Answer 1: Analysis of Reward for Service under ITAA 1997
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?
Required
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.
Is the taxpayer will be liable for assessment relating to the sum received from the publisher for the publisher for the reward for service as income under the ordinary concept of section 6-5 of the ITAA 1997?
- “Section 6-5 of the Income Tax Assessment Act 1997”
- “Scott v Commissioner of Taxation (1935)”
- “Brent v Federal Commissioner of Taxation (1971) ATC 4195”
- “Federal Commissioner of Taxation v Holmes (1995) ATC 4476”
According to the section 6 of the Income Tax Assessment Act 1936 income obtained from the personal exertion comprises of the amounts in the form of wages, salaries, commissions, fees, gratuities, pension, bonus or proceeds obtained from the business carried on by the taxpayer. According to the “section 6-5 of the Income Tax Assessment Act 1997” defines the expression of the term ordinary income as the income that is obtained from the most of the sources (Barkoczy, 2014). The court of law in the case of “Scott v Commissioner of Taxation (1935)” explained that the judicial concept of the expression ordinary income as the income that are determined based ordinary concepts or the use of mankind (Brokelind, 2014).
As understood in the present circumstances of Jenny an amount of $1 million was offered by Jack a publisher who was interested in publishing the life story of Herny, the deceased husband of Jenny. The publisher approached her with an advance of $500,000 so that he can conduct an interview with Jenny.
Answer 2: Analysis of Expenses Incurred for Child Care under Section 8-1 of ITAA 1997
According to the definition stated under the “section 6-5 of the ITAA 1997” an item that possess the nature of income and same is derived when it comes home to the taxpayer. The “section 6-5 of the ITAA 1997” explains that an item possessing the character of income which has been derived will be held as income up to the amount of its realisable value (Coleman & Sadiq 2013). The character of the income should be derived in all the circumstances based on its derivation by the taxpayer.
The court of law in the event of “Brent v Federal Commissioner of Taxation (1971) ATC 4195” provided its judgement by explaining that the payment that is received by the wife of the train robber was granted with the exclusive right of narrating the story of her husband to publish the life story would be held as taxable income (Grange et al., 2014). The taxpayer lend her name to the story that was written by the journalist and the receipt of amount from such exclusive right constitute income under section 6-5 of the ITAA 1997 that attracted tax liability.
Simultaneously in the case of “Federal Commissioner of Taxation v Holmes (1995) ATC 4476” the court of law held that the receipts relating to the salvage reward payment to the marine engineer was regarded as reward for service and the same was included in the taxable income (James, 2014).
Receipts that are associated to sponsorship money from the commercial firms and receipts associated to the appearance fees relating to attendance in function might provide an example of receipts related to services but are not held as employment (Kenny, 2013). Likewise in the situation of Jenny the receipts obtained for narrating the story of her husband during interview is held as reward for services but does not constitute employment. The receipt by Jenny for making herself available for interview would be liable for assessment. In accordance with the section 6-5 of the ITAA 1997, the amount of $500,000 will be held taxable as income from ordinary sources relating to “Reward for Service”.
According to the “Taxation Ruling of TR 2005/01” an individual is assessed for carrying on the business of professional artist (Krever, 2013). Considering the distinguishing character of profession of arts, the ruling explains the principles that are applied in determining whether an individual is conducting the business of professional artist.
The current question of Jenny is held relevant if Jenny had written the story by herself and the same would have held as business of professional artist and sum received from such business is considered taxable based on the ordinary concepts of “section 6-5 of the ITAA 1997”. The primary reason for considering the income taxable because the amount would have been derived by Jenny in compliance with the ordinary business course (Morgan et al., 2013). For instance, individual that engage in the business of professional arts are usually driven by the objective of creativity along with the aspiration of influencing the public opinion. Therefore, if the book was written by Jenny herself the book would have been considered as the work of professional art with the earnings generated from the sale of book will be considered for taxation in compliance with income from ordinary concepts under “section 6-5 of the ITAA 1997”.
Conclusion:
On a conclusive the receipt by Jenny for making herself available for interview for narrating the story of her husband constitute reward for service and the same will be held for assessment under “section 6-5 of the ITAA 1997”. Alternatively if, Jenny would have written the book herself and the income obtained from such sale of book would have been held as the work of professional art that attracts tax liability.
Is the taxpayer allowed to claim deductions for the expenses incurred related to child care under “section 8-1 of the ITAA 1997”?
- “Section 8-1 of the ITAA 1997”
- “Lunney v Federal Commissioner of Taxation (1958) CLR 478”
- “Section 8-1 (2) of the of ITAA 1997”
- “Lodge v Federal Commissioner of Taxation (1972) ATC 4174”
According to “section 8-1 of the ITAA 1997”an individual is entitled to claim deductions from their taxable income any sort of loss r expenditure till the extent that it such expenses are occurred at the time of producing the taxable income (Sadiq et al., 2014). “Section 8-1 of the ITAA 1997” allows a person to deduct from their taxable income outings or loss to the extent that such outgoings is necessarily occurred in carrying of the business with the objective of gaining the taxable income. As held in the “Lunney v Federal Commissioner of Taxation (1958) CLR 478” the essential characteristics of outgoings must be determined as the necessary prerequisite in the derivation of taxation income (Woellner et al., 2014).
The current situation of Sally who is a single parent employed in the accounting incurred expenditure on the child care so that she could attend her employment.
The negative limbs the section 8-1 (2) of the of ITAA 1997 explains that an individual is not permitted to claim deductions relating to any outgoings till the extent that the expenditure is held as capital or possessing the character of capital in nature (Woellner, 2013). Additionally, “section 8-1 (2) of the of ITAA 1997” prohibits a person from deducting any expenses from their assessable income if the same is occurred as the outgoing in the nature of private or domestic or occurred in generating non-taxable non-exempted income. For an expenditure to be allowed as deductions there should be sufficient amount of connection among the losses or outgoings or either of the positive limbs.
According to “section 8-1 (2) (b) of the ITAA 1997” a person is prohibited from claiming any los relating to the private or domestic in nature (Pinto, 2013). The primary reason for not allowing the expenditure to be held as allowable deductions because these expenditure does not meet the criteria of either of the positive limbs or the same is held as non-deductible in the second negative limb.
The expenditure incurred by Sally relating to child day care constitute entirely a private and domestic nature. The expenditure would not held as deductible because the day care expenditure does not meet the criteria of either of the positive limbs or the same is held as non-deductible in the second negative limb. Likewise considering the verdict of high court of Australian in the “Lodge v Federal Commissioner of Taxation (1972) ATC 4174” the taxpayer was denied an allowable deductions from the assessable income relating to the childcare expenditure to have the child minded in order to attend her day work (Basu, 2016). The court of law in its verdict explained that the expenditure incurred by the taxpayer is held as neither relevant nor held as incidental in the activities through which the taxpayer gained the taxable income.
Evidently in the case of Sally the expenditure incurred by her for child day care is non-allowable expenditure from the assessable income since the expenditure incurred by the taxpayer is neither significant nor held as related to the activities gaining taxable income.
Conclusion:
The expenditure of child day care holds the nature of private or domestic expenditure and the same will be prohibited from deductions under “section 8-1 of the ITAA 1997” in the case of Sally from gaining her taxable income.
Is the activities of planting wildflower amounts to carrying on of a business by taxpayer under section 995-1 of the ITAA 1997?
- “Taxation ruling of TR 97/11”
- “Subsection 995-1 (1) of the ITAA 1997
- “Evans v Federal Commissioner of Taxation (1953) AITR 548”
- “Ferguson v Federal Commissioner of Taxation (1979) ATC 4261”
- “Section 6-5 of the ITAA 1997”.
According to the “taxation ruling of TR 97/11” a guidance has been provided to determine whether an individual is carrying on the business of primary production. As per “subsection 995-1 (1) of the ITAA 1997” a primary producer refers to the primary business production as executing the trade of cultivation or plantation of plant under any form of physical environment (Tan et al., 2016). Whilst each and every circumstances might offer its certain facts but the question of determining is generally regarded as outcome or the process of taking account of all necessary signs. According to paragraph 25 of TR 97/11 an explanation of necessary factors have been provided in ascertaining the facts surrounding venture. This consist of whether the activity undertaken has relevant commercial purpose or possess the element of business. Furthermore, it also consists of whether activities of taxpayer possess the intention of profit making from the venture.
The present situation of Joseph he is viewing future retirement and purchase a land. Joseph begins the plantation of wildflowers that was intended for harvest and selling the same. According to “paragraph 14 of the TR 98/17” it is not obligatory for the taxpayer to obtain most of their business income from primary production (Cao et al., 2015). The taxpayer may be working in some other profession or business. Nevertheless the significant aspect is that the actions of primary production is held as carrying of a business. As held in “Evans v Federal Commissioner of Taxation (1953) AITR 548” the judgement of the court stated that whether the business activities carried no by the taxpayer is dependent on impression gained and whether the activities amounts to commercial sense.
As held in “Ferguson v Federal Commissioner of Taxation (1979) ATC 4261” the commissioner verdict stated that the character of activity or the purpose of taxpayer together with the mode of functional operations turns out to be a vital factor in ascertaining whether the primary production business is being performed by the taxpayer (Robin & Barkoczy 2018). The objective of deriving profit along with arrangement of activities in a business way helps in providing sign that a profit making venture is being performed by Joseph in the present question. On most occasion it is found that the taxpayers generate earnings from employment and or through other sources, enter into the business of primary production.
Likewise in the present state of Joseph there is a presence of significant commercial objective. The activities of Joseph undertaken is held as wide enough to assure that venture yields profit. There was an obvious presence of profit making intention despite it would take a five year time. The objective of making profit for Joseph was understood on reasonable grounds (Pinto, 2013). Planting of wild flowers were in adherence with actions of business and the profits derived from such activities is held liable for assessment under ordinary business course of “section 6-5 of the ITAA 1997”. Additionally, deductions can be claimed by Joseph under section 8-1 of the ITAA for incurring expenses on interest on loan, cost of fertilizers and the cost of acquiring native seedlings.
Conclusion:
On a conclusive note, the activities undertaken of planting of wildflowers and selling the same by Joseph amounts to carrying on of a business. Profits derived from such activities attracts tax liability.
Reference List:
Barkoczy, S. (2014). Foundations of taxation law.
Basu, S., (2016). Global perspectives on e-commerce taxation law. Routledge.
Brokelind, C. (2014). Principles of law: function, status and impact in EU tax law. Amsterdam: IBFD.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. & Wende, S., (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.
Grange, J., Jover-Ledesma, G. & Maydew, G. (2014). principles of business taxation.
James, M. (2014). Taxation of small businesses.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Pinto, D., (2013). State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.
Robin & Barkoczy Woellner (stephen & murphy, shirley et al.), (2018). Australian taxation law 2018. Oxford University Press.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. & Ting, A. (2014). Principles of taxation law.
Tan, L.M., Braithwaite, V. & Reinhart, M., (2016). Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.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. (2014). Australian taxation law.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
