Understanding The Tax Consequences: A Discussion

Issue

Discuss about the Understanding The Tax Consequences.

The existing issue is based on calculation of tax in order to establish the deductibility of expenses and taxation of income for the year ended 2017/18.

The present issue of Kate is based on understanding the tax consequences relating to transactions such as receipts of salaries, winning of cash prize, receipts from sporting events and television appearance. The issue in question is whether the collectables would be held as capital gains tax. Will the taxpayer be permitted to entitlement for deductions associated to travelling under “section 8-1 of the ITAA 1997”?

According to “section 6 of the ITAA 1997” a person obtaining income from private effort includes salaries, wages, bonus, fees, allowances, perquisites or profits acquired from any trade executed by the taxpayer (Barkoczy 2014). “Section 6 of the ITAA 1997” states that maximum of the earnings that is obtained by the person are assumed as ordinary earnings. The court in “Scott v Commissioner of Taxation (1935)” held that the word income is regarded as the term of art and necessary principles should be applied to treat the receipts as income in agreement with the ordinary conceptions of mankind.

As per “section 136 (1) of the FBTAA 1986” a fringe benefit originates when a benefit is provided by the company to the employee during the year in respect of the service rendered by employee (Brokelind 2014). Under “section 20 of the FBTAA 1986” an expense fringe benefit originates when the employer pays the expenditure that is incurred by the employee.

Ordinary awards are not held as income nevertheless, it may be held as income if there prevails a satisfactory association with the earnings deriving activities of the taxpayer. As held in “Kelly v FCT” the professional footballer received award for being the fairest and the best player (Coleman and Sadiq 2013). The sum received in the form of awarded was regarded as incidental to his work and employment with sufficient connection to his skills.

An individual deriving an amount from the personal exertion might held as income which is included for assessment as either the statutory income or ordinary income. The winnings from prize is regarded as income if an adequate link with the income generating activities of the taxpayers is found. In the case of “FCT v Stone” the taxpayer was the police women and also the javelin thrower (Robin 2017). The taxpayer earned salary income along with endorsement and prize money from her sports involvement. The commissioner held the taxpayer for carrying on the business of professional athlete and the money derived was held as income.

Rule

Payments that are received for public appearance, promotions or endorsements and the same is in connection with the assessable income then would be considered taxable income. As held in the case of “Kelly v FCT” payments received for public appearance is held as taxable income.

According to “subsection 108-10 (1) of the ITAA 1997” in determining the capital gains for the income year capital losses from collectibles should be only used to decrease the capital gains from collectables (Grange et al. 2014). Under “section 108-15 (1)” collectibles are ordinary disposed as the set. Under “section 108-15 (2) of the ITAA 1997”, collectibles are taken as the single set and each of the disposal forms the part of the collectibles. Furthermore, there are certain capital gains that are exempted and this includes collectables that is acquired for $500 or less.

Rent constitutes an amount that is paid to use the property of another person. As held in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” money received from rental property is included as income which is assessable (James 2014).  

An element of income is derived by the taxpayer when it comes home. An item having the character of income which is derived by the taxpayer will be regarded as income till its realisable value. In the event of “Brent v FCT” the wife of the train robber was provided with the special right by the media company to publish her life story and the amount derived from such publications was held as income based on reward for service which was assessable under ordinary concepts (Kenny 2013).

An individual receiving payment for relinquishing or restricting the rights are not held as ordinary income.  For example payment received as an agreement of not doing something. However, such payment results in “CGT event D1” since it happens if an individual creates a contractual rights or any form of other equitable rights in other entity (Krever 2013).

“Section 8-1 of the ITAA 1997” permits an individual to claim deductions for Legal fees when it is related to the income producing activities of the taxpayer. The law court in “Federal Commissioner of Taxation v Rowe (1995)” held that it is essential to conclude the character of legal expenses for deduction purpose (Morgan, Mortimer and Pinto 2013). Similarly, expenditure which forms an incidental costs to the capital proceeds are allowed as deductions from the taxpayers assessable income.

A taxpayer is permitted for an entitlement of deductions under positive limbs of “section 8-1 of the ITAA 1997” if the outlays is incurred in producing the chargeable income. However, under the “section 8-1 (2)” of negative limbs a person is not permitted to claim deductions that are capital or private character (Sadiq et al. 2014). As held in the case of “FCT v Madealena (1971)” expenditure to obtain new employment is not allowed for deductions since it is not incurred in the course of gaining or producing taxable income.  

Application

As evident from the case study of Kate, she derived her income from salaries for being employed in the accounting firm. The salaries derived by Kate constitutes income from personal exertion. Citing the case of “Scott v Commissioner of Taxation (1935)” Kate salary is held as income in accordance with the ordinary concepts which is taxable under “section 6-5 of the ITAA 1997” (Woellner 2013). It is often found that Kate employer pays for her taxi fares which constitutes fringe benefit under “section 20 of the FBTAA 1986” in respect of her employment.

Kate received a cash award of $5,000 for being the best accountant and citing the case of “Kelly v FCT” the cash award would be assessable since it is related to her income producing activities.

Evidences suggest that Kate often participates in high-jumping competition in pursuit of excellence and wins several prizes. Citing the case of “FCT v Stone” the receipt of $40,000 from high jumping competition is held as income which is assessable under “section 6-5 of the ITAA 1997” as she regularly participated in pursuit of excellence (Woellner et al. 2014). Furthermore, the receipt of coffee machine constitutes gift that does not has the character of income.

Evidences found suggest that Payments that are received by Kate for public appearance will be considered assessable. Citing the reference of “Kelly v FCT” the payment of $40,000 will be taxable since it is directly related to Kate sporting involvement.

An antique bed side lamp was purchased by Kate for $700 however, it was sold for a loss at $500. Kate under “section 108-10 (2)” is required to disregard any capital loss from the personal use assets (Morgan, Mortimer and Pinto 2013). Referring to “section 108-15 (2) of the ITAA 1997”, the capital gains from sale of lamp made by Kate must also be disregarded as the cost base was less $500.

Kate also derives income from rental property. Referring to “Adelaide Fruit and Produce Exchange Co Ltd (1932)” the rental property income would be held for taxation purpose under “section 6-5 of the ITAA 1997” (Krever 2013).

Kate received a sum of $30,000 for appearing in the TV interview to speak about her life after sports. Citing the case of “Brent v FCT” the receipts of $30,000 is held as income based on reward for service which was held for taxation purpose under ordinary concepts of “section 6-5 of the ITAA 1997”.

Kate later enters into agreement of not appearing in other similar interviews. The receipt of $20,000 is payment for relinquishing rights are not held as ordinary income since it is as an agreement of not doing something (Grange et al. 2014). However, the receipt of $20,000 by Kate is a “CGT Event D1” which will be taxable and the same is included in her taxable return. Additionally, the legal expenses incurred by Kate is regarded as the incidental costs to capital proceeds that would be allowed as deductions for Kate.

Kate often looks for new opportunities and travels to attend a new job interview. Citing the reference of “FCT v Madealena (1971)” expenditure to obtain new employment is not allowed for deductions for Kate since it is not incurred in the course of gaining or producing taxable income. The expense holds the private in nature.

Working Note:

Workings for Basic Income Tax Liability:

= $90,000 – $87,000 = $3,000

= $3000 x 37% = $1,110

= 19,822 + $1,110 = 20,392

Basic Income Tax Liability = $20,932

Conclusion: 

On a conclusive note the incomes that are generated from Kate personal exertion would be held liable for assessment under “section 6-5 of the ITAA 1997” as earnings from ordinary concepts. As apparent the assessable earnings for Kate during the year 2017/18 stands $90,000 with basic income tax liability of $20,797. Additionally she would be entitled to claim deductions under “section 8-1 of the ITAA 1997” relating to rental property and other allowable deductions reported by her. 

Reference List:

Barkoczy, S. 2014. Foundations of taxation law.

Brokelind, C. 2014. Principles of law: function, status and impact in EU tax law. Amsterdam: IBFD.

Coleman, C. and Sadiq, K. 2013. Principles of taxation law.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2014.  principles of business taxation.

James, M. 2014. Taxation of small businesses.

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Robin, H, 2017. Australian taxation law 2017. Oxford University Press.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A. 2014. Principles of taxation law.

Woellner, R. 2013. Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order