Income Tax Assessment Act 1997 is the legislation that governs the income tax related regulations in Australia. The Australian Tax Office (ATO) on the other hand is the statutory body responsible to administer taxation related matters in the country as per the applicable legislations. A detailed discussion on the facts of the two separate cases provided in the document shall be helpful in analysis the income tax implications to the parties involved in these cases.
Issue:
In this case the issue is to determine the income tax implications, if any, of the various benefits received by Leslie Perry for writing her experience in a travelling blog.
Australian Taxation Office (ATO) has explained the difference between trading activities and hobbies. However, there still remains a grey area in the tax law to determine the implication of income tax on financial benefits accruing from trading activities and hobbies (Braithwaite, 2017).
In order to determine whether a person is carrying on a business or not the Tax Commissioner’s view in Taxation Ruling TR 97/11 needs to be followed. Thus, even when a person is writing blog or doing anything which has resulted in inflow of economic benefits whether monetary or non-monetary. The following considerations must be given due importance in determining whether a person is carrying on business and liable to pay income tax or not.
The purpose of the activity: The activity must have a significant commercial purpose or character in order to be considered business activity. There must be a purpose to earn profit from such activity to be considered as business activities liable to be taxed (Burkhauser, Hahn and Wilkins, 2015).
The regularity of the act: Whether the act is regular or irregular in nature. In case the act is regular in nature with the specific commercial purpose of making profit then it will be considered as a business activity.
Manner in which the activities are carried on by the person: Whether the activities are carried on in similar manner as that of ordinary trade or not. In case the activities are carried on in the ordinary course of trade then it shall be considered business activities (Richardson, Taylor and Lanis, 2015).
The nature of activities which are in the ordinary course of business to earn profit is to be considered as an enterprise in such case the person receiving any benefits shall be liable to pay income tax in the country.
Alexander Drysdale v C of T 5 (Drysdale):
In the above case the honourable judge explained the importance of intention of the person carrying on any activities to determine whether the activities shall be considered business activities or hobby.
Goldberg & Anor v FC of T:
In the above case the honourable judge discussed the importance of time in determining whether a person was carrying on an enterprise or not. In the particular time frame the activities and the nature of activities performed by the person shall be considered to determine whether the person was carrying any business or not in that particular time. Thus, even if a person has ceased to continue its business at present but he may have done so in the past he will still be liable for the activities performed by him while he was conducting a business or not (Chardon, Freudenberg and Brimble, 2016).
In this case Leslie Perry who by profession is a tax lawyer writes a blog to share her experiences of travelling with her little infant in different places. Her blogs are quite useful to the readers as she has research everything before writing on her blog. As per the facts provided in the case study Leslie writes quite frequently in the blog to share her experience with the readers of the blog (McGregor-Lowndes and Crittall, 2017). With her blog generating significant interests she has received number of offers of travelling to different parts of the world staying there enjoying the hospitality of those places at free of cost. Starting from January in 2017 the offers from different travelling companies become very frequent and she started receiving number of such offers from different travelling companies. In the present year Leslie has received number of benefits including $22,000 in non-monetary benefits, $18,000 in advertising fees and $14,000 as travelling expenses (Vann, 2015).
In this case the nature of receipts have changed during the course of blog writing. Initially Leslie started writing blog to share her “experience” however, with passage of time she started writing specific blog for different travelling organizations in exchange of benefits. Accordingly, the nature of receipts are explained below:
Advertisement fees: The advertisement fees receipts is business receipts as it is specifically for earning income from the blog (Maley, 2018).
Benefits and travelling expenses: Receipts of other benefits and travelling expenses are also business receipts in nature as the intension of the writer to write the blog has changed.
Section 6.5 of the Income Tax Assessment Act 1997 has explained that the assessable income of a tax payer shall be determined by taking into consideration the ordinary income as defined in ordinary concept. For an individual resident in Australia, all ordinary income derived from sources within as well as outside Australia. Thus, an Australian indidviauls is liable to pay income tax on all ordinary income derived from Australia as well as outside Australia. Ordinary income includes income received from business or trading activities. Advertisement fees receipt by Leslie is an ordinary income in this case (Fry, 2017).
Benefits of staying in hotels and travelling to different parts of the globe as per the offer of the tourism organizations in exchange of writing blogs for these organizations. Travelling expenses paid by these organizations for travelling to different places for writing blogs for these organizations (Fry, 2017).
Conclusion:
Thus, both non cash and cash benefits received by Leslie for writing blogs for different organizations as well as advertisement fees received by her are liable to income tax. Hence, Leslie will be liable to pay income tax on these receipts as per the Income Tax Assessment Act 1997 as these are receipts in the nature of trade as per the tax ruling TR 97/11.
Issue:
The issue here is to discuss the tax implications, if any, of the amount of compensation received by Leslie Perry for the termination of advertisement agreement by Baby Smile, a baby food producer.
As per the ITAA 1997 the income tax implications of the termination payments received by a person shall be dependent on the nature of contract which has been terminated. If the nature of contract is a capital receipts to the person then the compensation received for termination of the contract shall not be liable to income tax. However, if the compensation is paid to make good the loss of revenue due to the termination of contract then the amount of compensation received for termination of contract shall be subjected to income tax in the hands of the recipient. Thus, the most important actor to be considered in case of receipt of compensation for termination of contract is whether the compensation is to make good the loss of revenue in the ordinary course of business or profession or is it in the nature of capital receipt to make good the loss of asset (Dunne et.al. 2014).
As already mentioned earlier that the concept of ordinary income has been defined in section 65 of the ITAA 1997. As per the section all ordinary income for a resident Australian even if receipts outside Australian shall be subjected to income tax. The compensation received by a person for termination of a contract to make good the loss of revenue in the ordinary course of business, profession of services shall be considered as ordinary income. Accordingly, such ordinary income shall be included as assessable of the tax payer to determine the taxable income of the person and resultant income tax liability on such income as per ITAA 1997 (White and Townsend, 2018).
Taxation ruling TR 95/35 has explained the scenarios where compensation received for termination of contact shall be considered as capital payments and not to be included in assessable income of the recipient. In such case the recipient is liable to pay Capital gain tax on the amount of capital gain resulting from receipts of such compensation (Somers and Eynaud, 2015).
As per the facts in the case study Leslie Perry has entered into an agreement with Baby Smile, a baby food producer, to receipts $600 per month as monthly fees for granting Baby Smile the right to promote its products by advertising its brand in the blog. The contract between the two was for a period of three years and was signed in July 2017. However, in March Baby Smile was taken to the court of allegedly using substances in its products. As a result all the advertisement contracts of the company were cancelled with immediate effects. Leslie was paid a compensation of $7,200 as compensation for termination of contract.
Thus, it is cedar from the above fact that the amount of compensation paid to Leslie was to make good the loss of revenue of $600 per month as advertisement fee. Advertisement fees are ordinary income as per the ordinary concept of Sect. 6-5 of ITAA 1997. Thus, the amount of $7,200 shall be considered for calculation of assessable income of Leslie for the income year 2017-18.
The taxable income of Leslie Perry shall increase significantly as the benefits, advertisement fees, travelling expenses and compensation fees received by her all shall be included in computing her taxable income for the relevant income year.
Conclusion:
Taking into consideration the discussion above it can be said that the liability of income tax is dependent on the amount of taxable income of an individual as per the Income Tax Assessment Act 1997 in Australia. For an individual who is a resident in Australia, all ordinary income whether received from Australia sources or sources from outside the country shall be included in computing the taxable income of the individual to determine income tax liability of the person. In this case the ordinary income of advertisement fees, other benefits and compensation received for the termination of advertisement agreement shall be included in computation of assessable income of Leslie Perry for the income year 2017-18.
References:
Berg, C. and Davidson, S., 2016. Submission to the House of Representatives Standing Committee on Tax and Revenue Inquiry into the External Scrutiny of the Australian Taxation Office.
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.
Dunne, J., Aldred, J., Gorton, T. and Taylor, H., 2015. 2014 cases show a continuing trend of high ATO success rate. Taxation in Australia, 50(1), p.20.
Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal, 57(1), pp.49-63.
Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.
McGregor-Lowndes, M. and Crittall, M., 2017. An examination of tax-deductible donations made by individual Australian taxpayers in 2014-15. Australian Centre for Philanthropy and Nonprofit Studies, Queensland University of Technology.
Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.
Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO’s proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.
Vann, R.J., 2015. Hybrid Entities in Australia: Resource Capital Fund III LP Case. TAX TREATY CASE LAW AROUND THE GLOBE.
White, J. and Townsend, A., 2018. Deductibility of employee travel expenses: The ATO’s guidance. Taxation in Australia, 52(11), p.608.
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