Issue
Advise ABC Sport and John on the taxation issues arising from the above fact situation. Reference should be made to appropriate legislation, case law and rulings.
The considered issue is based on the purpose of the tax consequences of ABC Sports Pty Ltd and John. The considered issue should be considering the measure ability of receipts and deductibility of the expenses involved during the dealing and course related to employment.
- “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 “subsection 6-5 (2) of the ITAA 1997” this can be stated that amount which is received by the resident taxpayer comprises of regular income (Barkoczy, 2014). Now this ordinary income can be a part of the direct or indirectly derived income from different sources during the income year. A sum which is received by the taxpayer for the termination of contract or dissimilarity of the contract or an agreement which is made during the business process is generally considered as an income for the business process. On the other hand, if the termination of the contract rules or disparity generates an impact on the structure of the business or creates any substantial portion of the business to lose its position and power then the pay which was received will be considered as the capital in nature.
The contemporary situation of ABC Sports Pty Ltd set down that the compensation received on the termination of the rules of the contract, and then it is declared that 40% of the sporting goods of ABC Ltd should be considered as the quantifiable income for the company. The events of ABC Sports Pty Ltd states that the company was able to discover another supplier and this can be measured that the contract did not bring any profitable income to the company (Brokelind, 2014). The cancellation of contract is supposed to have not made a considerable impact on the profitable income for the ABC Sports Pty Ltd though it should be marginally related to the sales revenues.
The agreement between the ABC Sports Pty Ltd and the contractor does not reflects the whole business which was developed by the taxpayer. According to the case of “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)” the taxpayer will be selected as an agent of the oil company based on the number of agreement decided. Upon the communal permission the contract was terminated by the company and the taxpayer will receive the capital payment (Coleman & Sadiq, 2013). The amount was not recorded with respect to the lost earning, however this amount needs to be paid in instalments. According to the court of law the amount collected was capital. Now according to the evident from the current condition of BC Sports Pty Ltd this can be highlighted that the receipt of recompense constituted a recoupment related to the loss according to the “section 20-20 (2)”. Consequently, the amount of 200,000 will be taken as taxable income depending on the common concepts of “section 6-5 of the ITAA 1997”.
Laws
As stated in “section 8-1 of the ITAA 1997” an individual is always endorsed for claiming the deductions related to their assessable revenue and this is dependent on the amount they produce as taxable revenues with respect of their earning extent (Grange et al., 2014). The taxpayer is endorsed for claiming the deductions if the expenditure is caused for needful reasons during the development of the business while gaining the taxable revenues. According to the evident from the situation of John, a travelling expense involved for carrying out the market research process. This expense now included for inspecting the market which is highlighted as the gaining of taxable revenue. The expenditure included by John identified as sufficient nexus in between positive limbs and outgoings.
According to the evident from the parliamentary responses of “section 25-100 of the ITAA 1997” an individual is endorsed for claiming the allowable deductions related to the travelling expense between the place of work and the taxpayer’s home itself. Acceding to the case of “Federal Commissioner of Taxation v Wiener (1978)” the court is endorsed the taxpayer travelling expense between their work place and home (James, 2015). Likewise, the expense involve in travelling by John for the purpose of employment and this will be allowed for deductions to the taxpayer according to the “section 8-1 of the ITAA 1997”.
Now from the evidences obtained in the case study advised that the ABC Sports Pty Ltd involved expenses for relocating few of their stores to Brisbane. The company incurred an amount of $125,000 for this relocation. “Section 8-1 of the ITAA 1997” permits deductions for the outgoings and this is limited up to the amount which was used for gaining the assessable income while developing the entire business process (Kenny, 2013). These incomes are capital or private in nature.
The court of law regards to the case of “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” the court starved of the taxpayer with deductions relating of the expenses involved for constructing the new premises and relocating the plant with all the equipment’s in case of ABC Sports Pty Ltd (Krever, 2013). The cost involved in this process considered as the capital expense and the taxpayer should not be endorsed for claiming allowable deductions related to this kind of expenditure of $125,000.
“Section 6-1 of the ITAA 1997” stated that the income gained from the personal hard work or the income gained from the salaries, earning or wages related to personal hard work generally considered as the taxable incomes (Morgan et al., 2013). According to the Section 6-5 of the ITAA 1997, most of the income from the taxpayer will be considered as the common income according to common concepts. Now according to the case of “Scott v Commissioner of Taxation (1935)” the term income must be judged in terms of the common concepts and utilization of mankind.
Applications
Ideally an amount that is received by the taxpayer is held as the income obtained from personal exertion and it is held assessable based on either statutory or ordinary concepts (Murphy & Higgins, 2016). Similarly in the situation of John the receipt of salary and superannuation contribution is held assessable as income obtained from personal exertion. The amount of $125,000 is held taxable under “section 6-5 of the ITAA 1997”.
As stated under “Section 136 (1) of the FBTAA 1986” benefits comprise of rights or privilege that is offered relating to the performance of work. Evidently, it is noticed that ABC Pty Ltd has paid the school fees of John son’s. As stated by the Australian taxation office, the employers are under the obligations of paying the FBT tax if the employees render services in respect of the employment (Pope et al., 2017). Referring to the “Section 65 (a)(ii) of the FBTAA 1986” in order qualify for reducing the tax liability of the expenses that are paid as fringe benefit the recipient of the such benefit must be in accordance with the full time educations of the employee’s child.
Decision handed by court in “J & G Knowles v Federal Commissioner of Taxation (2000)” explains that expression “in respect of” hardly has any form of fixed significance (Woellner, 2013). The decision of the court held that there must be a relation between the employment and benefit. The expenses related to fringe benefit that is provided by the ABC Sports Ltd is during the course of his employment and the expenses holds adequate relation with John’s son. ABC Sports Pty Ltd would be able allowed to claim an allowable deductions relating to the fringe benefit provided to his employee.
As defined under the “section 7 (1) of the FBTAA 1986” car fringe benefit constitutes when the employer provides the employee with car for their personal use. According to “Section 136 of the FBTAA 1986” private use refers to the use of car that is not directed towards the derivation of assessable income (Woellner et al., 2014). Any form of private use of made by the employee that is not in the direction of derivation of taxable income and the expenses incurred are not allowed for deductions. With reference to “section 7 of the FBTAA 1986” the car provided by ABC Sports Pty Ltd to John is held as fringe benefit.
Referring to section “section 58 Y (2) of the FBTAA 1986” subscription and membership fees that are paid by the employer is an exempted fringe benefit (Robin & Barkoczy 2018). The membership fees was paid by the employer that for John’s subscription to professional journal is an exempted benefit. According to the “subdivision 108-C” personal use of the assets represents the non-collectible use of the assets which is held for private enjoyment. This includes furniture, boat and household items.
Referring to “section 108-20 (2)” collectibles also represents the options or right which is held for private enjoyment (Robin, 2017). Referring to “Section 118-10 (3)” an individual deriving capital gains from the personal use assets that has the cost base of less than $10,000 should be disregarded. A taxpayer is under obligation of preserving the details of purchase of personal use assets given the cost base of the asset exceeds $10,000. Denoting the situation of John, the cost of the Yacht that was purchase stood $500,000 and further incurs an installation cost of $600,000. A horse was also held by John that was used for recreational or hobby purpose in the equestrienne events and represented a personal use asset.
As defined under the “section 110-25” the assets cost base also includes the capital expenses that are made by the taxpayer to improve or guard the value of asset. As evident the expenses of $600,000 for installing a new Mast in the Yacht should be included into the assets cost base (Blakelock, & King, 2017). The installation expenses reported by John is an improvement to the value of asset. Later instances suggest Yacht was used for racing purpose and consequently this resulted in “CGT event D1” under “section 104-35 (1) of the ITAA 1997”. Furthermore, the sale of Yacht by John represented a CGT event associated to the personal use asset which is disposed as set and the same would be regarded as the CGT asset since the cost of asset was greater than $10,000.
As stated under “section 108-20 (1)” a taxpayer is not allowed to claim any tax offset on selling the personal use asset for loss against the capital gains (Oishi et al., 2018). Citing the reference of “Higgs v Oliver” the taxpayer derived gains upon the sale of CGT event D1. The court of law denied the taxpayer from discounted capital gains relating to the CGT event D1 under “section 115-25 (3)”.
Likewise, in the circumstances of John the boat was purchased in 2008 for $12,000 and it was used for recreational purpose (Bankman et al., 2017). Later the boat was sold by John for $8,000 by bearing a loss of $4,000. Denoting “section 108-20 (1)” John is not permitted to set off the loss against the capital gains and such losses is required to be ignored.
As stated under the “Subdivision 108-B” collectibles constitutes assets that are primarily held for private use and enjoyment of the taxpayers (McDaniel, 2017). John held an antique table which was purchased for $12,000 and gifted the antique table to his mother. Therefore, this does not represent a CGT event as not sale of asset occurred.
The “taxation ruling of GSTR 2012/15” is related to the GST outcomes of the residential property. The rulings accounts for the implementation of the subdivision 40-B and “subdivision of 40-C” of the new tax system under GST 1999 associated to the supplies of residential premises (Murphy & Higgins, 2016). As stated under the “section 40-65 of the GST Act 1999” sale of the residential property does not attract GST if the residential property is completely used for residential purpose.
As noticed a house was bought by John that costed him $300,000 and spent weekend at the property. But in 2014 the land was rezoned for residential purpose and John decided to sell the property. Though an initial decision of subdividing the property was taken but the property was sold to the developer for $3,000,000.
At the time of disposing the property appropriate considerations is required whether the selling the property is subjected to GST. Selling the residential premises is held as input tax and does not attracts GST given the premises was entirely used for housing lodgings.
As denoted under “section 40-65 of the GST Act 1999” selling the residential premises is held as input tax but only to the level that the residential premises was entirely used housing purpose (Schmalbeck et al., 2015). The court of law in “Toyama Pty Ltd v Landmark Building Developments Pty Ltd” stated that the expression “to be used entirely for housing purpose” constitutes the subjective objective of the buyer that is relevant in determining the use of premises.
According to the decision stated by the law court in “Marana Holdings Pty Ltd v Commissioner of Taxation (2004)” stated that the sale of strata title of residential premises that was developed from motel would attract GST consequences (McDaniel, 2017). The court of law in regarded the definition of the expression “residential premises” in respect of “section 40-75 of the GST Act” and stated that the supply was regarded for input tax credit. As evident in the situation of John the selling the house to the property developer would be regarded as the input tax supply based on “section 40-65 of the GST Act 1999”.
According to the “section 26-5 of the ITAA 1997” an individual taxpayer is not permitted to claim any form of deductions associated to the penalties or fines that imposed as the consequences of breaching the Australian law (Oishi et al., 2018). This consists of the business fines that is imposed for breaching the laws. Similarly, in the case study of ABC Sports Pty Ltd the fines that is imposed relating to the breaching the trade practice act represents fines for breaching the Australian law. Referring to the “section 26-5 of the ITAA 1997” ABC Sports Pty Ltd is not permitted to claim an allowable deduction for such fines imposed.
Conclusion:
On arriving at the conclusion, ABC Sport Pty Ltd would be held liable for the taxation purpose relating to the receipt of the compensation payment that is paid for the cessation of agreement. Similarly the cost that is incurred in relocating the stores is a capital expenditure that is not allowed for deductions. However, ABC Sport Pty Ltd would be able to lower its tax liability for the fringe benefit expenditure incurred on John son’s school fees and subscription charges. On the other hand, John shall be held liable for taxation relating to the receipt of the salary income and sale of residential premises would be subjected to input tax credit.
Reference List:
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