TAXATION Principles and Applicaiton

LAW505: Final Examination Page 1 of 14 pages
School of Business
Sample Online Examination Paper
LAW533 – TAXATION Principles and Applicaiton
EXAM CONDITIONS:
This is an open book online exam – any self study materials are permitted.
All written responses will be submitted to Turnitin
Non-programmable calculator permitted
WRITING TIME: 3 hours plus 10 minutes reading time and
30 minutes technology time
NUMBER OF QUESTIONS: Part A: 25 Multiple Choice
Part B: 3 Short Answer Questions
Part C: 2 Problem Questions
VALUE: 60 %
DECLARATION:
By completing and submitting this exam, I declare that the answers
are my own work and I will not knowingly share the contents or my answers with any
other person before I or they have completed and submitted the exam

LAW505: Final Examination Page 2 of 14 pages
PART A MULTIPLE CHOICE QUESTIONS (15 Marks)
Students are required to answer ALL questions in Part A
Mark your answer on the Multiple Choice Answer Sheet provided. There is only ONE
correct answer for each question
Question 1
Sharon, a world-class tennis player, is a resident of Australia and competes in her sport on a
full-time basis. She received $34,000 for product endorsements, $27,000 in appearance fees
and $56,000 in match winnings during the year ended 30 June 2016. In addition, she was
awarded a cash prize of $4,000 on 4 May 2016, plus a perpetual trophy worth $5,000 for being
the best Australian female tennis player for the year. What amount should she include in
assessable income for the year ended 30 June 2016?
1. $121,000
2. $126,000
3. $56,000
4. $61,000
5. $90,000
(1 mark)
Suggested solution
Correct answer: 1
Due to the fact that Sharon is a professional tennis player, all amounts received from her
income-earning activities should be included in her assessable income. This would clearly
include the product endorsements, appearance fees and match winnings. The $4,000 receipt
would appear to be derived because of her business activities and, therefore, is likely to be
assessable income, see
Stone’s case. The perpetual trophy can only be held by Sharon for a
temporary period. The trophy cannot be converted to cash and accordingly is not income.
Question 2
Daniel is an accountant and on 4 June 2016 he received compensation of $25,000 for wrongful
dismissal from his former employer, Jones Ltd. The compensation was to reimburse Daniel for
lost wages as a result of the dismissal. On 10 June 2016, Daniel received $5,000 for agreeing
to enter into a three-year contract to work with Brown Ltd and he started working for Brown on
25 June 2016. While he was between jobs, he did some part-time work for a labour hire firm
and he received $900 in cash. The labour hire firm deducted PAYG withholding of $300 from
his gross earnings of $1,200. Based on the above transactions, what amount will Daniel include
in his assessable income for the year ended 30 June 2016?
1. $25,000
2. $30,000
3. $30,900
4. $31,200
5. $5,000
(1 mark)
LAW505: Final Examination Page 3 of 14 pages
Suggested solution
Correct answer: 4
Payments received for wrongful dismissal where the payment was in substitution for lost
earnings is assessable. In addition, amounts received as an inducement to sign a contract of
employment are generally income. In relation to his earnings from the labour hire firm, his
assessable income will be the gross earnings ($1,200) that are to be included in assessable
income. Thus a total amount of $31,200.
Question 3
Nicholas has a car that he uses 60% of the time in earning his assessable income. He purchased
it on 1 November 2012 for a cost of $45,000 and the adjustable value of the car on 29 June
2016 was $21,000. He sold the car for $27,000 on 29 June 2016. What amount should Nicholas
include in his assessable income or claim as an allowable deduction as a result of selling the
car?
1. $3,600 as assessable income.
2. $27,000 as assessable income.
3. $21,000 as a deduction.
4. $6,000 as a deduction.
5. $6,000 as assessable income.
(1 mark)
Suggested solution
Correct Answer: 1
Section 40-285 ITAA97 provides that if you receive a termination value greater than the
adjustable value then an assessable amount will arise. Alternatively, if the termination value is
less than the adjustable value a tax deduction will arise. The assessable/deductible amount will
be modified for the non-taxable use in accordance with s 40-290 ITAA97. In the present case
the adjustable value is $21,000 and the termination value is $27,000 so there is an apparent
profit of $6,000. This will be reduced to the taxable use percentage of 60% giving
$3,600 (6,000 × 60%). Note that the termination value is not adjusted under s 40-325 ITAA97
because the cost of the car is less than the car limit (which was $57,466 for the year ended 30
June 2012,
Taxation Determination TD 2011/18).
Question 4
John had purchased a depreciating asset for $2,000, used it 70% of the time for a taxable
purpose and subsequently disposed of it for $2,800. The adjustable value on disposal was
$1,200. What is the assessable capital gain arising from the disposal of the depreciating
asset?
1. $800
2. $1,600
3. Nil
4. $560
5. $240
(1 mark)
Suggested solution
Correct answer: 5
CGT event K7 occurs when a depreciating asset is disposed of and the item is used partially
for a non-taxable purpose. The balancing adjustment in accordance with s 40-285(1) ITAA97

LAW505: Final Examination Page 4 of 14 pages
is the excess of the termination value over the adjustable value, or $1,600. However, s 40-290
reduces the amount assessable by:
[240/800 × $1,600] = $480
Thus, the assessable amount is: [$1,600 – $480] = $1,120
For CGT purposes, the capital gain, assuming that any of the exemptions do not apply, is:
[($2,800 (termination value) – $2,000 (cost)) × 30%] = $240
Question 5
Which of the following entities is not exempt from paying income tax?
1. The Brisbane Sports Club where distributions of income may be made to members of
the club.
2. The Anglican Church of Australia.
3. The Townsville public hospital.
4. The Metal Workers Union of Australia.
5. The University of Southern Queensland.
(1 mark)
Suggested solution
Correct answer: 1
Clubs and associations can be exempt from income tax when they are established for
community service purposes and provided they are not carried on for the purpose of profit to
the members of the club. In this case, because distributions of income are made to the members,
the club is not exempt from income tax.
Generally entities falling within the categories listed in s 11-5 ITAA97 will be exempt from income
tax. Options 2 to 5 relate to organisations that are specifically exempt from income tax under s
11-5.
Question 6
Unicorp Ltd carries on a business of trading in fertiliser used by primary producers. Unicorp
purchases some of its trading stock from a related company, Unitune Ltd, which is a resident of
the Cook Islands. In the current year Unicorp paid Unitune $110,000 to purchase fertiliser that
it could have purchased directly from overseas sources and paid only $80,000. In addition,
Unicorp sold its main business premises for $15m and leased it back paying $50,000 in lease
payments in the current year (this is the arm’s length value). Based on the above two
transactions, what amount can Unicorp claim in tax deductions for the current year?
1. $110,000
2. $80,000
3. $160,000
4. $130,000
5. $50,000
(1 mark)
Suggested solution
Correct answer: 4
From a discussion of various cases that have addressed deductibility, it would appear that
Unitune will not be able to obtain a deduction for the $110,000, paid but may obtain a deduction
for the market value of the trading stock ($80,000), s 70-20 ITAA97. In addition, it would appear
that the costs of leasing back a former property from a new owner are deductible provided that
the premises are used to earn assessable income, s 8-1ITAA97.

LAW505: Final Examination Page 5 of 14 pages
Question 7
Roley is a crop farmer (primary producer) who uses a tractor in his business operations. On 1
May 2016 he paid $13,000 to replace the engine in the tractor. The replacement engine was
250 hp (187.5 kW), while the old engine was 175 hp (131.25 kW). Roley purchased the tractor
on 4 June 2013.
Assuming that Roley’s accountant advised him that he could not claim a deduction for the
$13,000 under s 25-10 ITAA97, for which of the following reasons would his accountant have
given this advice?
1. The repairs were “terminal repairs”.
2. The repairs constituted a significant improvement to the tractor.
3. The repairs were “notional repairs”.
4. The engine constituted an entirety and was an asset in its own right.
5. The repairs were “initial repairs”.
(1 mark)
Suggested solution
Correct answer: 2
The replacement of the engine in this case does not constitute a terminal repair, a notional
repair, or an initial repair and the engine is part of the tractor and not an individual asset.
However, the replacement engine is much stronger than the old one and constitutes a significant
improvement to the functional capacity of the tractor.
Question 8
During the income year ended 30 June 2016 Nicholas received salary and wages income of
$35,000, interest income of $3,000, a net capital gain of $5,000, an exempt compensation
payment of $23,000 and commission income of $4,000. What is Nicholas’s ordinary income that
is assessable for the year ended 30 June 2016?
1. $70,000
2. $47,000
3. $38,000
4. $42,000
5. $35,000
(1 mark)
Suggested solution
Correct answer: 4
Salary and wages income ($35,000), interest income ($3,000) and commission income ($4,000)
are ordinary income and amount to $42,00. A net capital gain is statutory income, while the
compensation payment is exempt income.

LAW505: Final Examination Page 6 of 14 pages
Question 9
Milos is a sales representative for Ozzie Publishing. During the year Milos received the
following:

$
Salary 50,000
Entertainment allowance 10,000
Travel allowance 5,000
Telephone allowance 750
Reimbursement of accommodation while working 10,000
Reimbursement of meals while travelling for working 2,000

Milos has assessable income for the year of:
1. $50,000
2. $60,000
3. $65,000
4. $65,750
5. $77,750
(1 mark)
Suggested solution
Correct answer: 3
Salary is assessable under s6-5; allowances under s15-2. Allowances are not fringe benefit.
Reimbursements for work related expenses are exempt income: s23L(1A).
Question 10
Kate is a university student who is studying for a sports science degree. At the end of the first
year of her course the Faculty of Science awarded her a book allowance of $700 which only
she can use at the university bookshop. Kate plays hockey with a local hockey club. The club
has a first grade team and, on hearing that Kate was studying, the hockey club provided her
with an educational scholarship of $2,000 to assist her with her study expenses. The scholarship
was granted on condition that Kate plays at least 10 games for the first grade team. To pay for
other expenses Kate worked at a local restaurant and earned $4,000 in salary and wages and
$500 in tips during the current year. What amount should Kate include in her assessable income
in the current year?
1. $7,200
2. $4,500
3. $6,500
4. $6,000
5. $5,200
(1 mark)
Suggested solution
Correct answer: 3
Section 51-10 ITAA97 exempts income derived by way of a scholarship or bursary, or other
educational allowance received by a student receiving full-time education at a school, college
or university. However, where there is a condition associated with the educational scholarship
requiring a student to perform services or to perform services if required, then the exemption

LAW505: Final Examination Page 7 of 14 pages
will be lost. Thus the $2,000 received by Kate from the hockey club is unlikely to be exempt from
tax under s 51-10. The $700 is likely to be exempt because there is no requirement that she
provide any services to the university. The salary and wages as well as the tips are ordinary
income.
Question 11
Dixon Ltd carries on a publishing business and owns a magazine that it publishes monthly. It
had the following expenditure during the year ended 30 June 2016.
In a recent magazine article one of the stories made a defamatory remark about a wellknown movie star and the company had to pay $50,000 compensation to the movie star.
The company paid $35,000 to a managing director to encourage him to terminate his
contract of employment early, because he was performing unsatisfactorily.
$12,000 was stolen by thieves from one of the company’s safes and the money was not
recovered. The money had been collected from and recorded as sales of the magazine.
Based on the above losses or outgoings, what amount will be deductible under s 8-1 ITAA97
?
1. $50,000
2. $85,000
3. $97,000
4. $12,000
5. $47,000
(1 mark)
Suggested solution
Correct answer: 3
There is a requirement that, for expenditure to be deductible, it must have a sufficient nexus to
earning assessable income. All expenditure incurred in the current year is deductible.
Question 12
Yash is an Australian resident for tax purposes and bought ordinary shares in a quoted company
and in the year end, received a dividend income of $ 6,300 after tax. Company’s tax rate is 30%.
Calculate Yash’s taxable income related to these dividends.
a. $6,300
b. $ 2,700
c. $9,000
d. $ 3,600
e. Nil
(1 mark)
Suggested solution
Correct answer C
Company
Taxable income 100
Tax rate (30)
Net income 70
Share holder’s (Yash) Taxable income = Cash dividend + Franking credit

= $ 6,300
= $ 6,300
= $ 9,000
+ {(6300/70%) * 30%}
+ $ 2,700

LAW505: Final Examination Page 8 of 14 pages
Question 13
Kate is employed by an electricity supply firm and has entered into an employment agreement
with her employer. On 12 April 2016 her employer wished to vary her contract of employment
to increase her hours to 40 hours per week, and she was paid $3,000 by her employer in
compensation for her agreeing to the change in her contract. As part of Kate’s employment
agreement she receives an allowance to cover her estimated motor vehicle expenses of
$4,000 per year and, in addition, her employer reimbursed her $2,500 for the exact cost of
accommodation that Kate paid while travelling away from home in the course of her work during
the year ended 30 June 2016. What amount should Kate include in her assessable income on
the basis of these receipts for the year ended 30 June 2016?
1. $3,000
2. $7,000
3. $9,500
4. $5,500
5. $6,500
(1 mark)
Suggested solution
Correct answer: 2
Allowances that cover estimated expenses are generally assessable, while reimbursements that
cover actual expenses are not assessable. Where an employee receives an amount to
compensate them for a variation in a services agreement, the compensation will be most likely
to be assessable whereas a unilateral variation such as the one that occurred in
Case Z9 may
give rise to a capital receipt.
Question 14
Kate borrowed $100,000 from the local bank on 30 June 2015 for a period of five years, at an
interest rate of 10% pa. Interest is to be paid annually in arrears on 30 June (first payment being
due on 30 June 2016). The purpose of the loan is to invest $50,000 in shares yielding very good
dividends and to on-lend $50,000 to her brother Nicholas, at an interest rate of 4% pa. What
amount can Kate claim as her interest expense in the current year, assuming that she paid
$10,000 to the local bank on 30 June 2016?
1. $10,000
2. $7,000
3. $5,000
4. $8,000
5. Nil
(1 mark)
Suggested solution
Correct answer: 2
In the case of
Ure v FC of T 81 ATC 4100, where a taxpayer borrowed funds at approximately
12.5% pa and on-lent these monies to family members at a rate of 1% pa, the Full Federal Court
held that the taxpayer had at least two purposes and allowed a deduction for the interest paid
to the extent of the interest earned from on-lending the money. Thus, in this case, a deduction
on the $50,000 on-lent to Nicholas to the extent of 4% is appropriate, while the taxpayer is able
to claim the full interest charged on the money used to purchase the shares. In total a deduction
for $7,000 is available or 100% of $5,000 (the interest on the money invested in shares) plus
40% of $5,000 (the interest on the money lent to Nicholas).

LAW505: Final Examination Page 9 of 14 pages
Question 15
Kate carries on a business of manufacturing school playground equipment. In addition, she also
provides consulting services to schools about the type of playground equipment to use. On 30
June 2016 she had raw materials on hand that cost $23,000, partly finished goods on hand that
cost $25,000 to get to their current condition, finished goods on hand that cost
$50,000 to manufacture and she has unbilled consulting fees of $12,000. What is the value of
her trading stock on hand at 30 June 2016, assuming that she wishes to value her trading stock
at cost?
1. $98,000
2. $110,000
3. $75,000
4. $87,000
5. $50,000
(1 mark)
Suggested solution
Correct answer: 1
The definition of trading stock will include raw materials, work in progress (partly finished goods)
and finished goods. Work in progress of a professional nature will not be included in assessable
income until it has been billed. Therefore in this question the total value of trading stock on hand
will be [$23,000 + $25,000 + $50,000] = $98,000.

LAW505: Final Examination Page 10 of 14 pages
PART B SHORT ANSWER QUESTIONS 15 Marks
Students are required to answer ALL questions from Part B
You must explain your answers and provide authority where relevant.
Question 26
Jay is an architect carrying on a consulting business as a sole trader. He has two employees:
Jill, a part-time office worker and Jack, a full-time draughtsman. Jay’s consulting fees for
2015/16 are $270,000 of which $260,000 has been received and $15,000 remains outstanding.
Annual salaries to employees total $65,000.
Required:
Should Jay return on a cash or accrual basis? [You must cite appropriate case law.]
A discussion is required of the factors relevant to cash v accrual, and
Carden’s,
Dunn’s
or Firstenberg’s cases must be discussed It is a reasonable conclusion that,
given there is only little correspondence between income and outgoings [$260,000
compared to $65,000], the reward is essentially for Jay’s professional skill and a cash basis is
appropriate. Alternative conclusions would need to be convincingly argued.
(5 marks)
Question 27
Deidre Dodge is a single parent who is employed as a solicitor. In order to attend employment
she must put her young child in a day-care centre. Deidre considers the expense is
necessarily incurred in gaining her income. Would she be entitled to a tax deduction under s8-
1?
Suggested solution
Issue is deductibility under s8-1; whether incidental and relevant [or essential character] to
income production: discussion
Or whether denied as private or domestic: discussion
Authority:
Lodge
Question 28
Terry Tree conducts an electrical repair business. With a view to future retirement he purchases
10ha of land and plants native wildflowers that he plans to harvest and sell. As a preliminary he
arranges to clear the land and plough in compost. It is expected that the first commercial crop
will not be harvested for six years. He incurs interest on a loan to finance the land purchase,
land preparation costs, fertilizer costs and costs of acquiring native seedlings.
Required
Advise Terry of the tax consequences of the venture.
Suggested solution
(5 marks)
Since there is no relevant assessable income (only perhaps the prospect of future income) the
question becomes whether the expenses are necessarily incurred carrying on a business or
hobby
Authority: As to business indicia generally –
Ferguson’s case.
Preliminary expenditure/feasibility exp not deductible –
Softwood Pulp & Paper; Griffin Coal.
For primary production –
Walker.
LAW505: Final Examination Page 11 of 14 pages
PART C PROBLEM SOLVING (30 Marks)
QUESTION 29
John is a student studying accounting at Charles Sturt University. The following information
relates to the financial year ending 30 June 2016.
From 1 July 2015 to 31 January 2016, John works as a waiter at a local restaurant and is paid
$18.00 per hour. He works 3 x 5 hour shifts each week. In addition, he often receives tips from
diners. The amount he receives varies, but is generally between $30 – $50 each shift.
In September 2015, John’s employer gives him an “employee of the month” award. This award
is given to an employee each month based on positive feedback received from customers. The
award is a $200 bonus. When John leaves the restaurant at the end of January 2015, his
employer gives him a ‘farewell’ present. The present is an expensive bottle of champagne,
valued at $150.
In February 2015, John starts a graduate position with an accounting firm in the Sydney CBD.
In April 2015, the accounting firm pays John’s private health insurance ($1,200 for the period 1
April 2015 to 31 March 2016); and gym membership ($900 for the period 1 April 2015 to 31
March 2016).
At the request of his employer, John is undertaking a Masters of Taxation at CSU. In June 2016,
his employer pays CSU $6,000 in fees associated with the course.
Required:
Advise John as to whether any of the amounts or benefits he receives under the above
transactions are assessable income to him.
Identify the fringe benefits liability from the benefits provided to John.
(10 marks)
Suggested solution 29
1) Salary/wages from restaurant job: ($270 per week from 1 July 2015 to 31 January
2016). Amounts derived from employment or the provision of services is ordinary
income.
2) Tips from restaurant job: John is clearly employed by the restaurant and is being paid
wages. There is no question that this income is received as a result of his personal
exertion, and is directly connected to the earning activity. Penn v Spiers & Pond Ltd
[1908] 1 KB. Also TR 95/11 which states that tips in the hospitality industry isincome.
3) Employee of the month award: $200 This payment was unexpected, and lacks the
regularity and recurrence which comes with the salary/wages and tips received.
However, unexpected or voluntary payments received as a reward for service are
ordinary income as the benefit is an incidence of employment: Laidler v Perry [1965] 2
All ER 121. In this case, the ‘award’ of $200 is clearly related to his employment, as
the ‘award’ was given based on positive customer feedback.
4) Farewell present: This brings up two issues – Gift vs. mere gift. The fact it isn’t money.
However, regardless of the conclusion to this issue (gift vs. mere gift), it will still will not
be ordinary income as it is not money. That brings up the question of whether it is a
fringe benefit. Statutory income – s15-2 would obviously be relevant, but that does not
apply if it is a fringe benefit. The champagne would be a fringe benefit. However,
minor benefits with a value of less than $300 are exempt: s58P(1). In this case, the
champagne is valued at $150 so would fall under this exemption.

LAW505: Final Examination Page 12 of 14 pages
5) Private health insurance, gym membership, course fees: All of these payments will be
fringe benefits rather than ordinary income. All of these benefits are expense payment
benefits: see s20. Health insurance: $1,200. Gym membership: $900.
University fees: here, we need to consider the otherwise deductible rule. The value
($6,000) is reduced to nil, as John would have been able to claim a deduction for the
fees if he had paid them himself.
Taxable amount/FBT liability
Type 1 fringe benefits. Type 1 fringe benefits are those that have GST. In this case it
would be the gym membership: $900 x 2.1463 = $1,931.67
Type 2 fringe benefits: no GST. Health insurance. $1,200 x 1.9608 = $2,352.96.
Aggregate amount: $1,931.67 + $2,352.96 = $4,284.63.
FBT liability = Taxable amount x FBT rate = $4,284.63 x 47% = $2,013.78
QUESTION 30 (10 marks)
Ivan, an Australian tax resident is employed as an electrician. He plans to travel to Brazil for 2
years and have decided to sell some of his assets to fund his trip. The following were the
transactions made by Ivan.

Assets
acquired
Purchase cost Acquisition
Date
Disposal date Sale price
A Ltd shares $6,000 30 July 1985 20 December
2015
$23,000
B Ltd shares $4,300 30 July 2013 24 July 2015 $5,000
C Ltd shares $2,000 11 April 1987 24 March 2016 $2,250
D Ltd shares $3,000 4 January 2009 2 June 2016 $1,200
Painting $5,000 10 March 1998 20 June 2015 $6,000
Jewellery $4,000 30 May 1997 16 June 2016 $2,300
Rare hunting
rifle
$2,000 3 May 1997 18 January
2016
$8,000
Toyota Camry
(Ivan’s car)
$30,000 8 March 1999 1 May 2016 $21,000
Flat (Ivan’s
home)
$180,000 28 August 1995 25 June 2016 $310,000
Home furniture $14,000 13 October 2002 6 February
2016
$12,000
Holiday
apartment
$120,000 15 April 1988 5 November
2015
$190,000

Ivan had $2,500 of capital losses carried forward from 2015/16 which are related to shares.
Required:
Compute Ivan’s net capital gains/ loss to be included in his 2015/16 assessable income using
the discount method. Please cite the relevant sections of the Act or case law
(10 marks)
Suggested solution
General assets

Shares A Disregard – prior to 20 Sept 1985 s104-10
Shares B $700
Shares D 1200 – 3000 = -1800
Holiday apartment 70,000
CG before discount 68900
Less prior year loss 2500
66400
Less discount 33200

LAW505: Final Examination Page 13 of 14 pages

CG after discount 33200
Shares C 2250 – 2000 = 250 less than 1 year – no discount
Total CG 33450
Since question does not ask to compute minimise CG please also do not mark student wrong
if prior loss was deducted after discount of 50%
see below
Shares A
Exempt
Shares B $700
Shares D 1200 – 3000 = -1800
Holiday apartment 70,000
CG before discount 68900
Less discount 34450
Add Shares C 250
34700
Less prior year loss 2500
CG 32200

Collectables

Painting 5000 – 6000 = -1000 ignore not in tax year 2015/6
Jewellery exempt – s118-10

Capital gains/ loss = NIL
Personal use of assets

Rifle exempt s118-20
Home furniture 14000 – 12000 = -2000

Loss ignore for personal use asset s108-20

Car exempt s118.5
Home
QUESTION 4
exempt
(10 marks)
s118-110

Sandra is an accountant who works at a chartered accounting firm in the city. She is a member
of a professional accounting society for which she pays an annual fee of $550 (inclusive of GST)
and she is undertaking a professional accounting qualification for which she pays fees of $1,100
(inclusive of GST). She is also undertaking a post-graduate degree in media studies at a
university for which she pays course fees of $2,000. She is undertaking this course as she hopes
to eventually become a financial journalist once she has gained enough practical experience at
her accounting firm. Sandra’s employer requires her to dress appropriately at work and last
year she spent $1,100 (inclusive of GST) on make-up and
$2,200 (inclusive of GST) on a designer work suit. Sandra prefers to dress casually and, on
leaving the office, she usually changes into casual clothes. Sandra also has a one-day per week
part-time job at a night club which starts soon after her accounting job finishes on Friday nights.
The night club is far away from the city and she therefore drives her car to work on Fridays so
that she can get to her part-time job in time. On all other days of the week, Sandra takes a train
between home and work and spends $44 (inclusive of GST) per week on tickets.
Required
Advise Sandra as to whether she is entitled to deductions for any of the above expenses.
(10 marks)
Suggested solution 3
Professional accounting society annual fee: $550 (inclusive of GST)
This is deductible under s 8-1 ITAA97 because Sandra’s membership of the society has a direct
nexus to her income-earning activity. If Sandra is not registered for GST she will not be entitled
to an input tax credit but the GST component will be deductible. If her employer were

LAW505: Final Examination Page 14 of 14 pages
to reimburse her the cost of her professional fees her employer would be entitled to claim the
input tax credits.
Professional accounting qualification: $1,100 (inclusive of GST)
These fees are deductible self-education expenses under s 8-1 ITAA97 because the course is
directly related to Sandra’s professional employment, subject to the first $250, which is not
deductible. (If we assume that Sandra is not entitled to an input tax credit, the GST component
will also be deductible.) See also
Taxation Ruling TR 98/9. If the course is of education is not
provided by a school, college, university or other place of eduction then the $250 limitation may
not apply. For example the costs associated with completing the CA program (Institute of
Chartered Accountants (ICA)) may not be reduced by the $250 as the ICA is not a place of
education.
Media studies course fees: $2,000
These fees are not deductible because there is no connection to any current income-earning
activities. This expense enables Sandra to engage in a new income-earning activity. In other
words the expense is preliminary to a new income earning activity (
Lunney, Finn).
Make-up: $1,100 (inclusive of GST) and designer work suit: $2,200 (inclusive of GST)
These expenses are generally regarded as private in nature and therefore not deductible,
even if a high standard of personal appearance is required for professional employment
purposes (consider
Mansfield and Edwards).
Travel expenses between home and office
These are not deductible as there is no connection with an income-earning activity and they are
private in nature (
Lunney and Hayley). Once again these expenses are preliminary to
commencing her income earning activity.
Travel expenses between office and nightclub
Travel which is not undertaken in the course of an income-earning activity is considered private
in nature. These expenses are not deductible according to the decision in
Payne. However, in
accordance with s 25-100 ITAA97 if you are an individual, you can deduct a transport expense
to the extent that it is incurred in your travel between workplaces. For the expense to be
deductible s 25-100 ITAA97 provides that your travel between workplaces is travel directly
between 2 places, to the extent that:
(a) while you were at the first place, you were:
(i) engaged in activities to gain or produce your assessable income, or
(ii) engaged in activities in the course of carrying on a business for the purpose of
gaining or producing your assessable income, and
(b) the purpose of your travel to the second place was to:
(i) engage in activities to gain or produce your assessable income, or
(ii) engage in activities in the course of carrying on a business for the purpose of gaining
or producing your assessable income,
and you engaged in those activities while you were at the second place.
Travel between two places is not travel between workplaces if one of the places you are
travelling between is a place at which you reside. In this case as Sandra is traveling from one
workplace to another (neither of the places is her home) she may be able to claim a tax
deduction for the expenses incurred. The train travel between home and work is not deductible
as it is merely home to work travel (Lunney).