Answers To Frequently Asked Tax Questions In Australia

1.What are the duties and powers of the Commissioner of Taxation?

You are working as a graduate accountant at a local accounting firm. Your boss has been asked to host a stall and give a presentation at a local university for their careers day.  In preparation, she asks you to research and draft some answers to some questions that the students are going to ask during the presentation.  She has asked that you provide appropriate references for your answers, so that she may refer the students to the source of the information if required.

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Questions 1

  1. What are the duties and powers of the Commissioner of Taxation?

  • The commissioner shall carry out the responsibilities conferred.

  • He shall carry out supervision (general) over all the assessors of general property  or other taxes over district boards, township, all other assessing officers etc

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  • He shall direct prosecutions and actions to be lodged for enforcement of laws w.r.t to punishment, penalty and liabilities of person, officers of corporation and others on event of failure to comply with relevant laws and regulations;

  • He may require state’s attorney of various counties to assist in the commencement and prosecution of actions and proceedings for violations of laws;

  • He shall certify all levies, assessments, equalisations or valuations made by him/ her;

  • May be required to maintain a special accounting system for assistance in taxation;

  • May ask the witness to be present and testify or produce books of account, documents etc.

  1. Describe the two main types of federal taxation in Australia

The two main types of taxation are:

  • Income Tax: It is levied on income of individual, corporations, firms etc. It is a direct tax under which the incidence of taxation and the person who bears the burden fall on the same. It is the most important source of revenue for the exchequer. Generally, slabs are defined for levy of taxation under Income Tax Act.

  • Goods and Service Tax: Goods and service tax is an indirect tax levied on goods and services. Under this federal tax system, incidence and ultimate burden may or may not fall on the same person. In Australia, the rate of tax under GST is decided @10%. Supplies like food products, export of goods are outside the purview of goods and service tax.

  1. One of the central roles of the ATO is providing advice and guidance on the application of taxation law. What are some of the ways the ATO publishes this advice, and what level of protection does this advice provide for taxpayers who rely on it?

The ways through which ATO publishes advise include bulletin ,newspapers, portal etc;

Level of protection

The level of protection depends on the law on which the ruling is provided. Generally, a high level of protection is provided if one relies on it. The advice consists of two parts one which is legally binding other is not.

When reliance on binding part is done, the law protect the reliant from any shortfall in tax if advice turns out to be incorrect and a mistake was committed on account of that. However, penalty and interest on tax shortfall shall not apply.

2.Describe the two main types of federal taxation in Australia.

However, when reliance is made on non-binding parts, the same shall be considered as the reliant is administratively bind by them, unless good and substantial reasons are provided.

Guidance

Guidance is generally issued by ATO to make one understand the rights and liabilities under the law administered.

If one relies on guidance and it turns out to be incorrect or wrong the same shall be taken into account while analysing the shortfall.

As a general rule, if shortfall is required to be paid then also penalty and punishment shall not follow. Further interest shall not be levied if carried out in good faith.

  1. Outline one situation where an individual may be able to claim the costs of travel between home and their place of work as a deduction

Generally under normal parlance an individual cannot claim for expenses that one incur for travel between work place and home. However the same can be claimed under in some circumstance and conditions. The condition is that you went home to work place or vice versa for official purpose or if your home is a base of employment. The same can be claimed when you have two jobs and one workplace is your home.

The expense can also be claimed when you are heavy bulky machines to your home and couldn’t leave them at your workplace.

  1. Explain how losses caused by theft are accounted for under income tax.

In terms of Income Tax Assessment Act, 1997  Sect 25.45

One can deduct loss by theft or loss of money if :

  • The loss has been discovered in the income year and

  • The loss was caused by theft, larceny, embezzlement or misappropriation or agent;

  • The same money was included in your assessable income for the previous year or in the current year.

  1. Briefly explain the impact of the temporary budget repair levy on both resident and non resident taxpayers

The temporary budget levy was introduced in 2014-15 federal budget and individual taxpayers with taxable income greater than AUD 1,80,000 /- were required to get extra withheld from their employer.

The levy was applicable on both resident and non-resident @2% and was applicable for 3 Financial Years. The levy ceased to apply from 01 July, 2017.

The impact was extra burden for taxation levied on both resident and non-resident on account of such levy.

Further, the tax table was updated accordingly so that employer can deduct tax on the same accordingly.

  1. What does Taxation Ruling TR 98/17 discuss?

The Taxation Ruling gives a direction to the interpretation by commissioner of the term resides within the definition of term resident u/s 6(1) of the Income Tax Assessment Act, 1936.

The aforesaid ruling shall be applicable on most individuals entering Australia encompassing:

  • Migrants;

  • Students studying in Australia or academics;

  • Holiday visitors;

  • Teaching academics;

However, the above ruling shall not apply to Australian resident individual returning to Australia after a stay temporary abroad when he was Australian resident while abroad.

The judgement encompassed the definition of term reside and shall encompass quality and character of individual behaviour for determining reside, The following shall be harped upon:

  • 3.One of the central roles of the ATO is providing advice and guidance on the application of taxation law. What are some of the ways the ATO publishes this advice, and what level of protection does this advice provide for taxpayers who rely on it?

    Purpose or intent of presence;

  • Ties in the form of family or business;

  • Arrangements: social or living;

  • Assets location and maintenance.

  1. Briefly explain the basic concept of the main residence exemption in CGT

For main residence CGT exemption to apply one must sell the property which is dwelling. Further, the term dwelling shall mean that something which is used mainly or wholly for residential accommodation. The general examples are:

  • Flat or apartment;

  • Cottage;

  • Caravan etc.

A mere intent is not satisfactory to make a claim accordingly claim can be done when above conditions are satisfied.

  1. What was the finding of the court in FC of T v Applegate 79 ATC 4307, and what legal principles are established by the case?

The major findings in the case of in FC of T v Applegate 79 ATC 4307 has been detailed here-in-below:

  • The aforesaid case primarily focussed on the issue of residency and can a place of abode which is permanent in nature can be determined objectively or shall the same be dependent on the intention of the person paying the tax.  The case further dealt with the term permanent and can the same be allotted its ordinary meaning.

  • Intention to return is a crucial factor in determining the residency is of less significance than the intention of taxpayer in relation to his place of abode outside Australia.

  1. A taxpayer is a resident of Australia for tax purposes. Explain whether income derived from a rental property that taxpayer owns in Singapore is assessable income in Australia

For a person resident in Australia his pan world income is taxable and hence the income earned in Singapore shall be taxable in Australia on the basis of residency.

Further an Australian resident individual is subject to tax on his income in Australia and his income outside Australia.

Part B: case study 5 marks (estimated 300 words). Include legislative references and calculations as necessary.

On 1 April 2008, Charles purchased 2,000 shares in ABC Ltd for $4.00 per share. On 1 June 2013, he also purchased 1,000 shares in NGB Pty Ltd at a cost of $14 per share, and 500 shares in OTM Pty Ltd at a cost of $8 a share. To purchase a flat, Charles sold some of his shares on 2 December 2017 at the following prices:

1,000 ABC Pty Ltd

 $8.00 per share

500 NGB Pty Ltd

$13.00 per share

250 OTM Pty Ltd

$12.00 per share

Advise Charles of the capital gains tax consequences of the share sales for the 2018 income tax year. To do this, you will need to include calculations which show whether Charles has made a capital gain or loss in the 2018 income tax year. To support the analysis in your answer, refer, where appropriate, to the ITAA 1993, ITAA 1997, Taxation Rulings, other relevant statues and/or case law.

Sl. No.

Name of shares

Date of Purchase

Date of Sale

Amount of Purchase

Amount of Sale

Indexation

CGT Income

1

ABC Ltd

01-04-2008

02-12-2017

4000

8000

4000

2

NGB Pty Ltd

01-06-2013

02-12-2017

7000

6500

-500

3

OTM Pty Ltd

01-06-2013

02-12-2017

2000

3000

1000

4

Pre Discount CGT

4500

5

Discount 50%

-2250

6

 CGT Income

2250

In terms of Australian Taxation System on Capital Gains, the tax shall be leviable on the sale of shares by an individual. The same shall act as trigger point under ITAA 1993 & 1997. Further, the tax shall be levied under three methods:

  • Discount Method of 50%;

  • Indexation Method;

  • 4.Outline one situation where an individual may be able to claim the costs of travel between home and their place of work as a deduction.

    Other Method.

The discount method being beneficial of all the three, the same has been used for the purpose of determining Capital Gain Tax Income. The Income has been determined by netting of the profits and loss. Further, the profits have been derived by deducting sale price from purchase price.

The requirement of using discounting method has been detailed here-in-below:

  • Indexation methodology has not been used by the individual;

  • The shares have been held for atleast 12 months before disposal;

  • The capital gain tax event has been triggered post 11:45 Am of 21stSeptember, 1999.

Part C:  case study 5 marks (estimated 400 words). Use complete sentences in the answer.

Rebekah is from England, and arrives in Australia on the 1st of December 2017, to undertake a Bachelor of Business at Central Queensland University. On her departure, she rents out her English house for $1,000 per month. Once in Brisbane, she moves in with an old school friend. She immerses herself in Australian life and joins several sporting and social clubs. So that she can contribute to the household expenses, she gets a part time job at the local cinemas. Her earnings from this job are paid into an Australian bank account. Her earnings on 30 June 2018 total $11,000. Unfortunately, in early July 2018, Rebekah gets word that her mother is terminally ill, so Rebekah quits university and her job, and returns to England to become her mother’s full-time carer.     Advise Rebekah whether she is likely to be considered an Australian resident for tax purposes for the 2018 income tax year. To support the analysis in your answer, refer, where appropriate, to the ITAA 1993, ITAA 1997, Taxation Rulings, other relevant statues and/or case law.

Sl. No.

Particulars

Intial Date

End Date

No of days

1

Outside Australia

01-07-2017

31-11-2017

153

2

In Australia

01-12-2017

30-06-2018

212

Resident since stay is more than 182 days

In terms of Section 6(1) of Australian Income Tax Act to determine residency for tax purpose there are various test once can undertake. The first test that can be checked is resides test. In terms of reside test, one needs to look whether one reside in Australia, if the said test is satisfied no other tests needs to be harped on.

If you fail to satisfy the first test, then other three statutory tests need to be taken into consideration for determining residency:-

Domicile Test:  If you have a permanent abode in Australia or a house in Australia then you satisfy this test and you are considered resident of Australia for tax purpose;

183-days Test: If the stay during the year exceeds 183 days then the individual is considered as tax resident of Australia.

Superannuation test: Under this test common wealth government employees are treated as resident of Australia for tax purpose if they are working for Australian overseas.

If any of the three tests specified above, an individual is considered as tax resident of Australia and is required to pay tax under the Act.

In the present scenario, Rebakh is from England who came to Australia for studies and stayed in Australia for more than 182 during the FY 2017-18 and later on moved back to England for taking care of his/her mother. Since the stay during FY 2017-18 exceeded 182 days, he shall be considered as tax resident of Australia for FY 2017-18 and not a tax resident for FY 2018-19.

5.Explain how losses caused by theft are accounted for under income tax.

Part D: case study 8  marks (estimated 700 words) Use complete sentences in the answer.

Harriette has collected teaspoons for over 40 years and has over 400 in her collection. Every time she visits a new place, she purchases a new teaspoon or two to commemorate her visit. She keeps the teaspoons in several cabinets around her home and keeps them in pristine condition.  Unfortunately, due to ill health, Harriette is forced to move into a smaller apartment, and cannot take her teaspoons with her. After much deliberation, Harriette decides to part with her spoons on eBay. Much to her surprise, Harriette usually sells the teaspoons for more than she originally paid for them. To make the transactions more straightforward, she created a separate PayPal account which she linked to her eBay account. In the 2018 income tax year, Harriette successfully sold all her teaspoons for a total of $1500.  

Advice Harriette whether she would be considered for tax purposes to be “carrying on a business” for the 2018 income tax year. To support the analysis in your answer, refer, where appropriate, to the ITAA 1993, ITAA 1997, Taxation Rulings, other relevant statues and/or case law.

Analysis

To begin to understand the tax implication and when tax is levied one need to understand the difference between the hobby and business as hobby is not taxable under the Australian Tax Act while business income is chargeable to income-tax i.e. ITAA 1993 or 1997. Further, each has different legal, record keeping and insurance obligations. Thus, understanding the same shall be pivotal in answering the aforesaid case.

A hobby is something which is done at a leisure time and is generally done for pleasure purpose and there is no intention to earn money.

Further, there is no single rule to determine when you hobby has turned to business in the eyes of ATO. Generally the ATO shall consider the following:

  • You have a business registered in your name;

  • You have a ABN;

  • The main purpose is to make profit  for example you make or purchase products at a cheap price and sell them at a higher rate;

  • You gradually try to increase the sales so as to achieve  a fulltime commitment and it shall become a fulltime engagement;

  • A separate bank account has been opened to that purpose;

  • There is a digital presence i.e. online and it looks like a shop. Further, you shall have a brand name and you have incurred expense for setting it up and have a master business plan at your backseat with process and system at place.

If majority of answers to the above questions are yes, then there is a high probability that income is taxable. The primary and most significant matter of consideration is whether the profit is the driving factor.

Further, if you are pursuing a hobby and don’t have an ABN number and you are selling goods online or in a manual process, you are required to intimate the buyer that the same is hobby otherwise the buyer shall deduct tax @49% on payment to you/seller.

6.Briefly explain the impact of the temporary budget repair levy on both resident and non-resident taxpayers.

Besides, government has provided a tool to determine the whether one is operating a business or hobby.

In the present case, Harriette has been pursuing hobby of collecting coins for a period of 40 years in her leisure time and has collected nearly 400 coins to her disposal. The same has been collected by her during her visit to different places and collected as souvenir of the same. Recently, she is shifting to a smaller apartment on account of ill health and is disposing the coins online at ebay and is making profits by selling them at a price higher than the purchase price of such coins.

On the basis of analysis, it can be seen that Harriette has not been carrying any business and the coins are disposed on need basis. Further, the majority of the conditions specified above are not satisfied and accordingly the same shall be treated as hobby of Harriette and he shall intimate to the purchasers that he has no ABN no and no tax shall be withheld on the same, otherwise purchaser shall be bound to deduct tax @49% in terms of Australian ITTA 1993 and 1997.

Part E: case study 10 marks (estimated 700 words). Use complete sentences in your answer.

Aaron, who is an Australian resident for tax purposes, is a flight attendant who works for a domestic airline carrier.

In the 2017 income tax year, he has the following receipts:

$74,500 in salary from the airline;

$4,000 allowance from the airline for domestic travel expenses;

$2,000 from the airline for actual expenses incurred for parking at the airport; and

$400 from a casino win.

In addition, he has incurred the following expenses:

$600 worth of speeding fines, incurred when he was rushing to make it to work so that the plane may depart on time;

$500 for the purchase of two compulsory uniforms. The airline did not reimburse the cost of these uniforms;

$300 for rehydrating moisturisers used to combat the drying effect on the skin when constantly exposed to harsh working conditions, and to meet his employer’s strict grooming requirements; and

$1000 for attending a seminar and training course in native beekeeping.

What is Aaron’s taxable income for the 2018 income tax year? To support the analysis in your answer, refer, where appropriate, to the ITAA 1993, ITAA 1997, Taxation Rulings, other relevant statues and/or case law.

Determination of Taxable Income

Sl. No.

Particulars

Amount

Amount

1

Income from salaries

74500

2

Allowance for domestic airline travel expenses

4000

3

Reimbursement of actual  expenses

4

Casino win

5

Total Income

78500

6

Expenses:  uniforms

500

7

Rehydrating Expenses

300

8

Seminar and Training Course

1000

9

Total Expense

1800

10

Taxable Income

76700

In terms of Australian income tax Salary is treated as taxable income and same shall be liable to tax under the act. Further, the allowance received from the employer shall not be taxable as fringe benefit and shall be liable to tax under the act.

For reimbursement of actual expenses it is assumed that same is liable to Fringe Benefit Tax under the Act and hence the same shall not be considered as assessable income under the Act. Further, the expense incurred shall not be allowed as deduction for the purpose of computation of tax under the Act.

Casino win shall not be taxable under the Act as the said income is not considered a profession in Australia. The same is treated as hobby or recreational activity.

The expenses incurred on account of uniform which are not reimbursed by the employer shall be allowed as expense under the Act.

Further, expenses incurred by airline agent for rehydrating moisturisers used to combat the drying effect on the skin when constantly exposed to harsh working conditions, and to meet his employer’s strict grooming requirements shall be allowed as deduction under the Act.

In addition to the above, seminar and training course for the purpose of present job shall be allowed as deduction under income tax Act of Australia.

Also, the expenses incurred as penalty shall not be allowed as deduction as the same is a penalty, which is not allowed to be deducted under the act.

References

2 Powers and Duties of Tax Comissioner,Powers and Duties of Tax Comissioner information<https://www.nd.gov/tax/about/powers-and-duties-of-tax-commissioner>3Different Types of Taxes in Australia,Different types of Taxes in Australia information (13 October 2010)< https://www.economywatch.com/tax/australia/different-types.html>

4Income tax in Australia,Income tax in Australia information(27 August 2018)< https://en.wikipedia.org/wiki/Income_tax_in_Australia>

5 How our advice and guidance protects you,Information onHow our advice and guidance protects you,< https://www.ato.gov.au/General/ATO-advice-and-guidance/How-our-advice-and-guidance-protects-you>

6Travel between home and work and between work places,Information on Travel between home and work and between workplaces(29 June 2018)< https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Vehicle-and-travel-expenses/Travel-between-home-and-work-and-between-workplaces/>

7 Australian Income Tax Assessment Act 1997

8 Australian Taxation Ruling 98/17

9 CGT Main Residence Exemption,Information on CGT Main Residence Exemption< https://inspire.business/cgt-main-residence-exemption-tips-tricks-and-traps/>

10FCT v Applegate (1979) 79 ATC 4307,History of FCT v Applegate (1979) 79 ATC 4307<https://www.studentlawnotes.com/fct-v-applegate-1979-79-atc-4307>

1The discount method of calculating your capital gain,Information on The discount method of calculating your capital gain<https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-discount-method-of-calculating-your-capital-gain/>

2 Australian resident for tax purposes,Explained Australian resident for tax purposes(9 September 2016)< https://www.quillgroup.com.au/blog/australian-resident-for-tax-purposes-explained/>

3 start paying tax on your hobby,Expalination on start paying tax on your hobby(20 April 2018)< https://www.smh.com.au/business/banking-and-finance/when-do-you-have-to-start-paying-tax-on-your-hobby-20180420-p4zaph.html>

4 Other work-related expenses 2016,Explaination on Other work-related expenses 2016<https://www.ato.gov.au/Individuals/Tax-Return/2016/Tax-return/Deduction-questions-D1-D10/D5-Other-work-related-expenses-2016/>