Assessment of Liability and Treatment of Expenditure
Advise ABC Sport and John on the taxation issues arising from the above fact situation.
The issue that the case has presented before us is in respect of the ABC Sports Pty. Ltd and John. For the evolvement of the issue, assessment of the liability then the treatment of the expenditure incurred during the course of business will be undertaken. The issues are provided below:
- The first issue is to determine whether the compensation received for the termination of contract is in the nature of capital.
- The second issue is to determine the general deductions available to ABC sports and John.
- The determination of the taxable of each fringe benefit is the third issue.
- The forth issue is to determine the capital gain arising under section 108 of the Income Tax Assessment Act 1997.
- Rule 1: The compensation that is received for the breach of contract is an income as it is a compensation for the loss of assets of the business.
- Rule 2: The general provision and specific deduction under section 8-1 of the act.
- Rule 3: The salary and remuneration is excluded from the computation of the fringe benefit under section 136(1) FBTAA. The external expenses payment Fringe Benefit under section 23 FBTAA.
- Rule 4: The capital gain or loss on sale of assets under section 108 of the ITAA 97.
- “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)”
- “Federal Commissioner of Taxation v Wiener (1978)”
- “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)”
- “Scott v Commissioner of Taxation (1935)”
- “J & G Knowles v Federal Commissioner of Taxation (2000)”
- “Higgs v Oliver”
- “Toyama Pty Ltd v Landmark Building Developments Pty Ltd”
- “Marana Holdings Pty Ltd v Commissioner of Taxation (2004)”
As per the provisions of the section 6-5(2) of the IOTA 1997 any amount that is received by a resident tax payer for the tax year whether directly and indirectly and from any sources is termed as ordinary income. If an amount is received by taxpayer due to the changes made in, the agreement previously entered into by the taxpayer or due to the cancellation of the agreement all together, will be held as an income that has accrued in his respect (Burkhauseret al. 2015). The reason for this is that it is assumed that had the agreement been carried out successfully the taxpayer would have been able to receive a certain sum of money. However if the cancellation of the agreement or the modification made to the agreement leads to substantial loss of a portion of the business or impacts the very framework of the business, then the amount that is received by the taxpayer will be considered as capital in nature.
Hence, if the provisions of the tax laws are to be followed then the compensation that is to be received from the distributor because of the cancellation of the contract and amounts to around 40% of the sporting goods held by ABC Sports Pty. Ltd. is to be held as an income. As per the given circumstances, it is seen that the firm was able to find another supplier and the cancellation of the contract did not harm the profitability of the firm to a substantial extent (Lederman 2015). The cancellation of the agreement only led to marginal drop in the sales revenue of the entity.
The whole business of the tax payer i.e. ABC Sports Pty. Ltd. is not represented by the agreement that had been entered into by the taxpayer and the supplier. The reference of this can be found in the case of “Californian Oil Products Ltd. vs. Federal Commissioner of Taxation. (1934)”. In this case, the taxpayer agreed to be an agent of the company based in the number of the agreement for selling of oil products. Ultimately, the taxpayer was able to receive the capital payment due to the cancellation of the contract based on mutual agreement. Even though the amount was to be paid in instalments, the amount was not being calculated based on the lost earnings (Saad 2014). It was held by the court that the amount received would be considered to be of capital nature. Hence the provisions of the section 20-20(2)” will be applicable in the case of the ABC Sports Pty. Ltd and the compensation received by it will be considered as recoupment of loss. Hence, as per the provisions of the section 6-5 of the IOTA 1997 the sum of 200000 received will have to be considered as taxable income as per ordinary concepts.
Cancellation of Contract and Income Tax
An individual is allowed to claim deductions in respect of such expenditure that have been incurred for the purpose of generating and producing taxable income in his behalf. These are the guidelines as laid down in the provisions of the section 8-1 of the ITAA 1997. The focus of the provisions is that only that expenditure will be considered as deduction, which has been incurred for carrying on the business for the generation of the taxable income. In the present case for carrying out market research, John incurred expenditure (Braithwaite 2017). It is established that the expenditure incurred by him was in respect of carrying on the business successfully. In addition to that it can be concluded that the expenditure incurred by him do hold sufficient nexus between the outgoings and the positive limbs.
As per the provisions of the section, 25-100 of the ITAA 1997 an individual is allowed to claim deduction nine respect of travel related expenditure, which he undertakes between two places of work and neither of them being his home. In the case of Federal commissioner of Taxation vs. Weiner (1978) it was decided by the court of law that the taxpayer must be allowed deduction in respect of the expenditure incurred by him for travelling between two places of work as neither of them were his home (Fry 2017). Hence as per provisions of the section 8-1 of the ITAA 1997 John will be allowed deduction in respect of the travelling expenditure incurred by him for carrying out his employment.
As per the evidences received, in respect of some of the stores owned by ABC Sports Pty. Ltd in Brisbane the company had to incur some expenditure for relocating them. A total of $125000 was spent by the firm for relocating them. An individual or entity is allowed deduction in respect of the expenditure incurred for producing the assessable income or for the purpose of execution of the business (King 2016). The only stipulation to this is that no deduction shall be allowed if the expenditure so incurred is of private or personal in nature. These are the provisions of section Section 8-1 of the ITAA of 1997. The capital expenditure includes any expenditure that is incurred for extending the current business facility of the taxpayer or for increasing the current profitability of the business.
The court of law denied the taxpayer deduction in respect of the amount incurred for the purpose of preparing the new premises and moving the plant and machinery in the case of Sun Newspaper Ltd vs. Federal commissioner of taxation (1938). The reason for denying deduction in respect of this expenditure was that, they were considered to be of capital nature by the court of law (Jameset al. 2015). Hence, in the case of ABC Sports Pty. Ltd. the expenditure incurred by it amounting to $125000 in respect of relocating the premises of the stores in Brisbane was being held as capital in nature.
Business Expenditure and Income Tax Deductions
All the income that is derived from conducting a personal exertion in the way of earnings, salaries, wages, commission fees, superannuation, pension, or proceeds from the business will be held as personal income under the provisions fo the section 6-1 of the ITAA 1997. It is stated in the provisions of the section 6-5 of the ITAA 1997 that most part of the income that is being derived by the taxpayer will be considered as income from ordinary concept. The determination of the terms must be undertaken based ordinary concept and the use of the terms my normal people of the country.
Accordingly, the sum that is derived by an individual from a personal exertion will be added up in his assessable income either by the way of statutory income or by way of ordinary income (McGregor-Lowndes and Williamson 2018). It is very evident from the provisions FO the sections that the superannuation and the salary received by John is due to his personal exertion and hence the same would constitute income from personal exertion. Hence as per the provisions of the section 6-5 of the ITAA 1997 the income arising out of it would be considered as income as per the ordinary concepts.
The definition or the explanation of the term benefit is being laid out in the section 136 (1) of FETA1986. Under the provisions of this section the term benefit, include any sort of right, privilege or services that is being provided to the performance who is charged with performance of certain kind of work. In the present case the school fees of John’s son was paid by him. The fees paid amounted to $20000. If the employee is providing certain kind of benefits to the employee other than the salary provided to him then he is liable to pay fringe benefit tax to the employee (Morris 2018). The regulations have been passed by the Australian Taxation Office. The only time deduction can be allowed in respect of the fringe benefits provided by the employer to the employee is that when the recipient utilises the benefit for the purpose of the education of his child. These are the guidelines of the provisions of the section (a) (ii) of the FBTAA 1986.
It was held by the court that the term “in respect of” does not possess any fixed relevance in the case of “JAG Knowles v Federal Commissioner of Taxation (2000)”. It was established by its decision that there should be significant and material association between the benefit and the employment. In the present case, it can be concluded that the expenditure provided in respect of the child fees by the ABC Sports Pty. Ltd. to John in respect of the education of his child has material and significant association with the full education of his child (Dattet al. 2017).
Travelling Expenditure and Income Tax Deductions
In the present case, the benefit is given to John in return of his full time employment with the company. Hence ABC Sports Pty. Ltd. is eligible for the reduction in respect of the amount paid as fringe benefits to its employees. This deception will be received by the company under the provisions of the section 65 of the FBTAA 1986. As per the provision of the section 7(1) of the FBTAA 1986, the definition of the fringe benefit in respect of the car originates when a car is being offered by an employer to the employee in for the purpose of his personal use (Walters and Zeller 2017). For the purpose of defining pirate, use the provisions of the section 136 of the FBTAA 1986 state that any use made out of the car that is not in relation of the generation of income will be termed as private use. As the business, use of the car of the employee will be allowed as deduction whereas the personal use of the car will not be allowed as deduction because it is the nature of private use. Under the provisions of the section 7 of the FBTAA 1986, the receipt of car constitutes private use by John of the car that had been provided to him by ABC Sports Pty. Ltd.
The benefit given to the employee in respect of membership fees or subscriptions is exempted from fringe benefit tax as per the provisions of the section 58 Y (2) of the FBTAA 1986. This will be exempted irrespective of the whether it has been paid directly by the employer or it has been reimbursed by him to the employee (McLaren 2015). As per the present case, it is seen that ABC Sports Pty. Ltd. paid for the subscription taken by John of professional Journals from CPA Australia. Hence as per the provisions of the section 58 Y (2) of the FBTAA 1986, the expenses incurred by the company in this respect will be exempt from the fringe benefit taxes.
As per the provisions of the subdivision 108-C a non-collectable use of the asset that are big primarily held for the purpose of personal enjoyment like the boat, furniture or household items constitute the personal use of the asset. Further as per the provisions of the subdivision 108-C consists of the option or the right to use the asset that had been kept solely for the purpose of personal use and enjoyment (Kim and Gerber 2018). The cost base of the assets cannot be said to contain the costs associated with the ownership of the asset for instance costs such as interests. In case of any capital gain arising out of an asset which was acquired for less than $10000, then the entire amount of the capital gain will be disregarded as per the provisions fo the section 118-10(3). Further, the taxpayer is required to keep detailed records in respect of the assets that have been acquired by him for more than $10000. In the presentcare, Joh undertook the purchase of a yacht, which was worth around $500000 and in addition to that incurred an installation cost of $600000. He also incurred expenses for acquiring a horse that was to be used by him for personal purposes in the equestrian events. John was able to sell the horse for $30000, and in this respect earned a capital gain too (Hodgson and Pearce 2015).
Relocating Expenditure and Capital Nature
As per the provisions of the “section 110-25”, the cost of the asset just includes the capital expenditure that has been incurred in its respect for the purpose of increasing or preserving the value of the asset. Hence, as per the provisions of this section the expenditure incurred for the purpose of installation amounting to $600000 will definitely form the part of the asset. The reason being that the expenditure has been incurred by John for increasing the value of the asset (Katic and Leigh 2016). As per the provisions of the section (104-35) (1) CGT event occurred in respect of John because of the fact that the Yacht was used by him for the purpose of racing and he got involved in sport between Sydney to Hobart. Hence, the sale of the yacht by John will be considered as a CGT event as this related to the personal use of the asset. In addition, the asset had been disposed of as a set and in addition to that, the set had been held by John as a single CGT asset that is being related to the purpose of determining the $10000 threshold (Sawyer 2015).
As per the provisions of the section 108-20(1) the loss incurred by the taxpayer in respect of personal use of the asset is not allowed to be deducted against the capital gains of the taxpayer. It was held by the court of law that the CGT event D1 at no cost can be factored in as a discount towards the capital gain under “section 115-25 (3)”.
Conclusion:
In conclusion, the compensatory receipts in respect of the ABC Sports Pty. Ltd will be assessed and relocation expenditure incurred by the concern, being a non-deductible expenditure under the provisions of the tax law will not be allowed as deduction. For the FBT expenses incurred by John as school fess and subscription, charges for his child will be deductible and the same would reduce the tax liability of the firm. In respect of the expenditure incurred by John for going on a personal exertion by arranging funds by selling of the residential house will be held liable for tax.
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