Personal Exertion Income and Ordinary Income

Discuss about the Taxing Democracy for Tax Avoidance and Evasion.

According to “Section 6 of the ITAA 1997” income that are generated from the personal exertion represents income that comprises of the earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation’s or proceeds from any form of business that is carried on by the taxpayer either in alone or through partnership. “Section 6-5 of the ITAA 1997” defines that income that earned through ordinary concept will be considered for assessment (Woellner et al., 2016). As held in the case of “Scott v Commissioner of Taxation (1935)” receipts would be considered assessable as income that are in accordance with the ordinary concepts. Similarly, in the present situation an amount of $80,000 received from service fees will be included in the assessable income under “section 6 of the ITAA 1936” of Manic Pty Ltd as income from personal exertion.

According to the Australian taxation office an individual deriving income when it beneficially comes home to taxpayer. According to 6-5 of the ITAA 1997 ordinary income constitutes income that are in accordance with the ordinary concept of the mankind (Barkoczy, 2016). As evident an interest of $10,000 will be included in the amounts that will be held assessable under “section 6-5 of the ITAA 1997”.

According to Australian Taxation Office an individual can claim deductions for the amount incurred on the trading stock (Vann, 2016). A rise in the trading stock value during the year represents assessable income while a decrease in the trading stock represents an allowable deduction. Including the trading stock for computation of taxable income for an income year makes sure that the during the ordinary course of business the taxpayer for trading stock purchased in the year portrays the costs the costs of sales that is involved in that year. The purchase of trading stock from the Hong Kong based shall be included for deductions during the accounting expenses.

The “taxation ruling of 92/18” provides the circumstances for the taxpayer to claim allowable deduction for bad debts that are incurred (Tan et al., 2016). Any form business losses or outgoings such as revenue in nature are considered for allowable deductions under section 51 (1) when such losses or outgoings are incurred. The court of law in “Crane Sales Ltd v Federal Commissioner of Taxation (1971)” stated that debt represents the purpose under section “63 of the ITAA 1997” where the taxpayer is merely entitled for an equitable entitlement for debt (Cao et al., 2015).

Assessable Income from Service Fees and Interest

A deduction is only available to taxpayer for a debt that is written off in the form of bad debt in an income year. Similarly, in the situation of Manic Pty Ltd the provision for bad debt shall not be allowed for deductions. This is because no such bad debt has been reported by the business during the income year (Braithwaite, 2017). Additionally, there is no such written off as bad debt by Manic Pty Ltd during the year of income in which deductions can be claimed.

According to the Australian taxation office it allows for deductions for some of the capital expenditure (Davis et al., 2015). These deductions are only available given the expenditure does not become the part of the cost of depreciating assets. An individual that incur expenditure in respect to the current business or a business that an individual earlier carried on or propose to carry on, the expenses to that extent shall be considered deductible to the extent the business proposes to carry on. The Australian taxation office allows deductions for costs of feasibility studies, market research or setting up of a business entity (Saad, 2014). The payment of $25,000 to research company for conducting the market research relating to the viability of entering into the new market will be allowed for allowable deductions.

“Section 25-10 of the ITAA 1997” allows an individual to deduct expenses for repairs to the premises or the depreciating assets that they hold or used entirely for the purpose of generating taxable income (Miller & Oats, 2016). Repair represents the restoration of asset to its previous conditions without changing the necessary function of character of the asset. expenses that are occurred for repairs are not considered as allowable deductions under section 25-10 if the expenditure constitutes capital in nature.

The guidelines have been established between the capital and revenue outgoings in “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” represents the expenditure that is occurred in gaining or establishing or replacing the business structure rather working or operating expenditure (Robin & Barkoczy, 2018). An individual is allowed to claim deductions only when the objective of making good deterioration with the help of wear and tear. This generally involve renewing or replacing the subsidiary part but not the entirety. Therefore, cost of $50,000 for replacing the metal roof with tiles constitute repair of capital expenditure and therefore Manic will not be able to claim deductions under “subsection 25-10 (3) of the ITAA 1997”.

Deductions for Trading Stock and Bad Debts

An individual is allowed to claim deductions for interest that is charged on the money borrowed to purchase shares and other related investments through which an individual generates assessable income or dividend income (Miller & Oats, 2016). Manic Reported an interest on loan to purchase the new factory will be included for deductions under section 8-1 of the ITAA 1997. The expenditure possesses sufficient amount of connection in the positive limbs and therefore a deduction is allowable in this respect.  

The profit of $536,000 reported from the sale of factory along with the profits from the sale of shares represents assessable income under “section 6-5 of the ITAA 1997”. The profit derived from the business represents an income of income that is derived in the form of amount of the realisable value (Davis et al., 2015). To possess the character of income an item should be a gain by the taxpayer that derives it. There cannot be any gain unless an item has been derived beneficially by the taxpayer. Similarly, the sale of factory and sale of shares represents gain that is beneficially derived by Manic Pty Ltd therefore these receipts would be included for assessment in the determination of taxable income.

If an individual realises loss from the disposal of investment namely shares and the loss constitute a capital loss it can only be offset against the capital gains (Cao et al., 2015). As evident the carry forward capital loss of $35,000 is in compliance with the CGT provisions of the ITAA 1997. Manic Pty Ltd can offset in this respect from the profits made from the sale of shares.

“Section 40-25 (1) of the ITAA 1997” defines that an entity is allowed to claim deductions for the amount that is equivalent to the declining value for an income year of the depreciating asset that is held in the year (Tan et al., 2016). A depreciating asset can be defined as the one that possess limited effective life and can be reasonably anticipated to decline in the value over the period of time it is used. Manic reported a depreciation expenditure of $120,000 however in compliance with the ITAA 1997 Manic can claim an allowable deduction under “section 40-25 (1) of the ITAA 1997”.

A business entertainment expenditure incurred on clients will be considered for allowable deductions. The entertainment expenditure constitutes work related and the same will be considered for deductions under “section 8-1 of the ITAA 1997” (Robin & Barkoczy, 2018). Payments that originates from the compensation might be considered for deductions under division 8 or section 40-880 for capital expenditure under ITAA 1997. A provision has been laid down under the “section 25-50 of the ITAA 1997” and “subdivision 3AA of the ITAA 1936” allows an individual to deduction certain kind of specific payments (Woellner et al., 2016).

An expenditure that is occurred by an individual for once and for all is generally regaded as the capital in nature while the expenditure that is incurred regularly is considered as revenue in nature. An expenditure that has the enduring benefit incurred in bringing into the existence the asset of lasting in nature is generally held as the capital expenditure.

As stated under the division 8 of the ITAA 1997 an individual is not allowed to claim deductions relating to the losses or outgoings of capital or capital in nature. A differences between the losses and expense of revenue in one hand and capital in other hand has been elucidated in the case of “Sun Newspaper v Federal Commissioner of Taxation”. A payment that are made for the restrictive covenants is usually but not necessarily made on the capital account (Davis et al., 2015). Similarly, in the situation of Manic the payment of restrictive covenants represents capital expenditure and the same will not be considered as allowable deductions.

Manic Pty Ltd Tax Reconciliation
Particulars	Amount ($)	Amount ($)
Net Accounting Profit Before Tax	620500
Add: Amounts no deductible and other amounts assessable
Accrued Interest	10000
Receipt of service fees	80000
Profit from sale of factory	536000
Profit from sale of shares	130000
Less: Capital loss bought forward	35000
Total  Addback		1341500
Less: Amounts deductible and amounts not assessable
Trading Stock	50000
Market Research expenses	25000
Interest on Loan	10300
Depreciation	112000
Entertainment expenses	32500
Total Subtraction		229800
Total Taxable Income		1111700
Tax Payable		473497
Add: Medicare levy		22234
Less: PayG		102500
Total tax payable		393231

Reference List:

Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.

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

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., … & Wende, S. (2015). Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2015). Do socially responsible firms pay more taxes?. The accounting review, 91(1), 47-68.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Robin & barkoczy woellner (stephen & murphy, shirley et al.). (2018). Australian taxation law 2018. Oxford University Press.

Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.

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.

Vann, R. (2016). Hybrid Entities in Australia: Resource Capital Fund III LP Case.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.