Issues
The current issue is related to the consequences of capital gains taxation under “section 104 of the ITAA 1997”?
According to the “section 102-5 of the ITAA 1997” a taxpayer is required to include in their assessable income the amount of capital gains made during the year (Barkoczy, 2018). To understand whether the taxpayer has made any capital gains or capital loss it is necessary to understand whether any CGT event has taken place to the taxpayer. Furthermore, it is necessary to understand whether the asset qualifies for the CGT asset. The taxpayer only makes the capital gains or losses that originates from the CGT event under “section 102-20” (Grange et al., 2014). Under “section 104-10 (1)” a CGT event A1 takes place when the taxpayer disposes the CGT asset.
As per “section 104-25 (1) of the ITAA 1997 a CGT” event C2 occurs when there is an end to the intangible asset. In other words, ownership of the intangible assets ends when the asset ends or expires (Jover-Ledesma, 2014). In respect to the goodwill, the ATO views that the CGT event C1 takes place when the business is ceased permanently. The taxation ruling of TR 1999/16 is applicable to the taxpayer that disposes the business goodwill or the interest in the goodwill under the “ITAA 1936” (Kenny et al., 2018). A business is ceased permanently as the outcome of voluntary act. It is noteworthy to denote that the business should be permanently ceased as temporary closure would not result in CGT event C1.
The court of law in “FC of T v Murry (1998)” has expressed its view on what constitutes the goodwill. Goodwill is regarded as the quality that is obtained from the other assets of the business (McCouat, 2018). The existence of goodwill is reliant on the proof that the business produces revenues from the asset, locations and techniques of the business. “Subsection 108-5 (2)” held that CGT asset must take into the account the goodwill. The court of law in “IRC v Muller & Co Margarine Ltd (1901)” held that the goodwill is dependent on character and the nature of business (Sadiq, 2018). A taxpayer is required to include in the taxable income the value of the net capital gains that is made from the sale of business goodwill.
The “taxation ruling of TR 1999/16” explains that restrictive covenants comprises of the agreement amid the vendor and the purchaser relating to the sale of business or any separate agreement that requires the vendors to not compete in the similar business (Sadiq et al., 2018). The “taxation ruling of TR 1999/16” explains that the covenants between the employee of the vendor and the purchaser relating to the agreement formed for selling the business based on which the employer agrees not to compete in the business or attract the business clients.
Payments that are received for relinquishing or restricting the rights are not regarded as income (Taylor et al., 2018). This includes the payments that is received for agreeing not to do something is not regarded as income. Citing the case of “Jarrold v Boustead (1964)” the court of law held that lump sum payment received by the rugby player for giving up the position of amateur were not regarded as income (Woellner et al., 2018). Similarly, the decision cited in “Dickenson V FC of T (1958)” held that the amount paid to the taxpayer of the petrol station for selling only the shell products for next ten years from the same petrol station and selling only shell products within the radius of 5 miles for the next five years will not be regarded as income (Woellner et al., 2018).
Laws
On noticing that a taxpayer enters into the restrictive covenants upon the sale of business, the restrict covenants represents the CGT assets that is created and vested to the purchaser in its own rights relating to the goodwill that is acquired by the purchaser. Under “section 104-35 (1)” receipts from such restrictive covenants are treated as “CGT event D1” (Caldwell, 2014). A CGT event D1 takes place when the taxpayer creates the contractual or the other legal right to another entity. As held in “Higgs v Olivier (1951)” the lump sum amount was paid to the actor that took the decision of not producing, directing or acting in another movie for a period of 18 months was not regarded as income (Douglas et al., 2016). The receipts in the preceding case was held as CGT event D1 since it created a contractual right of exclusive trade agreement.
For a taxpayer to obtain the main residence exemption the dwelling should qualify as the taxpayer main residence. Given the taxpayer owns multiple dwelling it is necessary to understand which forms the main residence for taxpayer and hence eligible for exemption (Morgan et al., 2015). Whether the dwelling forms the main residence of the taxpayer it is dependent on the matter of fact. The taxation commissioner views that the length of time a taxpayer has resided on the dwelling or the place where the family of the taxpayer resided (Pinto, 2013). As understood there are certain degree of physical occupancy that is necessary to establish the entitlement of the exemption.
“Section 118-110 (1) of the ITAA 1997” states that exemption is allowed to the taxpayer relating to the capital gains or losses that is originating from the CGT event. An exemption is only allowed where the CGT assets is dwelling and the taxpayer’s main residence all through the period of ownership (Miller & Oats, 2016). A partial main exemption might be applicable to a taxpayer. A taxpayer can obtain the partial exemption for the CGT event where the main residence formed a portion of the period of ownership.
As evident in the present case study it is noticed that Amber was the owner of a chocolate shop that she operated from Sydney. However, Amber following the birth of her child undertook the decision in 2018 of selling the shop for a sum of $440,000 out of which $280,000 was attributable to goodwill. The taxation ruling of “TR 1999/16” is applicable in the present situation of Amber. Referring to the decision of court in “FC of T v Murry (1998)” the goodwill formed the legal concept of Amber business (Kiprotich, 2016). With respect to “section 104-25 (1) of the ITAA 1997” a CGT event C1 occured when there was an end to the Amber business. The selling of shop gave rise to CGT event C1. The taxpayer entered into the contract that resulted in the end of asset. The existence of business and its goodwill is reliant on the proof that the Amber’s business produced revenues from the asset.
Capital gains and sale of business
Amber ceased the business permanently which signified the outcome of voluntary act. As the business of Amber was permanently ceased and sold it gave rise to CGT event C1. Citing the event of “IRC v Muller & Co Margarine Ltd (1901)” Amber is required to include in her taxable income the value of the net capital gains that is made from the sale of business and goodwill (James & Nobes, 2016). The capital gains amount obtained from the sale of chocolate shop will be held taxable under “section 104-10 (1)”.
In the later part of the case it is noted Amber was required to sign the contract that would restrict her from operating the identical business inside the 20km radius for the next five years. Upon entering the contract Amber received a sum of $50,000. The receipt of $50,000 would be regarded as CGT event D1. With reference to the “Jarrold v Boustead (1964)” the payment received by Amber for relinquishing or restricting the rights cannot be classified as income rather it amounted to CGT event D1.
Referring to the case of “Dickenson v FC of T (1958)” the payment that was received by Amber was in respect of the agreement of not doing business (Fleurbaey & Maniquet, 2015). The restrict covenants for Amber represents the CGT assets that is created and vested to the purchaser in its own rights relating to the goodwill that is acquired by the purchaser. Under “section 104-35 (1)” receipts of 50,000 by Amber from such restrictive covenants are treated as “CGT event D1”. The receipts in the case study of Amber should be held as CGT event D1 since it created a contractual right of exclusive trade agreement that stipulated her not to compete in the similar business.
In the later events it is noticed that Amber inherited an apartment from her Uncle during the month of October 2013. The property was bought by her Uncle in September 2013 and Amber lived in that apartment from October 2013. A contract of selling of the apartment was signed by Amber in May. However, the settlement for sale of residence took place in July 2018. For Amber the main residence exemption is applicable since the dwelling qualifies as the taxpayer main residence. Whether the dwelling forms the main residence for Amber it is dependent on the question of fact. The question of fact can be determined for Amber as the property was inherited from her Uncle and was used as the main residence when she moved into the apartment.
Citing the taxation commissioner views, the length of time Amber has resided on the dwelling or the place where the family of the taxpayer resided was considerably for five years. As understood from the situation of Amber reference to “section 118-110 (1)” can be made as there was the certain degree of physical dwelling on the residence throughout the period of ownership (Sikka, 2017). Amber in this aspect can obtain the partial main residence exemption since the apartment was used as her main residence from the time when she inherited from her Uncle. The property had dwelling on it and Amber lived in it. Therefore, with reference to “section 118-110 (1) of the ITAA 1997” the taxpayer can be entitled to partial exemption from the capital gains tax since the assets was dwelling and the taxpayer’s main residence all through the period of entire ownership.
Restrictive covenants
Conclusion:
On a conclusive note, the capital gains amount obtained by Amber from the sale of chocolate shop will be held taxable under “section 104-10 (1)”. While under “section 104-35 (1)” receipts of $50,000 from the restrictive covenants are treated as “CGT event D1” and cannot be regarded as income under ordinary concepts. The receipt created a contractual right of exclusive trade agreement. The sale of apartment by Apartment by Amber will be entitled to partial exemption from the capital gains tax since the assets had dwelling and the taxpayer’s main residence all through the period of ownership.
The present is based on determining the fringe benefit tax consequences of the taxpayer originating from the transactions reported by the taxpayer.
According to the “section 6-1 of the ITAA 1997” income from the personal exertion or the income derived from the personal exertion represents the income comprising of the earnings salaries, wages, commission, allowances, superannuation or any form of proceeds that is obtained by the taxpayer in respect to the service rendered. A receipt from the employment and offering personal services might be subjected to income tax for the purpose of the employee or fringe benefit tax for the employer (Robin, 2017). For a receipts to be classified as income there must be a nexus with the receipts originating from the taxpayer’s personal service.
The nexus is evidently established for the common items of personal services that includes the salary and wages, commissions or any form of ancillary payments that are within the incident of labour. “Section 6-5 of the ITAA 1997” defines that income based on the ordinary concepts is taxable under the “ITAA 1997” (Blakelock & King, 2017). Usually under “section 6-5 of the ITAA 1997” majority of the income that comes into the taxpayer is held as ordinary income. The legal meaning of the income is stated in the case of “Scott v Commissioner (1935)”. The commissioner held that income should be ascertained based on the ordinary concepts and use of mankind (Burton, 2017). An item of income nature is derived for the taxpayer when it comes-home. The court in “Dean v FC of T (1997)” held that retention payment that is made to the employees for agreeing to remain employed for the period of twelve months after the takeover were regarded as the income or remuneration from the employment.
A fringe benefit represents the payment to the employee but in the different form of the salary or wages. As per the legislation of fringe benefit tax, a fringe benefit represents the benefit that is provided in relation to the employment. This effectively means the benefit that is provided to someone due to the fact that they are employee. The car fringe benefit is defined under “subsection 136 (1) of the FBTAA 1986”. By virtue of the employment use of car by the employee constitutes benefit under the “subsection 136 (1) of the FBTAA 1986” (Fry, 2017). As per the fringe benefit tax legislation, the fringe benefit represents the benefit that is offered in respect of the employment.
Sale of property
A car fringe benefit usually originates when the employer provides the employee with the car for the private use or the employee (Taylor et al., 2018). An individual employee makes the private use of the car when it is usually used for the private purpose by the employee or the car is available for the personal use of the employee. The fringe benefit is regarded as the exempted income for the income tax purpose in the recipient’s hands.
Residual fringe benefit includes any kind of private, services or the facility that is provided to the employee in respect of the employment (Sadiq et al., 2018). A residual fringe benefit may comprise of providing services namely the travel or professional or the manual work or any use of property. As the general rule, the residual fringe benefit is regarded as benefit received when an employee is provided with the particular benefit over the period. The salary packages arrangement includes the total remuneration arrangement that an individual enters in the agreement with the employer.
A loan fringe benefit originates when the employer provides the loan fringe benefit to employee and charges lower amount of interest during the fringe benefit tax year (Kenny et al., 2018). A lower rate of interest is one that is less than the statutory rate of the interest rate. The taxable value of the loan fringe benefit represents the difference between the interests that would have been accrued during the fringe benefit year if the statutory interest has been applied in the understanding interest rate that is actually accrued.
As held in the case of “Moore v Griffiths (1972)” Mere winning from the prize is not held as the income (McCouat, 2018). However, it would be held as the income if there are sufficient connection is existent with the taxpayer’s revenue generating activities. As held in the case of “Kelly v FCT” the taxpayer received an award from the channel for being the best and fairest player (Sadiq, 2018). The amount would be regarded as the income since it was incidental to the work and employment and was related to the exercise of the skill. Similarly, in the case of “FC of T v Stone” the taxpayer was the policewomen and the javelin thrower that earned income through endorsement and prizes. The taxpayer was assessed for the carrying on the business of the professional athlete and the money was held as income.
The non-cash benefits might have an appropriate nexus with the personal service however it would not be held as the ordinary income if the same is non-convertible to cash. Citing the reference of the court decision in “Payne v FCT (1996)” redemption of the frequent flyer points that was accrued from the work-related travel would be held as the income (James, 2014). While the non-cash benefits will be considered taxable under the “section 15-2 of the ITAA 1997” or might be subjected to fringe benefit tax.
Usually when the expenditure has been occurred by the employee for the employer and the expenses are subsequently reimbursed by the employer, it gives rise to the expense payment fringe benefit (Barkoczy, 2018). The taxable value of the expense fringe benefit is the amount that is reimbursed or paid. If the employee occurred an expenditure entirely for the purpose of performing the employment related duties, the expenditure would be entirely held deductible for the income tax purpose. Usually, where the expenses have been incurred by the employee for the employer while the payment of such benefit results in the arise of fringe benefit.
Main residence exemption
The present case study is based on determining the fringe benefit tax consequences for Jamie who worked as the agent for Houses R Us, a real estate company. As the part of the employment contract Jamie was provided with the salary of $50,000. With respect to “section 6-1 of the ITAA 1997” the receipt of salary represents income from the personal exertion. The receipt of $50,000 from the employment represents the income from the personal services which is subjected to income tax.
Under “section 6-5 of the ITAA 1997” the salary would be held as ordinary income under the ordinary concepts (Burton, 2017). Referring to the case of “Scott v Commissioner (1935)” receipts of salary should be held as income based on the ordinary concepts of the “ITAA 1997”. Citing the case of “Dean v FC of T (1997)” the salary received will be held as remuneration from the employment.
In the later instances of the case it is noticed that Jamie is provided with the car by his employer for the use of both the private and work purpose. By virtue of the employment use of car by Jamie it constitutes benefit under the “subsection 136 (1) of the FBTAA 1986” (James & Nobes, 2016). The car fringe benefit represents the benefit that is offered in respect of the employment. The use of the car represents the private use by Jamie both within and outside the working hours of the weekends.
In the subsequent year it is noticed Jamie was provided with the salary package that included the laptop at a cost of $2,300 and also the mobile phone costing an amount of $1,200 every year. The employer also reimbursed an amount of $550 and also provided the entertainment allowance to Jamie. In the present situation of Jamie the expenses have been incurred by the employee for his employer House R Us while the payment of such benefit by the employer results in arising of fringe benefit. Therefore, Jamie would be held liable for fringe benefit taxation under “FBTAA 1986”.
Jamie later received the prize of $4,800 for achieving the highest sales in the last six months. As the reward for his service his was rewarded with home entertainment system for a sum of $4,800. Citing the case of “Kelly v FCT” the home theatre system of worth $4,800 would be regarded as non-cash benefit that can be convertible to cash (Sikka, 2017). The amount would be regarded as the income since it was incidental to the work and employment. The sum of $4,800 constitute a reward for his employment service. The receipts would be held as the income since sufficient connection is existent with Jamie’s revenue generating activities.
As understood from the case facts obtained Houses R Us provide their staff with a sum of $100,000 for purchasing their own house at the rate of 4% per year. Jamie is found to be interested in the offer of taking up the loan. A loan fringe benefit would arise for Jamie while the interest rate that is charged by his employer is lesser than the statutory rate of interest or the benchmark interest rate. If Jamie considers to take up the loan offer, a loan fringe benefit would originate since his employer provides the loan fringe benefit by charging less amount of interest during the fringe benefit tax year (Blakelock & King, 2017). Furthermore if Jamie considers to take the loan from his employer, the taxable value of the loan fringe benefit would represents the difference between the interests that would have been accrued to Jamie during the fringe benefit year if the statutory interest has been applied.
Conclusion:
On a conclusive note the salary that is received by Jamie will be considered taxable under the ordinary meaning of the “section 6-5 of the ITAA 1997”. While the use of car by Jamie constitutes fringe benefit under the “subsection 136 (1) of the FBTAA 1986”. Additionally, the sum of $4,800 constitute a reward for his employment service and would be held as the income since there are sufficient connection is existent with the Jamie’s revenue generating activities. Therefore, Jamie will be held taxable for the expense payment fringe benefit as his employee reimburses the expenses that is occurred.
References
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Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, 37(6), 18.
Burton, M. (2017). A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. J. Austl. Tax’n, 19, 50.
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