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HI6028 Finance Assignment Sample

Question 1

An owner of a Cinema Hall, on ascertaining that a portion of the ceiling of the hall was in need of repairs, decided to replace the whole of the ceiling with different but better materials. The new ceiling, in addition to enhancing the appearance of the hall, improved the acoustics. The total cost of the material and of erecting the new ceiling was $320,000. It was estimated that the cost of repairing the ceiling would have been $220,000.
With reference to Income Tax Assessment Act 1997 and relevant case law, discuss the amount, if any, allowable as a deduction for income tax purposes.

Kindly use the four sections of:

1. Facts of the scenario
2. Relevant laws and cases
3. Application of laws and cases
4. Conclusion

QUESTION 2

A new client, Mary, is your first client. She needs to lodge his income tax for 2021/22. Further, she wants to know about some tax-related provisions and practices. She asks some questions - what are the differences between taxable income, ordinary income, and statutory income? What types of ordinary and statutory income do not constitute assessable income? (Maximum 700 words)

Furthermore- She gave her annual income and deduction below. Calculate her Total Assessable Income, Taxable Income, Tax Liability, Medicare Levy and Medicare Levy Surcharge, if applicable, for the taxpayer (Mary) with the information below:

- Mary is a resident single mom with one dependent child (4 years old) taxpayer of Australia for the tax year 2021-2022

- Her Taxable Salary earned is $110,000 (Including tax withheld) having no private health insurance.

- She had a $12,000 deduction.

- Mary has a student loan outstanding for his previous studies at Queensland University of $32,000.

- Mary’s employer pays superannuation guarantee charge of 9.5% on top of her salary to her nominated fund.

- Mary earned a passive income of $5,000 from the investments in shares in the same tax year.

Hint: The following website can be used to cross-check your answers but you need to provide detailed calculations, rates and explanations of rates from ATO website.

QUESTION 2: Income Tax Calculation and explanation Weighting

- Answer tax related questions 5%
- Total Assessable Income 1 %
- Total Taxable Income 1 %
- HELP repayment amount 1 %
- Medicare Levy 1 %
- Medicare Levy Surcharge 1 %
- Total Tax Liability 3%

Solution

Answer 1

1. Facts of The Scenario

The facts of the scenario are concerned with eligibility of deduction of expenses from the income by considering the Income Tax Assessment Act 1997. In the cited scenario, assesse has spent amount for repairing and maintenance expenses, whether or not such amount for assignment help can be deduced while computing taxable income, is required to be discussed.

2. Relevant Laws and Cases

Division 8 of the ITAA 1997 explains that, taxpayer could decrease their profit from particular expenses, which is divided into two following categories –
General deduction (section 8.1): According to the cited section, if taxpayer has expenses or losses from production of assessable income from directly or indirectly, then they could deduct it under section 8.1. It has been provided that, assesse could reduce their assessable profit or expenses or losses to the extent they are incurred in earnings of assessable profit or mandatorily occurred in running on a business for the objective of achieving or generating assessable profits (Australian Taxation Office, 2021).

Section 8-1(2) of ITAA 1997: According to the cited section, following are the amount is not allowed as deduction from the assessable income under section 8-1 –

- If expenses or losses are in capital nature.
- If they are occurred for the personal objective (Millane, &Stewart, 2019, p. 505(2)).
- If expenses assists towards production of non-assessable non-exempt profit.
- If they are not eligible for deduction under any particular provision of ITAA 1997.

Specific deduction (Section 8.5): Along with general deductions, things could be added to decrease income of assesse if it is allowed under any particular section.

Section 25-10 of ITAA 1997: The taxpayer is eligible to avail deduction for repair of premises or depreciating assets that has been held for profit generating objective. Repair is referred as fixing something that is defective, which does not means renovation of the property, and creating the increment in value by application of distinct material (Burton, 2018, p. 34(1)). It should be noted that, there is difference between repair and improvement, and assesse is eligible to claim only expenses of repair and maintenance (Jones, 2018, p. 32(2)). In the case of FCT v Western Suburbs, assesse replaced the cinema ceiling by using distinct type of material, and the new material was better material. In this, it was stated by court that, it is considered as capital expenses because there was an improvement on the property (Woodcock, 1997). Further, in the case of Lindsay, court denied the deduction in which old ship ramp was demolished and replaced.

Moreover, as per the decision given in the case of W Thomas, repair expenses leads towards restoration of efficiency in functions instead the precise repetition of forms and material. It is because; anything would definitely get improved by repairing (Hümbelin, & Farys, 2017, p. 1(2)). Therefore, a limited improvement in the efficiency of function is not any concern for deduction of amount as improvement of the condition of items is possible by all repairs as compared to its earlier condition (Curran, & Yapa, 2021, p. 18(2)). On the other side, improvement is considered as adding benefits consisting of permanent features. In the case of Morcom v Campbell-Johnsom, a replacement with a modern comparable is considered as repair.

There is not any clear distinction between what is considered as repair and what an improvement expense is. Generally, if the expenses lead towards significant efficiency of functions rather than minor, then it is considered as improvement expenses in nature and therefore it will not allow for deduction from assessable income as per section 25 of the ITAA 1997 (Hrblock, 2020).

3. Application of Laws and Cases

The scenario states that, owner of cinema hall requires repairing of ceiling and he decided to make replacement of whole ceiling with distinct but better material. The facts of given case scenario is quite similar with the case of FCT v Western Suburbs. Since, expenses incurred replacement of whole ceiling with distinct but better material is considered as improvement rather than repair and maintenance. The reason behind the same is that, such expenses lead towards betterment of condition or increased value of ceiling beyond its original condition at the time of buy. Moreover, it is not considered as minor improvement in the functional efficiency of item as it is adding additional benefit, which has long lasting nature. Due to such aspect, such expenses are considered as improvement expenses instead of repair and maintenance.

4. Conclusion

By application of relevant provisions of ITAA 1997, it can be concluded that, expenses incurred by owner of cinema hall is not considered as repair and maintenance expenses of assets held for income generating purpose. Instead of this, expenses are considered as improvement, and therefore it is capital nature expenses and will not be allowed as deduction from assessable income.

Answer 2

In the prevailing case scenario, Mary requires to file income tax return for the year 2021-2022. However, prior to filing such income tax return, she wants to understand some provisions and practices of ITAA 1997. In this aspect, some of the requirements stated by her is explained as follows -

Dissimilarities between taxable income, ordinary income, and statutory income

Section 6-1 of the ITAA 1997 states that, assessable income of person consists of ordinary income and statutory income. Further, section 6-5(1) of the cited Act says that, assessable income includes income as per the ordinary concept. In the legal case Scott v FCT, it was stated by judges that, what receipts should be considered as income should be ascertained as per the ordinary concept and the application of mankind provided it is explained in statue otherwise. Therefore, it can be said that, ordinary income is the income generated as per the ordinary concept.

Further, it should be noted that, taxable income is the amount on which tax is levied by government. Since, ITAA 1997, section 8(1) and 8(5) explained about deduction of expenses from the assessable income, and tax is charged on the remaining amount. As per Section 4-15 of ITAA 1997, taxable income is computed from assessable profit and deduction.

Further, section 6-10 of the ITAA 1997 defined statuary income, which is the income of assesse that does not falls as ordinary income but it is required to include in the assessable profit due to particular rules in the ITAA 1997. For instance, capital gain is considered as statuary income of assesse.

Types of ordinary and statutory cinema do not consider assessable profit of assesse

The amount that is not included in the assessable income is divided into following categories such as –

Exempt Income: As per section 6-1 of the ITAA 1997, assessable income does not include exempt income, which is the tax-free income for assesse. Examples of exempt income includes but not restricted to following –

• Business grants and some scholarship.
• Some overseas allowance and payment for members of ADF (Australia defense force).

Non-assessable, non-exempt income: It is the receipts that are not assessed and payment of tax is not required to be done by taxpayer. Examples of non-assessable, non-exempt income includes but not restricted to following –

- Payments made by states as per Disaster Recovery Funding Arrangement 2018 in relation to 2019-20.
- Super co-contribution

Other receipts which is not included in assessable income: Usually, some of the following amount is required to declare by assesse –

- Winning money in ordinary lotteries.
- Gifts on special occasion.
- Prize receives on game show.
- Child help and spouse maintenance payment received by taxpayer.

Computation of income tax for Mary

By application of above concept of assessable income, calculation of assessable income for Mary is as follows –

Assessable income = Ordinary income + Statuary income
Taxable income = Assessable income – deduction
Tax = Taxable income*rate

Table 1 Calculation of tax for Mary for year 2021-2022

Notes:

a. Income tax

On the basis of this, Income tax = 23942

b. Medicare levy surcharge

It would be charged in addition to the Medicare levy. As per the provisions of ITAA 1997, Medicare levy surcharge would be charged to taxpayer if they do not have any private health insurance cover, and assessable income is more than basic threshold limit. The following rates is considered for Medicare levy surcharge –

Since, in this case, income of Mary is more than $90000, and not any private insurance cover is taken by her, therefore Medicare levy surcharge would be applicable. Rate of Medicare levy surcharge would be 1% by considering above threshold limits.
Medicare levy surcharge = 1030

c. Repayment of student loan

If the profit of borrower is more than $46620, then they have to pay particular percentage of loan amount. In this case, 7% is required to be repay by Mary as her income is exceeding $46620.
 

References

 

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