The issue in the current case is based on the determination of the capital gains tax consequences originating from the transactions reported during the year under “S 104, ITAAA 1997”.
As stated under “s 102-5, ITAA 1997” the taxable income of the taxpayer also comprises of the net amount of capital gains that is derived during the income year. In order to ascertain whether the taxpayer has reported any capital gains or loss it is vital to take into the account whether any CGT event took place (Barkoczy, 2018). Additionally, the taxpayer must be understand whether the asset is eligible as the CGT asset. As per “section 102-20” a taxpayer only derives capital gains or loss arising from the CGT event. As per “section 104-10 (1)” for a taxpayer a CGT event A1 happens when the CGT asset is disposed.
According to the “s 104-25 (1), ITAA 1997” a CGT event C2 takes place when the intangible CGT assets ends. Alternatively, a taxpayers, ownership of the intangible CGT asset ends upon the expiration of the asset. Relating to the business goodwill, the interpretative view of ATO suggest that CGT event C1 occurs when the business is stopped enduringly. For an individual taxpayer upon selling the business the taxation ruling of TR 1999/16 is applicable when the goodwill of the business is sold under ITAA 1936 act (Douglas et al., 2014). On noticing that the business is ceased permanently or due to the outcome of the voluntary act, it is worth mentioning that the business must be permanently ceased because closure of business on temporary basis would not give rise to CGT event C1.
The federal court in “Murry v FC of T (1998)” held its view on goodwill. According to the view of commissioner goodwill is viewed as the quality which is acquired from other business assets (Grange et al., 2014). The presence of goodwill is dependent upon the evidence that the business generates revenue from the asset. Referring to the definition stated in “Subsection 108-5 (2)” the CGT of asset of business considers the goodwill. The law court verdict in “IRC v Muller & Co Margarine Ltd (1901)” stated that goodwill of a business is reliant upon the character and business nature (James, 2015). An individual taxpayer should account in their assessable income the net amount of capital gains derived upon selling the business goodwill.
As per the explanation stated in “taxation ruling of TR 1999/16” restrictive covenants refers to the covenants that consist of agreement between the purchaser and the vendor regarding the sale of business or any form of separate agreement where the vendors are required to not directly compete in that business (Jover-Ledesma, 2014). The taxation ruling of “taxation ruling of TR 1999/16” provides explanation regarding the restrictive covenants amid the vendors and purchaser regarding the agreement that is formed for disposal of business on the grounds that the employer vows to not compete or attract the clients directly.
An individual taxpayer that receives the payment for restricting or relinquishing the rights are not regarded as the income. Generally these payments are made as an agreement of not doing something or competing directly in any business. As held in the case of “Dickenson V FC of T (1958)” the taxpayer received an amount for selling shell products for a period of ten years from its petrol station and in the next five years selling only products of shell within the area of 5 miles (Kenny et al., 2018). Such a payment will not be treated as income. In another event of “Jarrold v Boustead (1964)” the taxation commissioner held that the lump sum payment that is made to the rugby player for giving up the position of amateur were not treated as income (Kenny, 2014).
If the taxpayer forms an agreement of entering into the restrictive covenants for the sale of business, the restrictive covenants will be treated as the CGT asset which is created and vested in to own rights of the purchaser associated to the goodwill obtained by the purchaser. According to the “section 104-35 (1)” payment received from entering into the restrictive covenants agreement are considered as “CGT event D1” (McCouat, 2018). When a taxpayer creates any contractual or other legal rights on another entity it give rise to CGT event D1. The judgement made in “Higgs v Olivier (1951)” stated that the lump sum payment made to the actor for agreeing not to direct, produce or act in another movie for 18 months does not constitute income (Morgan et al., 2016). The judgement in the above stated case stated that the receipt of such amount give rise to CGT event D1 because it gave rise to contractual right of exclusive trade agreement.
A taxpayer is only permitted to claim for the main residence exemption when the dwelling qualifies as the taxpayer’s main residence. If it is found that the taxpayer has more than one dwelling it is essential to determine which is the main residence for the taxpayer and hereafter suitable for exclusion (Sadiq, 2018). Whether the dwelling of the taxpayer forms the main residence is reliant on the matter of fact. The views stated by the ATO is based on determining the length of time till where the taxpayer lived on that dwelling or the place where the taxpayer’s family resided. The interpretative views of ATO states that certain extent of physical occupancy is required to be eligible for claiming main residence exemption.
As stated under “Section 118-110 (1) of the ITAA 1997” a taxpayer is allowed exemption from the capital gains or loss arising from the CGT event given that the CGT asset is the dwelling as well as the main residence for the taxpayer all through the period of ownership (Sadiq et al., 2018). A taxpayer is allowed to claim partial main residence exemption where the dwelling is used partly for residence by the taxpayer.
As understood in the current case of Amber, she owned a chocolate shop which she operated from Sydney. After the birth of her child Amber decided to sell the chocolate shop in 2018 for an amount of $440,000. A sum of $280,000 was also attributable to the goodwill. In the current state of Amber the taxation ruling of “TR 1999/16” is relevant. Quoting the instance stated in “FC of T v Murry (1998)” goodwill was regarded as the lawful concept of Amber business. Referring to “section 104-25 (1) of the ITAA 1997” a CGT event C1 happened when a decision of closing the business was undertaken by Amber (Taylor et al., 2018). As a result the selling of chocolate shop resulted in CGT event C1. Amber formed a contract of selling the business which eventually ended the asset. It is worth mentioning that the existence of business is dependent upon the proof that generated revenue from her business.
The permanent cessation of business by Amber give rise to the voluntary act. The cessation of business on permanent basis by Amber resulted in CGT event C1. Quoting the instance of “IRC v Muller & Co Margarine Ltd (1901)” the taxable of income of Amber must include the net amount of capital gains that is made from the disposal of business goodwill (Woellner et al., 2018). Referring to “section 104-10 (1)” capital gains derived by Amber from selling her chocolate shop will attract tax liability.
Following events obtained from the case study suggest that as the part of the sale contract Amber entered into the contract that would restrict her from opening any similar business within the radius of 20 km for the period of five years. The contract of restrictive contract that was entered into by Amber fetched her a sum of $50,000. Referring to the judgement made in “Jarrold v Boustead (1964)” the receipt of $50,000 by Amber gave rise to CGT event D1 (Blakelock & King, 2017). This is because the payment for restrictive covenant received by Amber cannot be treated as income instead it amounted to CGT event D1.
Denoting the judgement made in “Dickenson v FC of T (1958)” receipt of payment by Amber was for agreeing not open same business or restricting her rights (McCouat, 2018). The restrictive agreement that was entered by Amber constituted CGT asset which was created and vested into the own rights of the purchaser associated to the goodwill acquired. Referring to “section 104-35 (1)” the receipt of $50,000 will be treated as the “CGT event D1” because a contractual right of restrictive trade arrangement was entered into that restricted Amber of not competing in the identical business.
In later part of the case it is found that an apartment was inherited by Amber from her Uncle in October 2013. Her uncle purchased the property during September 2013 and from October 2013 Amber lived in that apartment. A contract for the sale of apartment was entered into by Amber however the settlement for sale of apartment occurred in July 2018. In the current situation of Amber main residence exemption can be claimed by her. This is because the dwelling qualifies as the main residence. However, it should be noted that the dwelling is reliant on the matter of fact (Sadiq, 2018). The substance of fact can be ascertained for Amber since the property was inherited from her uncle and was used as the main residence when she moved in the dwelling.
Referring to the interpretative view of ATO, the time period until Amber lived on that dwelling was for the period of five years. In respect of the evidences gained reference of “section 118-110 (1)” can be sought to state that a certain extent of physical dwelling is existed when Amber used the dwelling as her main residence until she inherited the apartment from her uncle (Woellner et al., 2018). The property had certain degree of dwelling by Amber as she resided in it following inheritance. Referring to “section 118-110 (1), ITAA 1997” the taxpayer will be entitled to claim the partial main residence exemption from the capital gains tax since the residence was the main residence for Amber during the period of her ownership.
Conclusion:
Conclusively, the sum of capital gains that is derived by Amber from the disposal of her chocolate shop will attract tax liability under section 104-10 (1)”. Whereas the amount of $50,000 that is obtained from entering into the agreement of restrictive will be regarded as CGT event D1 under section 104-10 (1)”. The receipt from restrictive arrangement gave rise to contractual right of exclusive trade arrangement. Later the selling apartment by Amber qualifies for the partial main residence from CGT since the asset formed the main residence from the period when she inherited from her uncle.
The case is based on determination of fringe benefit tax consequence related to the taxpayer which originates from the transaction reported by the taxpayer.
As per the provisions of “section 6-1 of the ITAA 1997” any income which is consequent from personal exertion can be represented as income of the taxpayer which includes wages, salaries, allowances, superannuation or any other proceeds in any form which is received by the tax payer for the services which is provided by the taxpayer. Any receipt from employment and from personal service offering might be subjected to taxation on the part of employee or as a fringe benefit tax on the employer (Nijland & Dijst, 2015). In case of any receipt to be considered to be an income there must be a nexus with the personal services of taxpayer from which the receipts originate.
The nexus which is established is applicable for items which are common for personal services that consist of salary and wages, commissions or any other related payments which falls in the scope of labour. “Section 6-5 of the ITAA 1997” states that the income which are covered under ordinary concepts are taxable under the relevant sections of “ITAA 1997”. As per the provisions of “section 6-5 of the ITAA 1997” most of incomes which are earned by taxpayers are covered under ordinary income under this section (Kaplan & Price, 2014). An understanding of income under ordinary concept can be provided by examine the case laws of “Scott v Commissioner (1935)” which states that income should be based on ordinary concepts and the same should be related to the application made by mankind. An item can be considered to be income for a taxpayer if the same comes home to the taxpayer. As per the opinion of the court in the case of “Dean v FC of T (1997)” retention payment which is made to the employees in connection with remaining employed with the company after takeover for a period of 12 months is regraded as income which is generated from the employment (Schenk, 2017).
The term fringe benefit relates to the payment which are made to the employees but the same are not in the form of salaries or wages. In general terms as stated in legislation fringe benefits can be described as benefits which are provided to the individuals as they are employed by a particular business. The fringe benefits with relation to car is stated in “subsection 136 (1) of the FBTAA 1986”. In case an employer provides benefits of cars than the same is covered under “subsection 136 (1) of the FBTAA 1986”. Thus, from the legislation it is clear that fringe benefits refer to the benefits which are received by individuals just because they are employees of an organization.
The tax legislation which specifies the meaning of fringe benefit taxes which is related to the employment status of an individual is covered in “subsection 136 (1) of the FBTAA 1986”. A fringe benefit which is related to providing the employee with the benefits of a car is generally for travel purpose from residence of the employee to the place of work or any official work-related travels or any other use (Voßmerbäumer, 2013). The employee can make use of he car for official purpose as well as for personal purpose. As per the provisions of taxation rulings, fringe benefits income are regarded as exempted in nature in the hands of the recipients for taxation purposes.
A loan fringe benefit refers to a case where the employer allows an employee a loan for which the employee is charged a low rate of interest for a specified period which can be a year or even more (Piketty, Saez & Stantcheva, 2014). Low rate of interest means the rate of interest which is charged for the loan provided by the employer is much lower than the statutory rate of interest. In order to compute the taxable value, the difference is considered between the interest payment which the employee paid and the interest amount which the employee had to pay as per the statutory rate of interest.
As shown in the case of “Moore v Griffiths (1972)” mere prize winnings are not to be considered as income of the taxpayer. However, the same will be considered to be an income source for the taxpayer if it is established that there is a direct link between the income from winning prizes have close connection with the revenue generating activities of the business. In the case laws of “Kelly v FCT” the award prize received by the taxpayer for being the fairest and best player will be regarded as taxable as the revenue which was generated was closely associated with the work and employment of the taxpayer and also it involved a degree of skills. In the case of “FC of T v Stone” the income which the taxpayer earned through prizes and endorsements were assessible.
The tax payer in the case of “FC of T v Stone”, was an engaged in the business of professional athletics and thus money generated was held as income. The non-cash benefits might be closely related to the personal services however the same cannot be considered as income if the they are not convertible to cash. In the case of “Payne v FCT (1996)” the court had given the verdict that the frequent flyer points which was related to work related travel would be considered to be income and the non-cash benefits would be taxable under the provisions of “section 15-2 of the ITAA 1997” or alternatively can be held for fringe benefit taxes.
In certain cases when an employee incurs certain expenses which are for official use or personal use and the amount is reimbursed by the employer than such will be considered to be expense payment fringe benefits (Givati, 2015). The taxable value of such fringe benefits is the amount which is reimbursed or paid. The provisions further provides that if the employee incurs expenses solely for business purpose than the same will be held as allowable for deductions under income tax assessment (Tang & Wan, 2015). Therefore, in instances where the employee undertakes certain expenses on behalf of business and the employer reimburses the same fringe benefits arises for which deductions are also available.
The case study which is provided deals with fringe benefit tax application for Jamie who is employed as an agent for Houses R Us which has a business dealing with real estate operations. The contract of employment of Jamie stated that he was to receive $ 50,000 as alary income (Argente & García, 2015). In relation to this, “section 6-1 of the ITAA 1997” clearly identifies receipt of salaries as income from personal exertion and therefore the same represent income of Jamie which can be subjected to income tax.
The receipt of salary will be considered to be income under ordinary concepts as there is a connection with the receipts and the services which provided by Jamie. The income would be considered as ordinary income under ordinary concepts as per the provisions stated in “section 6-5 of the ITAA 1997”. In connection to this, the case of “Scott v Commissioner (1935)” can be cited where the receipt of salary shall be considered to be income covered under ordinary concepts (Le Vine, Jones & Polak, 2013). Moreover, in the case of “Dean v FC of T (1997)”, the salary received by taxpayer will be considered as remuneration of employment.
In the case study it is further noticed that Jaime was given further benefits which included a car which the employer had provided for both business and personal use (Pasztor & Valent, 2016). The situation is similar to the criteria stated in “subsection 136 (1) of the FBTAA 1986” where such benefits which are given in the course of employment are covered (Urbancová & Šnýdrová, 2017). The car provided by the employer is given as employment benefits which Jaime can use for personal use as well outside working hours of the office.
In the subsequent year, the salary package of Jaime was upgraded as provided in the case study where Jaime was offered a laptop which had a cost of $ 2,300 and also mobile phone which had a cost of $ 1,200 on a yearly basis. In addition to this, the employer provided allowances such as entertainment allowances and also reimbursed an amount of $ 550. All the expenses which Jamie incurred on behalf of the employer was reimbursed and alongside certain other benefits were also provided which comes under the purview of Fringe Benefit taxes and therefore Jaime will be held taxable for Fringe Benefits under “FBTAA 1986”.
The case study further provides that Jaime won a prize of $ 4,800 for good performance in terms of achieving maximum sales in last 6 months in comparison to others. The employer rewarded Jaime with a home entertainment system for a sum of $ 4,800. Taking reference from the case laws of “Kelly v FCT” home entertainment system can be considered as a non-cash benefit which can be converted easily to cash. This will be regarded as income as the same is incidental t work and employment (Soled & Thomas, 2016). The sum of $ 4,800 received as reward will also be held as income as there is sufficient link between the income and Jaime’s revenue generating activities.
The case study also shows that the management of Houses R Us have the policy of providing the employees a sum of $ 100,000 for the purpose of purchasing their own houses at an interest rate of 4% per annum. Jaime is interested in taking the loan for purchasing his own house. The interest rate which is charged for the loan is lower than the statutory interest rate. In case Jamie decides to take up the loan from the employer, a loan fringe benefit would arise as the employer is providing the loan at an interest rate lower than statutory rate. In case Jamie takes the loan, the taxable amount will be determined by analyzing the difference between the interest charged by employer and the statutory interest amount if Jamie had taken the same from outside source.
Conclusion
Thus, from the above discussion, it can be concluded that the salary amount which Jamie is provided will be considered to be taxable under the provisions of “section 6-5 of the ITAA 1997”. The use of car constitutes as fringe benefit and the same is covered in “subsection 136 (1) of the FBTAA 1986”. The amount which Jamie receives as prize will also be held as income as there is appropriate connection with existing revenue generating activities of Jamie. Moreover, Jaime will also be held taxable for expenses undertaken by his for the employer for which he got reimbursement for whatever expenses incurred as fringe benefit.
References
Argente, D., & García, J. L. (2015). The price of fringe benefits when formal and informal labor markets coexist. IZA Journal of Labor Economics, 4(1), 1.
Barkoczy, S. (2018). Australian Tax Casebook 2018 14e ebook. Melbourne: OUPANZ.
Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.
Douglas, H., Bartlett, F., Luker, T., & Hunter, R. (2014) Australian taxation judgments.
Givati, Y. (2015). Googling a Free Lunch: The Taxation of Fringe Benefits. Tax L. Rev., 69, 275.
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.
James, S. (2015). The economics of taxation.
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Kaplan, R. L., & Price, D. J. (2014). Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, 281.
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McCouat, P. (2018) Australian master GST guide.
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Pasztor, J., & Valent, S. (2016). Fringe Benefit-still a Motivation?. In Proceedings of FIKUSZ Symposium for Young Researchers (p. 127). Óbuda University Keleti Károly Faculty of Economics.
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