Assignment.Long.Taxation.Law.Sem.1

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UNSW Business School

School of Taxation & Business Law

LONG ASSIGNMENT COVERSHEET

Taxation Law — TABL 5551

Semester One, 2016

Staple this coversheet (top left of page only) to the front of your submitted assignment answer

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Introduction

Income from all trade transactions that Joan conducted is assessable. Joan will be able to claim a deduction for expenses incurred in gaining or generating the income or any expenditure that she necessarily incurred on the activity of gaining or generating the income as long as the expenditure was not capital, private or domestic in nature1.

Assessable Income

According to Section 25(1) of the Income Tax Assessment Act, 1936-1965 (Commonwealth), assessable income consists of “the gross income derived directly or indirectly” from all sources of income of a taxpayer2. During calculation of assessable income all amounts received from the business like selling trading stock, amounts over their written-down value when selling certain depreciating assets, grants, interests etc3.

In this case, Joan’s assessable income includes the rent income the tenant paid $110 per week as from 30 April 2013 to 31 March 2014 and the $150,000 Joan received from selling the property she had bought. In the case Commissioner of Taxation v Stone (2005) 215 ALR 61, it was ruled that assessable income includes all gross earnings or proceeds including awards and grants.

Therefore, Joan’s assessable income is: (110 × (4×12) + $150,000) = $155, 280. This is the only amount of money that Joan owned and as per Zobory v FCT 95 ATC 4251, for income to be assessable, the amount should be beneficially derived4.

Deductibility

Allowable deductions Division 8 of the ITAA 1997 includes general deductions as well as specific deductions. General deductions are loss or outgoing that can be deducted and they include any loss or outgoing to a level that the loss was incurred in gaining or production of the assessable income or the loss was incurred when performing business in order to gain or produce assessable income5. Nonetheless, a loss cannot be deducted if it is a loss or outgoing capital, loss that is private and domestic6.

In this case, it is important to consider if Joan incurred the loss when gaining or producing assessable income or when doing business in order to produce assessable income because according to 8-1 of the ITAA 1997, general deductions depend on this7. Accordingly, it is vital that Joan’s assessable income was to be gained or produced. In this case, Joan incurred the loss when conducting business in order to produce assessable income.

In addition, to be eligible for deduction under 8-1 of the ITAA 1997, a loss or outgoing should have been incurred. An individual incurs an outgoing when he/she owes an inescapable debt8. A taxpayer is not obligated to have paid any money to have incurred an outgoing as long as he or she is definitively committed within the income year9. Therefore, according to section 8-1a loss or outgoing can be incurred although it has not been paid as long as the taxpayer is ‘entirely subjected’ to the loss or outgoing. In the case Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105 ( Coles Myer ), it was ruled that the outgoing should be appropriately referable to the income year where the taxpayer is seeking deduction10. In this case, the deduction for Joan include the loss she incurred after selling the property, Interest incurred on the loan to Rural Bank Ltd in regard to Joan’s ownership of the rental property and council rates, a loan establishment fee by the Rural Bank Ltd on taking out the loan, paying $14,000 to the New Haven council for failure to retain the property, loan of $110,000 from the Rural Bank Ltd, as well as the lump sum of $6,000 that Joan paid in order to be granted a lease by the landlord.

Positive limbs hypothesis necessities that the taxpayer should incur the expenditure that is related to the business being carried out. In this case, all the above expenditures that Joan incurred were related to the business she was carrying out11.

In addition, according to s 40-880 items that qualify for deduction include:

  • Expenses to set up the business

  • Expenses to convert that business structure to different structure

  • Expenses to raise equity for the business

  • Costs incurred while stopping the business activities

As far as positive limbs are involved, the items that qualify for deduction in Joan’s case include all costs and expenditures that she incurred while setting up the businesses any other cost related to her businesses

To this far, the total items that qualify for deductions as per positive limbs include:

  • Lump sum of $6,000 to be granted a lease for her business by the landlord

  • Loan that Joan took of $110,000 from the Rural Bank Ltd

  • Loan establishment fee by the Rural Bank Ltd of was $1,400

  • Loss of $10,000 after selling the property

  • Joan paid $14,000 to the New Haven council for failure to retain the property

  • Loan interests amounting to $20, 965

  • Rent of $240 per week (4×12) = 11,520

However, negative limbs that are mainly stipulated within s 40-880(5) outline that in case the expenditure falls within one of the negative limbs then deductions cannot be provided as per 40-880(2). The key negative limbs consist of:

  • If the expenditure is a part of the cost of a depreciating asset

  • The taxpayer can subtract the expenditure under another provision of the Act

  • 12The expenditure can be accounted in the capital gain/capital loss

Therefore, in this case all expenditures that Joan initially used as part of the cost of buying the property that was deprecating should be exempted from the deductions. As a result, the items that Joan can claim deductions for include:

  • Lump sum of $6,000 to be granted a lease for her business by the landlord

  • Rent of $240 per week (4×12) = 11,520

Deduction for the purchase of property

Expenses on buying properties such as the one Joan bought are a capital nature according to the general deduction provision. The property is a depreciating asset according to s 40-30 but Division 40 is not applicable to the property that Joan bought because the property fulfills all requirements of s 43-10. The property was solely to be used as a general setting for Joan’s income activities. However, the property that Joan was buying is applicable to Division 4313.

Capital gains

Capital gains tax (CGT) is applicable to assets acquired after 20th September 1985 and capital gains are made after realising that such assets are included in assessable income and their taxing is done at ordinary rates of tax. Therefore, capital gains tax will be applied in the assets that Joan acquired to conduct her business. Capital losses are counterpoised only against capital gains. Accordingly, in this case since Joan made a loss of $10,000 after selling her property, capital loss will be offset against capital gains. In the case Myer Emporium Pty Ltd (1985) 85 A.T.C. 4111 it was held that making a sale for future rights, separated from the right to loan repayment is the sale of a structural asset and the proceeds generated from this should not be termed as part of the income and therefore should not be taxed14. Similarly, in this case Joan made a sale in order to avoid incurring further losses she was incurring and moreover she encountered losses after selling the property and hence the money she made from selling the property should not be termed as taxable income.

References

The Institute of Chartered Accountants in Australia, Allowable deductions – essentials, [The Institute of Chartered Accountants in Australia, 2012]

Psaltis Alexander, Introduction to Taxation Law, [Psaltis, 2009]

Parsons, R. W, Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting, [University of Sydney Library Sydney, 2010]

Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105 (Coles Myer ),

Myer Emporium Pty Ltd (1985) 85 A.T.C. 4111

Zobory v FCT 95 ATC 4251

Section 25(1) of the Income Tax Assessment Act, 1936-1965

8-1 of the ITAA 1997

1 Psaltis Alexander, Introduction to Taxation Law, [Psaltis, 2009]

2 Section 25(1) of the Income Tax Assessment Act, 1936-1965

3 The Institute of Chartered Accountants in Australia, Allowable deductions – essentials, [The Institute of Chartered Accountants in Australia, 2012]

4
Zobory v FCT 95 ATC 4251

5 Parsons, R. W, Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting, [University of Sydney Library Sydney, 2010]

6 The Institute of Chartered Accountants in Australia, Allowable deductions – essentials, [The Institute of Chartered Accountants in Australia, 2012]

7
8-1 of the ITAA 1997

8
8-1 of the ITAA 1997

9 8-1 of the ITAA 1997

10
Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105 ( Coles Myer )

11 Parsons, R. W, Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting, [University of Sydney Library Sydney, 2010]

12 Parsons, R. W, Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting, [University of Sydney Library Sydney, 2010]

13 Parsons, R. W, Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting, [University of Sydney Library Sydney, 2010]

14
Myer Emporium Pty Ltd (1985) 85 A.T.C. 4111