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Specifically, the following points are examined with help of the case study;
As per S 8-1 ITAA97, taxpayers can subtract their deductions from the assessable income to get
the taxable income of the year. Most of the deductions fall under the category of General
Deductions. Certain amounts are not allowed as deductions under section 8-1(2) and 8-5(2),
though they fall under allowable deductions.
TAX CONSEQUENCES FOR JAMES
-
DEDUCTABLE
NON-DEDUCTABLE
An employer is liable to pay his employees as per part III of the Employment Act. An employer
can generally deduct the amount paid to employees for the services performed by them. The pay
can be in form of cash, services or property. 1 It may include;
Wages
Salaries
Bonuses
Commissions
Non cash compensations such as vacation allowances
Fringe benefits
Employees pay must be a necessary business expenses and ordinary in nature to be deductible.
In addition the pay must meet the following tests;
TEST 1: It must be reasonable.
From above tests, it can be implied that whole amount of outgoing (in form of salary) constitutes
grossly excessive expenditure. Such type of outgoing is out of all the proportion to the secured
benefit.
Leading case on this point is: Robert G Nall Ltd. v FC of T2
Facts of the case are: A director is entitled to a salary of $5,000 p.a. under the taxpayer
companys Articles of Association to Salary. Even after the directors duties had shrunk to merely
collecting rents and debts due, the company continued to pay him.
Held: it was held that there is great disproportion between the services rendered and expenditure
in the business of the company. Accordingly the payment was not deductable.
In case of James, it can be assumed that salaries are paid in proportion to services rendered and
benefits derived. Hence the amount is a deductable expense.
-
Salary paid to Ann, daughter of James, who works once a week and being paid
$40,000 p.a.
EXPENSE
$40,000
DEDUCTABLE
NON-DEDUCTABLE
Tax law allows deduction of any expenses that is incurred for the purpose of earning income
from a business. The condition is expense must be reasonable. Since the amount paid to Ann, is
for the services rendered by her is considered to be reasonable can be claimed for.
Leading case on this point is: Gabco Ltd. V. Minister of National Revenue3
Facts of the case are: there held a dispute over the quantum of wages paid to a family member.
Held: it was held that business man would have been contracted to pay such an amount having
only business consideration in mind.
Sometimes, a family member is employed as an intention to reduce the taxable amount for a
business. It was held in case Hammill v R4. the purpose of reasonable rule is to prevent tax
payers from reducing the income artificially by deducting high expenses in the form of salary
paid to family member employed. Though this is an income splitting strategy, providing tax
savings but require reasonable descriptions for the same.
Therefore job description of family member is very much important as well as time sheets
showing hours worked. In this case ANN is described as working for one day a week and having
a degree of accountant. She maintains the accounts of James and files his GST.
-
DEDUCTABLE
NON-DEDUCTABLE
The expenses incurred to travel between home and work is generally not deductible.
Leading case on this point is: Lunney and Hayley v Federal commissioner of Taxation
(1958)100 CLR 478.5
3 Gabco Ltd. V. Minister of National Revenue( 68 DTC 5210), Cestnick, T. (2013), For the selfemployed, hiring family can pay off in deductions, The Globe and Mail
retrieved from http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/forthe-self-employed-hiring-family-can-pay-off-in-deductions/article10095413/
retrieved from;
Held: In this case court treated the expenditure as cost of getting to work or business rather
than a Working or business expense.
Another leading case on this point is: FC of T v Wiener6
Facts of the case are: A teacher was employed by education department was required to teach
between five different schools during a week.
Held: it was held that deduction is allowed for car expenses incurred in travelling between
schools but not for the travel expense incurred in travelling from home to first school and from
last school to home.
-
Travel expense of $2,500 for travel from a clients premises to his home.
EXPENSE
$2,500
DEDUCTABLE
NON-DEDUCTABLE
non- deductable, where as if an employee has to travel as per job requirements such as there is
concept of two places of work, such work expenses can be deducted. Therefore James travel
expenses of $2,500 are deductable.
-
DEDUCTABLE
NON-DEDUCTABLE
Generally, as per Division 34 ITAA 97, expenses incurred in respect of clothing are not
deductable. Moreover, as per s 1-8 ITAA97, the cost of acquiring conventional items of
clothing for example suit, is not deductable.
Leading case on this point is: Mansfield V FCT8
Facts of the case are: General expenditure on ordinary articles of clothing will not be deductible,
unless that expenditure is made to ensure a suitable appearance in particular profession or job.
Held: it was held by Lordship that deduction of cost of clothing is based on special
circumstances. An employer may be required to dress in an appropriate manner, but only one fact
alone cannot bring the expense to be deductible
Another leading case on this point is: FCT v Edwards9
Facts of the case are: the taxpayer was employed as personal secretary to the Governor of
Queenslands wife. He was required to accompany her on special occasions. The taxpayer has
attended more than 150 public engagements and was required to dress professionally for each
event. For some of the events, he has to change his attire more than one time a day.
Held: It was held that the additional clothing expenses were not for private use. A taxpayer is
allowed deduction for the cost of clothing as well as additional clothing such as gloves, hat
formal evening wear required for the job.
Therefore, clothing expenses of $1,000 incurred by James are deductible, as he incurred those
expenses to dress up appropriately and to fulfill the needs of his profession. Moreover James run
a small photography studio and it is a profession, so there is a clear nexus with the taxpayers
income producing activities.
-
DEDUCTABLE
NON-DEDUCTABLE
DEDUCTABLE
NON-DEDUCTABLE
As per division 9A FBTAA, S 37AC meal entertainment fringe benefit arises where the provider
provide meal entertainment to recipient.
EMPLOYER EXPENSES
Deduction allowed
Deduction not allowed
When food or drink to the taxpayers
When food or drinks are provided at a party,
employees or clients are provided in an in-
Leading case on this point is: Dean & Anor v Federal commissioner of Taxation.10
Facts of the case are: Two employees in a company are being paid off retention to stay in the
company. The contract was signed and Employees agreed to remain in the company for 12
months following a takeover of the company.
Held: It was held by Lordship that payments are made in consideration to keep employees to be
with company for a period of 12 months. If payments were made payments were made with
consideration to employees agreeing to remain with company, the payments were considered as
salary or wages and is clearly of income nature as they were paid by employer to employees for
the services rendered.
2. It is an assessable income: Assessable income includes payments categorized as salary,
wages, allowances, bonuses and any retention payments for continuance of services.
Leading case on this point is: Reuter v Federal commissioner of Taxation (1993).11
Facts of the case: the taxpayer entered into a contract with government for a piece of land on
which some conservation work is carried on. The contract is signed after submitting tenders for
the same. Tenders are filled on the basis on work done on that piece of land for last few years.
The contract was signed stating first payment to be made to taxpayer. The land was sold after
three years but contract was for ten years. It was mentioned in the contract if land was sold
before ten years, it will lead to termination of contract.
Held: The high court considered two factors determining the amount is a product of taxpayers
services. 1) The motive of payer in paying the amount. 2) There is an expectation to receive the
10Dean & Anor v Federal commissioner of Taxation 97ATC 4762, retrieved from Barkoczy,S.
(2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.
amount by taxpayer. If there is expectation to receive the amount in return for providing services
and the motive of government is to reward the taxpayer for providing services, the amount is
ordinary income as it is a product of taxpayers services. The amount is held to be an income if it
paid in consideration for performance of services.
3. It is an income from personal exertion: As per section 393-10 of ITAA97, any amount
that is included in the assessable income of the tax payer is income derived from
personal exertion.
Leading case on this point is: Brent v Federal commissioner of Taxation.12
Facts of the case are: The taxpayer in this case is wife of convicted Great Train Robbery. She
entered into a contract with General Television Corporations Pty. Ltd. for giving interviews to
journalists. In return she will receive payments. The payments were being made because she
agreed to publish an account of his life.
Held: It was held by Lordship that it is an income from personal exertion as that payments
received are consideration for making herself available for interviews to General Television
Corporations Ltd. though she has not disposed off any of her capital assets nor she assigned any
copyright. She is being rewarded for the services provided by her and assessed accordingly.
CALCULATION OF ANNs TAXABLE INCOME
Step 1
Calculate assessable income
Salary: s 6-5 ITAA97
TOTAL ASSESSABLE INCOME
Step 2
Calculate deductions
TOTAL DEDUCTIONS
Step 3
Calculate taxable income (Step 1- Step 2)
Step 4
Calculate basic income tax liability by
$ 40,000
$40,000
NIL
$40,000
$4637
NIL
12Brent v Federal commissioner of Taxation 71ATC 1952, retrieved from Barkoczy,S. (2014),
Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.
Step 6
$4637
Step 7
step 5)
Calculate Medicare Levy* by multiplying 600
Step 8
$5237
Levy Liability
*Currently Medical Levy is imposed at the rate of 1.5%. No medical levy is applicable if taxable
income is less than $20,542 (2013-14). Here Taxable income is $40,000; Medicare Levy is
applicable @ 1.5%.
DEDUCTABLE
NON-DEDUCTABLE
The cost of travelling on work or in course of work is usually deductable. It is considered that
such outgoings have a connection with taxpayers business activities or income producing
activities. Accommodation and meals on business trip may also be deductable.
Travelling expense incurred by Peter is a business travel expense, which is related to production
of assessable income, other than wages or salary, and it involves travelling away from home for
at least one night.
Leading case on this point is: Garrett v FC of T13
Facts of the case are: The taxpayer is a doctor and he used to carry on his medical practice at
various locations. These medical practices generate 35 percent of his income. It appears that
most of the aircraft travel was involved.
Held: it was held that taxpayer incurred expenses associated with travelling and he is allowed for
general deductions.
Therefore, it can be said that though Peter is not reimbursed for his plane tickets and Hotel cost,
he can claim a deduction for the same.
-
DEDUCTABLE
NON-DEDUCTABLE
It is a work expense as per S 900-30(1) of subdivision 900-B ITAA97. Such expenses are
incurred by individuals who are employees at common law. A work expense specifically
includes;
1.
2.
3.
4.
The allowance provided for meal and transportation cost to Peter is a Per Diem allowance.
Per Diem allowance is an allowance provided to employees on an overseas trip for business
purposes. The allowance is meant to cover;
1.
2.
3.
4.
5.
6.
Overseas accommodation
Overseas airport transfer
Cost of meals
Entertainment expenses for business purpose
Travelling expenses between cities for business purpose
Other incidental items like laundry
The reimbursement portion of such an allowance is not taxable. Peter is paid such allowance
related to his business travel expenses. He is not required to keep any written evidence for the
expenditure provided the claim does not exceed the reasonable allowance amount. Therefore,
expenses claimed must have been incurred and be an allowable deduction.
Peter is travelling to Indonesia in this case. As per ITAA97, transport and meal allowance are
deductible to a certain limit.
Salary $108,810 and below
Meals Incidentals
Total
$110
$135
$170
$35
$145
$40
$175
s
$45
$215
There is no information provided regarding salary of Peter, it can be assumed that his salary falls
in the category of $193,521 and above and therefore he can claim deduction for $600 for three
days.
CONCLUSION
It can be concluded that allowable deductions are a critical part of the income tax equation.
Though the section related to deductions is self explanatory, there is need to consult some
external references for further clarifications. This problem solving question is an attempt to
explain all issues related to Income tax, general deductions, Fringe Benefit tax, travelling
expenses, entertainment expenses. It is not the verdict of court of commissioner to decide the
amount a taxpayer has to spend, it is actually how much he has spent and deciding whether an
amount is allowable as deduction under s 8-1 ITAA97.
BIBLIOGRAPHY
Lunney and Hayley v Federal commissioner of Taxation (1958)100 CLR 47, retrieved from;
http://www.buseco.monash.edu.au/blt/jat/1999-issue5-barkoczy.pdf
Mansfield v FC of T 96 ATC 4001 retrieved from
Barkoczy,S. (2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 13, page 326
Publication 535 (2014), Business expenses, IRS Publications, retrieved from;
http://www.irs.gov/publications/p535/ch02.html
Reuter v Federal commissioner of Taxation (1993)111 ALR 716;93 ATC 4037.retrieved from;
http://law.ato.gov.au/atolaw/view.htm?docid=CLR/CR200792/NAT/ATO/00001
Robert G Nall Ltd. v Federal Commission of Taxation, retrieved from
http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2008D16/NAT/ATO/00001
Taylor v Provan (1975) AC 194, retrieved from; http://law.ato.gov.au/atolaw/view.htm?
rank=find&criteria=AND~residence~basic~exact&target=E
%20EA&style=html&sdocid=ITR/IT2481/NAT/ATO/00001&recStart=4021&PiT=99991231235
958&recnum=4043&tot=4059&pn=ALL:::ALL