Question 1: Tax Consequences of Payments for Personal Services
1. Henry, a tax resident of Australia, was a famous jazz singer who passed away recently. Jack, a publisher was interested on Henry’s life story and wanted to write a bibliography on Henry’s life. Jack approached Henry’s wife, Jenny (also a tax resident of Australia) to interview her on Henry’s life story. She was offered $1 million for Henry story. Jenny was paid $500,000 deposit before the interview. After the interview she was paid the balance of the money. Would the tax consequences have changed if Jenny had written the book herself?
2. Sally is a single parent who is employed as an accountant. In order to attend employment she must put her young child in a day-care centre. Sally considers the expense is necessarily incurred in gaining her income. Would she be entitled to a tax deduction under s8-1?
3. Joseph conducts an plumbing business. With a view to future retirement he purchases 20ha of land and plants native wildflowers that he plans to harvest and sell. As a preliminary measure he arranges to clear the land and plough in compost. It is expected that the first commercial crop will not be harvested for five years. He incurs interest on a loan to finance the land purchase, land preparation costs, fertilizer costs and costs of acquiring native seedlings.
Section 6 of the ITAA 1936 provides that income derived from the personal exertion or income that is derived from the personal exertion generally consist of bonus, fees, salaries or proceeds received from business or any other sum received as the bounty. Section 6-5 of the ITAA 1997 defines that usually most of the income that comes to the taxpayer is regarded as the ordinary income (Woellner et al., 2016). As evident in the current situation of Jenny she was offered a sum of $1 million for narrating the story of her husband who was the famous jazz singer that passed away recently. Initially, she was paid a sum of $500,000 as the advance by the publisher for an interview.
Section 6-5 of the ITAA 1997 defines that an item having the character of income that comes home to the taxpayer. An item having the character of income should be adjusted based on the circumstances of its derivation by the taxpayer (Barkoczy, 2016). As held in the case of “Brent v Federal Commissioner of Taxation (1971) ATC 4195” payment that is received for the making herself available for the interview by the journalist in order to disclose the facts related to her life with her husband and lending her name to stories written by the journalist will be considered as the assessable income (Tan et al., 2016 pp-329-344). Similarly in the case of “Federal Commissioner of Taxation v Holmes (1995) ATC 4476” held that the receipts of salvage reward payment by the marine engineer would be held as reward for service and forms the part of income.
Receipts relating to the sponsorship money from the commercial firms and receipts relating to appearance fees for attendance in a function by the taxpayer may offer the instances of receipts that are for the services rendered and does not constitute employment (Cao et al., 2015). Similarly in the case of Jenny, the receipts for making herself available for the interview constitute receipts for reward of service but does not involve employment. Such receipts constitute income and attracts tax liability. The payment that is received by Jenny was the ordinary income based on the provision of personal service and would be considered taxable under section 6-5 of the ITAA 1997.
Question 2: Deductions for Work-Related Expenses
The taxation ruling of TR 2005/01 is concerned with the carrying on the business of the professional artist (Saad 2014 pp-1069-1075). In regard to the distinctive nature of the arts profession the ruling lay down the guidance based on the principles to be implemented in ascertaining whether the person is an artist and carrying on the business as the professional artist.
The question of Jenny is relevant as if she had written the story herself it would have constituted the business of professional artist and the amount received from such business would be held as income according to ordinary concepts under section 6-5 of the ITAA 1997. This is because it has been earned by Jenny in the ordinary course of carrying on the business. For example people that indulge in the business of professional arts are generally motivated by purpose of creativity with the desire of influencing the opinion of public. If Jenny had written the book herself it would have been held as the work of professional artist and the income derived from it would be held assessable in accordance with the ordinary concepts of section 6-5 of the ITAA 1997.
According to section 8-1 of the ITAA 1997 an individual is allowed to claim deductions from their taxable income relating to the loss or outgoings up to the extent that such expenses are occurred in generating the taxable income or being necessarily occurred in carrying on the business for generating the taxable income (Robin & Barkoczy, 2018). However, section 8-1 (2) of the ITAA 1997 describes that an individual taxpayer is denied deductions relating to outgoings up to the extent that the outgoings are in the nature of capital.
Additionally section 8-1 (2) of the ITAA 1997 an individual taxpayer is not allowed to claim deductions relating to expenses that are in the nature of private or domestic and occurred in producing the exempted income (Robin, 2018). As evident in the current situation of Sally who is a single parent and employed as the accountant incurs childcare expenditure in order to attend her work.
An important consideration of section 8-1 (2) (b) is that any form of loss or outgoings that are in nature of private or domestic will not be allowed as deductions. These expenditure does not meet either the positive limbs or the same is not allowed for deductions under the second negative limb. Referring to the judgement of the court in “Lodge v Federal Commissioner of Taxation (1972) ATC 4174” held that the child care expenditure was not allowed as deductions (Blakelock et al., 2017, p 6-37). This is because the child care expenditure is neither considered relevant nor it held as incidental in producing or gaining the taxable income and hence these expenditure are not allowed as deductions.
Question 3: Determination of Whether a Person is Engaged in the Business of Primary Production
Subsection 51 (1) allows a taxpayer to claim allowable deductions relating to outgoings that are occurred in producing taxable income except where the expenditure are domestic or private in nature (Coleman & Sadiq, 2013). The court held that the expenditure constituted domestic or private in nature. Similarly in the situation of Sally the child care expenditure that is incurred by her would not be allowed as deductions. The reason for this is that the child care expenditure is neither measured as significant nor it held as incidental in generating or gaining the assessable earnings henceforth these expenditure would not be allowed as deductions for sally under section 8-1 of the ITAA 1997.
The taxation ruling of TR 97/11 is concerned with the business of primary production. The ruling provides guidance to the relevant indicators that are considered necessary in determining whether the person is carrying on the business of primary production. Subsection 995-1 (1) of the ITAA 1997 provides understanding of primary production business as carrying on the business of cultivation or propagation of plants or their products under any physical environment (Kenny, 2013). While each situation may provide its own particular facts the ascertainment of question is usually held as the result or the procedure of considering all the necessary indicators. Paragraph 25 of the TR 97/11 explains the necessary indicators that are relevant in determining the facts of venture (Morgan et al., 2013). This includes whether the activity possess significant commercial purpose or has the character of business. Additionally it also comprises of whether the taxpayer has the intention of profit along with the prospect of profit from such venture.
As evident in the current situation of Joseph considering his view of future retirement he bought a land and commences planting of wildflowers that he intends to harvest and sell. Paragraph 14 of the Taxation ruling of TR 98/17 states that a taxpayer is not required to derive most of their income from the business of primary production (Woellner, 2013). The taxpayer might be employed in certain other profession or business. However an important factor is that the activities of primary production accounts as carrying on of the business. The court of law in “Evans v Federal Commissioner of Taxation (1953) AITR 548” held that whether the business is performed is reliant on the general impression gained and whether the activities undertaken provides the nature of commercial flavour.
The court of law in “Ferguson v Federal Commissioner of Taxation (1979) ATC 4261” held that the nature of activity or the intention of the taxpayer along with the method of operation forms a significant factor in determining whether the business of primary production is carried on (Coleman & Sadiq, 2013). The purpose of profit making along with the organization of the activities in the business manner serves an indication that a business being carried on by Joseph in the current question. It is often noticed that taxpayer that derive income from employment or any other sources enter into some form of primary production.
Similarly in the current situation of Joseph there is an existence of significant commercial purpose. Similarly in case of Joseph the scale of the activity was big enough to makes sure that the venture was profitable. There was clear the existence of generating profit even though it would take a five year time to take place. The purpose of making profit was on the reasonable grounds. The plantation of wildflowers were in a manner that were consistent with the activities of business. Joseph established and carried out the activity of planting wildflowers in a business manner.
The profits generated from such activities by Joseph would be liable for taxation under the ordinary course of section 6-5 of the ITAA 1997 as proceeds from business. Joseph can claim allowable deductions under section 8-1 of the ITAA 1997 on the expenses incurred on interest on loan, fertilizer costs and the cost that are incurred in acquiring the native seeding since these expenses are incurred in running the business it is directly related to earnings of taxable income.
Reference List:
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Blakelock, Sarah, and Peter King. (2017) “Taxation law: The advance of ATO data matching.” 6-37: 18.
Cao, Liangyue, et al. (2015). “Understanding the economy-wide efficiency and incidence of major Australian taxes.” Canberra: Treasury working paper 2001.
Coleman, C., & Sadiq, K. (2013) Principles of taxation law.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Robin & Barkoczy Woellner (stephen & murphy, shirley et al.). Australian taxation law 2018. Oxford university Press, 2018.
Robin, H. Australian taxation law 2017. Oxford University Press, 2017.
Saad, Natrah. “Tax knowledge, tax complexity and tax compliance: Taxpayers’ view.” Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. “Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice.” International Small Business Journal 34.3 (2016): 329-344.
Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.
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