HI6028 Taxation Theory, Practice and Law Assignment Sample

HI6028 Taxation Theory, Practice and Law

Purpose of the assessment (with ULO Mapping)

Students are required to follow the instructions by your lecturer to confirm any relevant information. You also need to follow any relevant announcement on Blackboard to confirm the due date and time of the assignment. The individual assignment will assess students on the following learning outcomes:

1. Demonstrate an understanding of the Australian income tax system, the concept of FBT, Ordinary Income, general anti-avoidance provisions and income tax administration. (ULO 1).

2. Identify and critically analyse taxation issues. (ULO 2).

3. Interpret the relevant taxation legislations and case law. (ULO 3).

4. Apply taxation principles to real life problems. (ULO 4).

Assignments’ Instructions and Requirements

A. John recently purchased a Theatre Hall which was in poor condition. Before starting the hall, it needed to repair a portion of the ceiling, but he decided to replace the whole of the ceiling with different but better materials. The new ceiling, in addition to enhancing the appearance of the hall, improved the acoustics. The total cost of the material and of erecting the new ceiling was $210,000. It was estimated that the cost of repairing the ceiling would have been $150,000. With reference to Income Tax Assessment Act 1997 and relevant case law, discuss the amount, if any, allowable as a deduction for income tax purposes. (Maximum 800 words)

Kindly use the following instructions:

1. Facts of the scenario
2. Relevant laws and cases
3. Application of laws and cases
4. Conclusion

B. Sanjeev is employed as a marketing manager of the Theatre Hall. He requires to travel extensively during the year for work-related purposes using his car. Discuss the ways Sanjeev might be able to claim deductions for his car expenses.

QUESTION 2: 

After completion of your course, you start working at an accounting and tax office. Julia is your first client. She requires to lodge his income tax for 2021/22. She gave her annual income and deduction below. Calculate her Total Assessable Income, Taxable Income, Tax Liability, Medicare Levy and Medicare Levy Surcharge, if applicable, for the taxpayer (Julia) with the information below:

• Julia is a resident single mom with two dependent children (7 and 4 years old) taxpayer of   Australia for the tax year 2021-2022

• Her Taxable Salary earned is $109,000 (Including tax withheld), having no private health insurance.

• She had a $11,000 deduction.

• Julia has a student loan outstanding for his previous studies at Sydney University of $35,000.

• Julia’s employer pays superannuation guarantee charge of 10% on top of her salary to her nominated fund.

• Julia earned a passive income of $7,000 from the investments in shares in the same tax year.

Hint: The following website can be used to cross-check your answers, but you need to provide detailed calculations, rates and explanations with screenshots of rates from the ATO website. https://www.paycalculator.com.au/

Solution

Question: 1

a. Deduction for repairs and maintenance:

Facts of the scenario:

In this case, John has recently purchased a theatre hall which was in poor condition and wanted to repair that portion of the ceiling which would have cost $150,000. But, instead of carrying out the repairs on that portion of the ceiling, John has decided to replace the entire ceiling with different and better materials. As per the MBA Assignment Expert, This new ceiling will also enhance the acoustics of the building and the total cost will be $150,000. Hence, the issue here is John wants to know whether he will be able to claim a deduction for the replacement of the ceiling that he is doing under the income tax assessment act 1997.

Relevant Laws and Cases:

The income tax assessment act 1937 deals with the scenarios under which deduction will be allowed to the taxpayer under section 25-10 or section 8(1) i.e. the general deduction or the specific deductions. From the facts of the case, it is the case of allowing deduction under repairs and maintenance head and to increase the understanding income tax assessment act 1997 has come up with a 97/23 ruling where previous laws have been referred to and an understanding has been created by the regulations.

As per the clarification, repairs mean making good the defects, or damages to the property or building. The object is returned to its original form in case of repairs and does not lose its originality. Hence, in this case, the only deduction will be allowed under sections 25-10 but if major changes are made to the building or property and the property loses its form, then the deduction under this section will not be allowed. It means that only revenue expenditures are allowed as a deduction, and if any capital expenditure is done to the property, it will not be allowed as a deduction and it will be added to the cost of building, on which the taxpayer can charge depreciation(Barkoczy, 2021 p9(6)).

Hence, the word repairs do not include the word replacement or reconstruction and if replacement is done in its entirety then the same will be treated as a capital expenditure which is not deductible. The same was decided in W Thomas & Co Pty Ltd v FC of T (1965) that the taxpayer will not be allowed to claim a deduction of the expenditure that was incurred on extensive renovations. The High court also stated that expenditure done on the building will not be claimed if, without the certain renovation, the building will not be able to continue as an income-generating unit.

So, it is very important to differentiate between the word repairs, replacement, renovations, and whether a particular expenditure is in the nature of capital or revenue. For instance, if a repair is termed as an improvement, it will not be counted as repair. Also, if the repair changes the character of the building and improves the efficiency of its economic nature, then the same will not be treated as repairs and will not be considered in the revenue nature. It is also said, if the nature of the material used is improved, the changes will be counted as improvement and it will not be considered repairs (Federal register of Legislation).

Applications of Laws and Cases:

The ruling and the case law discussed above are applicable in this case as well. John was thinking to repair the part of the ceiling which was damaged, but later he decided to replace the whole part too with better and improved material, which will also improve the acoustics of the place, and as it is a cinema hall it will attract more customers. The ruling has stated that if a farmer is thinking to replace the damaged portion of the fence, it will be considered a revenue expenditure which is allowed as a deduction and the farmer will get the benefit of the deduction. But if the entire fencing is replaced it will be considered a capital expenditure which is not allowed as a deduction. Hence, here, the replacement of the ceiling will not be included in the definition of repairs (Stewart, 2018 p12(1)).

Conclusion:

From the above discussion, it can be concluded that John will not be allowed to take a deduction of the repairs that he had done on the ceiling because first it will be considered as a replacement, and it was not done to make good the damage, but, the entire ceiling was repaired, which will be considered as an improvement, and improvements are not allowed as revenue deduction and will be charged to depreciation. Also, this change has increased the cost of repairs and will increase the efficiency which will increase the economic flow. Hence, this expenditure will not be allowed as a deduction to John as per the Income-tax assessment act 1997, and it will instead be added to the cost of building.

b. Deduction for Work-related Car Expenses:

Section 8.1 of the income tax assessment act 1997 states that there are certain circumstances where deduction will be allowed for work-related expenses to the taxpayer as a general deduction. The expense will be allowed to be deducted from assessable income when it is incurred to earn the assessable income or to continue with the business or profession it is crucial to incur the expense. But, the expense will not be allowed as a deduction if it is in the nature of capital expenditure or it is incurred to earn exempt income or a particular provision in the act restricts the person from claiming the deduction.

In this case, it states that Sanjeev is employed with the company and his work ask him to travel extensively for work-related purpose using his car. Here, Sanjeev wants to know whether he will be able to claim the deduction on car expenses which he has incurred for work purposes. Hence, after reading the law, it can be said that work-related expenses incurred by the taxpayer are allowed as expenses because they are incurred to earn the assessable income, and they are necessary to earn the income. In this case, the car has been used by Sanjeev for work purposes, and hence, he will be allowed to claim a deduction on the same, but, it is important to notice this expense is not in the form of reimbursement and the employee has paid for these expenses (Allen, 2020 p5(9)).

Also, if the car has been used by the taxpayer for both private purposes and for work-related purposes, then the deduction will be allowed only for work-related expenses and the taxpayer will not be allowed to take a deduction for private use. Also, if the expense is in the nature of capital then the same will not be allowed as a deduction. Travel related expenses will be considered work-related expenses till the time, they are used for business purposes or to earn income. If the work of Sanjeev is travel based, he will be allowed to claim the deduction because he is using his car for travelling for work purposes and not for this personal expense. However, in some cases the travel expense incurred on the way from home to work and vice-versa are not allowed because travelling from home to work is extremely essential and domestic (Fullarton, & Pinto, 2020 p 9(3)).

Question: 2

Calculation of Assessable Income and Tax:

From the above, it can be said that the net tax liability that the taxpayer will be liable for discharge is $33,517. The taxpayer is an individual who has two dependents. The assessable income of the taxpayer will include the income from salary and the passive income earned by the taxpayer. The income tax is charged on the basis of rates that have been prescribed by the taxpayer and the same are as follows:

Here, the tax will be calculated as follows. For first 45,000 the tax will be 5,092 and for the remaining amount the tax will be (105000-45001) * 32.5% = 19,500. The Medicare levy will be charged as 2% of the taxable income i.e. the income calculated after reducing deductions from the assessable income. And in this case, the Medicare levy surcharge will be not taxed because it is for a family it is charged when income exceeds the threshold of $180,000. Hence, in this case, the Medicare levy surcharge will be nil(Connell, 2021 p 6(9)).

Reference:

Allen, C., (2020). From uncertainty to objectivity: reforming tax deductions for repair costs in Australia. In Australian Tax Forum: a journal of taxation policy, law and reform (Vol. 35, No. 4, pp. 496-520).https://espace.curtin.edu.au/bitstream/handle/20.500.11937/84394/84278.pdf?sequence=2

Fullarton, L., & Pinto, D. (2020). The Wade Case: An Analysis. This article was first published by Thomson Reuters New Zealand in the New Zealand Journal of Taxation Law and Policy and should be cited as Alexander Fullarton and Dale Pinto, The Wade Case: an analysis,(2021), 27(2). https://www.academia.edu/download/78490570/The_Wade_Case_An_analysis_SSRN_Manuscript.pdf

Stewart, M. (2018). Personal Income Tax Cuts and the New Child Care Subsidy: Do They Address High Effective Marginal Tax Rates on Women's Work?. Tax and Transfer Policy Institute, Australian National University. https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2018-12/complete_gender_tax_cuts_m_stewart_august_2018.pdf