Constitutional basis of taxation power

In accordance with the Constitution of Australia, the primary source of the Commonwealth Parliament’s taxation power is mostly comes from Sections 51(ii), 53, 55, 90 and 96.

According to Section 51(ii) of Australian Constitution, the power to create laws in regard to taxation is given to the Commonwealth Parliament (Gitman et al. 2015). However, there are certain conditions that those laws do not differentiate between states or parts of any states.

It is observed that Acts mainly create Tax Laws in Australia. Therefore, the primary source of Australian Tax Laws comes from Legislation that are various Parliamentary Acts and Regulations that are delegated legislation. Thus legislation is the primary or main or first source of Australian Tax Laws. The second source of Tax Laws in Australia are the Cases which interpret the legislation such as decisions of court, tribunals, etc. Third source of tax laws in practise in Australia is the Tax Rulings by the Commissioner of Taxation (Katic & Leigh 2016).

According to the Australian Taxation Office, Taxation Ruling TR 98/17 discusses about the residential status of any individual who is entering Australia (Braithwaite 2017).

According to TR 98/17, this ruling is applicable to most of the individuals those who are entering Australia which includes the followings:

1. Any migrants,
2. Any student who is studying in Australia,
3. Any person who came to visit Australia i.e. a Visitor,
4. Any worker(s) who came along with planned contracts of employment.

In Australia, Medicare gives the residents of Australia health care access. Medicare Levy of 2% has to be paid by the taxpayers in Australia which is partly funded by them. If one’s taxable income is below a certain limit then that person’s Medicare levy might get reduced or might not have to pay any levy at all (Kucukvar et al. 2014). On the other hand, one might need to pay Medicare levy surcharge (ML S) if he/ she have health insurance of a private hospital. The individual meets some medical requirements or a resident of other country are not entitled to Medicare Benefits then he/ she might be exempted from paying the Medicare Levy.

According to Australian Law, misleading or dishonest conduct is a principle. As per Schedule 2 of the Competition and Consumer Act 2010, any conduct by companies in trade and commerce that is misleading or false or like to misguide is prohibited under Section 18 of the Australian Consumer Law (Taylor & Richardson 2013). Moreover, prohibition of misguiding, false, or deceptive conduct in terms of financial services is clearly stated under Section 12DA of the Australian Securities and Investment Commission Act 2001.

Sources of Australian Tax Laws

The main objective of this principle is to provide security and safety to the consumers from being misguided by businesses.

The Section 25-45 of the Income Tax Assessment Act 1997 states about the lost by theft. As per the section, it is clearly mentioned that loss in respect of money cannot be deducted by one if:

1. One ascertains the loss in the year of income,
2. The loss so ascertained was the result of activities such as theft, stealing, larceny, defalcation,
3. In the assessable income for the year of income of that person, the amount was involved, or may be an earlier year of income.

The Case W Thomas & Co Pty Ltd v FC of T (1965), deals with deduction to a claim of a taxpayer for undertaking a repair. In the case a taxpayer who was a flour miller and grain merchant purchased a building whose some parts were in a state of broken down. The person then undertook extensive repair work which include repair of roof, guttering, walls and floor of the building (Richardson et al. 2013). Then the person pursued deduction for the cost of work as repair. However, the amount was not deductible under section 53 of the ITAA 1997 as the expenses for the repair for the house was not needed  for producing assessable income of the taxpayer.

A taxpayer can opt for one of the following method for valuation of each stock item at the end of the year of income (Forsyth et al. 2014).

1. The method of cost price which includes all cost relating to brining the stock at its current location and situation,
2. The method of Market selling value which makes use of the stock’s current value if sold during the normal course of business,
3. Method of Replacement Value where cost to acquire nearly same item is used.

The person having a taxable income of $45,000 in 2016/17 is liable to pay tax of amount $3752 and in addition to this, the person also needs to pay 32.5c for every $1 over $37,000.

The PAYG refers to Pay As You Go income tax instalment system that comprises of payments that are made regularly by the employers and other taxpayers. Here instalment system is used to collect income tax. It is a system of instalments in order to make regular payments towards one’s expected income tax liability for the year. If an individual pays PAYG instalments, still he/ she will be required to file a tax return for the year (Richardson et al. 2015).

The Division 8 of the Income Tax Assessment Act 1997 provides rules that describes the deductibility of outgoings and losses. The division makes a distinction between the general deduction as discussed under section 8-1 of the Income Tax Assessment Act 1997 and the specific deduction as provided under section 8-5 of the Income tax Assessment Act 1997.

The section 8-1 of the Income Tax Assessment Act 1997 states that an individual is allowed to claim deduction for the loss or outgoing that has been incurred for:

• producing or gaining assessable income;
• the expenses that are incurred for carrying on the activity related to business;

Residential status determination

The section 8-5 of the Income tax Assessment Act 1997 states that a taxpayer is allowed to claim specific deductions from the assessable income. The specific deduction is loss or outgoing that is deductible from assessable under specific provisions of the tax act (Borowski 2013).

In this case, Ram has incurred three types of expense the deductibility of these expenses are determined in this section of the explanation. The section 25-5 of the Income Tax Assessment Act 1997 states that expenses that have been incurred for managing the tax affair is allowed as deduction. That means the cost of accounting and the tax agent fees will be allowed as deduction under this section.

It can be seen that Ram has incurred solicitor expenses for drafting an objection against the assessment of ATO. The Para 11 of the Taxation Ruling 2011/5 states that if a tax payer is not satisfied with the assessment then the taxpayer can raise an objection in the procedure as provided under section 175A(1) of the Income Tax Assessment Act 1936. The ATO Interpretive Decision 2002/814 deals with the issue of deductibility of legal or accounting expenses for dispute with the tax authorities (McLachlan 2013). The decision provided in the interpretive decision states that expenses incurred for appealing in the court for tax dispute is allowed as deduction under section 8-1 of the Income Tax Assessment Act 1997. Therefore, it can be said that the expenses incurred by Ram for objecting to the assessment of ATO is allowed as deduction.

The amount that is incurred for payment of income tax is not allowed as deduction under section 8-1 of the Income Tax Assessment Act 1997. Therefore, the computation of allowable deductions are given below:

Computation of Allowable Deduction
Particulars	Amount	Reason
Tax Agent fees	$        1,000.00	Section 25-5 of ITAA 97
Solicitor Fees	$        2,000.00	ATO ID 2002/814
Allowable Deduction	$        3,000.00

Table 1: Allowable Deduction

(Source: Created by Author)

The residential status of an individual is a Question of fact and it is an important criteria for determining the income tax liability of the individual. The term resident defined under section 995-1 of the Income Tax Assessment Act 1997 indicates a person resident of Australia for the purpose of tax. The section 6-1 of the Income Tax Assessment Act 1936 provides the definition of resident and highlights the primary test for deciding the residential status of the individual (Hawkes et al. 2015). The Para 32 of the Taxation Ruling 98/17 states that the definition of resident provided under section 6-1 of the Income tax Assessment Act 1936 provides four test of residency indicated below:

• residential status according to the ordinary concept;
• test for permanent place of abode;
• 183 days test; and
• Superannuation fund test;

Deductibility of expenses

The taxpayer born and living in Australia is considered as resident for the purpose of tax according to the ordinary concept. If an individual is not resident according to the ordinary concept then the statutory test is applied for determining the residential status and if the individual satisfied any one of primary test then the individual is regarded as resident.  In accordance with the domicile test if the individual has a permanent place of abode in Australia, then the individual is considered as resident for the tax purpose. The 183 days rule states that if an individual resides in Australia for 183 days or more in a year then the individual is regarded as resident for tax purpose. The superannuation test is applicable for Australian government employees working overseas (Snape & De Souza 2016). The law further provides that if an individual enrols for a course that has duration six months or more then the student enrolling in the course is generally regarded as resident for the purpose of tax. That means the student will have to pay tax on the earning as a resident Australian and is required to declare earning from all the sources. In this case, Tina has arrived in Australia for study and has stayed until 30 June during the year. It can be seen that as she has stayed in Australia for 183 days or more so she is regarded as resident of Australia for the tax purpose. Therefore, the income of $12000 earned by Tina is taxable. 

In Australia, an individual is liable to pay tax on taxable income. The section 4-15 of the Income Tax Assessment Act 1997 provides that taxable income is calculated by subtracting allowable deductions from the assessable income. The Income tax laws classifies assessable income as ordinary income under section 6-5 of the Income tax Assessment Act 1997 and the statutory income under section 6-10 of the Income tax Assessment Act 1997.  The section 6-5 of the ITAA 97 states that income according to the ordinary concept should be treated as an ordinary income (Picciotto 2015). On the other, hand the income that is not as ordinary income is statutory income under section 6-10 of the ITAA 97.  It is provided in both the section that for a resident taxpayer income from all the sources are taxable. That means income earned by Jimmy working in the restaurant as a taxpayer is an ordinary income under section 6-5 of the ITAA 97 and it is taxable. The tips received from customer is an incentive from customer that is directly related to employment hence it is also taxable. The amount received by an individual is not always subject to tax. There are certain income that are not included in the assessable income as they are exempt income under section 6-20 of the Income Tax Assessment Act 1997 or non-assessable non-exempt income as per section 6-23 of the ITAA 97 so they are not included as a part of the taxable income. The gifts are generally not taxable but if it is received as, a part of the business like activity or it is received in relation to the income earning activity in that case it should be included in the assessable income. In this case, Jimmy has received gift from customer worth $250 so it should have been taxable. However, the Christmas gift received from employer or in relation to employment are exempted from tax. The gifts received from parents are not taxable as they are not related to income or business related activity. The Taxation Ruling TR 97/17 provides that food and drink provided by the employer to the employee are regarded as meal entertainment and are subject to fringe benefit tax (Austin et al. 2014).  That means the benefit provided will be regarded as fringe benefit and the employer will be allowed to claim deduction for the expenses that is only related to employees. The employment income of the employee should include the fringe benefit provided by the employer. Therefore, it can be said that the dinner benefit received from the employer should be included in the assessable income. The calculation of assessable income is provided below:

Assessable Income

Computation of Assessable Income
Particulars	Amount	Reason
Employment income (A)	$      27,000.00	S 6-5 of ITAA 97
Tips from customer (B)	$           750.00	S 6-5 of ITAA 97
Entertainment benefit (C)	$           645.00	TR 97/17
Total Assessable Income (A+B+C)	$      28,395.00

Table 3: Assessable Income

(Source: created by Author) 

The Taxation Ruling TR 93/30 provides details for expenses that are allowed as deduction for home office expenses. The individual working from home can claim certain portion of the expenses relating to the area that is used (van den Nouwelant et al. 2015). The deduction that can be claimed is classified into conditions:

• If the individual has a separate work area in home;
• If the individual does not have separate work area in home;

The deduction that can be claimed if there is separate work area are:

• Room utilities like gas and electricity;
• Phone costs that are related to costs;
• Depreciation of plant and equipment;
• Depreciation in the value of carpet, curtain and fittings of light;

However if the individual does not have separate work area then the individual can claim all deduction except depreciation of carpets, curtains and fitting of lights.

Computation of Allowable Deduction
Particulars	Amount
Electricity (A)	$        1,020.00
Cleaning lady (B)	$           510.00
Telephone expense (C )	$        1,620.00
Mobile phone bill (D)	$        6,480.00
Total Allowable deduction (A+B+C+D)	$        9,630.00

Table 4: Allowable deduction

(Source: created by Author) 

Reference

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