Tax Consequences For Writing A Book And Claiming Childcare Expense Deduction

Tax Consequences of Writing a Book

The key issue is to ascertain the relevant tax consequences for the payment derived by Jenny if the book had been written by Jenny herself.

It is imperative note that income may be derived on the basis of personal exertion and such income would be categorised under s. 6(5) or potentially s.15(15) ITAA 1997. In accordance with s. 6(5), proceeds from personal exertion would be categorised as personal income but it should be imperative that the underlying activity should be regular and related to business or employment (Gilders et. al., 2016).. However, in case of isolated transaction, assessable income may arise under s.15(15) provided the central condition of presence of profit motive must be satisfied. This implies that profits or proceeds arising from any isolated transaction would be realised as assessable income under s.15(15) (Barkoczy, 2015).

A relevant case law which ought to be discussed here is Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. As per the relevant details, the taxpayer was the wife of a robber who was serving jail term. However, her husband was involved in a very renowned robbery at the time and people knew about her husband. As a result, the taxpayer entered into contract by a newspaper that gave money to the taxpayer for sharing details about their marriage. This information was provided to the newspaper’s journalist through interviews that extended several days. The Tax Commissioner claimed that the proceeds earned were through interview and hence income from personal exertion. But the taxpayer disagreed. The court in this matter reached the verdict that the proceeds were capital in nature and thus non-taxable. This is because the court highlighted that the act of interview was only a medium to transfer the information and did not lead to creation of any commercial worth. Thus, it was ruled that the payment was made essentially for the information which is an intangible asset (Sadiq et. al., 2016).

In the given scenario, Jenny obtains $ 1 million for sharing the story about Henry. This information about Henry had commercial worth since he was a famous Jazz singer. In accordance with the Brent vs FCT case, the act of interviewing of Jenny did not produce any product or service of commercial worth but acted as only a medium for the transfer of the real asset. Thus, the payment would be essentially capital. Now, if Jenny instead of sharing this information with Jack wrote the book about Henry herself, then in that case also the tax treatment would essentially remain the same. There is no information to suggest the Jenny had superior writing skills. The commercial worth of the book would be derived from the subject matter which already exists and the book is just acting a medium to transfer of asset to the willing buyer. Thus, in this case also, the proceeds from the book would be capital proceeds rather than income from personal exertion.

Case Law on Income from Personal Exertion

On the basis of the above, it would be appropriate to conclude that if Jenny writes the book herself, then also the proceeds would be considered capital and hence exempt from any tax under s. 6(5) or s.15(15).

The key issue is to determine whether Sally can claim a deduction for the expense related to the day care centre of her child which is pivotal for her to gain

In accordance with s.8-1(1), any outgoing or loss that has been incurred would be deductible under this section provided the outgoing should have a direct relationship with the production of assessable income. Additionally, various negative limbs of this section are listed under s. 8-1(2) as per which expenses which are capital in nature, used for non-assessable income production or personal expenses are non-deductible under the ambit of this section (Deutsch et. al., 2016).

An interesting situation arises with regards to childcare expenses since most taxpayers argue that these are essential for the production of assessable income since if these expenses are not incurred, then the taxpayer would not be able to attend the job. operations, an alternative view that it should not be deductible under the aegis of s. 8(1) as it is a private, personal or domestic expense. As a result, to clarify the position on the same, reference needs to be made to the various tax rulings and relevant case laws (CCH, 2013).

In accordance with TD 92/154 and Lodge v. FC of T (1972) 128 CLR 171 case, the court has made the position clear that expenses related to child care would not be deductible under s. 8(1) considering the fact that these are not incidental to the profession or job that the taxpayer is engaged in. Also, it has been pointed that it is essentially a private expenditure. Further, it has been pointed that if this expenditure was so integral to the underlying profession, then it should have been incurred by every member of the profession which is not true. Besides, the verdict of Jayatilake v. FC of T (1991) 101 ALR 11 also provides that the expense on childcare is of private or domestic nature (Woellner, 2014).

As per the given scenario, Sally is a single parent and therefore has to be incur childcare expenses so that she can attend job and therefore is seeking a deduction under s.8(1). However, under the discussion of not only the relevant statute but concerned tax rulings and case laws, it is apparent that the childcare expenses would not be deductible as it would be considered as a private or domestic expense. These expenses tend to lie within the negative limb of s.8(1) and hence render the expense non-deductible.

Claiming Tax Deduction for Childcare Expenses

In line with the above discussion, it is apparent that the expense incurred on childcare by Sally would be considered as a personal or private expense and hence no deduction under the aegis of s.8(1) would be available.

The key issue is to ascertain the underlying tax consequences of the venture that Joseph has undertaken.

In accordance with s.8-1(1), outgoings which are directly related to production of assessable income can be deducted. A key aspect of this expense as highlighted under s. 8-1(2) is that the expenditure must have a revenue nature as capital expenditure are outside the ambit of this section (Barkoczy, 2015). Further, the revenue expenses would be deductible under this section even if the assessable income would not be produced in the current tax year but subsequent years. This has been highlighted in the verdict of the Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459 case. While the said case deals only with interest, the understanding has been expanded in accordance with ATO ID 2001/479 (CCH, 2013).

Besides, for interest expenses incurred with regards to capital asset purchase which in turn would be used for production of assessable income, hence interest expense deduction is available under s. 25-25 ITAA 1997 in the same year when expense is incurred irrespective of the realisation of revenue in the same year or not. Further, the other capital expenses are deductible under s.40-880 ITAA 1997 where a capital allowance is available for a year of five years at the rate of 20% (Deutsch et. al., 2016).

Further, another key concern that arises is where the taxpayer has a primary profession and engages in another activity.  In such cases, it is imperative to determine whether the activity is a hobby or business as the income derived from hobby is non-assessable and therefore in accordance with s.8-1(2), the expenses for producing this would not be deductible. A key parameter to distinguish between the two as per tax ruling TR 97/11 is the underlying intention on the part of the taxpayer (Gilders et. al., 2016).

In the given scenario, the taxpayer tends to have a primary business as that of plumbing. It is apparent that the planting of native wildflowers is with the intention of producing assessable income since Joseph is planning to do this after retirement. The planting is not a hobby since it is for producing future cashflows. The interest incurred on the land purchase would be deductible under s.25(25) since the land would be used for producing assessable income. The land preparation costs, fertiliser costs along with seedlings cost would all be considered as deductible expenses under s.8(1) owing to their direct relationship with producing assessable income in the future. The fact that no revenue would be derived in the current year does not matter and still allows Joseph to claim deduction.

Conclusion

On the basis of the above discussion, it is apparent that Joseph is doing a business of growing native flowers owing to presence of profit intention from the outset besides the regular nature of the activity. The various costs incurred on the same are deductible in the same year that these have been incurred irrespective of whether revenue is realised or not.

References

Barkoczy, S. (2015), Foundation of Taxation Law 2015, 7^th ed., North Ryde: CCH Publications

CCH (2013), Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8^th ed., Pymont: Thomson Reuters

Woellner, R (2014), Australian taxation law 2014 7^th ed. North Ryde: CCH Australia