HA3042 Application of Legal Tax Principles in Given Tax Issues Assignment Answer
Answer
Taxation Law Assignment
1. Question 1
a) Material information
According to given scenario, Francis is regarded as business that has brought old restaurant at market (Alstadsæter, Jacob and Michaely, 2017). After purchase, he found that kitchen is not in good condition as it was very poor and needed to be replaced with new one that incurred cost which is estimated of $23000. In addition to this, there is requirements of repairing some appliances of kitchen which will incurred cost of $4900. The main aim of Francis is to make new and modern kitchen and replacing all old appliances by doing proper innovation and adding more unique feature and making it durable with applied of modern equipment and appliances (Morse and Deutsch, 2015). In regard to this, Francis has gone through assessing deductions of admissibility of different expenses in legislation of tax as well as applying Australia law in best manner.
b) Important legislation as well as principles of tax law
This is very important to identify and understand definition of repairs which means doing motivations of all damages, defects and remedying harm or deteriorations of property that assist in making the property to be existence at marketplace on continuous basis (Beale, Gullifer and Paterson, 2015). It should be treated in tax laws having purpose of deducting repairs cost from all taxable incomes of payers which helps in making it differences with purpose of doing expenditure in most effective manner.
c) Section 53 sub-sections 1 of Income Tax Assessment Act, 1936
According to section 53 of sub-sections 1 of ITAA, 1936, it has said that if any expenses are made or incurred through tax payer for repairing of any machinery, article, premises, plant that should be applied by him, then it is regarded as assessable income which is allowed for deduction until it is shown in expenses of any capital income or nature (Best and Kleven, 2018). In addition to this, section 53 of sub-section 2 said that if any expenditure has incurred on repairing of any premises that is not applied or used by taxpayer then it is not liable for any deduction. Also, if any premises, building, equipment are applied or used by tax payer then it is responsible for deduction of assessable income or business purpose then expenditure made on repair is forming part of premises which is allow for deduction (Musaeva and et. al., 2015).
d) Section 25-10 of Income Tax Assessment Act, 1997
As per ITAA, 1977, section 250-10 is dealing with deduction of expenditure which is occurred for repairs. According to ITAA , 1977, some of them are as follows:
- As per this act, if any expenses are made for repairing of premises or using any depreciable property and applied by taxpayer then repaired income is liable for getting tax deduction from authority (Blankfein-Tabachnick and Kordana, 2017).
- Also if half or partial property is used by taxpayer with purpose of producing income then some proportion of those amount is liable for tax deduction from authority (Chilton and Levy, 2015).
- The deduction is not allowed for doing expenditure in capital assets or capital in nature (Niazi and Krever, 2017).
Therefore, from the above it has concluded that both depicts that same type of features which are repair in expenditures are made deduction if they are incurred for different repairing of machinery, article and premises that is used by taxpayer for various purpose in order to produce income (Reimer, Schmid and Orell, 2018).
e) Taxation Rule 97/23 of 1977
For mitigating or overcoming loopholes of such sections as well as meeting legislations gap, taxation ruling 97/23 was made in 1997 after making proper analysis of tax deductions of expenses that is occurred for all repairing items (Costinot and Vogel, 2015). According to taxation ruling, repair is defined as action which is taken in order to prevent all damages, harms and defects that is caused to property for making all efficiency and functioning of property in order to restore in best manner. This does not focus on altering any character as well as real shape of premises or property. In addition to this, there are many new things which are added to property that made to convert character or outcome into proper improvement which is not included as repair. For instance, if machine is repaired and it enable as re-function effectively then it is regarded as expenses that is made and considered as repair expenditure (Stantcheva, 2017).
It is very difficult to acknowledge determination of expenses in terms of repairing expenditure as per provisions made under section 25-10 of income tax act 1977 (Dafflon, 2015). This is essential to observe ruling of tax assessment as various factors are ascertain to determine about falling of expenditure under category of repair or not. In this respect, different decisions are to be considered for gaining practical experiences of several case laws. This is mentioned in ruling of taxation that taxpayers need to clear all doubts through private ruling made by Australian Taxation Office (ATO). In addition to this, there is mentioned that ruling of maintenance work in property that should be required for keeping functions of property to be active and classified under category of repair (Thomson, 2015). There are some situations that come across taxpayers for removing dangerous substances from their property as well as considering expenses in terms of repair character. These expenses do not qualify repairing expenses in section 25-10 of tax assessment act, 1977. For example, if any costs related to removing of asbestos from business building or premises or replacing of CFC gases are occurred at air conditioner plant then it is not considered to be repair expenditure for business. Such types of cost occurred at business for providing of safety and good surrounding at business place rather than improving functions of articles, equipments, plants and machinery. Therefore, these costs are outcome of meeting safety measures that are imposed through government and does not fall under category of repair expenditures.
According to section of 25-10 (3) capital expenditure is not regarded as deductible under repair expenses (Edelman and Elliott, 2015). In this case, expenditure are made for expanding as well as replacing property structure so that they can increase their profitability, sustainability, reconstruction of whole property and expenditure has made to acquire all type of capital asset which should be regarded as capital expenditure. In renowned case study of Lindsay’s, term called “entirely” is regarded as principle article of equipment falling under capital that is identified as separate or whole premises which is involved at time of doing transaction. For example, shipway that is made on site of enterprise of ship repairer, driveway, drainage system that is available at factory is considered under category of entire property. On other side, lining as well as insulation made for cool room, exhaust fan and window does not fall under category of entirely for factory of building at entire level (Tolhurst, 2016).
Moreover, improvement is used for enterprise property which does not fall under category of deductible as repair due to including of restoration of function efficiency of premises and does not consider making any change in their characteristics (Gullifer, 2015). On other side, improvement helps in providing more efficiency to property or function of business in appropriate manner. This assists in changing existing property to valuable as well as efficient property in which repair is not included. The improvement helps in enhancing ability of producing property and raising value at market. It has said by Commissioner that replacement is part of subsidiary of property which helps in making improvement in best manner.
Progressive reconstruction of whole property is regarded as repair (Hennessy and Strebulaev, 2015). If there contain any specified plants as well as machinery that is old and unable to find out their possible repair equipment for same then there is use of equivalents that is modern in nature for original materials which is applied for improving both plants as well as machineries. In regard to this, there is checking for sufficient degree of improvement for expenditure characteristics and fall under category of capital expenditure and not liable for any deductions (Webb, 2018).
f) Application
In this given case study of Francis, he has acquired for old restaurant as well as decided for replacing whole commercial kitchen of restaurants because of poor condition (Kenny and et. al., 2015). As per situation, it has found that replacement cost is estimated to be $23000. According to section of 25-10 of ITAA, 1997, replacement for whole unit is identified that should not be considered as part of repair as well as regarded as capital expenditure transaction. Therefore, Francis is not allowed for deduction for taxable income. Therefore, repairing of kitchen appliances are obsolete as well as raring in finding at market which is considered as repair.
2. Question 2
It is important for all citizens to follow income tax rule as well as offering income to be commutated and deposited with government of country (Levy and Chilton, 2015). Calculation is based on tax law as well as legislation where all tax payer need to follow for avoiding penalty prosecution.
a) Income of Tom from business
| Calculating business income of Tom | ||
| Particulars | Amount | |
| Sale of Tom’s band | $220,000.00 | |
| Less: Selling of musical instrument | $ (2,500.00) | $217,500.00 |
The income of Tom from business is $217500 that is not included in selling as it has taxed in previous year of income tax return (Lockwood, Nathanson and Weyl, 2017).
b) Taxable income of Tom
| Calculating taxable income of Tom | ||
| Particulars | Amount | |
| Income coming under Salary head (A) | $53,000.00 | |
| (long term services which are included in taxable head) | ||
| Income coming under Business head (B) | ||
| Sale of band of Tom | $220,000.00 | |
| Selling of musical instrument | $2,500.00 | $217,500.00 |
| Income coming under Other Source (C) | ||
| Total deposited amount | $22,050.00 | |
| Principle amount which is not taxable | $20,000.00 | |
| Already claiming at last year under income of interest | $1,000.00 | |
| Dividend that is unfranked fully taxable | $4,000.00 | |
| Franked dividends | $12,000.00 | $59,050.00 |
| Total income which is taxable (A+B+C) | $329,550.00 | |
Unfranked dividend is regarded as taxable which should not be paid by organisation where tax payer is liable for paying tax (Martini and Niemann, 2015). Whereas franked divided should be included in taxable income as well as tax liability that should be reduced by tax credit provided in such behalf.
c) Computation of Tax
| Calculating tax of Tom’s on taxable income | ||
| Particular | Tax Rate | Amount |
| $0 to $18200 | 0% | $- |
| $18201 to $37000 | 19% | $ 3,571.81 |
| $37001 to $90000 | 32.50% | $ 17,224.68 |
| $90001 to $180000 | 37% | $ 33,300.00 |
| $180001 to $over | 45% | $ 67,297.50 |
| Total Tax | $ 121,393.99 | |
The total tax liability of Tom before making credit on divided is $121,393 (Mason, 2015). It should be disclosed under tax return of ITAA of 1977.
| Calculating net tax of Tom payable | |
| Total tax to be paid by Tom | $ 121,393.99 |
| less: Tax credit on divided | $ (5,143.00) |
| Net Tax liability | $ 116,250.99 |
The above concluded that Tom is need to pay for Income Tax which is $1,16,250.99 after reducing divided of tax credit of $5,143.
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