LAWS3101 Assignment Solutions on Income Tax Law

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Question 1

1.1 Part a)

The federal government of Australia is responsible for placing Australian citizens only on Australian revenue from international sources and non-residents. Australian law provides special rules for residence to determine if a person or corporation is a tax resident. In Australia there is also a scheme where the wages in Australia or elsewhere will be calculated. In general, earnings are produced in the workplace or the fixed place of business. Internal contracts are generally made by the arrangement in question, although these general principles are often changed in terms of the circumstances (Braithwaite & Reinhart, 2019).

Taxable income is usually the net income of an individual minus any deductions that might be allowed. When a loss happens, the loss will be postponed for subsequent years until further checks on the loss are fulfilled. Inputs include wages, salaries, sales, investments, rent and dividends are included in the projected income. Deductions usually cover costs accrued in the process of receiving or generating profits, plus a variety of particular legitimate deductions. Deductions for personal or capital costs are not approved. However, it is common for businesses to make claims against their profits until such requirements are fulfilled.

The taxable income is as under for the 2019-2020 income year:

Taxable income 2019-2020
Details	Amount
Gross salary	$ 300,000.00
Employer contribution	$ (50,000.00)
Fringe benefits	$ 2,400.00
PAYG withheld	$ 200,000.00
Total	$ 452,400.00
Win three man of the match	$ 5,000.00
Income tax	$ (3,900.00)
Interest charge	$ (200.00)
Pays to personal assistant	$ (4,500.00)
Income from endorsements	$ 105,800.00
Money stolen	$ (5,800.00)
Airline fee	$ (6,600.00)
Accommodation rent	$ (3,890.00)
Appearance fee	$ 25,000.00
Total	$ 110,910.00
Taxable income	$ 341,490.00

1.2 Reason:

Taxable income includes all the income and then subtract the different expenses on it, on above table we do the same thong, we calculate it total gross salary and then we add different incomes he earns and then subtract the income tax and other costs from it, the reason behind it is that if we do not subtract the expenses and taxes from gross salary then we cannot calculate the taxable income or it is necessary to do it for taxable income calculation (Woellner et al., 2016).

1.3 Part b)

The taxable income of Payne at the end of year 2019 -2020 areas under:

Taxable income 2019-2020
Details	Amount
gross salary	$ 300,000.00
employer contribution	$ (50,000.00)
fringe benefits	$ 2,400.00
PAYG withheld	$ 200,000.00
win three man of the match	$ 5,000.00
income tax	$ (3,900.00)
interest charge	$ (200.00)
pays to personal assistant	$ (4,500.00)
income from endorsements	$ 105,800.00
money stolen	$ (5,800.00)
airline fee	$ (6,600.00)
accommodation rent	$ (3,890.00)
appearance fee	$ 25,000.00
Total taxable income	$ 563,310.00

1.4 Reason:

We simply calculate the taxable income by adding all the incomes and then subtract all the expenses on it and income tax on it and we did it because taxable income means to deduct all the I=taxes and expenses from income.

1.5 Part c.

The company has to pay $ 780,000, and I suggest that they should pay it and try their best to become successful in their legal action, because if they become successful they would get compensation of $ 1 million and they should pay income tax if they become succeeded and got $ 3 million, the table is given below which tells that what they got if they succeeded

legal fee	$ (780,000.00)
awarded damage	$ 3,000,000.00
compensation	$ 1,000,000.00
profit	$ 3,220,000.00

 The following table shows that if they pay income tax and pays legal fee for legal action and if they succeeded they will be in profit of 3220000 dollars.

1.6 Part d.

If a tax expense is paid to generate an assessable benefit for the activity of a corporation, it is normally allowed as a deduction. Exceptions apply when the legal fee is a capital expenditure, a domestic or a private expense or is paid as a result of receiving exempt and non-assessable non-exempt revenue or specifically excluded by another field of the income tax legislation. In addition, legal expenditures are deductible in conjunction with all company costs. Some legal investments are obviously capital-like and some of them clearly income-like; others are clearly private-like (Woellner et al., 2016).

However, there has been a lot of debate about the questionable area of legal expenditures. Few forms of professional costs are deductible, but under the general deduction clause they may not be deductible. Under this context, the costs incurred will not be deductible for persons expended under legal services without a direct relation with the cost involved in deriving taxable profits (e.g. for real property). In certain other situations, the expenses might be private, such that in either case no deduction is possible (Braithwaite & Reinhart, 2019).

Moreover, contrary to the general deductible rules, the following types of tax charges are not deductible, as they are personal or proprietary of existence. Rather, under a special clause of tax law they are deductible:

• Prepare an income tax return, challenge a tax estimate and seek competent tax advice
• Preparing rental reports
• such costs for borrowing, and
• Any discharge expenses for hypothecary goods.

When the owner uses or owns the land to gain taxable income, the expense to contract, authorize and stem a lease shall be deductible. The fees are deductible according to the general laws of deduction and subject to particular rules concerning pre-payments. In general, the valuation fees charged are capital expenses and not an acceptable expense to help determine on whether to purchase a property. However, where the value is used to fund a bid to borrow funds to be used in a company, the interest costs may then be reported as immediate expenses if the debt was more than $100 or for a term of less than $100, or for a duration of five years following the date of the debt. Specifically, deductions are rejected for penalties or fines (although described), which are levied as a result of a violation of any Australian or international rule. This provision does not extend to fines that are administratively levied such as taxes of the public interest (the ATO refers to tax obligations which are unpaid) and punishments for the underestimation of the GST thresholds. While the damages and sanctions should be excluded directly, the expenses accrued in the prosecution of the case can be deducted (Murphy, 2019).

There must be a percentage that company would have to pay on legal fee of & 780,000 to start the legal action, let suppose if there is 10% tax then they have to pay $ 858000 to start the action legally, they should have to pay this if they want to do a legal action against the newspaper and wants to get compensation, following table shows the whole calculation:

Legal fee	$ (780,000.00)
Awarded damage	$ 3,000,000.00
Compensation	$ 1,000,000.00
Legal fee after 10% tax	$ (858,000.00)
Profit	$ 3,142,000.00

This table shows that if they pay the tax on legal fee a got succeeded they would still be in profit, so that’s they should pay the tax on legal fee and try to get successful in their legal action otherwise they would lose the amount of fee plus they would also lose reputation (Braithwaite & Reinhart, 2019).

Question 2

As mentioned in the letter that all the accommodations and benefits to Herman would be provided free by WHO and the income tax rate would be 10%, and besides it there would be no other tax, but here are 4 ATO test to judge that whether a person is liable for income tax or not. The names of these tests are as under (Woellner et al., 2016):

• Profit test
• Real property test
• Assessable income test
• Other asset test

These are the 4 test of ATO, to judge that whether a person is liable or not for income tax, now we think that how Herman can pass this test.

2.1 Real property tax:

first of all, real property tax, it is clear in the letter by WHO that they would give a single room apartment only for the tenure of contract, so this is not a real property for Herman, so he can easily pass this test, and he don’t have to pay income tax because he does not own a property and he would sell his current house to hid son, and he would not have any property, in both countries, so he can easily pass the test.

2.2 Other assets test:

There is also an other asset test, other assets like car etc, but after accepting the offer of WHO, he does not have a car of its own he would get a car from WHO, which would be the asset of company and not an asset of Herman, and he do not have any other kind of such asset on which the income tax imposed, so he can easily pass this test also (Braithwaite & Reinhart, 2019).

2.3 Profit test:

There is also a profit test, but he can easily because he does not do a business, he would get a fixed amount of salary whether he take it in advance or month by month, it would not be considering as profit, it would be a salary which fixed, so he can also take himself out from this test.

2.4 Assessable income test:

Herman can also pass this test easily, because he would get a fixed salary from its job and he would not earn money from other sources, so he can easily clear this test. Income tests are used to assess your eligibility for a variety of tax credits and incentives that will minimized the tax you have to pay. When conducting income checks, we consider a variety of elements in the tax report. In the income checks portion of your tax return, you can ensure all things are done. Various substitutes, incentives and commitments are measured for the criterion for family profits. In the related portion of your tax return, you can show the earnings of your partner while you have a girlfriend. Changes in the definition of residual gains under the wage tax have been introduced from 1 July 2017. See Adjusted Taxable Income (ATI) for information on the adjustments. A business in Australia is a separate and distinct organization. After applying residence and source laws identical to those applied to persons, the revenue earned by a business is taxable to the organization. However, in comparison to persons, business gains, independent of the income class, are taxed at a fixed rate of 30 percent.

However, the recently formed Liberal Party is preparing to reduce the company’s tax rate by 1.5% from 1 July 2015 to 28.5%. Owing to the ‘dividend imputation’ scheme, distributions paid by corporations to their owners are included in the taxable profits of the owners. In Australia any employer is obligated to make sure his workers get funds for their retirement with a minimum amount of superannuation (the so-called superannuation guarantee) (Murphy, 2019). In 2013-14, the superannuation commitment rate rose to 9.25% of each individual’s work revenue, from 9% in the previous year. The minimum wage will steadily climb in the next six years with recent changes until it hits 12% as of 1 July 2019. When a certain level of pension over payments is not paid by an individual they are obligated to pay the Superannuation Guarantee Fee (SGC), which requires over payment of the over payment gap and interest and operating costs. In fact, however, in order to escape the SGC, most businesses would pay the full superannuation amount (Body, 2008).

2.5 Advantages of WHO offer:

The Herman can easily clear all this test and can prove that he is not liable for the income tax and he would only have to pay a 10% flat income tax and which is suitable and best for him, and he should must take this opportunity because he do not know how much time it takes to return to his previous job and if it takes long he would not survive for long, so to survive and get benefits he should must accept this offer because the salary is attractive, income tax is less, and he is getting all the necessary assets like car and apartment etc, from company, and he can easily prove that he is not liable for income tax, so he can get benefits and he can get advantages from this favorable income tax rate, so I suggest that he should must avail this offer (Woellner et al., 2016).

Question 3

The Michelle should go for the 1^st option to do his business in Queensland, and for this the calculations and explanation of both options are as under:

They must contain on your tax return the following percentages of the taxable income whether the dividends are paid or shared or non-share dividends:

• un free quantity
• the number, and
• The franking loan, because you have the right to a franking tax offset on the franking loan. Show the registration fee on your franking tax offset (Braithwaite & Reinhart, 2019).

If an Australian corporation is not provided with its TFN by a local shareholder, the corporation must withhold tax on any dividend at the highest rate on corporate income tax for persons (45 percent) plus the Medicare levy (2 percent), which makes a total of 47 percent for 2019–20. No sum of TFN has been withdrawn as John had told Coals Tier Ltd of his TFN (Murphy, 2019).

Had not told John of Coals Tier Ltd of its TFN, a TFN value of the un ranked sum of the dividend may have been excluded from it, as John must have revealed in his V item 11 tax return. In the John tax assessment, a deduction for the value kept by the TFN will then be required. If, in the course of the income year, John earned more than one dividend statement, he would need to record on his 2020 tax declaration the cumulative sums at S, T, U and V, if applicable.

You will see from the aforementioned argument by Coals Tier Ltd that John did not receive a TFN sum from the dividends it received.

4 Option 1:

All the costs and benefits he got from this option are as under in table:

Details	Amount
Business expansion grant	$ 10,000
Other costs
Rent to landlord	$ 10,000
Husband’s salary	$ 230,000
Outdoor advertising expense	$ 60,000
Uniform for staff	$ 3,500
Water bottles	$ 1,900
Cocktail party expense	$ 25,000
Total	$ 330,400

She would have to pay $ 330,400 for all the cost but the grant he would get is $ 10000 and she can pay her rent to landlord from this grant and then her cost become $ 320,400, and she can retain her old clients as well as she can get new clients as well and once business start generating profit she can easily cover up her cost on her business. And these all are onetime costs, so she can easily do the business and can stay with her family. So she needs an opening balance of $ 330,400 to start her business.

4.1 Reasons:

This option is suitable and best, because these all are onetime costs, so she can easily do the business and can stay with her family and she can retain her old clients as well as she can make new clients and can easily cover up her startup cost and can make more profit with this expansion (Murphy, 2019).

5 Option 2:

Michelle should not choose this options because this option is not a good option. All the costs for this option and reason that why it is not a good option to choose are as under, which clearly tell us that how much opening balance she needs to start her business from Melbourne:

Details	Amount
3-D digital video camera	$ 98,000
Computer system	$ 185,000
Video editing software	$ 5,000
Expense on hair	$ 1,000
Makeup artist	$ 1,200
Total	$ 290,200

So, for this option she need a starting balance of $ 290,200 to pay the cost for starting the business with this option, and she can only retain her old clients and could not make new clients.

5.1 Reason:

Firstly, she cannot make new clients with this option or it is very rare that she would get new clients, secondly, she can retain her old clients but if some of its old clients do not want to make a video session and wants to do a session live then she would be in loss ad she would loose her some clients. She also has to pay money after some time to make its assets in good shape, like she would have to repair her camera if it would break down, she would have to pay money to hairdresser after every two weeks, and she would earn less in this option and could not coverup her starting cost easily (Murphy, 2019).

5.2 Reason for choosing 1^st option:

This option would give her more clients as well as she can easily retain old clients and earn more profit than 2^nd option and she have the opportunity to expand her business but in option 2 she cannot expand her business, that’s why first option is best and suitable for her.

6 Sources

Braithwaite, V., & Reinhart, M. (2019). The Taxpayers’ Charter: Does the Australian Tax Office comply and who benefits? Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.

Body, J. (2008). Design in the Australian taxation office. Design Issues, 24(1), 55-67.

Murphy, K. (2019). Procedural justice and the Australian Taxation Office: A study of scheme investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.

Murphy, K. (2019). Moving towards a more effective model of regulatory enforcement in the Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The Australian National University.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.

Waller, V. (2007). The challenge of institutional integrity in responsive regulation: Field inspections by the Australian taxation office. Law & Policy, 29(1), 67-83.

Schenk, A., Thorny, V., & Cui, W. (2015). Value added tax. Cambridge University Press.

Smith, J. P. (2004). Taxing popularity: The story of taxation in Australia. Australian Tax Research Foundation Research Studies, viii.