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Taxation Implications for Auditors Duties

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| TAXATION LAW | ASSIGNMENT | | | GROUP MEMBERS: | Jamal Ahmed Khan S0243702Ijaz Ahmad S0206099 | | | SUBMITTED TO:Michael Gallagher | DATE:6th Jan, 2014 | | |

|

TAXATION LAW - ASSIGNMENT

Part A
To find the residency status of John and Susan for the time when they were living overseas. The definition of “resident” in s 6(1) of ITAA 1936 contains four tests to determine whether an individual is a resident of Australia for taxation purpose. i. Common Law Test ii. Domicile Test iii. 183-day Test iv. Superannuation Test
These cases will apply to determine that whether John and Susan are residents of Australia for tax purposes for the period they left Australia to their eventual return to Australia.
Common Law Test:
It is the primary test to determine whether individual is a resident of Australia is the “residence according to ordinary concepts” test. There are two examples are mentioned which explains “reside” as to dwell permanently or for a considerable time; have a one’s abode for a time and other example which explains it as “to dwell permanently or for considerable time; to have one’s settled or usual abode, to live in or at particular place. It is according to the taxation ruling TR 98/17.
There are also some considerable factors for determining the residency for taxation purpose. a. Physical presence b. Regularity and duration of visits c. The person’s nationality d. Purpose if visits e. Family business and social ties
As per these factors and common law test John and Susan are not a resident of Australia and common law test is not applicable in this case.
Domicile Test:
It is the 1st statutory test which also provides the reliable information as per residence of Australia. Domicile is a legal concept according to the domicile Act 1982 (Cth) and the common law rules. This test basically applies those individuals who leave Australia but still have an Australian Domicile this situation demonstrate that he or she does not have permanent place outside Australia. There are two reason of acquiring Domicile. Section 10 of the Domicile Act 1982 defines that a person acquires a domicile in choice intension to make his home in that country. A person also acquiring a domicile of origin at birth.
The commissioner issued Ruling IT 2650 and set out various factors in response of two cases FCT v Applegate and FCT v Jenkins.
If an individual leave Australia and live overseas temporarily it is mentioned that those insividuals are considered as a Australian resident for the taxation purpose. To this extent Ruling a period of two year or long will be considered substantial period for the purpose of taxpayers stay in another country.
According to the commissioner Ruling IT 2650 this test is not is applicable because of they spent a more than 2 year in overseas which are not satisfied by the commissioner due to this they are not considered as a nonresident. On the other hand they have a option of “Domicile of Origin” this option provides the opportunity to be considered as a resident of Australia for the taxation purpose.
183-day Test:
It is the 2nd statutory test of residence. Under this test the individual will be considered as a resident off Australia if he spends more than 183 days whether continuously and intermittently.
As per commissioner the person has no permanent place outside Australia and he or she intends to take up residence in Australia. These both conditions must be satisfied to be considered as a resident of Australia.
This test clearly mentioned that John and Susan are not resident of Australia because they spend more than 183 days outside Australia continuously. This test is not applicable in this case.
Superannuation Test:
This test is only applicable for those people who are the members of Commonwealth superannuation funds and their families. As per John and Susan case it is not mentioned that they are the members of Commonwealth superannuation funds by this reason we can find that this test in not applicable for John and Susan.

(Words: 665)

Part B
Dominic’s Taxable Income Dominic’s Assessable Income and Deductions | | Assessable Income | | | | Section 6-5 | Gross Salary – Banyule City | | 105,000 | | Section 6-5 | Net proceeds from business | | 3,500 | | Section 15-15 | Net Capital gains | | 500 | | Section 8-1 | Motor vehicle allowance | | 12,000 | | Section 4-1 | Net Dividends – BHX Ltd. | | 15,000 | | Sub Div. 202D | XLY Pty Ltd. Dividends | | 7,000 | | Sub Div. 202D | Rio Ltd. Dividends | | 3,500 | | Sub Div. 202D | Excel mining NL Dividends | | 5,000 | | | Gross service pay in Army | | 5,000 | | Section 26-52 | Gift of wine | | 500 | | | Total Assessable Income | | | 157,000 | | Deductions | | | | Section 900-30 | Brief case – work related | | 275 | | | Interest by Taxation office | | 350 | | Section 8-1 | Self-education expenses: | | | | | Diploma fees | 3,000 | | | | Travel – 1000kms | 750 | | | | Books | 500 | | | | Meals at university | 150 | 4,400 | | Section 8-1(1) | Membership of the Professional Cooks Union | | 100 | | Section 8-1(1) | Membership of the Institute of Public Accountants | | 500 | | Section 8-1 | Home office expenses | | 130 | | Section 8-1 | Mortgage payments (10%) | | 1,500 | | Section 900-30 | Purchase of umbrella | | 85 | | | Parking meters cost | | 150 | | Section 40-25(1) | Decline in value of car | | 6,701 | | Section 28-110 | Car expenses | | 16,908 | | Section 30-15(1) | Gift to royal children’s hosp. | | 1 | | | Superannuation payment | | 2,500 | | | Total deductions | | | (33,600) | | TAXABLE INCOME | | | 123,400 | | Total tax liability | | | 63,205 | | Less: | | | | | PAYGW | | | (1,000) | | Share deductions | | | (8,000) | Section 207-20 | Imputation credits | | | (4,500) | | Medical expenses rebate | | | (1,176) | Section 159J-4 | Spouse rebate | | | (2,355) | | TAX PAYABLE | | | $46,174 |
Dominic’s Capital Gains Section 15-15 | Capital proceeds: | | -Sub Div. 108-B | Jewelry sold | 4,500 | -Sub Div. 104-G | Shares sold – Eastfarmers Ltd. | 25,000 | | Less: Cost base | | | Jewelry | (2,500) | | Shares | (10,000) | | Capital gain | 17,000 | | Less: discount (50%) | (8,500) | | | 8,500 | -Sub Div. 104-G | Loss from sale of Woolies shares | (8,000) | | Net capital gains | 500 |

Dividends Calculation
Fully franked dividends- XLY Pty Ltd
Dividend received = $7,000
Imputation credit = $7,000 x 30/70 = $3,000
Partially franked Dividends – 50% franked- Rio Ltd
Dividend received = $3,500
Imputation credits = $3,500 x 30/70 = $1,500
Unfranked Dividends- Excel Mining NL
Dividend received = $5,000
No imputation credits
Total imputation credits = $3,000 + $1,500 = $4,500

Medical expenses rebate
Medical expenses paid by Dominic = $8,000
Section 159P of ITAA36 allows Dominic with a rebate for net medical expenses incurred to him. Since there is no refund from Medicare, the whole amount which he spent for his medical will be taken into account. The calculations are as follows: 20% x (8,000 – 2120) = $1,176
Decline in value of Car:
Assuming that the car was owned by Dominic and was not provided by Banyule City Council.
Purchase of car is capital expenditure and its cost cannot be deductible as per Section 8-2(a). However, According to Section 40-25, deduction can be claimed for decline in value of assets used to produce assessable income.
As car was used 75% for the business purpose, no deduction will be allowed for the use of nontaxable purpose as per Section 40-25(1). Thus, only 75% of decline in value can be claimed for deduction. Also, decline in value of car can be calculated based on cost no more than $57,466 even if the cost of car was $83,216* as per Section 40-230.
Calculation:
As per Division 328 new rule 2012/13,
Immediate write-off is allowed for first $5000.
Therefore,
Total decline in value = 15% of ($57466-5000)*183/366 + $5000
= $8,935
Thus, total deduction = 75%*8935= $6701
*Car’s cost on 1/03/12 = $85,900
According to straight line method, the depreciation rate is 12.5% and the depreciation for the year is $10,738. Therefore, the value of the car at the beginning of the financial year is:
85,900 – (10,738 x 3/12) = $83,216

Car expenses:
12% of original value method
$57,466 x 12% x 183 days/366 days = $3,448 One-third of actual expenses method 22545
Car expenses deduction = 1/3 x (2104+8500+555+327+22+438+54+45+10500) x 183/366 = $3,758
Log-Book method
Calculation for deduction is based on log book method as per Section 28-125(4)
Total deductible amount = (2104+8500+555+327+22+438+54+45+10500) x 75%
= $16,908
Dominic’s other incomes/expenses i. Winnings at casino will be exempted under Section 118-37(1)(c). ii. Maintenance payments for previous marriage will be disregarded as they are not considered to be an expense to produce assessable income. iii. Gift of a golf club as a birthday present will be exempted because it is assumed that the services rendered by Dominic to his client had already been paid off. Moreover, this argument can be supported by Scott v FCT’s case in which it was held that the gift which Scott received was exempt and he earned it because of his long and faithful service. iv. Sale of household items is an isolated transaction and is outside the scope of the business or employment of Dominic. Therefore, it will be exempt. v. Dominic does not use any private health insurance. Hence, the life insurance policy and personal accident and sickness policies will not be deductible.…...

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