Tax - Assignment PDF

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LAWS20060: Taxation Law of Australia By:

Piyushika Nair S0214375

QUESTION 1

Answer:

The main issue in this question is to determine whether Juliet is a resident of Australia for the year income tax purpose for the year 2014-2015 income year and 2015-2016 income year. It is important to find out Juliet’s residency status for both the income year separately. There are certain rules to be satisfied for determining the residency status as per Residency tests in s 6(1) of ITAA 36 (TR 98/17). A ‘resident of Australia’ or a ‘resident’ is defined in s6 (1) of ITAA 1936 (TR 98/17, para 31).

(TR 98/17, para 32)

We must apply all these tests to Juliet’s situation:

For the income year 2014-2015



Ordinary Resident test: Juliet will be considered as a resident if she satisfies all factors related to the term ‘resides’ as identified by ATO in 98/17. We have to consider all the facts and the factors to determine if Juliet is ‘residing’ in Australia. Juliet satisfies one of the factors of being a resident, which is being physically present in Australia, from 1st February 2015. But We can debate that she is not a resident, on the fact that, in the beginning she does not have a home in Australia as she gets on a bus trip for leisure for two months, to travel the whole country as she waits to begin her work, Also, Juliet sells her furniture and gives up the lease on the flat in London, she keeps the valuable antiques and other furniture in the storage to use them once she returns back to London. This explains that she does not intend to stay in Australia after her contract terminates. But, once she returns from England on 1st May 2015, she leases a flat in Sydney and also purchases furniture. This factor shows that she a home to stay while she is in Australia.

Hence, by referring to the cases like IRC v Lysaght (1928) AC 234 and the case of Levene v IRC (1928) AC 217, Juliet is considered as someone who resides in Australia. Hence as per residence by ordinary concept test, Juliet is a resident of Australia for tax purpose, as she does ‘reside’ in Australia.



Domicile and permanent place of abode: As per the domicile test, Juliet automatically becomes a resident of Australia, because Juliet gives up on the lease on flat in London and sells her furniture. She also leases a flat in Sydney, after her return from England on May 1st 2015, and also purchases some furniture for the flat in Sydney. This shows that Juliet has a place of abode while in contract of work and she does not have a permanent place of abode overseas. Thus, Juliet ‘resides’ in Australia and is a resident for the income tax purpose.



183 – day rule test: As per this test Juliet will be a resident of Australia if she is physically present in Australia for 183 days or more. But Juliet arrives on 1st February 2015 and she returns back on 28 February 2015 to England to visit her mom in hospital. Then she returns back to Australia on 1st May 2015, and continues to be in Australia for the income year 2014-2015. Thus she is in Australia for 89 days only. Hence Juliet is not a resident of Australia as she is not in Australia for 183 days for the income year 2014-2015.



Commonwealth superannuation fund test: This test is not relevant to Juliet on the given facts.

In conclusion, it is likely that Juliet is a resident of Australia for tax purpose, for the income tax year 2014-2015, as she satisfies the ordinary resident test and domicile test.

For the income year 2015-2016



Ordinary Resident test: Juliet will be considered as a resident if she satisfies all factors related to the term ‘resides’ as identified by ATO in 98/17. We have to consider all the facts and the factors to determine if Juliet is ‘residing’ in Australia. Juliet is in Australia from the beginning of the income year 2015-2016 and continues to reside in Australia till October 15th 2015. She also has a flat in Sydney, and she falls in love as well, because of which she intends to stay back in Australia and purchases a house, and she also make plans to get married to Romeo by 1st September 2015.

It can be argued that, Juliet is not a resident as she travels back to England on 15th October 2015 to take care of her mother, and in return her mother pays her $1000 for meeting her mobile expenses, and she resides with her mother without paying any rent till 14th April 2016. But as per clearly stated in the given facts that, Juliet intends to return to Australia as soon as her mother recovers. Also she continues to receive $70000 as payment for the service rendered in Australia through Romeo to her assistant choreographer. On 15th April Juliet returns back to Australia to her husband and continues to work on the contract. All these factors demonstrate that, as per residence by ordinary concept test, Juliet is a resident of Australia for tax purpose, as she ‘resides’ in Australia, and has all the intention to reside in Australia permanently.



Domicile and permanent place of abode: As per the domicile test, Juliet automatically becomes a resident of Australia, because Juliet has a place of abode in Sydney, and in August 2015 she purchases a house to live in together with Romeo, and she does not have a permanent place of abode overseas. Thus, Juliet ‘resides’ in Australia and is a resident for the income tax purpose.



183 – day rule test: Juliet will be considered as a resident of Australia under this test as she is in Australia for 183 days for the income year 2015-2016. Hence Juliet is a resident of Australia.



Commonwealth superannuation fund test: This test is not relevant to Juliet on the given facts.

In conclusion, it is likely that Juliet is a resident of Australia for tax purpose, for the income tax year 2015-2016, as she satisfies the ordinary resident test, domicile test and 183 day test. Therefore Juliet is a resident of Australia for income tax purpose for the 2014/15 income year and 2015/16 income year.

QUESTION 2

(a) Statement setting out the Taxable income arising from rental property. Rental Property Worksheet:

$

Particulars Income Rental Income

13900 $ 13900

Gross rent Expenses Repairs : Replacing the damaged fibre roof with longer lasting colorbond General repairs and maintenance Repainting the front fence which consists of painted wooden pickets Fixing the broken front door which was damaged by vandals

$ 15000 $ 6000 $ 2500 $ 1000

24500

Depreciation *: Stove Hot water service Carpets Furniture and Fittings

$ 75 $ 167 $ 350 $ 337

929

Commission paid to agent

695

Total Expenses

$ 26124

Net Rental Income or Loss

- $ 12224

Notes:

* Depreciation on assets calculated on the prime cost basis:

(Rental properties, 2016, p. 19)









Stove : $ 900 x 366/366 x 100% / 12

= $ 75

Hot water service: $ 2000 x 366/366 x 100% / 12

= $ 167

Carpets : $ 3500 x 366/366 x 100% / 10

= $ 350

Furniture and Fittings: New Furniture purchased on 1st December = $1200 Depreciation = $ 1200 x 213/366 x 100% / 13 1/3 = $ 52 Existing Furniture = $ 3800 Depreciation = $ 3800 x 366/366 x 100% / 13 1/3 = $ 285

Thus, total depreciation on furniture and fittings is 285+52 = $ 337 Therefore the Taxable income (loss) from rental property is - $ 12224

(b) All the components that are included in the rental property worksheet and excluded from the worksheet are discussed below. 

Rental income:

As per the given facts the rental income from the inherited property for the current year is $13900. There is no other rental related income for the current year thus we get the Gross rent as $13900.



Expenses:

All the expenses can be claimed related to the rental property, if the property is rented or available for rent for the current year. These expenses in this case include repairs and maintenance, commission paid to agent, depreciation on assets. Repairs: The repairs on property means the work done to rectify or improve the damage happened to the property, and maintenance means prevent or fix any deterioration in the property. The following are considered as repairs and maintenance on the property (Rental properties - claiming repairs and maintenance expenses, 2016). -

Replacing the damaged fibre roof with longer lasting colorbond Here it is a damaged fibre roof, so it is replaced by a long lasting colorbond. Thus it is a repair to improve the damage on property.

-

General repairs and maintenance As the description suggests these are the general repairs carried out for the improvement of the property, hence they can be considered as repairs.

-

Repainting the front fence which consists of painted wooden pickets Repainting the front fence is considered as maintenance because it is preventing the fence from the deterioration.

-

Fixing the broken front door which was damaged by vandals Fixing the broken front door can be considered as repair because it’s a fixation on a damaged door which is a part of property.

Depreciation on Assets: Deduction can be claimed on the depreciating assets that are acquired while inheriting or purchasing the property. These asset will have a limited effective life, and they are expected to have a reasonable decline in their value over the years it is used. Any asset that costs $300 or under can be immediately claimed as deduction. Here, as per the facts given all the assets cost exceeds $300, thus we cannot immediately claim the deduction (Deduction for decline in value of depreciating assets, 2016).

-

Stove, Hot water service, Carpets: Stove, Hot water service, Carpets are the assets, that are assumed to be acquired when the house was inherited by George as there is no evidence of any purchase made during the years. Thus we calculate depreciation on for the current year, by using prime cost method.

-

Furniture and Fittings:

We are given in the facts that there is a new purchase of furniture and fittings on 1st December 2015 for $1200. That means there was furniture and fittings for a value of $3800 while inheriting the house. Depreciation for the $3800 worth value of furniture would be for the whole year, i.e. 366 days. But for the new furniture and fittings the depreciation would be charged only from 1st December 2015 to 30 June 2016 (213 days). The total of both the amounts ($ 337) would be added as an expense in the rental property worksheet, to assess the net rental income or loss. Commission paid to agent: George has hired appointed ‘Honest Chris’ Real Estate’ managed by local real estate baron Christopher Skate to manage his property. There is a charge or the commission that is charged by the agents for the service provided by them. As it is a direct expense for managing the property, we consider it as an expense.

Conclusion: Hence the taxable income (loss) from the rental property here is calculated as - $ 12224.

References

Deduction for decline in value of depreciating assets. (2016, June 22). Retrieved September 3, 2016, from https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rentalproperties/Rental-property-expenses/?page=3#Deduction_for_decline_in_value_of_depreciating_assets IRC v Lysaght (1928) AC 234 Levene v IRC (1928) AC 217 Rental properties, 2016, May 26, Retrieved September 1, 2016, from ATO, https://www.ato.gov.au/Individuals/Tax-return/2016/In-detail/Publications/Rental-properties-2016/ Rental properties - claiming repairs and maintenance expenses, 2016, June 22, Retrieved September 2, 2016, from ATO,https://www.ato.gov.au/General/Property/In-detail/Rental-properties/Rentalproperties---claiming-repairs-and-maintenance-expenses/ TR 98/17 - income tax: Residency status of individuals entering Australia. Retrieved August 15, 2016, from Australian Taxation Office, http://law.ato.gov.au/atolaw/view.htm? Docid=TXR/TR9817/NAT/ATO/00001...