Income Taxation - Assignment Example

Name: Lecturer: Course name: Course code: Date A).Income by ordinary concept This generally implies an ordinary income for a resident person. The treatment of ordinary income is that, for a resident person, the income generated includes income earned directly or indirectly from the country or outside the country in any year of income. Non resident person will have their income assessed either whether the income was generated from all source in Australia and or other income deemed assessable as income on some origin other than having an Australian source.ent B).the tax consequence of income received Normal income includes wages and salaries or fees derived from employment or service rendered. Gifts are not connected to employment and hence they are not treated as income unless adequate relationship between employment and service exist. Mahler, Schubert and tull are in the business of fishing and thus income derived from fishing is considered as their main source of income because a direct relationship between employer and the service rendered is clearly envisaged. The income of $100,000 received by Mahler, Schubert and tull is regarded as gifts on the ground that the amount received is not related to employment or service being delivered and thus a character of income does not exist. This therefore would mean that the amount received would not surfer taxation. Obviously, the matter is whether cash received is adequately connected to income generating activities so that it can be satisfied for those precise dealings or whether it simply occurred by high merit of some services or trading link up which is correlated Finally, the nature of the imbursement in the hand of the receiver decides whether the cash received is an income or merely a gift. It is not material that the payment falls within the definition of a ‘GIFT’ Mahler entered into an agreement to publish a magazine and was paid a sum of $30,000 inclusive of amount not to disclose the information to others, this amount constitute an income and it will be added to all other income derived by Mahler and taxed accordingly under the progressive tax rate. This is due to the fact that, transaction and cash received would amount to a business carried on. If an Australian resident receive income abroad, the total foreign assessable income must be disclosed whether it suffered tax in that country in which same income was generated or not. Exempted foreign income will be taken into consideration in arriving at the net assessable income. Tull sold the movie at a cost of $8,000 which constitutes an income and also was paid $50,000 as travelling cost to U.S.A in which he was to stay in U.S while pursuing film making. The tax implication is that, Tull will be subject to taxation from income generated within the country and outside the country. All Australian resident are taxed at their worldwide income and thus an Australian citizen living abroad would be required to include all income derived outside the country in his return. the government would offer an exemption inform of foreign income tax offsets when one has paid tax in another country. The consequence of tax off sets is to offer a relief on double taxation effect on an individual. Resident has an obligation of paying the medical fee subject to 1.5% charge on income received. Therefore, Schubert was offered $10,000 for OA medal but he was sick. This amount received is tax deductable on medical fee and it is deducted by the employer and submitted to Australia tax office. An exemption on medical fee is only applicable if a person is a non resident Case law 1 Facts: in 1940, a taxpayer enrolled in the AIF and served until released in the year 1945, before this recruitment, his company had assumed that, for workers who were recruited, it would make up the divergence between army and normal pay. This agreement was ordinary. After the war, Dixon revisited his previous service but was not indebted to do so nor was his company under any commitment. The taxpayer was paid $104 in the appropriate year and commissioner evaluated the amount received as proceeds based on ordinary concept HELD: Dixon CJ, Williams JJ, McTieman and Webb concluded that the amount was an assessable income. He was employed at a wage. The war positioned him in general with others in a situation in which Dixon was in the office on him to solicit. And thus his gross would be reduced. His manager acknowledged these essentials and anxious that they would do their finest to see that, if Dixon determined to unite to the armed force, his forces disburse and allowance would be added-on so that it would not signify a monetary loss From the taxpayer opinion, it is not doubtful that. When Dixon opts to join the military services, he relied to some degree on the pressure he received from his boss. This consequence was to maintain his earnings up to the normal that would have been upheld had he not joined. Hence the statement INCOME would be evidently appropriate to receipt from his armed disburses and allowances and would amount to an ordinary income. Q2a).tax deductibility of assets replacement, this allowance permits a company to suspend a capital gain from disposal of a company asset for utmost two years. If a company purchases a replacement asset or make a capital upgrading to an existing property, then the capital gain can be deferred until the gain is shaped up. Defer of capital gain to afterward income year is allowed by roll over. Any capital gain remaining will be subject to assessed income, A capital gain from disposal of a depreciated property used for production of revenue to the company is excused from CGT. Conversely, a computable quantity might occur on the provision for depreciation account . under the rental properties act: (claiming for repairs and maintenance) repair has been defined to mean exertion to make good in crack to or wear and tear of the assets while maintenance means effort to prevent assets deterioration. A company cannot claim full cost on repair and maintenance in the year of income if the expense does not have a direct relation with wear and tear allowance or other cost which is not directly attributed to cost of renting the property Ruby Company made a replacement of identical assets to the kitchen fittings. In this case, a company received a new assets inform of purchase to replace the old one. The tax implication is that a company can get exemptions for the replacement of assets by claiming expense incurred on repair and maintenance cost. If a capital gain exists from disposal of the assets, the company can reschedule the tax responsibility to disburse tax on the capital gain. To claim this expense, the tax authority recommends that a company should keep proper books and records such as rental income received and expense deductable for the next five years and also ownership of property and the purchasing cost and disposal of the same. The law states that an exemption on tax deductibility is only applicable when a replacement is done on the identical cost and the companies do not charge extra rental charge above the rental pay of $15,000 threshold. if the company otherwise do not comply with this rule, that is after assets repair, rental charge is increased, this will be deemed as non allowable expense incurred and thus would be capitalized in arriving at the net adjusted taxable profits. You must keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself. Q2b).legal expense incurred. This is expense incurred by a company in instituting legal proceedings against a party. For this expense to be regarded as deductable, it must be an ordinary expense as well as necessary to the company operation. Ordinary and necessary condition ought to be reasonably met for the majority of legal fee because; a good judgment will have made the taxpayer to use this professional service. Ruby ltd incurred an expense of $4,000 as a legal expense. The tax consequence is that, the amount will not be allowed as a deductible against company assessable income on the ground that, it is not an ordinary expense for the business and necessary to the business. A visitor to the rental premises will not contribute to doing business because his is not a tenant and also Ruby ltd will not gain any income inform of rental income from the visitor. Some condition must be upheld for legal expense to be regarded as an allowable expense. First is that the fees paid ought to be reasonable in value and must have a correlation with the business such as legal expense on property maintenance used to generate income as well as the expense should have been incurred during the year of income. A company should pay legal expense for itself and its benefit and not another person expense. Those legal expense incurred by the company in protecting or settling suits against a worker taking place during the cause of the business are treated as an allowable expense because this expense is beneficial to the company. .  Under section 8 of the income tax assessment act, states that any expense is deductable against income on the ground that the expense incurred is for the furtherance of business and gaining more output and generation of more profit. On the other hand one is not entitle to expense deduction if los suffered is of capital in nature or expense for private reasons other than for business. This therefore means that for an expense to be deductable, it must be incidental and relevant to the subject matter that is of profit generation. Ruby company incurred legal expense of $4,000.this expense is treated as non allowable against assessable income because the injured person is not a resident but a visitor to the premises .visitors are treated as private expense due to the fact they will not contribute to the rental pay and assessable thereafter, Q2c).expense lodged as damages. Treatment of contingent liability depends on whether the liability is an obligation of the company or the buyer, if it is implicit by the buyer or whether it is just a responsibility that took place subsequent to purchase and assets treated as charge of the buyer. Before treating this expense as an allowable cost, a clear understanding should be known as to whom liability did arose. From the information gathered, a liability arose after ruby sold a car part to a company. That is after the transaction of selling was completed. It is clear that the seller assumed the liability by paying an amount of $ 750,000.some of the consideration is that, the selling price of the assets and amount realized from the sell of assets should be known, and whether ruby ltd is in a position to withhold the expense in order to make a counterbalance on any increase in the sum realized Ruby company paid an expense of $750,000 as compensation to the car manufacturer, the tax consequences is that this expense are treated as non allowable and are not deductable in arriving at the net adjusted taxable income. This is due to the facts that defect item were produced by the company hence it is the legitimate responsibility of the company to ensure that standards product are produced and sold. If this product claimed were lost in transit or burned and was insured, then the company could have claim allowable deduction on the net assessable income of the company. Case law of (Hold croft transportation versus commissioner) Q2d). Reserve of $100,000 This is an allowable expense against company’s assessable income for the year because a specific reserve is set aside and thus the amount of $100,000 would be regarded as an allowable expense which qualifies tax deductibility. Only specific provision for bad and or doubtful debt is allowed as a deductable expense against income of the company. Ruby company should ensure that a best estimate is made as specific provision. Specific provision helps the company to reduce against risk that might occur in the near future. Risks occurrence would force the company to incur unnecessary expense which will lead to reduction in net profit. General provision/reserves in the company income statement is treated has non allowable expense against the company assessable income. This is because that, it is believed that general provision is a form of tax avoidance by a company, this can be achieved by having a huge amount of cash set aside as general provisions. Anti-avoidance provision for this is to treat it as a non-allowable expense against adjusted net profit of the company. Q2e). Possibility of re-entering the car parts manufacturing industry The gain or loss from financial contract will be regarded as an assessable income for tax purposes .any expense incurred in the ordinary cause of the business will be regarded as an allowable expense. . The company paid an amount of $120,000 to a consultant in assessing the possibility of re-entering back the car parts manufacturing industry, the implication of this is that the amount would be treated as tax allowable deduction because it is in the normal cause of the business that the decision is being made as well as the amount paid is used in the business industry to have a prospect of exploiting back to the industry, which it would mean that, if the prediction turns worthwhile, then the company would be in a position to earn more profit by investing in the car manufacturing Indus Reference 1. -, P. L. (2002). In C. a.-2. Summaries. 2. (2010). Stephen Barkoczy, Cameron Rider, John Barin. In A. T. Casebook. 3. Daniel Bellan, D. V. (2010). Individuals' Income Under Double Taxation Conventions: A Brazilian . 4. (1995). Terence M. Dwyer, J. Terence Larkin. In T. T. Income. 5. Maisto, G. (2010). In Residence of Individuals Under Tax Treaties and European Community Law (p. ppg 215). 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