Taxation Case Study

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Task one

Issues:
1. Are activities relating to use of land a business or a hobby? 2. Are the amounts related to the land deductible or not under general rules? * the loan to purchase the land and interest expense

* council rates and insurance in respect of the land
* payment to develop plans for proposed building
3. If no, is there a “specific deduction” section?

References:
ITAA97 s8-1---general deductions: you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, and you cannot deduct losses or outgoings that are capital, private or domestic, gaining exempt income and specifically excluded by the Act. Specific deductions: you can deduct from your assessable income an amount that a provision of this Act (outside this Division) allows you to deduct.

s8-1---The test of whether a business is being carried on appear to be: 1.profitability 2.size 3.effort 4.bussiness records Steele v FCT (1996)---no deductible. The expense was incurred too soon before the commencement of the income earning activity to be deductible. Sun Newspapers Case (1938)---capital as once and for all and asset for the enduring benefit.

This case:
On July 1 2011, Hector Vector purchased a land and expected to build up accommodation. But the building project did not commence until 2016. On 1 August 2011, Hector does another business--- renting vacant land to a neighbouring earthmoving business to earn money. So it means that Hector have two businesses in respect of the land. $2000000 Hector borrowed from NBN bank is regarded as capital because of the purpose to buy a land. So land is a tree. Under the use and purpose test, the money of relevant interest is used to acquire income-producing assets (property for rental). Interest paid on payment of council rates may be deductible, as it is an administrative charge rather than a penalty (ID2001/85). Insurance premium is paid for the land--- a capital loss. During the 2012 taxation year, Hector Vector gains assessable income by renting the land. So rates of land incurred in respect of income-producing premises or land and they may be deductible as a normal business expense under ITAA97 s8-1. The payment to architect is to improve preliminary plans for proposed building—accommodation. According to the law, a taxpayer can claim a deduction for capital expenditure incurred in constructing capital works that are included buildings and structural improvements. The architect fee is one of structural improvements cost.

Conclusion:
The loan is not deductible as capital. The interest is deductible to the extent to which it is incurred in carrying on a business for that purpose and is not of a capital. Council rates and insurance relating to the land is deductible. The payment to develop purposed building is deductible under ITAA97 Div 43:s 43-1 to 43-260.

Task two

Dear Mary-Anne,
I appreciate the opportunity to advise you regarding this tax matter. To ensure a complete understanding between us, I am stating the pertinent information about the advice that I will be rendering and the facts you provided to me. I just use my judgment in solving problems. Unless you instruct me otherwise, I resolve such questions in your favor whenever possible. However, the opinion I express does not affect the ATO. Thus, I cannot guarantee the outcome in the event the ATO challenges my opinion.

The main issue in your case is whether you can be classes as a resident of Australia for income tax purpose. According to relevant law—ITAA36, the definition of reside is have one’s...
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