HI6028 - Taxation Theory, Practice and Law

Week 1 answers

Different functions of taxation include:

1. Fiscal - the tax budgets are prepared for the State and the Centre for realizing one of the main objectives of taxation policy, i.e, to meet the fund requirements of defense, environmental protection, social issues etc.

2. Allocation: this function ensures the equitable social income redistribution of wealth in the Economy, i.e, from the rich to the poor and needy. Hence in a way, it ensures social stability in the Economy and tries to bridge the economic gap between rich and poor.

3. Regulatory: This function is further sub divided into 3 parts:

a) Stimulating- which aims at socio-economic development of the society via providing exemptions, deductions, tax preferences and incentives to small entities, farmers, charities etc.

b) DE stimulating: this helps in bringing parity in the financial system by imposing higher taxes on certain activities or entities, for example. imposing higher import duties on imports ensures higher sales of domestic companies.

c) Replication (regeneration): taxing the utilization of natural resources , roads, minerals and using the proceeds to regenerate the exploited resources.

4. Controlling: this means controlling the sources of income of individuals and corporates as well as tracking their spends during the financial year via taxation rules and regulations.

5. Incentive : this function of taxation helps in incentivizing special individuals or corporates for doing some good responsible deeds, like warriors, army citizens etc.

 

Week 2 answers

According to Australian Taxation Office (ATO) , The Resides Test (office, 2019) states that If a person live permanently Australia, He /she is considered to be the Australian resident for tax purpose.

As given in the question , Amandeep lives permanently in Australia and signed contract with his employer to work at Australian office at Sydney, he also buy an apartment in Australia. Thus he qualifies to be Resident for Australian resident for tax purpose.

Amandeep would need to pay income tax on his salary and investments in Australia as he is an Australian resident, however, if he has paid foreign tax in the overseas income such as dividend tax paid for dividends earned in India, salary tax paid in New Zealand, etc  he would be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

Explanation:

As per Australian Tax Office residency test, the main domicile of Mr. Amandeep would fall in Australia as he owns an apartment in Sydney and lives with his family there. As a result he would be considered a resident within Australia and also be considered an Australian resident for tax purposes.

Amandeep would need to pay income tax on his salary and investments in Australia as he is considered an Australian resident. Per tax laws in Australia, any resident would be required to disclose all his income from Australia and overseas within his return of income. However, if any of such overseas income are subject to tax in respective countries then, such foreign tax in the overseas income would be provided as an offset to the tax payer to avoid double taxation. Thus, Mr. Amandeep  would only have to pay net tax in Australia after deducting dividend tax paid for dividends earned in India, salary tax paid in New Zealand, etc  to avoid double taxation.

Week 3 answers

Issue : Gary is the lessor who leased his commercial property to John to conduct bakery business with an obligation to repair modified or damaged parts if any after lease term. However, John couldn’t repair the same but paid $3,100 to Gary to cover the repair expenses.

Legislation : Provision says that lessee is responsible to keep the premises in good condition and to handover back to the lessor in the same condition as it was in the beginning of the lease period except normal wear and tear. Here damage to the building was not due to passage of time or Act of God . It was due to installation of Machinery and fixtures in the building by the lessee.

As per Polster, Inc. v. Swing, tenant was responsible to repair the damage to the drop ceiling, ceiling tiles, interior walls, front door sill and jamb as it was not normal wear and tear.

Also as per Churchill Forge, Inc. v. Brown, there is no unjust in requiring a tenant to reimburse the expenses to landlord. As a result cost will shift to the tenant/lessee as the case may be.

Conclusion :   Thus it is the responsibility of John to repair the property or else to reimburse the entire expenses incurred to Gary to put the building in good shape other than for normal wear and tear. (office, 1997)

Thus, Gary cannot claim the deduction for the same as he has not incurred any such expenses

Here, the installing of machinery and fixtures should be considered as capital expenditure as long-term benefit is determined. However, repairs at the end of the lease period will be categorized as revenue expenditure and considered in Profit & loss account for the purpose of tax.

Week 4 answers

1. When a legal expense is incurred in relation to the operation of a business to produce assessable income, it is generally allowable as a deduction. Exceptions are when the legal fee is capital, domestic or private in nature, if it is specifically excluded by another section of income tax legislation, or is incurred in earning exempt and non-assessable non-exempt income.

Legal Expenses incurred will be deductible expense.

2. Under instant asset write-off eligible businesses can:

    immediately write off the cost of each asset that costs less than the threshold

    claim a tax deduction for the business portion of the purchase cost in the year the asset is first used or installed ready for use.

Instant asset write-off can be used for both new and second-hand assets. Some exclusions and limits apply. Threshold amount for each asset is $30,000.

Fridge costing $800 can be written off as instant asset

3. The capital works deduction is available for:

    buildings or extensions, alterations or improvements to a building

    alterations and improvements to a leased building, including shop fitouts and leasehold improvements

    structural improvements such as sealed driveways, fences and retaining walls

    earthworks for environmental protection, such as embankments.

Shop alteration costing $ 22,000 will be capitalized and depreciation will be allowed over the period.

4. Advertising is an audio or visual that reaches your target audience and explains what your business does. Promotions, on the other hand, can be a little different than advertisements. Promotions include events, activities, sales, or anything that creates awareness for your business.

Both are allowed as deduction

T-Shirt prating cost of $,1500 allowed as deduction.

5.Deductions are specifically denied for fines or penalties (however described) that are imposed as a consequence of a breach of any Australian or foreign law.

Deduction for fine in violation of permit rules wll not be allowed.

Week 5 answers

Oct 1 2019 , CNC Machine, = $110,000 (gst included)

1sT May 2019, Holding Car = $63,000

Lets calculate the cost of machinery excluding of GST, as depreciation charged on the cost.

Considering the GST is 10%

GST calculation = Total cost including gst * rate of gst/ (1+ rate of gst)

= 110,000 *10/110 = $10,000

Therefore, original cost of machinery without gst

= 11000 – 10000 = $100,000

As per the income tax law, depreciation expenses are allowed as a decuction from business income.

  1. Prime cost method –

Depreciation for the year (taking FY 01 April 2019 to 31st March ‘2020)

= 100000/7 = $14,285.7

Depreciation are calculated as the cost of te asset divided by its useful life.

As purchased in second half of year. Only partial deduction will be allowed then

Thus, deduction allowed = $14,285.7/2 = $7,142.85

Depreciation on Holden Car = 63000/ 5= $12,600

Full depreciation will be allowed as purchased in first half of the year.

  1. Declining value method

Assuming the depreciation rate for machinery and car are 15% and 25% per annum respectively.

Therefore, Depreciation on machinery = 100000 * 15% = $15,000

As purchased in 2nd half of the year, partial deduction will be allowed.

Thus, deduction will be 15000/2 = $7,500

Depreciation on Holden car = 63,000 * 25% = $15,750

Full depreciation will be allowed as purchased in first half of the year.

 

References

office, A. t., 1997. ww.ato.gov.au. [Online]
Available at: https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/nat/ato/00001
[Accessed 20 May 2020].

office, A. t., 2019. www.ato.gov.au. [Online]
Available at: https://www.ato.gov.au/individuals/international-tax-for-individuals/work-out-your-tax-residency/
[Accessed 20 May 2020].

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