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MBS164 Tax Information Relating to Different Issues Assessment Answer

S2 2020 – MBS164 Taxation Principles

Assignment – 20%


  1. Read the case facts
  2. Individually, prepare a four-page referenced, report (1.5 line spacing, Times New Roman font, Word) providing key tax/legislation information relating to the four main key issues – Residency, Source, Exemptions, Business (15 marks). Submit through LMS. In the conclusion, you will need to advise your client of these issues and summarise their tax position (5 marks). 

Case Facts:

Mr Mark Lewis is employed on a luxury cruise liner which travels the Mediterranean Sea. After deductions his taxable income is AUD$150,000, (Hong Kong Dollar 790,000)

He owns a farmhouse in Australia which was his family home. After divorcing his wife, the wife took their twins to live in Canada. Mark now rents the farmhouse to a lovely couple who sublease parts of the house through Airbnb.

The farmhouse is rented including all furniture, with the furniture belonging to Mark. Mark stays on the property when he is in Australia in a converted shed consisting of a master suite, bathroom and toilet. This part of the property is not listed on the lease agreement. All of Mark’s personal belongings are locked up and stored in this shed. The shed makes up about 25% of the overall lettable property.

In the current tax year, Mark spent eighty days in the converted shed in Australia. The remainder was spent on the luxury liner or visiting his twins in Canada, where he spent a total of 40 days.

The luxury liner where Mark works visits many locations around the Mediterranean. Mark is employed by a company incorporated in the Cook Islands under an employment contract signed in Hong Kong. The luxury liner is owned by a company incorporated in Bermuda.

The income earned by Mark from the cruise company was salary and wages derived by him under the contract of employment.

In addition, in preparation for his retirement, Mark has taken up cattle breeding. He currently owns one hundred cows which live and feed on an external farm in Australia (for a fee). These cows are being fattened up and after half are at the required weight they will be sold. The other half will be used for further breeding.

Mark consistently keeps up to date with the development of the cows. He spends most of his free time reading literature and attending paid courses related to the business. Mark plans on purchasing a large, vacant property next door to his farmhouse specifically for keeping his cows when he retires from the luxury liner. In retirement, Mark intends on living permanently in the converted shed and will still rent out the farmhouse

For each of the prior three years that Mark has been undertaking this activity, there has been a tax loss made, although the tax losses have been reducing in size as the venture becomes more successful. In fact, this year Mark has made a small profit before tax of $50,000 (taxable income $200,000, tax deductions $150,000). 


Identify the specific tax issues relating to the four main categories above

Find any relevant taxation legislation/case law pertaining to the tax issues

Prepare your written responses for each part of the question in the following manner:

Writing your concluding advice as if you were presenting to Mr Lewis himself

Why is this important to the student?

This assignment will develop your ability to apply relevant taxation principles, legislation and case law to real world scenarios. The ability to work collaboratively and effectively in a team environment is also an essential skill for a professional workplace environment.

Required Resources:

Income Tax Assessment Act (1997)

Income Tax Assessment Act (1936)

Principles of Taxation Law 2019

Any other appropriate references, internet etc.


Specific tax issues related four categories of income:

1. Salary income from luxury cruise liner:

In the given case the specific tax issues arise for taxability of salary income earned from luxury cruise liner are as follows:

  • Whether Mr. Mark is resident in Australia or not for taxability of foreign employment income.
  • Which test is applicable for the determination of the residency of Mr. Mark?
  • Implication on the tax return filed by Mr. Mark related to foreign employment income.
  • Income earned by Mr. Mark during the employment is taxable or not as per Australian Taxation law.
  • Impact of divorce with his wife on the residency status of Mr. Mark.
  • Tax credit benefits available on income from employment paid outside Australia while filing return in Australia (Xynas, 2019).

2. Rental income from farmhouse:

Income earned by Mr. Mark as rental income from the farmhouse, the specific tax issues are as follows:

  • Income earned by Mr. Mark is taxable as income for foreign residents or income for the resident of Australia.
  • Which payment becomes the part of rental income for taxability such as letting and booking fees, reimbursement of repair expenses by the tenant, rent paid by the tenant, etc.
  • Rent expenses are allowed or not allowed from rental income for tax calculation.
  • Whether the property is a residential property or not.
  • Impact on rental income when farmhouse provided on rent including furniture that is owned by Mr. Mark.
  • Which expenses are not allowed to claim from rental income by Mr. Mark 

3. Income from the sale of cows:

The legal issues identified on income from the sale of cows are as follows:

  • The taxability of sales of cows in the hand of Mr. Mark.
  • The valuation of livestock on the date of sale.
  • The profit on the sale of cows is taxable as capital gain or as business income from agriculture.
  • Expenses allowed under taxation earned from income on the sale of cows to Mr. Mark
  • Method of valuation used for the value of livestock under the trading account.

4. Income from cattle breeding business:

The legal issues identified on income from cattle breeding business are as follows:

  • The business of cattle breeding is for commercial purposes or not.
  • The size and scale of business run by Mr. Mark
  • Tax incentives available to Mr. Mark for carrying the business of cattle breeding.
  • The tax implication on Mr. Mark due to farm business as Mr. Mark is making cash loss in the business while there is tax profit in the cattle breeding business (Comans, Moretto, & Byrnes, 2017).

Relevant taxation legislation to the tax issues:

1. Salary income from luxury cruise liner:

As per the Income-tax assessment act, a person working outside Australia on a contract basis and earn income from outside Australia, the residential status are check as per domicile test:

  • The domicile place of the taxpayer is in Australia during the financial year
  • The domicile place refers to the permanent place or permanent home of the taxpayer, where the taxpayer has the intention to live permanently after retirement.
  • Working overseas may not change the residential status for tax purposes.
  • In that case, the taxpayer is considered as resident in Australia (Braithwaite, & Reinhart, 2019).

As per Section 23AG of ITAA 1997, the income earned by the resident person due to employment from outside Australia is considered as foreign employment income. The foreign employment income is exempted if the taxpayer has satisfied all of the following conditions:

  • Engaged in continuous Foreign Service as an employee for 91 days or more.
  • Foreign earning are derived from employment in one or five categories of Foreign Service.
  • Foreign income will not exempt if the income is covered in the non-exemption list.

2. Rental income from farmhouse:

As per ITAA 1997, the income from rent of residential property following income is required to declare such as:

  • Rent received from a tenant during the financial year.
  • Reimbursement of expenses by the tenant to the owner of the property.
  • Payouts of insurance from the tenant.

The expenses allowed for deductions from the rental income to taxpayer for calculating the taxable income (Basu, & Madsen, 2017).

  • Advertising made for tenant
  • Repair and maintenance of the property
  • Water charges and taxes are paid by the owner for the property.
  • Interest expenses on the property
  • Payments made for insurance coverage of property.

As per taxation rulings, the residential rental properties refer to the residential premises that can be used for providing residential accommodation to produce the assessable income. Example of residential rental property is building, flats, farmhouse, etc.

3. Income from the sale of cows:

The person carrying the business of livestock and farming is known as the primary producer in the Australia taxation law. The livestock is considered as trading stock means the items held for sale and trading account is required to prepare for calculating the taxable income of livestock. The methods used for preparing the trading account are cost method, market selling method, and the average cost method.

Cash profits refer to the difference in the sale price of cattle and cost of cattle while tax profit is calculated as follows:

Opening stock of livestock + purchases – sales – deaths – Closing stock of livestock

 The value of opening stock and closing stock is based on the market selling method, average cost method, and cost method. 

As per section 8-1 of ITAA 1997, the primary producer can claim deductions of expenses incurred by him for earning the income such as maintenance of livestock, expenses on feeding, etc.

4. Income from cattle breeding business:

The cattle breeding business is covered under agriculture income under the taxation law of Australia. The person involved in the business is considered as the primary producer and liable for tax on tax profits earned by him. The trading account is prepared by the primary producer for ascertaining the profits from the business. The tax profit differs from cash profits as the cash profits are calculated on expenses incurred by the primary producer on cattle breading while tax profit is calculated as per the trading account method based on the closing stock of animals. The valuation of cattle is done on the cost method, market selling method, and the average cost method (Murphy, 2013).

Written response and concluding advice:

1. Salary income from luxury cruise liner:

Written response:

Mr. Mark is resident in Australia due to the following reasons:

  • As per the domicile test, Mr. Mark is having a permanent place of residence in Australia as he is planning to reside in Australia at the farmhouse and do cattle business there.
  • Working overseas in the company luxury cruise liner does not change the residential status of Mr. Mark.

The income earned by Mr. Mark is not exempted from taxability in Australia as he is not working in employment as per the exempted list and not satisfied with both conditions of exempted income.

Mr. Mark is liable to disclose the foreign employment income i.e. $150000 as salary income, however, he can claim benefits of tax relief as per the tax treaty made by the Australian government.

Concluding advice:

Mr. Mark is required to disclose income in return filed as per Australian income tax law and liable to pay tax on income earned during the employment with a luxury cruise liner. However, he can claim the tax credit against the withheld tax on foreign employment income (Murphy, & Byng, 2012).

2. Rental income from farmhouse:

Written response:

The income earned by Mr. Mark is taxable as rental income under the taxation law of Australia as per the provision mentioned above. The partly let out of property does not make any difference in rental income. As per the definition of residential property, the farmhouse is a residential rental property, and the income derived through is taxable under the hand of Mr. Mark during the financial year. The farmhouse is providing accommodation facility to couples which fulfill the requirement of law under the residential rental property (Twite, 2011).

 Concluding advice:

Mr. Mark is liable to pay tax on income earned from the farmhouse due to rent to the couple whether it is including furniture or not. Mr. Mark has to disclose income as rental income under the taxation law. However, he can claim the deductions of expenses incurred during the period for repair and maintenance of property from rental income (Dar, & Asif, 2017).

3. Income from the sale of cows:

Written response:

In this case, the sale of cows is not taxable as per capital gain while cows are considered as trading stock in the hand of Mr. Mark. Mr. Mark is involved in the business of cattle breeding which is covered under agriculture income as per taxation law. Mr. Mark is considered as the primary producer and tax is calculated as per the trading account prepared by Mr. Mark. The profits as per taxation are calculated in the hand of Mr. Mark are a method of cost, market selling, or average cost which is more beneficial for Mr. Mark. 

Concluding advice:

The profit on the sale of cows is not taxable separately under a taxation law. The cash profit and tax profits under the cattle breeding business are different as the tax profits are calculated as per the valuation method adopted by the primary producer. The sale of cows is reduced from the opening value of cows and after adding the closing value of cows, tax profits are determined.

4. Income from cattle breeding business:

Written response:

The profits in the case of cattle breeding business based on the valuation method and trading account prepared as per the primary producer i.e. Mr. Mark. The cash profit is not considered for taxation purposes under the cattle business. The profits made by Mr. Mark i.e. $ 50000 are taxable under a taxation law. Cash profits are ignored for taxation purposes whether Mr. Mark makes cash loss in the cattle business (Yu, Li, & Huang, 2017).

Concluding advice:

The tax profit i.e. $ 50000 is liable for tax in the hand of Mr. Mark as per taxation law. However, Mr. Mark can take benefits of subsidy offered by the government for the promotion of the agriculture business.

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