Why Do Small Business Taxpayers Stay With Their Practitioners?

Importance of Taxation in Economic Development

One of the main purposes of the taxation is to ensure the economic development of the country. The economic development of any country is dependent upon the capital formation of the country. For the purpose of capital formation, the government of the country mobilises resources, so that rapid capital formation could take place (Enste, 2018).

The taxation in the country can be effectively utilised to monitor the demand for goods and services within the country. Lowering of the taxes would result in increase in the demand and thereby increase the employment of the resources.

The taxes can be used to stabilise the prices. By raising the amount of direct taxes, the amount of private expenditure can be reduced. Thereby reducing the prices of the commodity (Basu, 2016)

• Taxation ruling refers to the binding statements or rules made by the Commissioner. The commissioner is bound by the rulings. This means that a taxpayer who has relied on the rulings cannot be penalised later even if it is proved later that the ruling was incorrect by the court. Some of the binding rulings issued by the Australian Taxation Office include

1. Public rulings- it is generally issued to explain the application of a particular tax law to the common tax payers and includes TR, ITR, GSTR, TD, GSTD, CR and PR.
2. Private rulings-

This is a kind of advice given in respect of the application of the tax law, which is related to a particular specific arrangement. Only that specific taxpayer is supposed to rely on the ruling (Tan et al., 2016).

This contains advices in respect of the application of the law for a taxpayer who is an individual.

• The ruling deals explains in which circumstances the packaging items that are being held by the wholesaler, retailer can be considered as trading stock as defined under section 70-10 of the Income Tax Assessment Act 1997. The ruling is applicable in case the items are acquired, manufactured and produced by a taxpayer and held for the purpose of –

1. Purpose of affecting sale in the normal course of business.
2. Purpose of manufacturing in the normal course of business.

• The requirements of an individual seeking registration as a tax agent are as follows:

1. Minimum age should be 18 years for the purpose of application.
2. The person must be fit and proper
3. The person will have to satisfy qualification and experience requirements.
4. The person maintains or will be able to maintain professional indemnity insurance that meets the requirements of the body (Symes, 2016).
5. The application must be filled in online and all the supporting documents must be given.

• The two divisions that give out the details about the deduction available in respect of capital expenditure are division 250 and division 150.
• The act relates to specific deduction because of the following:

1. Tax related expenses.
2. Expenses on repairs.
3. Expenses related to lease document.
4. Borrowing expenses.
5. Expenses in respect of bad debts
6. Loss by theft.
7. Local government election expenses
8. Deduction of work in progress amounts.

• The decision taken in the case is relevant fordetermining the overseas travel expenses and other items like the food and other incidentals. It determined whether the same will be deductible under the section 8-1(1) (a) of the Income Tax Assessment Tax Act 1997 (Berns, 2017).
• If any amount is received as a compensation for the loss of the trading stock, the acquisition cost of the stock is reduced by the value of the compensation. No capital gain or any sort of tax will be attracted unless and until, the taxpayer disposes of the trading stock.
• The applicable tax rate for an individual having an income of $75000 in the year 2107/ 18 is $3572 plus 32.5 cents for each $1 over the amount of $37000.
• The formula mentioned in the section 4 10 (3) is as follows:

Income tax = (Taxable Income * Rate) – Tax Offsets.

1. The taxable income for the taxable year as to be computed first.
2. Then the basic income tax liability on the taxable income earned has to be worked out using the following:
3. The income tax rates that is applicable for the income year.
4. Any of the special provisions that is applicable for working out that particular liability.

• The tax offsets that are applicable for the particular year must be worked out. A tax offset is responsible for reducing the taxable income of an individual.

1. The tax offsets calculated must be deducted from the basic income tax liability of the individual. The result that is obtained will determine the income tax the individual owes to the government.

In this case, Lisa is a self employed marketing consultant and the issue is to ascertain whether the expenses are allowed as deduction as per the provision of the tax law. The section 8-1 of the Income Tax Assessment Act 1997 provides that a taxpayer can deduct expenses that it incurs in producing assessable income (Picciotto, 2017). The expenses those are necessary in carrying out the business for producing the assessable income are allowed as deduction. It is further stated in the section that the following expenses cannot be claimed as deduction:

• The loss or outgoing of domestic or private nature;
• The loss or outgoing of the capital nature;
• The expenses that are incurred for producing the exempted income;
• The expenses that are specifically prevented from deducting;

In this section the deduction that can be claimed by Lisa are discussed. The section 25-10 of the ITAA 97 provides that an individual can claim deduction for expenses it incurred for repairing the premises or producing the assessable income. The capital expenditure cannot be claimed as deduction under this section (Braithwaite, 2017). The repairing expense that leads to substantial improvement in the item of expenses are not allowed as deduction. The expenses related to installation of new ceiling are substantial capital expenditure. However, in the current case the expenses related to repairing of leaking roof is not a capital repair and hence it is allowed as deduction. The painting expenses for home office are allowable expenses and can be claimed as deduction. The replacement of the wooden floor in the office room is a substantial expenditure so it is treated as capital expenditure. The resurfacing expense related to client car parking is not an allowable expense. It is because this expense does not fall within the definition of allowable expenses.  It is because this expenditure is not incurred for producing assessable income. The gardening expenses can be claimed for immediate deduction (O’faircheallaigh, 2017).

Calculation of Deductible Expenses
Particulars	Amount
Repairing to leaking roof	$2,400.00
Painting of Office room	$5,200.00
Gardening expenses	$9,000.00
Allowable Deduction	$16,600.00

Advice on Tax Laws for Self-Employed Individuals

The Tax ruling 98/17 deals with the issue of residential status for determining the taxable income of an individual. In order to be considered a resident the individual has to pass any of the three tests. The tests are as follows-

• Ordinary resident
• Domicile test
• 183 days test
• Super annulation test.

In the present case, Satya was not present in the country for 183 days hence he fails that test. The superannuation test does not apply in this case. However, the ordinary test and the domicile test do suggest that Satya is an Australian citizen for the period concerned. This is because of none of his act suggesting that he is going to leave Australia (Marett, 2018). While away, he lived in the house given by the company and not any other place, which he purchased. Farther more he only leased out his residential house in Australia not sold it. All this suggest that Satya intended to stay in Australia after returning (Edge, 2017).

In this case the issue is to determine the assessable income of Jane for the year. The section 6-5 of the ITAA 97 provides that the income according to the ordinary concept is regarded as the ordinary income. In the case of Scott V CT (1935) it is provided that the term income should be determined in accordance with the ordinary concept and the usage of the mankind. The income that is earned from working in hospital is an income according to the concept. Therefore, this income will be included in the calculation of assessable income. The income in the nature of windfall gain or from gambling is not an income (Gitman et al., 2015). Therefore the income from winning horse races will not be included in the calculation of assessable income.  In the case of Scott V FCT it was held that the gifts of personal nature are not income. It should be noted that in case of Moore V Griffiths (1972) it was held that mere prize should not be treated as income. In the current case personal gift received from brother should not be treated as assessable income.  The income from personal exertion should be treated as an assessable income. The personal exertion includes income from painting and other activity (Murphy et al., 2016). Therefore, the proceed from the two painting should be included in the assessable income. The income that is earned from the rental property should be included in the assessable income. It is because the income is received for providing the right to use the property (McGee et al., 2016). The calculation of the assessable income is provided below:

Calculation of Assessable Income
Particulars	Amount
Income from Hospital	70000
Proceed from sale of painting	2000
Rental Income	20800
Assessable Income	92800

 

Tax Rulings and Cases Related to Assessable Income Calculation and Expense Deduction

In this case the issue is to ascertain whether the expenses that are incurred are allowable expenses. In the case of FCT V Payne the court has denied the deduction of expenses related to travelling cost between home and the place of work. However, the travelling expenses for work related purpose is allowed as deduction (Picciotto, 2015). In the current case, the travelling expenses to Canberra for the employment interview are not allowed as deduction.  The taxation law provides that a taxpayer cannot claim expenses related to deduction for the cost involved in travelling or transferring for new employment (Richardson & Lefroy, 2016). Therefore the expenses of moving from Sydney to work place are not an allowable deduction.  If the taxpayer uses phone or internet for the purpose of work then the taxpayer is allowed to claim deduction for such expenses. However, the taxpayer should maintain appropriate receipt for claiming deduction.  In case the phone is used for both the private and office purpose then the reasonable percentage should be used for distributing the expenses. In the current case telephone calls made to the student for work related issue after the office hour should be allowed as deduction (Scollo et al.,2015). The cost of telephone calls made is allowed as deduction. The food expenses related to lunch from the school canteen is not an allowable expense. The travelling expenses to and from the work is not allowed as deduction. This expense is treated as personal expenses. In the case of Lunney V FCT it is provided that the travel between the home and work is not an allowable deduction. Therefore based on the above discussion it can be said that only telephone call expenses is allowed as deduction.    

Calculation of Deductible Expenses
Particulars	Amount
Telephone Expenses	$700.00
Allowable deduction	$700.00

 

Reference

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Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), 329-344.