Australian Taxation Law - Essay Example

PART A In small business such as a sole trader any earning derived from such business is assessable for income taxation with a right to deduct any expenses incurred from the operation of said business; however, any loss is entitled to offset from other income or brought forward to offset in future income. Taxable income is defined as the assessable income minus allowable deductions.1 As provided in Section 4-1 of the Income Tax Assessment Act 1997, income tax is payable by each individual, and company, and by some other entities.2 In the case of Joel being a sole trader the income of the business is treated as his individual income and he is solely responsible for any tax payable by the business. This means that, after deducting allowable expenses, they include all their business income with any other income and report it on their individual tax return.3 Section 8-1(1) of the Income Tax Assessment Act 1997 established the fact that any loss or outgoing to the extent that (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income can be deducted from the assessable income.4 Provided further in Section 8-1(2) of the said Act that a loss or outgoing to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income; or (d) any provision of such Act prohibiting deduction are not to be deducted.5 Hence, with regards to Joel’s expenses for his retail shop premises the following contentions are to be considered: 1) The installation of pizza oven in the amount of $18,000 is not an allowable deduction under section 8-1(2) of the Income Tax Assessment Act 1997 since the installation requires major work to the brickwork premises and as such it is part of the improvement. The cost of the improvement would be of a capital nature. In the High Court Decision FC of T v Western Suburbs Cinemas Ltd (1952) 86CLR 102, it was held that where, in lieu of effecting repairs to part of an entirety, that part which is replaced with something different, and is an improvement on the original part, no deduction is allowable for the amount.6 2) The pre-termination payment of $30,000 to the previous owner’s tenant is deductible. An amount for capital expenditure incurred to terminate a lease is deductible if the expenditure is incurred in the course of carrying on a business.7 Provided further that the amount to be deducted is 20% of the expenditure (a) for the income year in which the lease is terminated; and (b) for each of the next 4 income years.8 Such pre- termination payment is also an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 for the reason that expenses incidental and relevant to the taxpayer’s income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction.9 3) No deduction is allowable for the expenditures incurred on the promotional displays and the sign on fee of $7,000 to attract applicant for a full-time pizza cook as the expenses are of a capital nature. Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent that they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.10 The difference between capital and revenue expenditure corresponds to the difference between the business structure and the business operations. In relation to making the distinction between capital and revenue three matters are to be considered: (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.11 Expenditure is capital in nature when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. The promotional display was to provide long term benefits to the taxpayer’s business. In these circumstances it was expenditure of a capital nature rather than of a revenue nature.12 4) The minor painting and re-staining of the premises in the context of subsection 53(1) is more directed to the holding, occupying or use of property for the purpose of producing assessable income or carrying on a business for that purpose than it is to the property’s appearance, form, state, or condition. In determining whether work done to property is a “repair” in terms of subsection 53(1) , it is therefore more significant to consider whether the work restores the efficiency of function of the property than it is to consider whether the appearance, form, state, or condition of the property is exactly restored. Repairs are not limited to rectifying defects which have already become serious. Work done to premises, plant, etc that is not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under subsection 53(1). Deduction may be allowed under section 51(1).13 PART B Assessable income consists of ordinary income and statutory income. Some ordinary income, and some statutory income, is exempt income. Exempt income is not assessable income.14 The assessable income for an Australian resident includes the ordinary income derived directly or indirectly from all sources.15 It also includes other sources which are not ordinary income but are included as assessable income by provisions and these are called statutory income.16 Under division 15 of Income Tax Assessment Act 1997 assessable income includes the value of all allowances, gratuities, compensation, benefits, bonuses, and premiums provided in respect of or in relation directly or indirectly to, any employment of or services rendered. It may be provided in money or in any other form.17 Hence, Lara’s income derived directly from her three-week stay at Joel’s shop as pizza cook constitute a part of her assessable income. However, Lara’s expenses incumbent upon her being a full-time university student and taking on the job as pizza cook are not deductible. Generally the expenses of travel to and from work are not deductible. The essential purpose of much home to work travel is not to enable a taxpayer to derive assessable income; that such expenses are incurred is a necessary consequence of living in one place and working in another.18 Provided further that the mode of transport, the availability of transport, the lack of suitable public transport, erratic times of employment, time of travel, distance of travel, frequency of travel and necessity of travel all are factors which do not alter the essential character of travel between home and work as private in nature.19 However, the Commissioner accepts that expenses incurred by employees in travelling from home to work are deductible under section 8-1 of the Income Tax Assessment Act 1997 in some limited circumstances.20 Read More