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LAW 3521 Income Tax Law

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LAW 3521 Income Tax Law

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LAW 3521 Income Tax Law

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Course Code: LAW3521
University: The University Of Adelaide is not sponsored or endorsed by this college or university

Country: Australia


1. You are required to advise Amity on whether or not she was an Australian resident during the income year ended 30 June 2016 by reference to the relevant legislation and case law.2. With reference to the characteristics of ordinary income and the concept of ordinary income discuss whether the following amounts are ordinary income:
a)An employee dentist swapping dental work valued at $600 for a computer game with a client who sells computer games.  The market value of the game is $550, however it cost the client $300 to place in trading stock.
b)A car valued at $15000 given as a prize to the 500 000th customer of a bank.  

As defined under the “section 6 (1) of the ITAA 1936” resident of Australia refers to the person that have their domicile in Australia, except the commissioner of taxation is contented that the person’s permanent place of residence is out of Australia (Robin, 2017). In other words the an Australian resident includes person that have been in Australia for more one-half of the year either constantly or in breaks will be regarded as Australian resident except the commissioner of taxation is contented that the person’s permanent place of residence is out of Australia and does not have any intention of taking up the Australian residency.
The current case is based on determining the residential status of Amity who left Australia in 2015 with the intention of at least living in Kiribati for two years and then decide on whether to stay longer depending upon the life style. To determine the residential status of an individual there are relevant test conducted namely;
Resides Test: The word reside refers to dwelling permanently for a considerable period of time. Under resides test to determine the quality of an individuals residence it is necessary to understand the taxpayers original intention or the purpose of presence (Woellner et al., 2016). Further considerations should be paid on factors such as the taxpayer’s family and business or employment ties along with the taxpayer’s social and living arrangements.
Domicile Test: Under the domicile test a person is said to be an Australian resident if his or her domicile is in Australia, except the commissioner is content that an individual has their permanent place of abode out of Australia. An individual’s domicile is determined under the “Domicile Act 1982” or based on Domicile of choice i.e. the country where the taxpayer has the intention of making home. Similarly the court in “Applegate v FC of T (1979)” held that permanent does not represent everlasting or forever and the objectively is determined every year (Grange et al., 2014). The taxpayer was had the permanent place of abode out of Australia in spite of the fact that he intended to come back to Australia and eventually returned when he became ill.
183 days Test: Under the 183 days test an individual is treated as the Australian resident if the person has been in Australia for a continuous period of at least half of the income year except the commissioner of taxation is contented that the person’s permanent place of residence is out of Australia (Kenny et al., 2018).
As evident in the existing situation of Amity she went to Kiribati for a period of two years with the exercisable options of extending her stay for another three years. Her salary was paid into the Asia-Pacific bank and rented her Adelaide home for a period of 12 months. However, after her 18 months stay the couple eventually returned Australia. Citing the case of “Applegate v FC of T (1979)” the original intention of Amity was to live out of Australia at least for a minimum period of two years and eventually Amity thought of living permanently if the lifestyle was enjoyable (Jover-Ledesma, 2015). Amity social and living arrangement reflected the behaviour of continuity of residing out of Australia without having any definite intention of returning Australia.
Conclusive, Amity would not be regarded as the Australian resident for the year ended 30 June 2016 under “section 6 (1) of the ITAA 1936” as neither does she qualifies for the Domicile Test nor does she met the criteria set under 183 days.       
A game which is a mere gift is not regarded as income. As held in “Hayes v FCT” the receipt of shares in the company by the business owner was not regarded as income. Similarly in “Scott v FCT” the solicitor receiving 10,000 pounds as gift from the client’s wife was not regarded as income (Sadiq, 2018). In the current case the receipt of computer game by an employee dentist is not an ordinary income under “section 6-5 of the ITAA 1997”. 
As per the ATO winning from prize draw or lottery run by bank must be included for assessment as ordinary income. This may include the cash, cars or interest free loans. Similarly in “Kelly v FCT” the amount received as award by tax payer was held for assessment since it was related to the taxpayer employment (Taylor, 2018). In another example of “FCT v Stone” the prize winning from the policewomen was treated as income since the taxpayer was found to be carrying on the business of professional athlete. The receipt of car as prize to a bank customer constitute an ordinary income under “section 6-5 of the ITAA 1997”. 
According to the “section 8-1 of the ITAA 1997” a permissible deduction is allowed to the taxpayer for the expenses incurred as outgoing or loss while deriving the assessable income (Woellner, 2018). According to the Australian Taxation Office if a person takes loan to be used for both the private and business purpose then it is necessary to apportion the interest on loan. Under such situation the interest on loan should be divided into deductible and non-deductible category. Evident, Betty and Barney in the current case can obtained deduction for the interest on loan under “section 8-1 of the ITAA 1997” only for the amount that is used for income generating activities. While the interest on loan for private portion shall be excluded from deductions.   
As per “section 8-1 of the ITAA 1997” a taxpayer is allowed to claim deduction for expenses if the occasion of loss or outgoing is found to be in the business operations that was previously carried on by the taxpayer with the objective of generating taxable income. As held in “FCT v Brown 1999 ATC” the taxpayer was allowed to claim deduction even after the business was sold because the loan was entered while carrying on the business for generating taxable income (Robin, 2017).

Robert will be allowed to claim deduction under “section 8-1 of the ITAA 1997″for interest on loan when the business was at continuous
Robert would be allowed to claim deduction for interest on loan under “section 8-1 of the ITAA 1997″when the business has ceased because the transaction was entered into while carrying on the business with the aim of generating income.  

As held in “FCT v Harris” a mere windfall gain does not has the nature of income (Jover-Ledesma, 2015). Therefore the winning from lottery is not included for assessment since it is regarded as mere windfall gain and not an income. Lincoln further reports receipts of incentive to display the game console in his window. The amount will be treated as ordinary income within the ordinary concept of “section 6-5 of the ITAA 1997” since it was received as the part of business activities.  
Grange, Janet, Geralyn A Jover-Ledesma, and Gary L Maydew. (2014) principles of business taxation, n.d.
Jover-Ledesma, Geralyn. Principles of business taxation (2015). Cch Incorporated.
Kenny, Paul, Michael Blissenden, and Sylvia Villios. Australian Tax 2018, n.d.
Robin, H., (2017). Australian taxation law. Oxford University Press.
Sadiq, Kerrie et al. (2018) Principles of taxation law.
Taylor, C. J et al. (2018) Understanding taxation law.
Woellner, R. H et al. (2018) Australian taxation law.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. & Pinto, D., (2016). Australian Taxation Law 2016. OUP Catalogue.

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