Issue
Discuss about the Taxation Consequences For ABC Sports Pty Ltd.
The current issue surrounding the case will be ascertaining the taxation consequences for ABC Sports Pty Ltd and his employee John. The issue surrounding the case will be addressing the transactions occurred by the taxpayer during the accounting year and would understand whether same will be held taxable or a deduction for the same can be claimed.
- “Scott v Commissioner of Taxation (1935)”
- “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)”
- “Federal Commissioner of Taxation v Wiener (1978)”
- “Higgs v Oliver”
- “J & G Knowles v Federal Commissioner of Taxation (2000)”
- “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)”
- “Toyama Pty Ltd v Landmark Building Developments Pty Ltd”
- “Marana Holdings Pty Ltd v Commissioner of Taxation (2004)”
Considering the definition of “subsection 6-5 (2) of the ITAA 1997” any amount earned by the taxpayer constitute income based on the ordinary meaning given the amount that is derived by the taxpayer is either from the direct or indirect sources during the year of income (Schenk 2017). A sum that is obtained by the taxpayer relating to the cessation of deal or of an agreement through the progression of trade is generally held as revenue given the sum that is substituted would have been held as income. If the cessation of an agreement results in significant effect on the structure of trade or leads to a extensive loss of business then the compensation sum is held as capital receipt.
Denoting from the circumstances of the ABC Sports Pty Ltd it is understood that the company received a termination payment from one of suppliers that accounted 40% of the business of the ABC Sports Pty Ltd. Evidences obtained from the situation of ABC Sports Pty Ltd explains that the company soon found a new supplier and there was hardly any noteworthy influence on the profitability of the business. The cessation of an agreement has not resulted in noteworthy effect on profits of the company although the sales were slightly on the lower side.
An important factor to denote is that the agreement between the supplier and the ABC Sports Pty Ltd does not comprised of whole business. Referring to the judgement in “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)” the taxpayer obtained a contract with the oil company to sale petroleum goods (Samansky and Smith 2017). However, based on mutual consent the contract between the taxpayer and the supplier was ended and the supplier compensated the taxpayer with lump sum that was to be paid in instalments. The amount that was obtained by the taxpayer was not calculated by referring to the earnings that was lost indeed the court verdict stated that compensation amount received was capital. Denoting the judgement of the court of law in the existing state of affairs of ABC Sports Pty Ltd, the compensatory sum that was received is regarded as the recoupment of loss based on “section 20-20 (2)” (Bankman et al. 2017). Conclusively, in accordance with the ordinary concept of “section 6-5 of the ITAA 1997”, the compensation sum of $200,000 will be included in the taxable income of the taxpayer.
Laws
Referring to “section 8-1 of the ITAA 1997” a person can from their taxable income claim deductions for expenditure that is occurred in deriving the taxable income only to the degree that the outgoings are incurred in deriving the assessable earnings of the taxpayer (McDaniel 2017). An individual taxpayer is permitted for allowable deductions given the outgoings or losses incurred is in the direction of earning taxable earnings. Denoting from the current circumstances of John, he reported an expenses on travelling to conduct a market research for ABC Sports Pty Ltd. The expenses of travelling reported by John is occurred in assessing the market and the in due course of his employment. It can be stated that the travelling expenses of John carries adequate association amid either of the positive limbs.
Referring to “section 25-100 of the ITAA 1997” an entitlement for deductions is allowed to a taxpayer given the cost of travelling is occurred amid two work places and none of this is home for the taxpayer (Oishi, Kushlev and Schimmack 2018). The judgement in “Federal Commissioner of Taxation v Wiener (1978)” held that the taxpayer would be allowed for deductions relating to the cost that is incurred in travelling between two work places. John travelling cost is occurred during his employment and a deductions is allowed under “section 8-1 of the ITAA 1997”.
In the later part of the case study ABC Sports Pty Ltd occurs a cost relating to relocating some of his stores. A sum of $125,000 was occurred for moving the stores to Brisbane. It is understood that under “section 8-1 of the ITAA 1997” deductions is only allowed for outgoings or losses that is incurred in producing the taxable earnings however deductions a taxpayer is prohibited from claiming deductions that are capital or private expenditure (Schenk 2017). Expenses associated to alteration or extension of the present facilities of the taxpayer, these payments are regarded as capital expenditure because it is associated with the profit making venture of the taxpayer.
Denoting the judgement in “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” a deduction was disallowed for the cost of moving the plant and equipment to the new premises (Murphy and Higgins 2016). This is because the expense were capital and allied with the profit making venture of the taxpayer. In the situation of ABC Sports Pty Ltd expenses relating to the relocation of some of its stores to Brisbane is non-deductible capital expenditure and no deductions will be allowed under section 8-1 of the ITAA 1997.
Application
As defined under “section 6-1 of the ITAA 1997” income that is earned from the personal exertion such as income from salaries, wages, fees, commissions or proceeds from business carried on is included in the taxable income of the taxpayer. Furthermore, “section 6-5 of the ITAA 1997” explains that a large portion of the revenue that is derived by the taxpayer is regarded as ordinary income (Schmalbeck, Zelenak and Lawsky 2015). The court of law in “Scott v Commissioner of Taxation (1935)” clarified that the revenue should be held in accordance with the ordinary meaning and usage to the mankind. John earned a salary and a superannuation contribution from his employer ABC Sports Pty Ltd (Burke 2016). The receipt of salary income and the superannuation contribution is held as income based on ordinary concept under “section 6-5 of the ITAA 1997”.
As per “Section 136 (1) of the FBTAA 1986” the definition of benefit constitutes any form of right or amenities that given to the employee by the employer relating to course of employment (Hudson, Lind and Yamamoto 2016). Similarly, ABC Sports Pty Ltd paid the school fees of John son’s that amounted to $20,000. As per the Australian taxation office an employer is subjected to fringe benefit taxation relating the benefit given to the employee during the employment course. According to “Section 65 (a) (ii) of the FBTAA 1986” the employer qualifies for the reduced taxation if the benefit is based on the full time education of the employee’s child.
According to the judgement in “J & G Knowles v Federal Commissioner of Taxation (2000)” it was stated that the expression “in respect of” barely has any static significance (Simmons et al. 2017). The court in its verdict stated that there must be a satisfactory factual relation amongst the benefit provided and service. The expenses for John son’s school fees paid by the ABC Sports Pty Ltd was in respect of full time education and has adequate material association. The ABC Sports Pty Ltd, the expenses is in full time work of John and ABC Sports Pty Ltd is liable for reduced taxation under “section 65 of the FBTAA 1986”.
As specified under “section 7 (1) of the FBTAA 1986” the car fringe benefit results when the employer provides an employee with the car for his private use. According to “Section 136 of the FBTAA 1986” the private usage represents the usage of car by the employee that is not in the sequence of employment (McNulty and McCouch 2015). Any private use made by the employee is disregarded from assessable income while the business use of the car constitute fringe benefit that is in respect of work. As evident John was provided with the car by ABC Sports Pty Ltd which results in fringe benefit based on “section 7 (1) of the FBTAA 1986”.
According to “section 58 Y (2) of the FBTAA 1986” an exemption is provided from the fringe benefit when an expense relating to membership or subscription fees is paid by the employer (Barkoczy 2014). Understandably in the condition of John, a membership fees was waged by his company ABC Sports Pty Ltd. Consequently, the membership fees paid by ABC Sports Pty will be held as exempt benefit under “section 58 Y (2) of the FBTAA 1986”
According to “subdivision 108-C” the use of a personal asset institutes a non- collectable utilization of asset. These are primarily held for individual amusement and named as boat, fittings or other house hold products. Under “section 108-20 (2)” this is also containing the option for acquiring the asset which was used for personal enjoyment or usages (Brokelind 2014). The basic cost for that asset does not contain the cost of association for the owner, and this is named as interest. “Section 118-10 (3)” elaborates that any version of capital gain is overlooked whenever an individual uses an asset for personal reasons and acquires $10,000 or less amount. Therefore, this is clear that the person who using the asset for personal usages they need to keep all the details from purchase to basic daily uses as they are acquiring more than or $10,000 from that asset (Coleman and Sadiq 2013). According to this evident from the current scenario of John, he procured a Yacht at a cost of $500,000 and incurs an installation cost of $600,000. He also kept one horse which was used for entertainment purposes during the equestrienne. John even sold that horse for $30,000 which was his capital gain.
As stated in “section 110-25” the basic price of the asset involves the capital outlay which is made for increasing or preserving the worth of that particular asset. The expense of $600,000 for fitting a new mast in yacht would be considered from the part of the basic cost involved for the asset (Eliot 2016). The expenses involved by John are for improving the valuation of asset. He frequently used the yacht for competing which caused “CGT event D1” occurred under “section (104-35) (1)” for john. Henceforth, the sale of Yacht established a CGT event for involving the individual utilization of asset that was disposed as the set and also that held as single CGT asset. This asset has given around $10,000 threshold during this period.
Section 108-20 (1) highlights that at the moment of vending the private usage of the asset relating to loss the taxpayer is not eligible for any tax offset for the loss in contradiction of the capital gains. According to the circumstance of “Higgs v Oliver” the taxpayer made capital gains from the deal of “CGT event D1” (Grange et al. 2014). The law court detained that the “CGT event D1” cannot be regarded as discount capital gain under “section 115-25 (3)”.
From the apparent existing condition of John he bought a boat in 2008 for $12,000 but this was utilized for entertaining purpose. In the later years, the boat was sold by him at $8,000 which involved a loss of $4,000. Mentioning to “section 108-20 (1)” John is not permitted to set-off the loss involved within the deal. These losses are to be ignored in this case.
“Subdivision 108-B” states that the collectable assets are held in reserve mainly for individual usages or enjoyments (James 2014). According to the evident from this case, John had an antique table which he bought for $12,000 in 2006 but presented to his mother. At this time the market worth for this table was around $18,000. Henceforth, this should not involve any CGT event as no CGT event happened.
The “taxation ruling of GSTR 2012/15” states about the goods and service tax penalty of the housing properties. This particular ruling considers the use of “subdivision 40-B and Subdivision 40-C of the new tax system under the GST 1999” that relates the supplies to the housing properties (Kenny 2013). Rendering to “section 40-65 of the GST Act 1999”, this highlights that the sales of the housing properties does cannot be considered GST as the housing property is used completely for the housing accommodations.
Apparent from the state of affairs of John, he bought the house for an amount of $300,000 and devoted stay at the asset. Nevertheless, in the year of 2014 the land-dwelling was rezoned for the housing reason. The choice of selling the possessions was undertaken by John himself. Originally he decided to split the land but later he changed his mind and sold asset to a property developer at $3,000,000.
On selling the asset the deliberations must be made if the sale of the possessions would lay open to GST or not. This sale of housing possessions is highlighted as input taxed and did not accounted for GST as the property was totally used for housing purpose.
“Section 40-65 of the GST Act 1999” highlights that the sale of the actual property is taken as a consideration for input tax nevertheless only up to some limit as the property is considered as the housing accommodation. The high court in “Toyama Pty Ltd v Landmark Building Developments Pty Ltd” the court of law held that the word predominantly should be used for housing accommodations and this highlights that the buyer was ready to use this property for personal usages (Krever 2013). “Section 195-1 of the GST Act 1999” outlines residential properties as the set of land that is considered for housing accommodations.
The law court in “Marana Holdings Pty Ltd v Commissioner of Taxation (2004) ALR 190” held that the sell-out of strata title housing asset which was created from motel was under GST (James 2014). The law court highlighted that the word “residential premises” is pursuant to “section 40-75 of the GST Act”. This involves also the input tax credit. Likewise, the case of the sale of the house by John to the property developer will be held as the input taxed supply under “section 40-65 of the GST Act 1999”.
“Section 26-5 of the ITAA 1997” states that an separate taxpayer is not eligible for claiming any deductions related to the consequences those are imposed on the considerations of breach of Australian law. This comprises of trade penalties for breaking the laws. As apparent in the current condition of ABC Sports Pty Ltd the fines incurred for breaching the trade practice act which constitutes fines as they breached the Australian laws. In pursuant to “section 26-5 of the ITAA 1997” ABC Sports Pty Ltd would not be eligible for claiming the deductions in this regard.
Conclusion:
The case study can be concluded by stating that ABC Sports Pty Ltd will be considered taxable for the compensation receipts from the cessation of agreement. The company would not be permitted to entitlement for permissible deductions involving the relocation cost since the expenses were capital in nature. A reduced tax liability will be payable by ABC Sports Pty Ltd relating to the fringe benefit provided to John. Conversely John will be held taxable for the salary income and superannuation contribution as they constitute income individual exertion. While the sale of residential house amounts to input tax.
Reference List:
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Barkoczy, S. 2014. Foundations of taxation law.
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Eliot, G. 2016. The mill on the Floss. New York: Open Road Integrated Media.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. principles of business taxation.
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Samansky, A.J. and Smith, J.C., 2017. Federal Taxation of Real Estate. Law Journal Press.
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Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.
Simmons, D.L., McMahon, M.J., Borden, B.T. and Ventry, D.J., 2017. Federal Income Taxation. Foundation Press.
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