Tax Implications For Kate – Calculation Of Taxable Income And Basic Income Tax Liability For 2017/18

Taxable Income and Fringe Benefits

Advise Kate regarding the tax implications, arising from the above facts in relation to the 2017/18 income year. In your answer, make sure you: (1) apply the HIRAC methodology and refer to any relevant cases, legislative provisions, and principles of tax law; and (2) show separately your calculation of Kate’s taxable income, and ‘basic income tax liability’, for the 2017/18 income year, fully explained by reference to any relevant legislative provisions. (Note: you are not required to calculate Medicare Levy or income tax payable).

The issue that is presented in the given case study is based on the income taxation computation. This has been done for creating the taxation income and deductibility of the expenses for the financial year 2017-2018.

The given case about Kate who is a full time accountant and is concerned about the consequences of taxes. It is required to make the assessment about the impact of taxes in relation to the transactions such as winning the cash prize, appearance of television, receipts from salaries and receipts from events of sports. It is required to ascertain that the collectables from such transactions can be treated as capital gains tax. The section 8-1 of the ITAA 1997” is analyzed in terms of whether Kate would be entitled for deductions related to travelling (Eccleston and Smith 2015). Hence, it is required to answer whether the mentioned section allow for the tax payer to enjoy the deductions associated with the travelling expenses. 

It is stated under the section 8-1 of the ITAA 1997 that the maximum earnings that is earned by an individual are related as ordinary earnings. The section depicts that suich types of earnings can be earned by individual from sources such as profits generated by them from involvement in any trading activities or income generated from involvement in any private jobs such as wages, allowances, bonus, salaries or any other prerequisites. It was held in the “Scott v Commissioner of Taxation (1935)” that treats the word “income” as the required principles and terms of art that is considered applicable when the agreement involves the ordinary conceptions of mankind by treating the receipts as income (Torgler 2016).

When an employer provides benefits to employees during any particular financial year in regard to the services offered, then such benefits are treated as fringe benefits under the “section 36 (1) of the FBTAA 1986”. Expenses on part of fringe benefits occur or it is incurred by employer when such expenditure is incurred by employees and it is paid by employer. Such expenses are treated as an expenditure on part of employer under the “section 20 of the FBTAA 1986”.

Income from Personal Exertion

Income does not comprise of the ordinary awards that are received by individual. Nonetheless, if there exists any satisfactory association or relationship of such awards with the activities of the tax payer that generates earnings, then they are included in income. As mentioned that an award for being the best and fairest player was received by the professional footballer under “Kelly v FCT”. The sum that was received by the player as award had a sufficient connection to the skills and incidental to his profession.

An amount received by the individual might be treated as income if it is derived from personal exertion. Such income is taken into account for the assessment of income as ordinary income or statutory income. If sufficient amount of relationship is found to exit between the prize amount and the tax payer activities, then such amount received as award should be treated as income. As indicated in the case of “FCT v Stone”, the tax payer practiced two professions that is one as police and other as sports person that is thrower of javelin. The tax payer in this case has two source of income that is salary that he or she received as income from his police profession and involvement in sports also generated income in the form of prize money and some endorsements. It was help by commissioner that the income derived by tax payer by being a professional athlete should be treated as income (Tran-Nam 2016).

Furthermore, taxable income takes into account of all the payments that are received by individual for promotion, public appearance and endorsements. Therefore, the payment received by taxpayer in the case “Kelly v FCT” for public appearance should be treated as taxable income.  

For determination of capital gains in accordance with the “subsection 108-10 (1) of the ITAA 1997” in order to decrease the capital gains from collectables should take into account the amount of capital losses that is generated from collectibles. Collectibles under “section 108-15 (1)” are liable as set. Collectibles on other hand are treated in the form of disposal and are taken as single set under “section 108-15 (2) of the ITAA 1997” (Berg and Davidson 2017). In addition to this, there is exemption of capital gains generated from the acquisition of collectibles of amount $ 500 or less.

Rent is the amount that is paid by individual for using the person property. Rent is accounted for assessing the income as taxable income as depicted in the case of “Adelaide Fruit and Produce Exchange Co Ltd (1932)”.

Capital Gains

Any item that the tax payer derives it as part of its income is treated as income until its net value has been realised. As provided in the case of “Brent v FCT” that the media company provided special rights to the train robber wife to make the publication of life story. The amount that was received by her by way of such publication is held as income and it is taken into account for assessing the income tax as it arise from the ordinary concepts of her rewards (Gilders et al. 2016).

Ordinary income does not include the payments that are received by individual due to restriction or relinquishing of the rights. It can also be the amount that might be received by individual for entering into an agreement of not performing anything. Nonetheless, this can lead to creation of “CGT event D” because it occurs when any contractual rights or any equitable rights are created by individual in any entity.

An individual can claim deductions for legal fees under “Section 8-1 of the ITAA 1997” provided if the fees received are associated with the activities of taxpayer. It is held as per the court law “Federal Commissioner of Taxation v Rowe (1995)”that character attributable to legal expenses should be concluded for the purpose of deductions (Woellner et al. 2016). In the same way, if there is any expenditure that is associated in the form of incidental cost related to proceeds generated from capital should be taken into account for assessment of deduction of taxable income.

According to “section 8-1 of the ITAA 1997” of positive limbs, a taxpayer is allowed for having an deduction entitlement if any chargeable income is produced because of the outlays are incurred. Nonetheless, under the negative limbs of “section 8-1 of the ITAA 1997”, deductions cannot be claimed by person if it is of private character. Expenditure incurred by individual in gaining new employment is not accounted for purpose of deductions as held in the case “FCT v Madealena (1971)”. This is so because such expenses are not incurred in the course of producing or gaining taxable income.

The income generated by Kate as depicted in the case study is from her profession of working as an accountant in a firm. Personal exertion forms the basis of salary generated by Kate. Salary received by Kate is held as an income according to the ordinary concepts as cited by the case “Scott v Commissioner of Taxation (1935)” and treating such income as taxable under the “section 6-5 of the ITAA 1997”. Payment received by Kate as a taxi expense forms part of fringe benefits being derived according to “section 20 of the FBTAA 1986” (Dabner 2015).

Rent, Legal Expenses, and Deductions

For being the best accountant, a cash award was received by Kate and such award would be assessed for income tax purpose as it is associated with the producing activities by citing the case “Kelly v FCT”.

It is indicated that Kate often participates in sporting activities for which she receives sevetal prizes. The amount received as an award will be assessed for taxation under “section 6-5 of the ITAA 1997”.

Kate purchased an antique bed side lamp of amount $ 700 for which was sold at loss of $ 200. Any capital loss generated from personal assets should be disregarded under “section 108-10 (2)”. The amount received by Kate for appearing in the interview is held as taxable income under the “section 6-5 of the ITAA 1997”.

Working Note:

= $90,000 – $87,000 = $3,000

= $3000 x 37% = $1,110

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

Conclusion:

From the above analysis of the given case, it is concluded that under the “section 6-5 of the ITAA 1997”, the income derived by Kate would be assessable for income tax purpose. Total amount of earnings of Kate for the financial year 2017-2018 stood at $ 90000 with the liability pertaining to income tax of amount $ 20797. Moreover, section 8-1 of the ITAA 1997” Kate is also entitled to deductions in relation to rental property and other deductions that are allowable.

Reference List:

Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.

Berg, C. and Davidson, S., 2017. ” Stop this greed”: The tax-avoidance political campaign in the OECD and Australia. Econ Journal Watch, 14(1), p.77.

Bird, R.M. and Zolt, E.M., 2014. Redistribution via taxation: the limited role of the personal income tax in developing countries. Annals of Economics and Finance, 15(2), pp.625-683.

Dabner, J.H., 2015. The Australian tax office/tax profession partnership: Lessons from a pilot interview program.

Eccleston, R. and Smith, H., 2015. Fixing Funding in the Australian Federation: Issues and Options for State Tax Reform. Australian Journal of Public Administration, 74(4), pp.435-447.

Enste, D.H., 2018. The shadow economy in OECD and EU accession countries–empirical evidence for the influence of institutions, liberalization, taxation and regulation. In Size, Causes and Consequences of the Underground Economy (pp. 135-150). Routledge.

Gilders, F.M., Taylor, C.J., Walpole, M., Burton, M. and Ciro, T., 2016. Understanding Taxation Law 2016. LexisNexis Butterworths.

STEPHEN. BARKOCZY, 2018. FOUNDATIONS OF TAXATION LAW, 2018. OXFORD University Press.

Tan, L.M. and Xiaoqian Liu, E., 2016. SMEs Tax Compliance: A Matter of Trust. Austl. Tax F., 31, p.527.

Torgler, B., 2016. Tax compliance and data: What is available and what is needed. Australian Economic Review, 49(3), pp.352-364.

Tran-Nam, B., 2016. Tax Reform and Tax Simplification: Conceptual and Measurement Issues and Australian Experiences. In The Complexity of Tax Simplification (pp. 11-44). Palgrave Macmillan, London.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

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