The issue in the first case is sit out about the Tax Residency of overseas employee working in Australia and Assessing the Taxable income and Tax liability in regards to Income Tax laws in Australia. It provides insides about Australian Taxation System and Common law cases effects on determination of Taxable income and deductions to different types of income. The second case is based on taxability of Income and deductions arise from the transactions related to property and its maintenance.
It gives importance to individuals’ general savings strategies and how they can get tax offsets and Capital Gains benefits in tax. It also gives the idea about properties contributes to total income and which types of deductions can be claim as tax offsets. The whole assignment is concentrated on the individuals’ tax accessibility and different types of Tax offsets can be claim by the individual. PART 1 – INDIVIDUAL’S TAX RESIDENCY AND TAX ASSESSMENT According to Income Tax Assessment Act 1936, Section 6(a) gives the definition of Residency of individual with any one of three tests to pass to be Australian Tax Resident. The definition determines resident of Australia means, A. A person who resides in Australia and includes a person, i.
Whose domicile is in Australia, unless the commissioner is satisfied that his permanent place of abode is outside Australia ii. Who has actually been in Australia, continuously or intermediately, during more than one half of the year of income, unless the commissioner is satisfied that his permanent place of abode is outside Australia and that he does not intend to take up residence in Australia.
Mr. Basil has to evaluate on test given. As his usual domicile is England he is not qualified for first test. In Second test, He becomes tax resident as he was in Australia for more than half of taxable year i. e. he arrived in Australia on 28 August 2009 and the tax year completes on 30 June 2010 but he can also become non – resident if tax commissioner satisfies that his normal place of Abode is England he is not willing to take residency in Australia. As per the FCT v Jenkins case, Mr.
Basil has developed home in Australia as he rented a accommodation in Adelaide and looking to buy a property if he likes the country and spots a real estate bargain in addition to that he has a bank account in Australia which shows clear intension to be in Australia for permanently for tax year which gives rise to residency as Australia becomes his permanent place of Abode. According to FCT v Applegate case, the permanent place of abode did not mean one that was everlasting or forever but it was permanent in relation to a particular year of income.
As Mr. Basil came to Australia on 3 years working visa with his wife and two children. It shows clear intention to be permanently in Australia for tax year. It also came in light that he set up rent accommodation and willing to buy property which shows his intensions to permanently be in Australia. These all facts consider the Mr. Basil as Australian resident for tax purpose and he has to pay tax on Australian income as well as income from outside Australia. ADVICE TO MR. BASIL ON TAX POSITION AND THE ASSESSABILITY.
• Salary: - Section 6-5 of Income tax assessment act, 1997 lay down Assessable income is all income in ordinary concept. In section 6-5(2), it describes if person is Australian resident, accessible income includes all ordinary income derived directly or indirectly from all sources, whether in or out of Australia. Mr. Basil has salary which is provided as ordinary income and must become taxable. • Rent Subsidy: - It’s also ordinary income for Mr. Basil as he received it in addition to his salary by his employer. It is not consider as Fringe benefit because it’s given as cash subsidy.
The ordinary incomes of Australian resident are assessable under Income tax act. • Motor Vehicle: - According to section 136 of Fringe benefit tax assessment act 1986, Fringe benefits tax is a tax placed on benefits provided by an employer to an employee. The benefit is given a money value and inflated to reflect a pre tax value, then taxed at a flat rate of 48. 5% in the hands of the employer. As motor vehicle is provided by the employer of Mr. Basil, it is considered as fringe benefit to him and it is totally exempted from assessable income. • Phone Account: - As employer of Mr.
Basil pays the half of phone account, it considers as the benefit to Mr. Basil but it is consider as fringe benefit and it is totally tax free for him. • Holiday: - As a performance award from his employer Mr. Basil received trip to Hong Kong, as it’s a part of employment it is also consider as fringe benefit to Mr. Basil and it is consider as non taxable. • English Rent: - Mr. Basil and his wife jointly own the house in England so they both are under partnership agreement and income from that house must be divided equally between them. So that $A400/month is consider as Mr. Basil’s taxable income.
• English Dividends: - As it is normal income it is also included in to assessable income but if paying company had paid tax before paying dividends, Mr. Basil can get tax offset up to that much. • English Interest: - According to Section 6-5 of Income Tax Assessment Act 1997 Interest income of Australian residents is consider as income in normal concept so it becomes Assessable in Australia. The interest earned in bank account in England by Mr. Basil and his wife is considered as joint income and as both has partnership in that income so both must pay income tax on their part of income.
Therefore the half of the English Interest is consider as assessable. • Gain on English Shares: - According section 100-25 of ITAA 1997, Shares are considered as CGT asset. The gain on shares is a statutory income of Mr. Basil as he earned this income from shares bought in 1990. As per Section 100-35 of Income tax assessment act 1997, To Capital gains or losses occur where a CGT asset is subject to a CGT event i. e. the asset is sold more or less than relevant cost and the proceeds are greater than or less than the relevant cost base. the gain on English Shares can be considered either revenue gain or capital gain.
If the shares were purchased before 1 year and those shares sold and earned gain, it called as capital gain and it is assessable in Capital Gain Tax. The gain from CGT assets which are held less than one year and due to disposal of asset there is gain or loss, it is consider as revenue gain or loss. In this case, Mr. Basil had purchased English shares in 1990 which suggests that he hold the shares more than one year, so Income from that shares is consider as Capital Gain and it is assessable under CGT which deals 50% flat tax free gain (as per Section 102-3) and other part of 50% is assessable.
Here, Mr. Basil had gained A$ 9000 from England shares sale which is CGT event so, he gets 50% of that gain as tax exempt and on other 50% gain is considered as assessable i. e. A$ 4500. • Australian Dividend: - According to Gilders, Dividend in Australian is received after franking (Section 202 of ITAA 1997) so to consider the real income we have to include the tax that dividend paying company had paid to Australian Tax Department and together with that the individual claim credit on that paid tax from Australian Tax Department.
In this case, Mr. Basil received dividend from Australian company whose shares he held, so to find out his assessable income and tax claim we have to do some calculations as follow. Mr. Basil’s Australian dividend income is A$1750 which is 70% part of his dividend income as dividend paying company franked the 30% dividends and pay the rest i. e. A$1750 and the company had paid the tax to Australian Tax Office which Mr. Basil can as tax credit. Assessable income = 1750 * 100 /70 = A$2500 Therefore, Tax credit = 2500 – 1750 = A$750.
• Australian Shares: - According to Section 100-25 of ITAA 97, Gain or Loss from sale of shares consider as Capital gain if the shares which were sold, has been held more than one year. Those gain or loss which not satisfy the section 100, it consider as ordinary income and it is include in assessable income. As Mr. Basil did not hold the Australian shares more than one year, the profit or loss consider as normal income or loss, as here in this case he lost A$ 1850 ( 8250 – 6400) it can be treated as negative income and assessable.
• Chairs: - Chairs are consider as one kind of personal asset of Mr. Basil as he bought it by paying A$ 550, but he didn’t sold during the year. Even though its value increased after finding the truth of its antiqueness, it is not consider as income for Mr. Basil. The CGT even didn’t occur in this situation. . PART – 2 ADVISE TO KUMAR On the basis of Taxation Ruling 97/23 on Income Tax: Deduction for Repairs explains most of fundamental differences between repairs and improvements. In Section 25-10, Repairs are described as work done on premises.
In ordinary meaning repairs means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. The repairs are normally of occasional and partial nature. If work done increasable improves the property it not consider as repairs and not deductible under section 25-10 of ITAA 97. Repairs are mostly done for restoration of the efficiency of the property. Section 25-10(3) of ITAA 97 also precludes a deduction for capital expenditure.
The Sun Newspaper Ltd case describes differences between capital and revenue repairs. As Kumar had incurred $ 30000 to restore the property to its original nature so it is not consider as improvement of property. it is tax deduction under section 25-10 of ITAA 97. According to Tax ruling 97/23 paragraphs 59 to 66, expenditure to remedy defects, damage or deterioration in existence at the date of acquisition of property is consider as initial repairs which are of a capital nature and not deductable under section 25-10. In the Thomas case, same has defined by court.
The capital nature of expenditure can be determined by the test specified in Sun Newspaper Ltd case. In the Kumar’s case his $ 10000 expenditure is consider as capital nature as he has know the cost of that before buying and it is assumed that it affects the buying price of property which disallow the affect of Odeon Theatres case. So, Kumar can claim $ 30000 as a deduction and $10000 is consider as capital expenditure and will include in cost of property. According to Pearson J in Day v Harland and Wolff case, Only maintenance in the anticipation of forthcoming defects or deterioration does in face cease to be repair work.
In paragraphs 92 to 95 in Taxation ruling 97/23 explains the maintenance work to be consider as repair. In the BP Oil Refinery (Bulwer Island) Ltd case, it is clearly said that maintenance work in the anticipation of forthcoming defects of deterioration does consider as repairs and deductable under section 25-10 of ITAA 97. As Kumar is spending $ 1500 to prevent the future problem of termites in remaining part of building, it is consider as repairs according to the BP Oil Refinery (Bulwer Island) Ltd case. CONCLUSION.
These assessment tasks provide insights about income tax in Australia. It provide practical know how to assess individual’s tax liability. It provide all the consideration from start to end of the tax computation like determining residency of individual to his different income and how different situation affects computation of tax. The second task gave idea about Taxation of Income and deduction from property. Overall it increased the knowledge of individual’s tax assessment. REFERANCE LIST ? Gilder et al. (2009). Understanding Taxation Law 2010: 4th Edition.
NSW: LexisNexis/Butterworths. ? Deutsch, Friezer, Fullerton, Hanley and Snape. (2009). Australian Tax Hadbook. Pyrmont, NSW: Thomson Reuters. ? Fisher and Hodgson. (2009). Tax Questions and Answers. Pyrmont, NSW: Thomson Reuter. ? Krever Richard. (2009). Australian Taxation Law Cases. Pyrmont, NSW: Thomson Reuters. ? Australian Tax Office. (2010) Taxation Ruling 97/23. Retrieved September 10, 2010 from http://www. ato. gov. au/ ? Australian Legal Information Institute. (2010). Tax legislation. Retrieved September 7, 2010 from http://www. austlii. edu. au/.