Deductions Under ITAA 1997: Medical Professionals, Tax Loss Offsets, And Capital Gains – A Taxation Case Study

1. Is the taxpayer permitted to claim deduction for expenses incurred in registering as a private doctor under “sec 8-1 ITAA 1997”?
2. Is the taxpayer permitted to claim deduction for the cost incurred in defending against the allegation of breaching patient privacy rules under “sec 8-1 ITAA 1997”?

Background

Accordingly, there are two positive limbs under “sec 8-1” to claim deductions under the general deduction rules (Barkoczy 2022). The taxpayer is permitted to claim deduction from their assessable earnings regarding any loss or outgoing till the extent that the outgoing has been incurred by them at the time of making or earning income or the outgoing has been incurred necessarily in doing the business for gaining their assessable income.

If a person is a doctor, specialists or other medical professional, it simply pays to learn what they can claim as deduction. In order to claim deduction for work purpose, the taxpayer must have spent the money by themselves and they were not reimbursed (Barkoczy 2017). The outgoing should be related directly to earning of their assessable income and the taxpayer must have record to prove it. The taxpayer can only get deduction for expenses that is associated to work.

Moving further, whether or not legal expenditure can be permitted as deduction under sec 8-1 is considered as a question of fact (Sadiq et al. 2018). In “FCT v Snowden & Wilson Pty Ltd (1958)” the legal expenses were incurred while doing business and hence it was allowed as deduction.

Philippa reports that she has incurred an expense of $1,500 to register as the private doctor. The expense incurred in registering as a private doctor is related for work purpose and the money has been spent by Philippa by herself and it was not reimbursed to him. The expenses are directly associated to deriving his assessable income and it is allowed as deduction to Philippa under “sec 8-1 ITAA 1997”.

Philippa further reports incurring a legal expense of $3,000 in defending herself against the allegation of breaching Big Hospital patient privacy rules in posting selfies to her social media accounts at the time of work. Citing “FCT v Snowden & Wilson Pty Ltd (1958)” the legal expenses incurred is an allowable deduction under “sec 8-1 ITAA 1997” because the outgoings were incurred by her while carrying on her business of private practitioner.

Conclusion: 

Conclusively, Philippa is permitted to claim deduction for the cost incurred in registering as a private doctor and the legal expenses in defending against the breach of patient privacy because the expenses were incurred while producing assessable income.

Is the taxpayer permitted to claim deduction for the prior year tax loss under “sec 36-10 of ITAA 1997”?

As stated in the “sec 36-10 ITAA 1997” a tax loss is existent if the total amount of eligible allowable deductions surpasses the total income (Main 2019). The eligible permissible deductions involve the total allowable deductions of taxpayer excluding the tax loss originating in earlier income year and an amount that represents gift till the extent it produces or increases the tax loss in the present income year under “sec 26-55”. The taxpayers with respect to “sec 36-10” are required to carry forward the tax losses originating in the previous income year and they are permitted to claim the amount as deduction in the present income year.

Application of ITAA 1997 rules

As mentioned in “sec 36-17 (3) of ITAA 1997” a taxpayer or an entity reports any net exempt income during the later income year and the total amount of assessable income of taxpayer during that year surpasses the total deductions, the taxpayer is required to first deduct the tax loss from net amount of exempt income (Murray et al. 2018). Later, deduction the remaining part of tax loss of previous year from total assessable income which surpasses those deductions till the un-deducted amount of tax loss as the taxpayer decides to choose.  

As evident from the current circumstances Philippa reports that she has earned a business income of $100,000 and incurred $130,000 as general expenses. Consequently, Philippa has incurred a tax loss of $20,000 in 2018-2019. With respect to “sec 36-17 (2)” the taxpayer here Philippa has not reported any exempted income the loss needs to be carried forward to later income year.

Moving to the income year of 2019-20 the taxpayer here Philippa has reported earning profits from business. In addition to this, Philippa also received reserve pay from army and the same has been included in the assessable income as a net exempt income to offset the tax loss of prior year suffered by Philippa. With regard to “sec 36-17 (3)” the tax loss is deducted from the net exempt income to arrive at taxable income.

Calculation of Tax Payable
In the books of Philippa
For the year ended 2019-2020
Particulars	Amount ($)	Amount ($)
Assessable Income
Business Income		200000
Reserve Pay from Army		20000
Payment from Lecturing at University		10000
Total Assessable Income		230000
Allowable Deductions
General Expenses	130000
Carry forward prior year loss (offset)	20000
Total Allowable Deductions		150000
Total Taxable Income		80000
Tax on Taxable Income	17547
Add: Medicare Levy	1600
Less: Low Mid Income Tax Offset	1080
Less: PAYG Withheld	3000
Total Tax Payable		15067

Conclusion: 

Conclusively, with respect to “sec 36-10 (3) ITAA 1997”, Philippa is permitted to offset the prior year tax loss of 2018-19 income year against the current year assessable income.

As evident from the above stated computation the tax rates for the undistributed trust net income is usually taxed at a higher tax rate of 45% + 2% Medicare based on the assessment that is sent to trustee.

1. Whether the taxpayer is permitted CGT Exemption for the sale of Home under “sec 118-110 TAA 1997”?
2. Whether the sale of holiday home and any capital gains derived will be considered as income under “sec 102-5 ITAA 1997”?
3. Whether the taxpayer is required to disregard the loss on selling “personal use asset”under “sec 108-20 (1)”?
4. Whether or not the taxpayer is required to disregard the capital gains derived from selling “pre-CGT asset”under “sec 104-10 (5)(a)”?
5. Whether the sale of shares and any capital gains derived will be considered as income under “sec 102-5 ITAA 1997”?

The “capital gains or capital loss” are regarded as the part of net capital gain and under “sec 102-5” it is included within the assessable income of taxpayer and it is held taxable in accordance with income tax law (Braithwaite 2017). Under “sec 102-5 ITAA 1997”, the taxpayer must denote that the net capital gains are regarded as the category of statutory income. As noted in “sec 105-10 (5)(a)”, a taxpayer is needed to be ignored capital gains or loss when they have acquired the asset before 20/09/1984 (Kapoor et al. 2020). These assets are regarded as “pre-CGT assets”.

Meanwhile, as per “sec 108-20 (2) & (3) ITAA 1997” “personal use assets” represents those type of assets that is held by taxpayer for private use purpose (Arnold, Ault and Cooper 2019). Some noteworthy examples of personal use assets are boats, furniture, items of household, electrical goods etc. An important rule regarding personal use assets mentioned within “sec 108-20 (1) ITAA 1997” is that a loss upon selling of personal use assets needs to be disregarded.

Calculation of Tax Payable

The home at Newtown of Dorothy is considered as a main residence. The sale of Newtown home by Dorothy and any capital gains derived should be considered exempted from CGT under “sec 118-110” because Dorothy qualifies for main residence exemption as she has not used her home for producing assessable income (Shome 2021).

Dorothy also reports selling her holiday home in Vincentia. Her holiday home will be considered as a CGT asset under “sec 108-5” and its sale has resulted in capital gains that is included in the assessable income of Dorothy as statutory income under “sec 102-5”.

Later a grand piano has been purchased in 2004 for $40,000 was sold for $20,000. The grand piano is classified as personal use asset under “sec 108-20 (2) & (3) ITAA 1997”. Upon selling the grand piano, Dorothy suffered capital loss (Oats, Miller and Mulligan 2017). With regard to “sec 108-20 (1)” the capital loss from grand piano needs to be ignored by Dorothy.

Later she reports selling a painting for $850,000 that was purchased for $1,000 in 1984. The painting has been classified as a “pre-CGT asset” because it was purchased by Dorothy before 20^th September 1985 and the capital gains derived from selling the painting will be treated as exempted from capital gains under “sec 104-10 (5)(a)” (Kenny and Devos 2018). 

Finally, Dorothy reports selling 5,000 shares in NRMA that she bought in current tax year. The shares are treated as CGT asset under sec 108-5. However, the shares were not held by Dorothy for 12 months’ period and the “12-month ownership rule” is not satisfied (Sadiq 2020). Therefore, Dorothy will be considered eligible for claiming 50% CGT discount on capital gains.

Conclusion: 

Conclusively, the total net amount of capital gains derived by Dorothy stands $189,175 while the capital gains tax payable by Dorothy for the income year ended stands 59,659.

References:

Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a structural analysis. Kluwer Law International BV.

Barkoczy, S., 2017. Core tax legislation and study guide. OUP Catalogue.

Barkoczy, S., 2022. Foundations of Taxation Law 2022. Cambridge University Press.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Kapoor, A., Mainkar, D., Sewak, K., Jha, K., Singh, R.P. and Jain, S., 2020. Law of Taxation-Fall 2020.

Kenny, P. and Devos, K., 2018. Australian Small Business Taxation. LexisNexis.

Main, J., 2019. Taxation: Buying or selling: beware the sting of GST. LSJ: Law Society of NSW Journal, (55), p.73.

Murray, I., Taylor, J., Walpole, M., Burton, M. and Ciro, T., 2018. Understanding Taxation Law 2019.

Oats, L., Miller, A. and Mulligan, E., 2017. Principles of international taxation. Bloomsbury Publishing.

Sadiq, K., 2020. Australian Taxation Law Cases 2020. Thomson Lawbook Co.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A., 2018. Principles of taxation law 2018. Thomson Reuters (Professional) Australia Limited.

Shome, P., 2021. Taxation History, Theory, Law and Administration. Springer.