Taxation Case Studies: Residency, Assessable Income, Government Funding, Deductibility, And Small Business Entity

Part A: Residency of John

Part A: Issues:

Will the taxpayer be held resident or the resident of Australia under the meaning of “section 995-1, ITAA 1997” or under “subsection 6 (1), ITAA 1997” during his stay in the overseas nation?

According to the “subsection 6-1 of the ITAA, 1936” the term resident and the resident of Australian refers to the person that lives in Australia and includes those person that has their domicile in Australia, unless the taxation commissioner is content that permanent place of abode is out of Australia. An individual will be treated as the Australian resident whose has actually been in Australia either constantly or intermittently for no less than one-half of the income year until the commissioner of taxation is content his permanent place of abode is out of Australia.

The definition above to provides certain test to determine the whether the person is an Australian resident within the meaning of the term “Resides”.

1. The domicile and permanent place of abode test
2. 183 days test
3. Commonwealth superannuation fund test.

Domicile can be defined as the lawful concept that should be determined as per the “Domicile Act 1982”. The main rule is that a person obtains the domicile of their origin by birth where his or her father has permanent home. The opinion of court in “Henderson v Henderson (1965)” a person retains the domicile of their origin nation unless the person acquires the domicile in another nation by the operation of the law. The expression permanent place of abode refers to the place where an individual resides with their family. In “FC of T v Jemkins (1982)” the court held that the taxpayer had the permanent place of abode out of Australia during his stay in overseas despite the taxpayer did not indefinitely formed the intention of residing out of Australia.          

The 183 days test states that a person who has actually been present in Australia either constantly or in breaks for more than one-half of the income year will be held as the Australian resident unless the commissioner is content that permanent place of abode is out of Australia. The 183 days test rule is helpful in ascertaining whether the taxpayer has begun living in Australia.

The superannuation commonwealth fund is also relevant to the member of the superannuation fund or who is the eligible employee of commonwealth public servants and their family are deemed to the resident of Australia for taxation purpose.     

In the current case of John he was employed with the global aerospace company that required him to travel to aircraft manufacturers across the world. He initially left Australia with intention of returning and sold majority of his personal assets namely car and boats. As his wife did not accompanied John to Dubai he often returned to Australia to meet is wife and children. However, due to long distance in relationships they agreed to end their marriage.

Part B: Assessable Income of Ed

With reference to the “Domicile Act 1982” John has maintained his Australian residence as he moved to one-bedroom apartment and stayed in the same apartment when he was not travelling. Citing the reference of “Henderson v Henderson (1965)” it can be stated that John has retained the domicile of his origin nation and has the permanent place of abode in Australia. It reflects that John has maintained his domicile in Australia by taking up the one bedroom apartment. The intended and the actual length of stay in the overseas nation was not substantial. Furthermore the durability of association that he had was in Australia. Citing the reference of “FC of T v Jemkins (1982)” the permanent place of abode was in Australia during his stay in overseas. Therefore under the domicile test John will be held as the Australian resident.

With respect to 183 days test John has been present in Australia either in intermittently for less than six months and following his return in April he commenced residing in Australia until August 2018. Therefore under the 183 days he cannot be treated as the Australian resident since he was only present for five months.

In the later instance it is noticed that John maintained his bank account in Australia and also maintained his superannuation account in Australia. This signifies that he is the member of the superannuation fund and hence meets the criteria of superannuation test as well.

Conclusion:

With reference to “subsection 6 (1), ITAA 1936” John will be held as the Australian resident for the year ended June 2018 since he has met the domicile and permanent place of abode test and Commonwealth superannuation fund test.  

Issue:

Will the taxpayer be held liable for assessment under “section 6-5 of the ITAA 1997” for the receipts obtained based on the ordinary concept?

According to the Australian taxation office insurance pay-out for the items that the taxpayer uses to generate taxable income may have to be included in the tax return. A pay-out that is received under the policy for the loss of the trading stock is usually treated as taxable income.

Payments that is received for agreeing of not doing something are not considered as income. As held in “Pritchard v Arundale (1972)” payments made to accountant for leaving the personal practice and work for the company in 6 months’ time will not be treated as income.

As per “section 6-5, ITAA 1997” majority of the income that comes into the taxpayer is treated as the ordinary income. The court of law in “Scott v CT (1935)” the term income should be treated in respect to the ordinary sense and use of mankind.

Part C: Government Funding of Renewable Energy Pty Ltd

As per “section 118-10 (2)” special rules are applicable if the collectables are an interest in the CGT assets. Any capital gains or capital loss that is made from interest is disregarded if the asset is beyond $500 or less.

According to “section 118-10, ITAA 1997” capital gains or capital loss made from the collectable is disregarded given the cost base of the asset is less than $500.  

The receipt of insurance pay-out for the damaged stock is treated will be treated as the taxable income. This is because the taxpayer to generate taxable income uses trading stock.

The receipt of compensation payment by Ed will be treated as the taxable income since it constituted an exclusive trade agreement ties.

The item of trading stock that was sold by Ed to the local football club constituted income under the ordinary concept of “section 6-5, ITAA 1997”.

With reference to “section 118-10(2), ITAA 1997” the Ed did not legally own the table but had an interest on the asset. The sale of antique will be treated as capital gains under “section 118-10(2), ITAA 1997” since the cost base of asset was greater than $500.

The sale of antique vase to the customer will be treated as capital gains. Under “section 118-10, ITAA 1997” the capital gains will be held liable for taxation.

Conclusion:

On a conclusive note, Ed will be held liable for taxation relating to the transactions reported above under the ordinary concepts of “section 6-5, ITAA 1997”.  

Issues:

Will the receipt of government grant by the taxpayer would be subjected to taxation under the ordinary concepts of “section 6-5 of the ITAA 1997”?

As stated under “section 6-5 of the ITAA 1997”, an individual taxpayer deriving majority of the income is treated as ordinary income. “Section 6-5, ITAA 1997” lay down the judicial concepts of ordinary income in “Scott v FC of T (1935)”. The term income should not be viewed as the term of art rather appropriate principles must be implemented to determine the receipts under the ordinary concepts and use of mankind. The judicial concept is applicable when the item of income character is obtained when it is derived by the taxpayer till the realisable value.

The “taxation ruling of TR 2006/3” is associated with the income tax consequences of the government grants made to industries for helping company to continue, commence and cease business. The ruling is applicable to the recipients of the government payments to help the recipients of money in continuing, starting or ending the business. The taxation rulings of TR 2006/3 is only applicable to the schemes such as bounties, grants, subsidies and rebates that are paid or funded by the local, state or territorial government.

Part D: Deductibility of Micro Brewer Pty Ltd

The “TR 2006/3” states that government payments to continue or expand business includes the payments made to support the costs, helping with the operating expenses, promoting business expansions or undertaking any research and development activities. The government payment to the industry in helping the business in continuing the operation, excluding where the payment is for agreement of giving up the profit making scheme is included into the taxable income of the receipt under the ordinary meaning of “section 6-5, ITAA 1997”. Furthermore, a government grant to help the business in its operating costs or liabilities is treated as the ordinary income in the recipient hands and held for taxable purpose under “section 6-5, ITAA 1997” during the year in which such grants are received.

The “taxation ruling of TR 2006/3” explains that the government grants as the assistance to the business is at times provided based on the terms where the sum should be repaid until the recipients satisfies the agreed conditions inside the specified period. Such government grants turn out to be unconditional when the recipient meets the necessary obligations of the agreement with the funding authority.

The court of law in “Hayes v FC of T (1956)” held that payment that is provided for the particular revenue expenditure forms a factor that supports the conclusion of income. The commissioner in its opinion expressed that a government payment to industries which constitute an ordinary income is held taxation purpose under the subsection 6-5 (1) during the year in which the income is derived.

In the current case of Renewable Energy Pty Ltd it is noticed that the business specializes itself in the manufacturing of solar panel. However, the business was provided with the grant of $750,000 by the Queensland statement government to expand its business based on the condition that the business would work exclusively in manufacturing the solar panels for a two-year time.

With reference to “taxation ruling of TR 2006/3” the receipt of $750,000 constitute government that is received by Renewable Energy Pty Ltd to assist it to continue expansion of its existing business. Citing the reference of “Hayes v FC of T (1956)” the payment that is provided to Renewable Energy constitutes revenue expenditure forming a factor that supports the conclusion of income.

Referring to the judgement made in “Scott v FC of T (1935)” the money is received by the company under the ordinary business course and hence it is an ordinary income. The amount will be taxable under “section 6-5, ITAA 1997”.  

Part E: Taxation Consequences for Anna’s Business

Conclusion:

On a conclusive note the government grant provided to Renewable Energy Pty Ltd was exclusively based on meeting the agreed conditions of manufacturing the solar panel. The payment is associated to the current revenue generating activities of the company.

Issue:

The present case involves the issue, whether Micro Brewer Pty Ltd can claim deduction for the $275,000 as consultation fees and sponsored lobby against the restriction put on by the Australian government on advertisement of alcohol?

Under section 8-1 of ITAA 1997, a person paying tax can claim deduction relating to transaction mentioned under the general deduction clause of the said act. An expense or loss may be considered as deduction under section 8-1 and under certain specific provision. A person paying tax can be allowed to claim deduction from the income which is taxable only if the expense is a consequence of earning that income. A taxpayer is not allowed to claim deduction under the negative or non-permissible limb of section 8-1(2) of ITAA 1997. Expenses in the nature of capital, private or domestic is not allowed for deduction. Thus here it has to be proved whether the amount of $275,000 contributes to earn taxable income because to claim general deduction the expense should be a consequence of producing income. For a business, most of the expenses are directly related to the income producing process. Now there are certain expenses that does not contribute to produce taxable income. As decided by the tax commissioner in the landmark case of “Softwood Pulp and paper v FCT”, the deduction was denied as the expense was not incurred in earning the actual income. The taxable income for a financial year is calculated after subtracting the amount of deduction allowed as per the given provision in the ITAA 1997. 

On the other hand, we have section 8-5 of ITAA 1997, which talks about specific deduction, in situation where general deduction is not applicable. Specific deduction is available under a range of provision for particular kind of gains or losses. The specific deduction provision are designed to cover certain kinds of expenditure and other amounts that might not otherwise be deductible under the general deduction provision.

In the present case Micro Brewer Pty Ltd, was engaged in the business of alcoholic beverages. Advertisement is one of the most important part of increasing the customer base that was restricted somewhat by policies brought in by the Australian government. Advertisement of alcohol in sports ground was banned by the recent policy which would result negatively on both the profitability and goodwill of the business, thus the company spent $275,000 for consultation. Now it is important to determine whether this amount of consultation would be eligible for deduction under the general or specific wings of deduction. ITAA 1997 provides for both general and specific deduction depending on the situation. Here in the present scenario the exposure through advertisement was disturbed by the government policy which would eventually affect the overall profitability of the business. Thus it is partially clear that the expense of $275,000 would contribute to produce income for the company. To make it more conclusive, we would refer to the case of “Ronpibon Tin NL v FCT”, where the court said that expense which helps in creating opportunity to earn income which is taxable would be eligible for deduction. Thus, here this principle would apply that the expense for consultation forms part of the amount that contributes to produce actual taxable income. Australian tax system is based on a global general model which make it consider all kinds of income and loss together, that is why, even if general deduction is not permissible, there is little scope for specific deductions.

Conclusion:

On a conclusive note and considering the facts of the case and available laws under the Australian tax system, we can say that, the amount of $275,000 as consultation qualifies as an amount that actually contribute to produce actual taxable income. Thus, it is advised that Micro Brewer Pty Ltd claim the deduction under ITAA 1997, as they qualify for the same because the expense is a consequence to earn actual taxable income. Even if section 8-1 of ITAA 1997 does not apply, section 8-5 of ITAA 1997 might help them claim specific deduction.

The present issue is about the income tax consequence given transaction for the year ended 30^th June 2018.

Under the ITAA 1997, any expense for a tax payer might be eligible for deduction. Australian tax model has a great scope for deduction, either general or specific depending on the nature of expense. In the present situation, section 8-1 of ITAA 1997 applies, where Anna can claim general deduction for the expenses incurred for professional activities. However, there are expenses that does not form part of actual taxable income or rather for which general deduction cannot be claimed because they are not a consequence of producing actual taxable income.

For the expense of equipment and stock she can claim deduction under the positive wing of section 8-1 of ITAA 1997. She can guarantee deduction under the positive wing of segment 8-1 of ITAA 1997. She reports of her cost of $2000 for the rent of the shop and after the instance of “Ronpibon Tin NL v FCT”, it was chosen that this cost will be considered for deduction as it important and aftereffect of making assessable salary. The lawful expenses of $4,400 that is happened by anna for getting the recommendation for setting up the business could be a primer to the beginning of financial gain creating action. By relating “Softwood Pulp and Paper v FCT” non-deductible underneath general arrangement of “section 8-1”. anna reports relate costs of $2200 for the securing of PC. She utilized workstation phone of the ideal opportunity for private reason. anna will exclusively guarantee 90th of the PC phone for deductions as 10% of the PC phone involved private utilize.

The costs of $2,500 incurred for hole gathering of pursuit with local famous people are regularly delegated personal or domestic consumption and non-deductible since the costs neglects to satisfy the constructive appendages and non-deductible underneath second pessimistic appendage of “section 8-1 (2) (b)”. A sole merchant is permitted to state deductions concerning the obtaining of trade stock since these costs frames a piece of carrying on of the business in assembling the assessable financial gain. Correspondingly, the cost incurred in examination of shop is furthermore deductible underneath the positive appendages of “section 8-1” since the costs is basically incurred and pertinent inside the citizen’s financial gain producing action.

The voyaging costs for development with business classification that is incurred by Anna for going to the new york design is ordered in light of the fact that the personal in nature. Anna will be denied to declare deductions underneath “section 8-1. Also, she incurred costs on settlement and sustenance that was in connection for the business reason. In this way, a deduction is passable. Referring to the occasions of “Lunney v FCT” the cost incurred by Anna to make up for lost time alongside her companions is personal in nature and non-deductible underneath constructive appendages of “section 8-1”. Anna will guarantee deductions for wage and wages paid to staff however, the wage paid to herself is non-deductible.

Computations of total allowable deductions
For the year ended 2018
Particulars	Amount ($)	Amount ($)
Allowable Deductions
Bank Interest	6000
Payment of Monthly Lease Expenses	2000
Purchase of Lockable glass display	28000
Laptop of laptop (90% business use)	1980
Purchase of Jeweler	480000
Security surveillance cost	24000
Accommodation and Food Expenses	2000
Salary and wages paid to employee	65000
Total Allowable deductions		608980

Conclusion:

To conclude, we can say that the tax consequence differs according to the nature of transaction. We have seen different kinds of transitions some of which are eligible and some are not. Thus, the total amount on which Anna can claim deduction is all the expense apart from the travel and party expense which is barred by the case legislation and given statutory guidance.

It is assumed that Anna qualifies as a small business entity but the provisions applicable in this case are part of general deduction and no specific deduction. Thus, Anna can claim deduction on the total amount of $608,980 as expense and eligible under section 8-1 of ITAA 1997.

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