Taxation Law Assignment Solving Case Scenarios Concerning Tax Theory

Question

Task: Prepare a taxation law assignment evaluating the following case scenarios:
Question 1
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)

Question 2
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)

Question 3
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 cost 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. (10 marks)

Question 4
1. 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.
2. 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

Answer

Taxation Law Assignment Answer 1
Subsection 6(1) ITAA 1936 deals with the subject of tax residency for individuals and outlines test which can be used to determine the tax residency. These tests have been detailed in TR 98/17. There are three specific tests namely domicile test, superannuation test and 183 days test (ATO, 2018). However, all these three tests are not applicable in the given since Amandeep is an Indian domicile holder and is not physically present in Australia for 183 days. The residency of Amandeep is tested using ordinary residency test (Coleman, 2016).

As per this test, a host of factors are taken into consideration to determine tax residency. These are outlined below (Barkoczy, 2018).

• Purpose of visit – Typically, taxpayers coming to Australia for study, employment are more likely to be considered tax residents as against visitors or casual travellers.
• Professional and personal ties – A taxpayer who has close personal and professional ties is more likely to be held as Australian tax resident.
• Asset ownership in Australia – Since fixed assets purchases in Australia indicate the taxpayer’s intention to settle in Australia for long, hence such individuals are more likely to be Australian tax residents.
• Nature of social life in Australia – The more normal the life in Australia is compared to country of origin, the greater the chances of Australian tax residency.

Based on the above test, Amandeep would be a tax resident of Australia. The key reasons for the same are outlined below. 1) Amandeep has come to Australia for employment and is settled in Australia with family.

2) He has significant personal ties as his wife continues to be in Australia and he frequently visits Australia during holidays. Professional ties with Australia exist as salary credited in Australian bank and employment contract executed in Sydney.

3) There is fixed asset ownership by Amandeep in the form of house in Sydney.
4) His social life during his stay in Australia is perfectly normal.

Answer 2
Gary has received a payment of $ 3,100 and the suitable tax treatment for the same needs to be determined.
In order to understand the nature of the given payment, it is essential to highlight how allowances differ from reimbursement from the taxation treatment. As highlighted in TR 92/15, an allowance is defined as a payment of pre-determined amount which is paid in context of specified expense without regards to the actual expense incurred on the given item. As a result, with allowance it is possible that the taxpayer may derive some economic benefit as the allowance amount may exceed actual expense (Nethercott, Richardson. and Devos, 2016).
However, in context of reimbursement, the amount which is paid is always equal to the actual expense which has been incurred. As a result, there is no chance of the taxpayer deriving any economic benefit from being reimbursed. This is also indicated by Taxation Board in Case 153 10 TBRD 480. As a result, reimbursement amount is usually not reflected in the assessable income unlike allowances which contribute towards assessable income (Barkoczy, 2018).

As per the relevant facts, the amount received by Gary would be termed as reimbursement as this very same amount has been used in repair. However, in accordance with the lease agreement, John had the contractual responsibility of getting the repairs done. As a result, by paying Gary the money spent by him on repairs, John is merely fulfilling his contractual obligation. By accepting the payment, Gary is not deriving any economic benefit and therefore the $3,100 amount would have no tax consequences for Gary (Coleman, 2016).

Answer 3
For determining if the underlying expense is capital or revenue, the appropriate test has been suggested by Dixon J in Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73 case. As per this test, if the underlying expense seeks to gain a long term (more than one year) advantage, then the expense is capital or else revenue (Barkoczy, 2018). The given situation would be analysed keeping this in mind (i) The legal expenses incurred by John relate to false advertising would have long term impact on the reputation of the business. Owing to this, the underlying legal expense would be capital and not revenue. As capital expenses cannot be deducted under s. 8-1 ITAA 1997, hence claim under s. 40-880 would be made for business related capital expenditure(Nethercott, Richardson. and Devos, 2016).

(ii) The nature of advantage derived from the purchase of new fridge and building additional space in shop front would be long term as this would boost sales not only in the current year but in future years. As a result, deduction under s. 8-1 ITAA 1997 is not allowed. Hence claim under s. 40-880 would be made for business related capital expenditure which would be availed over a 5 year period (Coleman, 2016).
(iii) The incremental effect of T-shirt based marketing would be limited only in the short term and would not extend over the long run. As a result, the expense would be termed as revenue which has direct relation with production of assessable income. Hence, deduction under s.8-1 ITAA 1997 would be claimed.

(iv) Assuming that the permit is meant for long term, then the impact on business sales would also be long term since footpath usage would provide more space to display items and thereby increase sales. Thus, the expense is capital in nature. As a result, deduction under s. 8-1 ITAA 1997 is not allowed. Hence claim under s. 40-880 would be made for business related capital expenditure which would be availed over a 5 year period (Barkoczy, 2018).

Answer 4
The prime cost method for decline in value in accordance with s.40.75 ITAA 1997 is stated below (Autlii, 2020a)
The diminishing value method for decline in value in accordance with s.40.72 ITAA 1997 is stated below (Austlii, 2020b).
(a) The relevant information for depreciable asset CNC machine is listed below.

Useful life = 7 years
Business usage = March 31, 2020 – October 1, 2019 = 183 days
CNC machine (including GST)=$ 110,000
Thus, base value is CNC machine cost (excluding GST) = $110,000 (1-(1/11)) = $ 100,000

Prime cost method decline in value (2019/2020) = $100,000*(183/365)*(100%/7) = $7,142.86
Diminishing method decline in value (2019/2020) =
100,000*(183/365)*(200%/7) = $14,285.71
The deduction of the above decline in value can be availed under general reduction under the assumption that 100 % machine usage is for generation of assessable income (Nethercott, Richardson. and Devos, 2016).

b) Assuming 100% usage of the car for business, the following decline in value has been computed. .

Useful life = 5 years
Business usage = March 31, 2020 – May 1, 2019 = 336 days
Holden Car (Base Value) = $ 63,000
Prime cost method decline in value (2019/2020) = $63,000*(336/365)*(100%/5) = $11,598.9

Diminishing method decline in value (2019/2020) = $63,000*(336/365)*(200%/5) = $23,197.81

References
ATO (1998), TR 98/17, [Online] Available at https://www.ato.gov.au/law/view/documentDocid=TXR/TR9817/NAT/ATO/00001
Austlii (2020a) Section 40-72, [Online] Available at
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.72.html
Austlii (2020b) Section 40-75, [Online] Available at
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.75.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,
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press,