Part A - Case Study

You are currently working as a graduate accountant and are provided with the following information from a client. The client, Rachel, has the following income and expenses for the financial year ended 30 June 2022. Rachel is employed as a manager for a large retail store. Rachel also operates a chicken satay store at the local market every Saturday.

Income

50.00

Rachel’s employer operates a suggestion box and each month an employee wins a cash gift for best suggestion

1,000.00

Bonus received from her employer for successful completion of a large project

100,000.00

Salary received from her employer (including PAYG Withholding of $18,000)

750.00

Rachel has a $30,000 invested in a 5 year savings bond (acquired 1 July 2021) which earns 5% interest each year but is paid as a lump sum at the end of the term of the bond (5 years).

8,000.00

Rachel wins $8,000 on a rare night out at the Casino

70,000.00

Income from chicken satay market store. Rachel is not registered for GST but does have an ABN.

1,000.00

Received an award from the Institute of Managers for her contribution to the profession. To receive the award Rachel was nominated by her peers and had to attend the Manager’s year end function.

500,000

During the 30 June 2022 financial year Rachel sold a vacant block of land, the contract was dated 25th June 2022 and the property settled on the 28th July 2022.

Rachel originally brought the block of land in May 1998 for $350,000, in June 2020 she subdivided the block of land into two lots. At the time of subdivision each lot had a market value of $200,000.

Rachel only sold one of the blocks for $300,000 on the 25th June 2022 and she still owns the other block.

5,000

Rachel sold a rare sculpture for $5,000 during the 30 June 2022 financial year. Rachel had purchased the sculpture for $300 two years earlier.

10,000.00

Rachel’s employer approaches her to been involved in a new product line. The employer advises it is highly confidential and asks Rachel to sign a restrictive covenant that she will not reveal information to a competitor or work for a competitor within two years of leaving her employment. Rachel signs contract and accepts the $10,000.00 payment.  

Expenses

800.00

Rachel purchased safety work boots for $250 and protective glasses for $250 as she sometimes needs to attend the factory. In addition to this Rachel purchased a new evening dress for $300 (which she wore to the Institute of Managers dinner)

400.00

Cost of meals and entertainment that her employer reimbursed her for

500.00

Taxi fares for travel from her office to factory.

450.00

Taxi fares for travel from home to her office. Rachel advises that she sometimes works from home at the kitchen table of her small one-bedroom apartment.

730.00

Membership fees, $530 relating to membership of institute of managers and $200 relating to membership fee for real estate institute (Rachel one day wishes to be a real estate agent).

900.00

Electricity cost for her home

2,500.00

Telephone expenses, Rachel estimates 40% of the cost relates to work and her employer does not reimburse this cost.

55,000.00

Purchases of goods for the chicken satay store. Rachel estimates that total cost of materials on hand as at 30 June 2022 is $10,000 at cost and $15,500 at market value. Last year’s closing stock was Nil

11,000

During the financial year Rachel purchased a new table $5,000, a register $5,000 and shelving $1,000 for the chicken satay store

Rachel has no children and does not have private health insurance.

Required:

 Determine which Income and Expenses are assessable income or allowable deductions. Note you will need to cite legislative references, case law and tax rulings as applicable. Emphasis is on providing substantiation for you reasoning to include as assessable income or allowable deduction.

 Assume Rachel is a resident for Australian taxation purposes, calculate her tax liability including any tax offsets and levies

Part B – Advice

There has been much debate around the relevant tests for residency in relation to Australian taxpayers. This debate has led to numerous recent litigations with respect to whether a taxpayer is or is not a resident for Australian taxation purposes.

Required:

 Discuss current legislative provisions with respect to the test of residency for Australian Taxation purposes. With respect to recent developments (proposed test by the Board of Taxation) discuss implications and propose a residency test that you believe will work in a modern society.