Taxation Structure of a Resident of Australia

Questions:

Part One: Income tax rates

Martha is a resident who is 40 years old and has $170,000 of taxable income for the current income year. Calculate her basic income tax liability.

Part Two: Ordinary income

In 1979, a doctor who lived and worked in Sydney purchased a 20 acre parcel of rural land on the outskirts of the city for $100,000. Over the years, he used the property as a “hobby farm” for growing “fruit trees” and as a “weekend retreat” for relaxation. Recently, the surrounding area has become more developed and the property has increased in value substantially. The doctor has also recently run into financial difficulties as a result of a malpractice suit and he is considering selling the property. Advise him as to whether he would be required to include any amount in his assessable income as a result of the sale.

Part Three: General deductions

Compare the decision in FC of T v Anstis (2009) with the decisions in Lunney and Hayley v FC of T (1958) and FC of T v Maddalena. Is it possible to reconcile the outcomes in these cases?

Requiremens – talk about genereal deductions what are the similarities between these cases what are the differences between these cases & how is it different/outcomes?

Provide summary of each case first and discuss similarities & differences?

Part Four: Provisions that deny or limit deductions

Discuss some of the circumstances in which entertainment expenditure is deductible?

Requirements – cover all sections? Talk about cases or give example different areas allowed

As per the rules of the Australian taxation law the resident is being taxed on the tax slabs set for the under the ITAA. The taxation structure of the resident of Australia Mr. Maratha would be as under.

Name of the Resident: Martha, Age: 40 Years

Taxable Income of Current Year        =          $170,000

Income Tax liability                               =          $17,547 + 37c per $1 above $80,000

                                                             =          $17,527 + 37C* (170,000 – 80,000)

                                                                =          $17,527 + $33,300

                                                                =          $50,827

Add: 1.5% Medical Levy                          =          1.5% * 50,827

                                                                 =          762.40

Total Liability                                          =          $50,827 + $762.4

                                                                  =          $ 51,589.4

The total tax that has to be paid by Mr. Martha would be 51589 that would be as per the provisions of the Income Tax Act after the medical levy of 1.5% on the total tax payable as per the ITAA.

As per GST Act of Australia sale of farmland is free from GST if following two condition is satisfied:

a) The Land is being used by the assesses for farming business for at least five years before the date of sale. The five years would be calculated prior to the date of sale which means the resident has to hold the land at least for five years before he can sell the land to the buyer to avoid the value of GST on thus sale of land.

b) The buyer is intended to use it for farming business. The buyer should intend that he should carry on farming business on the land sold to the farmer. Then only the benefit is available. It needs to be further seen that only intention is needed and not actual practice of farming so if by any reasons no farming was done exemption would still be there.

However, as per Income Tax Act of Australia any gain arising from sale of farm land will be considered as Capital gain and should be included in the Assessable Income. So no benefit is given on capital gains earned from the sale of land. The same capital gain will be charged at standard rate. However, if the asset has been held for more than one year then we can avail the Indexation benefit under the indexation method of calculating capital gains.

Exemptions under GST Act for Farmland Sale

Indexation benefit:  If the Asset has been acquired before 21 September 1991, the cost base Indexed as per the movement in the consumer price Index and the same is frozen as at 30th September 1999.

So, in the given case Capital gain will be charged to the doctor who lived and worked in Sydney. Further, the profit arising from the sale of farm land, need to be included in his assessable income. However, the doctor will be eligible for indexation benefit as discussed above.

Case of FC of T v Anstis (2009)

In this case the Federal court allowed the self education deduction claimed by the Assesses which was incurred by him in the course of earring the Youth Allowance. The Expenses was incurred by the assesses on Administrative fees of student, textbooks, depreciation of computer, travelling expenses other than to university. The Court found that the Expenses was incurred in deriving the Youth income and also satisfied the criteria as specified in Section 8-1 of the Act. So the expenses would be allowed as per the income tax act.

Lunney and Hayley v FC of T (1958) 

In this case the court states the fares paid by the Assesses on travelling from home to the place of employment and also from place of employment to home will not be allowed as deduction. The Court ruled that the travelling expenses are incurred in the way of going to the employment and not in the course of employment as specified in section 8-1 of the Act. So, no deduction will be allowed for the expenses on fares incurred.

FC of T v Maddalena

In this case High Court held the expenses incurred by the Assesses in the self – education of will not be allowed as deduction, if such study is designed to get the employment or new employment. The Expenses is considered as incurred in gaining or producing the assessable income. Any expense incurred in for the purpose will be allowed as a deduction under the Income Tax Act of Australia.

As per the Income Tax Act of Australia, generally the Entertainment expenses are not allowed even if the expenses are incurred specifically for the business purpose such as expenses incurred in entertaining the client or business lunch.

However, there is certain situation in which such entertainment expenses is allowed which is as follows:

1) Expenses which has been incurred in the ordinary course of business where the entertainment is provided to the paying client. Such as in hotel, theatres, restaurant e.t.c.

2) Entertainment allowance given to the employees provided the same is included in his assessable income.

3) Expenses incurred in the recreation facility that is situated in the office premises and used by the employee on working days. Such as pool, gym etc.

4) Expenses which have been incurred in providing the Fringe benefit to the employee.

5) Expenses incurred in providing overtime meal to the employee under an industrial award.

6) The Expenses on food and drink which has been incurred in seminar of at least four hours.

7) Expenses incurred on gratuitous entertainment provided to the sick, poor and disabled public. Example. Organizing Christmas party in child hospital.

8) Expenses incurred in the advertising the goods and service of the company.

References

Calculator, T. (2014-2015). Australian Income Tax calculator.

Capital Gain. (2014, june 11). Retrieved 2014, from https://www.ato.gov.au/General/Capital-gains-tax/.

Government. (2014). Austrailian taxation office. Retrieved from ato.gov.au: https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind39784n17290614.pdf

Office, A. T. (n.d.). ATO, Deductions for Business. Retrieved from ato.gov.au: https://www.ato.gov.au/Business/Deductions-for-business/What-you-can-claim-and-when/What-is-an-allowable-deduction-/

Property. (2014, june 12). Retrieved 2014, from https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Selling-your-rental-property/.