Taxation Theory, Practice and Law|HI6028|Holmes institute
Week 1 answers
Different functions of taxation:
The functions of taxes are a manifestation of their essence; they are a means to represent the characteristics of taxes. The functions of taxation illustrate its social purpose of the value-based distribution and redistribution of income. Each of the functions fulfilled by the taxation instrument is a manifestation of an internal feature, an indicator or trait or this economic category.
There are five main functions of taxation: fiscal, redistributory, regulating, controlling, and promoting.
1) The main function of taxation is the fiscal one. It is through fiscality that taxes play their role in the formation of the state budget necessary for the realization of national and holistic state programmes. The fiscal function provides for the achievement of the main social goal of taxation – the formation of the state’s financial resources necessary for executing the role of the latter (defense, social, environmental protection, etc.)
2) The allocation function of taxation expresses their essence as a special centralized instrument of allocation relations and consists of the social income redistribution among various groups of citizens: from wealthy to deprived ones, which ultimately provides for the assurance of the social stability of the population.
3) The regulatory function of taxation was initiated as soon as the state started to take active part in the economic set-up of the society. This function is aimed at achieving specific goals of the taxation policy through the taxation mechanism.
4) The controlling function of taxation – through taxation, the state controls the financial-economic activity of juridical and natural persons. This also contributes to controlling the sources of income and the directions of spending.
5) The incentive function stipulates special taxation arrangements for a certain group of citizens, who are social achievers (participants in wars, etc.). This function of taxation has a social facet.
Answer to week 2
To determine the residency status of the individual, "The Resides Test" can be performed to determine whether a person is an Australian resident for the purpose of income taxes.
The Taxation Ruling TR 98/7 applies to class of individuals entering Australia :
academics teaching or studying and students studying in Australia
workers who have entered into pre-arranged employment contracts.
As per this ruling, the meaning of the word "reside" is not defined and general dictionary meaning has to be taken into consideration.
The Oxford dictionary defines reside as a person who dwells permanently or has settled in a particular place to live.
Other factors like intention or purpose of residency, family, location of assets, social and living arrangements and the period of the stay should also be taken into consideration while determining the residential status.
Subsection 6(1) of the 1936 Income Tax Assessment Act defines the term resident includes a person whose domicile is in Australia or a person who has been in Australia for a continuous period or for intermittent period of one half of the year of income.
Analyzing Mr. Amandeep's residential status :
1) Mr. Amandeep lives in Australia permanently even though he is an Indian citizen.
2) He has signed the contract of employment in Sydney, Australia.
3) His family is residing in Sydney, Australia.
4) He has purchased a unit apartment is Australia (location of asset).
Therefore, considering all these factors, Mr. Amandeep is a Resident of Australia for the income tax purpose.
The Nationality of the Mr. Amandeep is irrelevant for the purpose of determining the residential status. Also, his temporary visit to India to visit his inlaws and family will not affect the residential status in Australia as the purpose of visit is temporary.
Taxability of Income:
An Australian resident is required to offer all the incomes earned domestically as well as internationally to tax.
Hence, Mr. Amandeep's Salary income and Investment income is taxable in Australia.
The aggregate salary income received during the year is taxable as Employment Income.
The dividend earned from investment of shares in Indian Company is taxable as Investment Income.
Answer to week 3
This is an example of expense reimbursement, hence Gary is not required to report the payment as income.
Reimbursement of expenses does not have any tax treatment. As per the lease agreement, John is obligated to repair any parts of the building that underwent modification or suffered damages, however, John agreed to reimburse Gary the expense that he will incur while doing the necessary repairs. Therefore, there no business relationship exists between Gary and John besides reimbursement of costs aimed at satisfying the agreement between them. There will not be any tax treatment for the money Gary receives to do the repairs.
Full amount of rent earned on leased commercial premises is included in income tax returnLessor can claim deduction for related expenses for the period the property is rented or is available for rent:
deduction for expenses relating to the management and maintenance of the property, including interest on loans.
some expenses are claimed over a number of years, including depreciation costs (decline in value of depreciating assets such as carpet, furniture and appliances), and certain construction expenditure.
However following expenses cannot be claimed as deduction
acquisition and disposal costs of the property
expenses not actually paid by lessor, such as water or electricity charges paid by lessee
expenses not related to the rental of the property.
In the given scenario while repairs were to be carried out by the lessee, John who in turn agreed to pay $3100 to cover the repair expenses. Technically Gary has not incurred any repair expenses hence he cannot claim any deduction for the same.
Additional amount received by Gary would tantamount to lease income and would be taxable for Gary.
Answer to week 4
In the US, the federal govt regulates advertising through the Federal Trade Commission (FTC) with truth-in-advertising laws, and additionally enables private litigation through various statutes, most significantly the Lanham Act (trade mark and unfair competition).
The goal is prevention rather than punishment, reflecting the purpose of civil law in setting things right rather than that of criminal law. The typical sanction is to order the advertiser to stop its illegal acts, or to include disclosure of additional information that serves to avoid the chance of deception. Corrective advertising may be mandated, but there are no fines or prison time except for the infrequent instances when an advertiser refuses to stop despite being ordered to do so.
In 1905, Samuel Hopkins Adams released a series of papers detailing the misleading claims of the patent medicine industry. The public outcry sparked from the articles led to the created of the Food and Drug Administration in 1906.
In 1941, the US Supreme court reviewed the Federal Trade Commission vs Bunte Bros LLC, under Section 5 in regard to Unfair or Deceptive Acts or Practices
In 2013 and 2014, the US Supreme court reviewed three false advertising cases; Static Control Vs Lexmark (Concerning who has standing to sue under the Lanham Act for false advertising). ONY Inc Vs Cornerstone Therapeutics, Inc. and POM Wonderful LLC Vs Coco-Cola Co
State Govt have a variety of unfair competition laws, which regulate false advertising, trademarks and related issues. Many are very similar to that of the FTC and in many cases copied so closely that they are know as "Little FTC Acts" These laws also go by the terminology "Unfair, Deceptive or Abusive Acts and Practises" Laws (UDAAP or UDAP Laws) and can vary widely in the degree of protection they provide to consumers, according to the National Consumer Law Center.
Purchase of Assets for the business is exempt from Income tax because generally assets are liable to sales tax.
Advertising expenses can be deducted
You may deduct expenses for advertising your business to customers. It's important to note that these must be ordinary and reasonable expenses for advertising. some examples would be the printing of business cards, placing a yellow pages ad, running newspaper, Tv and radio advertisements (including production costs) and the costs for setting up your business website.
Expenses for Promotion Activities can be deducted
Expenses like sponsoring local events, special events to bring people to your business, publicity costs are deductible.
Answer to week 5
The following information is given in the question:
date of purchase
Life in years
1. Oct. 2019
$110, 000 ( gst included)
1. May. 2019
The cost of machine excluding gst needs to be calculated as depreciation are calculated on cost excluding taxes only -
Considering gst as 10%
Gst will be calculated as below
=total cost including gst * rate of gst/ (1+ rate of gst )
= $ 1,10000 * 10 / 110
= $ 10,000
Thus, cost of machine excluding gst will be
= $1,10000- $10000
The depreciation on fixed assets for the year is generally allowed as deduction from the business income for that year while calculating taxable income for the year in accordance with the income tax law.
The company may adopt any method for depreciation There are two methods that are being used for calculation of depreciation. Calculations under both the methods are explained below.
1.Prime cost method
This is also called straight line method. In this method asset declines at a uniform rate over the useful life of the asset.
(taking financial year as 1.4.2019 to 31.3.2020 )
Depreciation for the year using prime cost method:
= cost of asset ÷ life of asset
Thus, using above formula
Depreciation on machinery =$ 100,000/7 = $ 14,285.71,
As machine was purchased in second half of the year , deduction allowed will be:
$ 14,285.71/2= $ 7,142.85
Depreciation on Holden car
= $ 63,000/5=$ 12,600.
As car is purchased in first half of the year depreciation expense will be fully allowed for deduction.
2.Declining value method
This is also called written down value method. In this method asset declines with a fixed percentage on yearly basis and every year the depreciation is calculated on the declined value and not on the cost of asset.
Assuming that machine depreciate at 15% per annum and car depreciate at 25% per annum
Calculation of depreciation using declining value method
Depreciation on machinery:
$ 100,000*15% = $ 15,000
As machine was purchased in second half of the year, Deduction allowed will be
$15,000/2= $ 7,500
Depreciation on car
As car purchased in first half of the year, full depreciation will be allowed as deduction.