Assignment: PRINCIPLES OF TAXATION LAW – LAW6300
To determine Peter’s income tax liability. The following formula is applied as set out in Section 4-10 (3) ITAA97:
Income tax = (Taxable income x Rate) – Tax offsets
To determine the taxable income for peter as an individual, we use the formula provided below as set out in Section 4 15 (1) ITAA97:
Taxable income = Assessable income – Deductions
(3) Section 6-1 (1) describes assessable income to be a combination of ordinary income and statutory income.
(4) Ordinary income is described as “income, according to ordinary concepts” – Section 6-5 (1). Statutory income on the other hand is income from property. When a person buys a property, either for personal or business use and later sells it at a higher rate, then the difference is taxable as a statutory income. This is a classical example of statutory income and is a part of the assessable income.
(5) The common law provides that, a receipt is “income, according to ordinary concepts” if it has a source. To establish a source of income, the courts base on precedence, other rulings by courts on similar matters. Income can be in the form of payment for a service rendered, it can result from the exchange of goods where person sales goods at a higher price than that which he paid for them or it can be as a payment, a salary or wages during employment.
(6) There are two major sources of income as recognized by common law and a third minor income source. These are personal exertion and carrying on a business. Person exertion income is income earned directly through either laboring or applying a skill. The third source is the change in value of property and the proceeds following the disposal of assets.
Ordinary income as per section 6-5 (1)
Income that Peter gets from operating his mobile food outlet will be considered ordinary income under section 6-5 (1) as the income was derived from his personal exertion.
The lease on the caravan is part of ordinary income being income from operating a business. This can be demonstrated by the fact that there are repeated activities and an intention to make profit. There is no definition of income given by statute and therefore it is determined by common law. In case of a conflict, the court will apply the objectivity test to determine if transactions qualify to be treated as ordinary income.
Obsolete stock should be deducted from assessable income. This will include the food that remains after close of business and has been opened. The food taken by Peter and the staff is not cannot be returned to the supplier since it has been opened. Since the trading period is over, the food can also not be sold to customers. Therefore the food is treated as obsolete goods and deducted from the cost of goods sold.
Income tax is charged on the total income of individuals on an annual basis. According to Section 6-5(1) of the Australian Tax Law, the form of income has to be determined. Ordinary income according to the Section is determined with respect to ordinary concepts as well as usages of mankind and through the application of principles that are developed in the various judicial decisions on what has to be termed as income (Barkoczy, 17). According to the Australia tax law, income tax is determined on the basis of advance tax, self-assessment tax, and tax deducted at source among others. Taxpaying is a simple and convenient mode of paying income and other taxes through which individuals ensure responsibility towards a society; thus Peter should consider the paying of tax as his own responsibility. He should not avoid paying the legal taxes based on his business because avoiding taxation is one of the most violent crimes in the country’s tax law. He cannot avoid taxation because several laws have been also enforced in order to reduce the tendency of false tax. He has to understand however, that tax can be reduced by incorporating income reducing measures such as investing on charitable events and government bonds among others.
Having started a sole proprietorship venture operation as a fast food outlet in Australia, Peter can conduct his business smoothly and legally. Peter has leased a mobile kitchen and employed certain number of employees. Simultaneously, Peter has arranged all the required raw materials from Edible Food Pty Ltd under an arrangement whereby unopened packets can be returned. In this regard, Peter should be wise about taking responsibility on his income tax liability for the year ended 30 June 2014 in order to minimize his income tax liability based on the expenditure list of the sole proprietorship venture operation. He should not that accounting for tax liability is different from sticking to proper accounting principles (Barkoczy, 3).