advisor or accountant to determine the correct treat-
ment of expenses for tax purposes. While he may not be able to claim an immediate deduc-
tion for the cost of replacing the roof, he may be able to deduct the cost of the new roof over
its lifetime as a capital improvement to the property.
10. Kelly has been investing in shares for many years. During the year ended 30 June 2022 she disposed of the following parcels of shares. Calculate the minimum capital
gain that will be included in her assessable income. Show all working out.
Company
Purchase
date
Cost
Sale Date
Sale Pro-
ceeds
Telstra shares
17 Nov 1997
6,300
17 Nov 2021
5,050
Rio Tinto shares
20 Sep 1984
6,000
11 Jul 2021
19,500
One steel share
8 Feb 2022
1,200
28 Jun 2022
1,440
Woolworths shares
15 Aug 1998
6,500
31 May 2022
9,150
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Answer 1:-
Purchase Date 17
th
Nov 1997
Cost $6300
Sale Date 17Nov 2021
Sale Proceeds: $5050
Capital Gain= Sale Proceeds – Cost Base
Capital Gain = $5050-$6300
Capital Gain = -$1250
Since the capital gain is negative (-$1250, it means Kelly made a loss on the sale of Telstra Shares. However, for tax purposes, only capital gains are included in assessable income.
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Therefore, the minimum capital gain included in her assessable income for the Telstra shares will be $0.
o
Answer 2 -
Purchase Date 20 Sep 1984 – Exempt – The Capital Gains Tax(CGT)
regime applies to CGT assets acquired and disposed of after 19 September
1985.Assets acquired before 20 September 1985 are outside of the provisional CGT
regime
Cost .$6000
Sale Date 11 July 2021
Sale Proceeds $19500
Capital Gain= Sale Proceeds – Cost Base
Capita Gain = $19500-$6000
Capital Gain = $13500
Therefore, in Kelly's case, the CHT from the sale of her Rio Tinto shares, which amounts to $13500, would be entirely exempt from CGT. As a result, none of this capital gain would be included in her assessable income for tax purposes.
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Answer 3 - Purchase date: 8 Feb 2022 Cost: $1,200 Sale Date: 28 Jun 2022 Sale Proceeds: $1,440 Capital Gain = Sale Proceeds - Cost Base Capital Gain = $1,440 - $1,200
Capital Gain = $240 So, the minimum capital gain that will be included in Kelly's assessable income for the One Steel shares is $240.
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Answer 4 - Calculate the capital gain: Capital Gain = Sale Proceeds - Cost Base Capital Gain = $9,150 - $6,500 Capital Gain = $2,650 So, the minimum capital gain that will be included in Kelly's assessable income for the Woolworths shares is $2,650.
11. a) Under what circumstances will a taxpayer be able to choose between the discount method and the indexation method when calculating the taxable capital gain on disposal of an asset? Include relevant sections of the Income Tax Assessment Act in your answer.
Answer:
- Reference - https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-
2023/part-a-about-capital-gains-tax/how-to-work-out-your-capital-gain-or-capital-loss
https://www.cliffsnotes.com/tutors-problems/Accounting/52393815-Under-what-
circumstances-will-a-taxpayer-be-able-to-choose-between/
In Australia, taxpayers can choose between the discount method and the indexation
method when calculating the taxable capital gain on the disposal of an asset under
certain circumstances. The choice between these methods depends on when the asset
was acquired and whether the taxpayer qualifies for certain concessions.
Discount Method
: Under the discount method, taxpayers are entitled to a 50%
discount on the capital gain if they have held the asset for more than 12 months before
disposing of it. This means only half of the capital gain is included in their assessable
income.
Indexation Method: Under the indexation method, taxpayers adjust the cost base of
the asset using an indexation factor based on the Consumer Price Index (CPI) to reflect
inflationary changes in the value of the asset. This method is only available for assets
acquired before September 21, 1999.
In most cases, taxpayers are free to select the strategy that yields the least amount of
taxable capital gain. The Income Tax Assessment Act 1997 (Cth) has the following
pertinent sections: Section 115-25: This section describes the requirements for using the discount method,
which include having owned the asset for a minimum of 12 months. Section 115-10 outlines the 50% capital gains discount for assets held for more than a
year, as well as defining the discount method. Section 115-30: Provides guidance on how to calculate the capital gain using the
discount
method.
For the indexation method, specific sections of the Income Tax Assessment Act 1997
might not directly address it since it was phased out in 1999. However, historical
versions of the Act would include provisions related to the indexation method. It's
important for taxpayers to consult with a qualified tax professional or refer directly to
the current version of the Income Tax Assessment Act for the most up-to-date and
accurate information regarding capital gains tax calculations and methods.
b)
James Kettle disposed of an Antique clock on 23 March 2022 for $17,300. He had acquired the clock on 12 May 1988 for $8,600. Calculate the assessable net capital gain on disposal of the clock using:
i.
The discount method
ii.
The indexation method
Show all working out for both methods
Answer in excel worksheet
.
12.
Charles Harley seeks your advice for the 2022 financial year
in respect of the transac-
tions below:
Purchase
date
Cost
Sale Date
Sale Pro-
ceeds
Investment
Property
1 April 2004
110,000
11 Jul 2021
320,000
Family resi-
dence
3 Jun 1995
195,200
12 Aug 2021
650,200
Jewellery
(worn regu-
larly)
23 Apr 1982
4,850
22 Apr 2022
6,300
Oil Painting
(protected
and in stor-
age)
3 Mar 1992
13,100
13 Apr 2022
10,350
Sailing Boat
14 Oct 1993
14,500
15 Dec 2021
10,200
A capital loss of $5,500 on shares was carried forward from previous years and is available.
a)
Determine the minimum amount of capital gain that Charles can include in his assessable income for the year. Show all working out.
Answer in excel worksheet
b)
Specify any losses that Charles has available to carry forward for future years (personal use, collectable, other)
End of Assessment
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