Taxation Questions: Franking Account, Capital Gains/Losses, Business Accounting, And Assessable Income

Question 1

In the present context, Simon has incurred capital loss before adjusting for inflation therefore Simon is not entitled to adjust a capital loss for inflation.

As per the Australian taxation office, there are two methods of accounting for GST namely cash basis and a non-cash basis (accrual). Business having an aggregated turnover with less than $2 million or using a cash method of accounting make the use of the either of the method. From the current case study, it is evident that the client was using the cash method of accounting for GST however; it chose to use the non-cash method of accounting, which is commonly known as accrual method of accounting[1]. Business having aggregated turnover of less than $2 million can make the use of accounting for GST using the cash method of accounting.

Accounting for GST on cash basis represents that an individual can account for GST on the business activity that covers the period on which the sales was made and purchase. In the current situation, the on switching from cash basis to accrual basis the GST on the business activity statement covers the period in which the goods were issued and the tax invoice that was received in 2015/16 will be included in the income year of 2015/16.

On the other hand, had the customer not paid it account until 30 June 2016 the sum would not have been included in the income year of 2015/16.

According to the taxation ruling of TR 95/25 deductions for interest under section 8-1 of the income tax assessment act 1997 states that interest are deductible which is incurred by the taxpayer at the time of gaining or producing assessable income[2]. The loss of outcome that is not capital in nature, private, or domestic in nature.

In the current context, interest on borrowed loan can be claimed as deductions during the income year since the taxpayer necessarily incurred it at the time of carrying on the business for the purpose of taxation or producing assessable income of the taxpayer. The interest expenses paid by the taxpayer in the present context possess sufficient connection with the operations or activities, which is more directly to gain or produce the taxpayer assessable income.

• At the time of considering whether the prize will be considered as the ordinary income under section 6-5 of the ITAA 1997 the primary step is to determine whether there is a relationship with the any kind of services provided. The prize reward received for being as top student whether forms the part of personal exertion. The relationship with the personal exertion might not be available since the student does not provided any kind of service to the donor of the award. Hence under section 6-110 of the ITAA 1997 the prize is not relied on the high level of chance that makes for a stronger case since it is not an ordinary income. As held in the case of Kelly v FCT (1985) ATR 478 a prize which is paid for the best performance was held to be the part of the ordinary income on the basis that it was a direct result of the taxpayer skills.
• The amount received by the student if paid in instalment of $100 per month will still be considered as exempt income. It is assumed the amount received is a part of bursaries and awards, which is subjected to exemption and will not be included in the assessable income. The fact that the student receives government assistance brings forward the issue of whether such prizes relates to the assistance. It clearly does not changes the fact the nature of prize for taxation purpose.
• If the gratuity forms the part of gift it will not be considered as the ordinary income under section 6-5 however the payment will be regarded as the income if it provided for the services rendered by the taxpayer. The taxpayer under the current case is widow and receives benefit of payment with the provider of the services was her deceased husband. Since the taxpayer had not rendered any services to her deceased husband employer, the gratuity shall not be subjected to ordinary income. Hence, section 15-2 would not be applicable, as the payment is not related to any kind of service provided.
• Under the current context, the student has acted as the honorary secretary for a small country town football club and not at the school. Hence, the honorarium received by the student for his service and would not be regarded as the source of ordinary income.
• Under the current context, the employee has provided suggestion which is related to the profession which was adopted by the management. Therefore, the bonus received by him would also be considered as the ordinary income.

Reference List:

Barkoczy, Stephen. “Foundations of Taxation Law 2016.” OUP Catalogue (2016).

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

[1] Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

[2] Barkoczy, Stephen. “Foundations of Taxation Law 2016.” OUP Catalogue (2016).

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