Taxation Case Study

Issues: 1. Are activities relating to use of land a business or a hobby? 2. Are the amounts related to the land deductible or not under general rules? * the loan to purchase the land and interest expense * council rates and insurance in respect of the land * payment to develop plans for proposed building 3. If no, is there a “specific deduction” section? References:

ITAA97 s8-1---general deductions: you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, and you cannot deduct losses or outgoings that are capital, private or domestic, gaining exempt income and specifically excluded by the Act. Specific deductions: you can deduct from your assessable income an amount that a provision of this Act (outside this Division) allows you to deduct.

s8-1---The test of whether a business is being carried on appear to be: 1. profitability 2. size 3. effort 4. bussiness records Steele v FCT (1996)---no deductible. The expense was incurred too soon before the commencement of the income earning activity to be deductible. Sun Newspapers Case (1938)---capital as once and for all and asset for the enduring benefit. This case: On July 1 2011, Hector Vector purchased a land and expected to build up accommodation. But the building project did not commence until 2016.

On 1 August 2011, Hector does another business--- renting vacant land to a neighbouring earthmoving business to earn money. So it means that Hector have two businesses in respect of the land. $2000000 Hector borrowed from NBN bank is regarded as capital because of the purpose to buy a land. So land is a tree. Under the use and purpose test, the money of relevant interest is used to acquire income-producing assets (property for rental). Interest paid on payment of council rates may be deductible, as it is an administrative charge rather than a penalty (ID2001/85). Insurance premium is paid for the land--- a capital loss.

During the 2012 taxation year, Hector Vector gains assessable income by renting the land. So rates of land incurred in respect of income-producing premises or land and they may be deductible as a normal business expense under ITAA97 s8-1. The payment to architect is to improve preliminary plans for proposed building—accommodation. According to the law, a taxpayer can claim a deduction for capital expenditure incurred in constructing capital works that are included buildings and structural improvements. The architect fee is one of structural improvements cost. Conclusion:

The loan is not deductible as capital. The interest is deductible to the extent to which it is incurred in carrying on a business for that purpose and is not of a capital. Council rates and insurance relating to the land is deductible. The payment to develop purposed building is deductible under ITAA97 Div 43:s 43-1 to 43-260. Task two Dear Mary-Anne, I appreciate the opportunity to advise you regarding this tax matter. To ensure a complete understanding between us, I am stating the pertinent information about the advice that I will be rendering and the facts you provided to me.

I just use my judgment in solving problems. Unless you instruct me otherwise, I resolve such questions in your favor whenever possible. However, the opinion I express does not affect the ATO. Thus, I cannot guarantee the outcome in the event the ATO challenges my opinion. The main issue in your case is whether you can be classes as a resident of Australia for income tax purpose. According to relevant law—ITAA36, the definition of reside is have one’s settled abode, dwell permanently or for a considerable time, live in or at a particular place.

And under ITAA97 s6-1, if an individual is an Australia resident, he/she need to satisfy ordinary concepts test or one of three statutory residence tests. So in link with your circumstances, you got the teaching contact of university in England. It is sure that the ruling will directly do another three tests that are domicile test, the 183-day test and commonwealth superannuation test. In the light of your fact, I feel that only the second rule will be looked.

Because the second statutory test delimits constructive residence in Australia is attributed to a person who is actually present in Australia for a total period of more than half the income year unless usual place of abode is outside Australia or does not intended to take up residency in Australia and an individual is a resident under third the third test if he/she is a contributing member of the superannuation fund, the fact is that you have recently completed your study and never worked in Australia before. In test two, it will be judged whether you are domiciled in Australia unless permanent place of abode is outside Australia.

You are born in Australia and have always lived with your parent before coming to the UK, which means your base-home is Australia. So the important factor to the ruling depends on whether you establish a permanent place of abode outside Australia. We need to consider what your intention, family business and assets are. There are some similar cases can be referred such as: IYENGAR v FC of T---resident under the domicile test Applegate’s case---an employed solicitor who was transferred to a Pacific Island to open up a branch office, but returned 21months because of ill, was held to have a permanent place of abode outside Australia.

Jenkins’s case---not a resident as bank officer has a permanent abode while overseas even though he intended to back. Now I show you both positive and negative factors in your information as followed: Positive---you prepared sufficient funds to pay for a return flight. You have few assets and a motor vehicle valued $15000 in Australia. Your family still lives in Australia. Although you lease an apartment closed to university, it is not regarded as house in UK. Negative---you are an UK employer and you open an account with a UK bank to receive salary. You also have a $10000 term deposit in UK bank.

The time you are back is unlimited. At 30 June 2012 you can know whether you will be considered a further 12-month extension to the contract, which may affect the ruling of being resident and your intention. Secondly whether you have make a decision to either apply for another teaching position in the England or return to Australia to start PHD courses is most significant because it show your attention. To my opinion, you can be classed as an Australia resident as you did not establish a permanent place of abode outside Australia in the income years ended 30 June 2012 under section 995-1of the ITAA1997.

But it is not the final result. The ruling is made by FCT later and I merely give you some advises. Another thing I will tell you is that if you are an Australia resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. If you are not, it includes ordinary and statutory income from all Australian sources. In this case, your income of source is your salary. Hence, if you are a resident, your income is taxed by both Australia and UK and if not a resident, your income is only as assessed by the UK.

Thanks again for choosing me to service your tax issue. I look forward to a long and mutually satisfying relationship. Should you have any questions or concerns regarding your matter or my services, please contact me. Best regards, Ling He Li Task three Assessable income: Salary 65524 Franked dividends received 3800 Unfrank dividends received 1350 Imputation gross-up 3800*(30/70)=1629 1629 US gross salary 8240 Centrelink Unemployment benefit (NewStart Allowance) 1950 Net rent loss 5200-7500= -2300 (2300) Less deduction.

Briefcase (280) Computer 1850*200%/4*60%*150/365=228 (228) Other deductible expenditure relating to Australian income (1000) Taxable income 78685 Tax payable (78685-37000)*30%+4650=17155. 5 17155. 5 Less tax offset Imputation credit 3800*(30/70)=1629 (1629) Foreign tax (<1000) (995) ADD Medicare levy 78685*1. 5%=1180 1180 Medicare levy surcharge 78685+2500+3300+2300=86785*1%=868 868 Flood levy (78685-50000)*0. 5%=143 143 HECS 78685+2500+3300+2300=86785*8%=6943 6943 Net Tax payable 23665. 5 Less PAYG (21000) Refund 2665. 5.