Determining Taxable Income For A Personal Trainer- Case Study

Issue

Will the taxpayer be held liable for fees derived under the “subsection 25 (1) of the ITAA 1936” as the income from the ordinary concepts? The case study also revolves around the issue regarding whether the prize winning from body building would be treated as ordinary income under the ordinary concepts of “section 6-5”? Whether the taxpayer in the present case would be held taxable for the gifts amounts that is received from Doreen.

“Section 25 (1) of the ITAA 1936” explains that taxable income of the taxpayer must include the gross income that is obtained directly or indirectly from all the sources, in situations where the taxpayer is the resident of Australia or the taxpayer is assessable for all the source in the Australia if the taxpayer is non-resident of Australia[1]. Under the “subsection 6-5 (2) of the ITAA 1997” the taxable earnings of the taxpayer would comprise of the ordinary income that is derived during the income year.

As per “section 6-5 of the ITAA 1997” majority of the earnings that comes to the taxpayer is detained as ordinary income. As per the judicial concept income is explained in “Scott v CT (1935)” where receipts must be viewed as income and is ought to be treated based on the ordinary conceptions and use of mankind[2]. An item that has the nature of earnings is derived by the taxpayer will be treated as earnings up to the sum of the realisable price.

The question of fee income is obtained under the “subsection 25 (1) of the ITAA 1936” and should be ascertained by the orientation to the evidences in every cases and particularly reference must be made to the contract terms or the preparation that is entered into amid the person and client[3]. As a general rule, it is vital to ascertain on the appropriate grounds of the contract that the arrangement of the contract, a recoverable debt is established in such a manner that an individual providing service is not indebted to undertake any additional steps prior to being entitled to the payment. A fee is regarded as the recoverable debt in the applicable sense even though time for payment has been allowed[4]. An exclusion to the rule is that returns from fees is held taxable when the recoverable debt originates given the income from fees is obtained in advance related to the work.

An appropriate creation of the specific agreement or the preparation may be in a manner that the recoverable obligation for the professional work done is established when the business persons bills the customer. One of the collective preparation for the work, especially if the contract or arrangement terms are not expressed in writings[5]. Under such situations income from fees is obtained in the income year where the business persons bill the clients. A fee income is held as recoverable under the relevant situations if the clients has been allowed the time.

Rule

Under the arrangement of the contract, a recoverable debt might be formed and the business person is not required to bill the customer once the work is entirely finished. If such is the situation, earnings from fees is obtained during the income year where the work is entirely finished. The law court in “Farnsworth v FC of T (1949)” held that income is considered taxable under the accrual basis when it is derived under the “subsection 25 (1) of the ITAA 1936”[6].

While the court of law in “Henderson v FC of T (1970)” held that a fee is recoverable based on the relevant instance that if the time has been allowed to pay. An exception to the rule was stated in “Arthur Murray (NSW) Pty Ltd v FC of T (1965)” that income is obtained when the recoverable debt is created if the amount that is received or receivable as advance given the goods is supplied or services is provided[7].

A business person would at times obtain fee in advance for the work to which it is related. If the arrangement of the agreement requires that the fee should be compensated in advance, then the fee earnings is derived during the income year in which the business person finishes the work for which the fees is related. Whereas, if a client pays the fees early then the fee income is derived when the recoverable debt is created.

The law court in “Moore v Griffiths (1972)” held that the mere prize is not held as the income. An exception to this rule is that it may be held as the income if there are any sufficient connection with the income generating activities of the taxpayer. The law court in “Kelly v FC of T (1985)” held that the professional footballer received the award for being the best and the fairest player[8]. The amount was held as the taxable income since the receipt of award was regarded as incidental to his work and employment and was also related to his usage of skills. Similarly, the court of law in “Stone v FC of T (2005)” held that the taxpayer was the policewomen and the javelin thrower who made approximately $39,000 in the form of salary along with endorsement and prize money[9]. The taxpayer was held assessable for the income made from the business of professional athlete since the amount received constituted income.  

Application

A gain that is a mere gift does not have the nature of income. A mere windfall gain cannot be held as the character of the income while the capital gains does not possess the character of income. A gain which is regarded as the mere gift does not have the character of income. As held in the case of “Hayes v FC of T (1956)” an accountant received the shares in the business from the former boss or business owner is not held as income. Similarly, in the case of “Scott v FC of T (1966)” the solicitor received the sum of $10,000 pound as the gift from the wife of longstanding client out of the estate of the husband was not regarded as the income[10]. The unsolicited gift does not turn out to be part of the income of the recipient simplicity because of the generosity was inspired by the goodwill.

As evident in the present situation of Jenny she ran a business of personal trainer and charged from its clients in two ways namely paying after the lesson is provided or in advance. The taxpayer also made the arrangement to provide lesson to the clients who wanted to take lesson continuously and new members that wanted to provide lesson before using the equipment of fitness in the gym. The taxpayer derived a sum of $6,000 from providing the occasional lesson and also derived receipts of $28,800 from the 12-week lesson. “Section 25 (1) of the ITAA 1936” is applicable on Jenny as the taxpayer is required to include the gross income that is obtained directly or indirectly from all the sources. The fees that is obtained by Jenny from her business of personal trainer constitutes receipts under the ordinary concepts[11]. The fees that is obtained by her has the character of income and will be held as income up to the amount of the realisable value.

The instances obtained from the case study provides that the clients of Jenny were required to pay in advance for the 12 lessons even though she would refund the money if she fails to provide her client with lesson. The contract creates a recoverable debt in a manner that Jenny is not obliged to undertake any additional steps prior to becoming entitled for the payment. In such a situation income from fees is obtained in the income year where the business persons bill the clients. Fee income is obtained by Jenny in the income year when Jenny bill the clients. A fee income is held as recoverable under the relevant situations if the clients has been allowed the time[12].

Conclusion

As evident in the situation of Jenny a recoverable debt is created and she cannot bill her client until she renders 12 lessons for the fees that is received in advance. Citing the reference of “Henderson v FC of T (1970)” the receipt of $6,000 and $28,800 will be held as income under the ordinary concept of “section 6-5 of the ITAA 1997” since it is obtained during the income year of 30 June 1980 where the work is entirely completed[13].

In the later part of the case Jenny reported the receipt of $7,800 for the 12-week lesson commencing from 1^st June 2018. Citing the reference of “Arthur Murray (NSW) Pty Ltd v FC of T (1965)” Jenney received an income since a recoverable debt was created and the amount that was received by her was “receivable as advance” relating to the service that is being provided[14]. As the part of her business activity Jenny obtain fee in advance for the gym training lesson. The arrangement of Jenny contract was such that where the client that seek to obtain 12 weeks training were required to pay the fee in advance. The fee income was derived by Jenny during the income year in which she completes the work for which the fees is related. With reference to “subsection 25 (1) of the ITAA 1936” the assessable income of Jenny would include the gross receipts from her training lessons since a recoverable debt was created and training was completed in the year in which the services was provided.

In the later instances it was noticed that Jenny won a sum of $5,000 in competition of body building. Citing the evidence of “Stone v FC of T (2005)” the winnings receipt of $5,000 from the competition would be held as the taxable income. Referring to the case of “Kelly v FC of T (1985)” the winning from the body building will be considered as the taxable income since it was as incidental to her work and was also related to her usage of skills. Jenny also earned a sum of $8,000 from working as the physical trainer.

The receipt of $8,000 by Jenny from working as the physical trainer constitute income under the ordinary concepts. Referring to the judicial concept of income explained in “Scott v CT (1935)” the receipt of $8,000 will be held as income and should be treated based on the ordinary concepts “section 6-5 of the ITAA 1997”[15].  

Jenny accidently damaged her treadmill at the time of providing lesson that valued $500. As a mark of appreciation, Jenny unexpectedly received a sum of $1,000 from Doreen whom she had provided training and has recently won a bodybuilding competition. Referring to the case of “Scott v FC of T (1966)” the receipt of $1,000 from Doreen by Jenny does not constitute income rather it should be considered as receipt of gift[16]. Citing the instance of “Hayes v FC of T (1956)” the sum of $1,000 will not form the part of Jenny’s tax liability since the amount cannot be not held as income.

Conclusion:

On a conclusive note, under “subsection 25 (1) of the ITAA 1936” the assessable income of Jenny would include the gross receipts from her training lessons provided because a recoverable debt was created and the training was completed in the year in which the services were provided. The winning of prize from body building and working as the physical trainer should be held as income under the ordinary concepts of “section 6-5 of the ITAA 1997” while the sum of $1,000 constitute gift which cannot be held as taxable income.