Advise Kate regarding the tax implications, arising from the above facts in relation to the 2017/18 income year. In your answer, make sure you: (1) apply the HIRAC methodology and refer to any relevant cases, legislative provisions, and principles of tax law; and (2) show separately your calculation of Kate’s taxable income, and ‘basic income tax liability’, for the 2017/18 income year, fully explained by reference to any relevant legislative provisions.
The following scenario would be determining the taxable income of Kate during the year ended 2017/18 and would also considered whether the expenditure is allowed as deductions under “section 8-1 of the ITAA 1997”?
The following issue is associated with the determination of the taxable income of Kate and determining whether the she would be held assessable for ordinary income reported during the year 2017? The issue takes into the consideration whether Kate would be permitted to claim an allowable deduction under “section 8-1 of the ITAA 1997”?
Denoting the explanation of “section 6-1 of the ITAA 1997” an individual taxpayer is considered for taxation purpose for the income derived from the personal sources[1]. This includes salary income, wages, bonus, fees, allowances or revenue from the business carried on by the taxpayer. As stated under the “section 6-5 of the ITAA 1997” ordinary income of the taxpayer constitutes income that comes into the taxpayer. In “Scott v Commissioner of Taxation (1935)” the expression income should be ascertained in agreement with the ordinary concepts.
As noted in “section 136 (1) of the FBTAA 1986” fringe benefit constitutes where a company offers benefit to the employee for their employment[2]. With reference to “section 20 of the FBTAA 1986” expense fringe benefit occurs when the expenses of employee is paid by employer.
Mere prizes are not treated as income. But the amount received from such prizes may be treated as income when it holds sufficient nexus with the income producing activities of the taxpayer. In “Kelly v FCT” the professional football player received award for being the fair player[3]. The sum received by footballer constituted income as it was incidental to his work and employment with club. According to “section 6-1 of the ITAA 1997” a taxpayer obtaining income from personal exertion is included in taxable income as either ordinary or statutory income. Mere prize wins is not an income but assessable if holds nexus with the taxpayer’s income earning activities. In “FCT v Stone” the taxpayer received salary as policewomen and earned prize money from sporting endorsement. According to commissioner of taxation, the taxpayer was found to be executing the business of professional athlete and the money received constituted income.
An individual receiving payments from sporting appearance or promotions that has nexus with the income producing activities then such amount is considered taxable. In “Kelly v FCT” receipt of payment by taxpayer for public appearance is chargeable earnings. As stated in “subsection 108-10 (1) of the ITAA 1997” to work out the capital gains losses obtained from selling collectibles should be only employed in lowering the gains from collectibles. Collectibles are viewed as single assets under “section 108-15 (2) of the ITAA 1997” and selling of each set is held as portion of collectibles. Moreover, collectibles purchased for less than $500 should be ignored[4].
Rent represents that sum paid by an individual for use of property. In “Adelaide Fruit and Produce Exchange Co Ltd (1932)” income from rental property is included in taxpayer’s assessable income.
An element of income derived by an individual constitutes income up to the realisable value. The item of income should possess the character of gain for the taxpayer. Reward for services are usually held assessable as ordinary income under “section 6-5 of the ITAA 1997”[5]. In “Brent v FCT” the train robber’s wife was granted with the right of narrating the story of her life and in return received amount that was held as income under ordinary concepts.
Payment received for relinquishing rights cannot be referred as income because it constitutes CGT event D1[6]. The reason for classifying the payments as CGT event because it occurs when an individual forms a contractual or equitable rights in any other entity. An individual is permitted to claim deductions for legal expenses under “section 8-1 of the ITAA 1997”. In “Federal Commissioner of Taxation v Rowe (1995)” it was held by the commissioner that necessary characteristics of legal expenses must understood for allowing as deductions. Expenses that are incidental cost to capital proceeds is a permissible deductions[7].
The general rule of “section 8-1 of the ITAA 1997” states that expenses that are preliminary to commencement of income generating activities is not allowed for deductions since it is not incurred in the course of producing assessable income. In “FCT v Madealena (1971)” the court denied taxpayer with deductions for getting new employment as it was not in the course of gaining taxable income.
Denoting the circumstances of Kate the receipt of salary as professional accountant represents income from personal exertion. Mentioning the decision of court of in “Scott v Commissioner of Taxation (1935)” the receipt of salary income constituted income from personal exertion. Such income would be considered for assessment in respect of the ordinary concepts under “section 6-5 of the ITAA 1997”[8]. The employer of the Kate on most occasions pays her taxpayer and under “section 20 of the FBTAA 1986” these payments constitutes fringe benefits.
A cash prize of $5,000 received by Kate for the best accountant was associated to her employment. Mentioning the event of “Kelly v FCT” the amount constituted income as it was incidental to her work and employment[9].
Kate regularly participates in competition of high-jumping in chase of sporting brilliance and also wins prizes for her excellence. Mentioning the event of “FCT v Stone” Kate is found to be executing the business of professional athlete and the money received constituted income and the sum received is assessable in accordance with the ordinary concepts of “section 6-5 of the ITAA 1997”[10]. Later events provides that Kate obtained a sum of $40,000 for appearance in sporting event. Pointing out the decision in “Kelly v FCT” receipt of payment by Kate for public appearance is chargeable earnings.
Kate reported a loss from the sale of antique bed side lamp. Mentioning the explanations of “section 108-10 (2)” Kate must disregard any capital from the sale of collectibles. Additionally Kate reports a capital gains from the sale of antique lamp however the cost price of the asset was $400. According to the “section 108-15 (2) of the ITAA 1997” Kate should disregard the capital gains from Antique lamp because the cost base of asset was less than $500.
Kate later receives income from rental property and referring to “Adelaide Fruit and Produce Exchange Co Ltd (1932)” these rental property receipts constitutes periodical receipts which is assessable under “section 6-5 of the ITAA 1997”.
Kate was paid for appearing in the television interview and narrating the story of her life outside sports. Mentioning the judgment of “Brent v FCT” the receipt of $30,000 would be held as income under ordinary concepts of “section 6-5 of the ITAA 1997”[11].
Kate later receives in a second agreement a payment of $20,000 for relinquishing the rights of not giving any similar interview in other television. These amounts results in CGT event D1 which is considered for assessment purpose. She later incurs a cost of $5,000 for legal expenses and referring to “Federal Commissioner of Taxation v Rowe (1995)” Kate would be permitted to claim deductions for legal expenses under “section 8-1 of the ITAA 1997”. The expenses was incidental cost to capital proceeds and it is a permissible deductions[12].
In the later instances it was noticed that Kate in search of employment travelled to Melbourne to attend the job interview an expenses of $400 on airfares and $800 for accommodations. Mentioning the explanations of “section 8-1 of the ITAA 1997” expenses that are preliminary to commencement of income generating activities is not allowed for deductions since it is not incurred in the course of producing assessable income. Referring to “FCT v Madealena (1971)” Kate would be denied allowable deduction for the expenses incurred by her since it was preliminary to commencement of income generating activities and is not incurred in the course of producing assessable income.
= $90,000 – $87,000 = $3,000
= $3000 x 37% = $1,110
= 19,822 + $1,110 = 20,392
Basic Income Tax Liability = $20,932
Conclusion:
The case of Kate can be concluded by stating that the amount derived from the salary are held as assessable income from personal exertion. In accordance with the section “section 6-5 of the ITAA 1997” the cash awards, rents, television consideration payment etc constituted income from ordinary concepts that would be considered for assessment under section 6-5 of the ITAA 1997. Furthermore, Kate would be able to claim allowable deductions for the amount reported under “section 8-1 of the ITAA 1997”.
Reference List:
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.
Jones, Sally, and Shelley Rhoades-Catanach. Principles of Taxation for Business and Investment Planning. McGraw-Hill Higher Education, 2015.
Kiprotich, B. A. “Principles of Taxation.” governance (2016).
Long, Brendan, Jon Campbell, and Carolyn Kelshaw. “The justice lens on taxation policy in Australia.” St Mark’s Review235 (2016): 94.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.
ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET AL.). AUSTRALIAN TAXATION LAW 2018. OXFORD University Press, 2018.
ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.
Schmalbeck, Richard, Lawrence Zelenak, and Sarah B. Lawsky. Federal Income Taxation. Wolters Kluwer Law & Business, 2015.
Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue (2016).
Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue (2016).
Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Long, Brendan, Jon Campbell, and Carolyn Kelshaw. “The justice lens on taxation policy in Australia.” St Mark’s Review235 (2016): 94.
ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET AL.). AUSTRALIAN TAXATION LAW 2018. OXFORD University Press, 2018.
ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017
Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.Kiprotich, B. A. “Principles of Taxation.” governance (2016).
Jones, Sally, and Shelley Rhoades-Catanach. Principles of Taxation for Business and Investment Planning. McGraw-Hill Higher Education, 2015.
Schmalbeck, Richard, Lawrence Zelenak, and Sarah B. Lawsky. Federal Income Taxation. Wolters Kluwer Law & Business, 2015.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
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