1). Issue
In the given segment, Amber owns a boutique chocolate shop. Her transactions throughout the year 2018 have been provided in the given case and it has been asked to provide Amber the proper informations about her tax consequences for the transactions she has made throughout the year. The transactions of capital gains taxations will be evaluated in accordance with the legislations provided in section 104 of the Income Tax Assessment Act 1997.
Laws
As it is stated in the section 102-5 of the ITAA 1997, an individual needs to record all the assessable incomes gained in a form of capital gains during the year in order to calculate the total payable tax to the entity. In order to evaluate the expected profit or loss of the individual, it is required to have a proper understanding of the CGT qualification of that assets or income incurred by that individual (Borrego et al., 2015). The section 102-20 helps to identify the probable capital gains or loss in accordance with the CGT event A1. In order to dispose the CGT event, the individual needs to follow the section 104-10 of ITAA 1997.
For identifying the CGT event C2 for intangible assets, section 104-25 needs to be followed in order to determine the end or expiry of the assets or to declare the end of the ownership over the assets. CGT event C1 is applied when it comes to calculate the goodwill. This CGT event is particularly associated when the business is permanently ceased (Braithwaite, 2017). The taxation ruling 1999/16 is associated with the disposal of goodwill or the interest over the goodwill. In case the business is permanently ceased, the CGT event C1 will not result the temporary closure of the business.
The brief explanation of goodwill is stated in the citation of the case FCT v Murry. The goodwill is an evidence of generating revenues from the assets, locations and techniques within the business and it is regarded as an intangible quality which is gained from the assets of the business. In accordance with the section 108-5 (2), the goodwill must be associated with the CGT assets (Braithwaite et al., 2018). As it stated in the case of IRC v Muller & Co Margarine Ltd, The goodwill of an assets varies in accordance with the nature and character of the business. The total amount of net capital gains must be included in the taxable income which is incurred from the sales of goodwill of the business.
For the next instance, it is required to discuss about the taxation ruling of 1999/16 where it is stated about the restriction of restrictions among the purchaser or the vendors relating to the competitiveness of similar business. The agreement between the vendors and the purchasers regarding the selling of an item or assets are being specified in the agreement stated in TR 1999/16 and restricts the vendor to attract the clients of a particular business towards them (Burkhauser et al., 2015).
For the next segment, it is need to be discussed that the payments which are being received for making an agreement of restrictive rights will not be identified as an income. For an instance, in the case law of Jarrold v Boustead, it was stated that the payment made to the rugby player cannot be considered as an income in accordance with the TR 1999/16. Apart from that, in the case law of FCT v Dickenson It was stated that the amount received by the taxpayer in connection with the sales of shell product would not be regarded as an income by the course of this legislation (Chapman et al., 2016).
If the CGT assets acquired by the purchaser are vested within any kind of restrictive covenants, it will represent the goodwill over the CGT assets. In accordance with the section 104-35 (1), these covenants are being regarded as the CGT event D1 in case any contractual or legal rights is created by the taxpayer upon other entity. In the case law of Higgs v Olivier, it is stated that if an individual decides to not continue the production in return of being paid by another authority. This transaction will not be regarded as an income and thus it will be regarded as a CGT event D1 as the payment is received from a contractual right imposed by a trade agreement (Clausing, 2017).
For another instance, if the taxpayer obtains multiple residences, then the primary dwelling place of the tax holder will be regarded as the main residence of the tax payer. The understanding of the residential form of the taxpayer is needed in order to decide the eligibility for exemption of the taxpayer (Dyreng et al., 2016). The point that is being considered by the taxation commissioner is that for how much time does the taxpayer is dwelling in that particular residence is being regarded as deciding fact of the physical occupancy in order to establish the entitlement of the exemption. In accordance with section 118-110 of ITAA 1997, the exemption which is incurred from the residential status is allowed to be indicating as a capital loss or gains only if this exemption is generated from the CGT events. These exemptions can only be considered when the main residency and the dwelling place of the taxpayer will be regarded as the CGT assets. If the taxpayer manage to dwell in the place which is being considered as a CGT assets, a partial exemption will be allocable to the tax payer in term of the ownership of the assets (Enste, 2015).
Application
Sale of Shop
In this case, Amber decided that she will sell her chocolate shop situated in Australia in return of a sum of $440000. Within this amount, a total of $280000 was included as goodwill of the shop. In order to decide the taxation consequences of this transaction, the TR 1999/16 will be taken into consideration. Apart from the taxation ruling, the case law of FCT v Murry will also be required in order to get the appropriate citation for this case (Frey & Feld, 2015). As it is stated in the citation of the case, the good will which formed in accordance with the legal concept within the business of Amber, the CGT event C1 occurred with regard to the section 104-25 (1) of the ITAA as Amber decided to end her business. In accordance with this section, it is also decided that the ownership of Amber over this business has ended and the revenue generated from this business had produced the stated goodwill for the business.
The ending of the business made by Amber will be regarded as a result of the voluntary act and will be encountered as CGT event C1. In order to evaluate the value of the net capital gains, it is needed to take reference of the citation of the case law of IRC v Muller & Margarine Ltd where it is stated that the taxpayer needs to include the net value of capital gains into the taxable income. In accordance with the section 104-10, the capital gains received from the selling of the shop will be regarded as taxable income (Fuentes-Nieva & Galasso, 2014).
Restrictive covenants:
In the next segment, it is required to identify the consequences which were emerged due to the contract of restrictive covenants signed by Amber. As per this contract, Amber was restricted to operate similar business operations within the radius of 20km for upcoming 5 years. The total sum of $50000 which was received by Amber for signing this contract will be regarded as CGT event D1. This identification of the CGT event was decided due to the citation made in the case of Jarrold v Boustead. Apart from this, as it was stated in the case of Dickenson v FCT, this agreement of CGT event would restrict the purchaser from using the goodwill made by the vendor and thus, the produced goodwill will be vested and used by the new owner of the CGT assets (Gupta & Sawyer, 2018). Thus, as it was stated in the section 104-35, this income will be regarded as a CGT event D1 and will not allow the purchaser to stipulate any kind of business which is identical to the current one.
Sale of Apartments
In accordance with the current event stated in the case, the apartment sold by Amber was received from her uncle in 2013. The apartment was her dwelling place till May 2018 and then she sold the property in July 2018. In the meantime, this property was regarded as the primary residency of Amber. The question of fact that can arise from the current circumstance is that whether the apartment in which Amber lived could be considered as her main residence though her uncle and thus whether Amber will receive any kind of CGT benefits from this sale of property bought it (James et al., 2014)..
The main factor that would be considered by the commissioner of taxation is that if the taxpayer and her family had dwelled in a particular place for two years or more or not. Due to the current circumstance, it can be said that in accordance with the section 118-110, Amber dwelled in that particular residence due to the entire period of her ownership. Thus, the partial main residence exemption can be allocated to Amber due to the legislations stated by the Commissioner of Taxation (McCluskey & Franzsen, 2017). The apartment was used by amber due to the whole course of her ownership of the house bought by her uncle. So that, as the legislations of section 118-110 (1) of the Income Tax Assessment Act 1997 has stated, the partial exemption over the capital gains tax can be allocated to Amber due to her dwelling in that apartment and use it as her main residence for 5 years.
Conclusion:
As per the circumstances of the case is concerned, there are three major legislations used for identifying the CGT events of these case. For the first case, section 104-10 has been used in order to evaluate the CGT events of Amber regarding the goodwill of the shop. For the next instance, section 104-35 has been used in order to figure out the CGT event of restrictive covenants. For the last part, section 118-110 is referred in order to identify the CGT events regarding the main residential status of the tax payer through the period of ownership.
2). Issue:
In the given case, a taxpayer named Jamie has been given some benefits over his income made by the salaries from his employer. This benefits includes salary, car, residual and loan benefits. Now it is required to state whether these benefits can be regarded as fringe benefits in accordance with the legislations of ITAA 1997 or not.
Law:
The personnel exertion or the benefits generates to individual regarding the earning issued for salaries, wages, commissions, allowances, superannuation etc in being regarded as an income in accordance with section 6-1 of the ITAA 1997. These earnings should be given to the taxpayer by the employer as a return of the service provided by the individual. In case of receiving such benefits, the income can be regarded as the fringe benefits and will be added to the taxable income of the taxpayer (Mishel et al., 2016). In order to classify these earnings as an income, the proper receipts must be issued for stating that these earnings are generated from the personnel service of that individual.
The fringe benefits can be generated for the common earnings received for personnel service such as salary, wages, commissions etc as a return of individual labour. As it stated in the Section 6-5 of ITAA 1997, the common income based on the provided service of the individual will be regarded as taxable income (Richardson et al., 2015). In order to evaluate what can be regarded as income for an individual, it is necessary to take reference from the citation of the case Scott v Commissioner (1935), it is stated that the assessable income based on ordinary concept of payment will be regarded as taxable income. In the case of Dean v FCT (1997), it is stated that the earnings which are being allocated to the employees as an compensation of employment of a certain time period will be considered as an income (Rose & Karran, 2018).
In case of the individual is allocated with the allowance of using a car by the employer, a car fringe benefits will be generated for taking that allowance by the individual. This fringe benefit is generated when the employer use the car for his personnel usage apart from the usage in the work. The income which is generated from the usage of the car will be regarded as an exempted income and will be regarded as a taxable income for the individual.
In order to figure out what residual fringe benefits are, the section 6-1 of the ITAA is necessary to take into account. According to this section, any personnel service or facility which is given to the individual as extra benefits and is not enlisted in the salary package will be considered as ordinary income (Rose & Karran, 2018). These benefits may contain the travelling allowance, or obtaining the usage of some property personally. These benefits are provided to the individual by the employer for a certain period. The total agreement of the remuneration received by the individual is listed in the salary package agreement between the employer and the employee.
In order to generate a loan fringe benefit, the individual must receive a amount of loan from the employer where the interest loan allocated by the employer is much lower than the standard market interest rate benchmark. This benefit needs to be given over a certain period of time and the total loan fringe benefits allocated to the employee is calculated in arrears. This amount is taxable and in order to record the earning as a fringe benefit, the difference between the statutory market interest rate and the allocated interest rate to the employee must be calculated (Saad, 2014). The difference between these two market rates will be added to the taxable income and the difference of these amounts will be calculated in accrued over the period of fringe benefit year. The fringe benefits needs to be applied over the statutory interest rate and the interest rate should be recognized as an accrued income.
In case of receiving a prize for the service provided to the employer, the earning generated by the individual will not be considered as an income. As it stated in the case law of Moore v Griffiths, 1972 the incidental earning can be regarded as income if the earning serves as the activity which generates revenue for the individual (Schneider, 2015). To get into the matter more accurately, it is needed to consider the citation of the case Kelly v FCT where it was stated that if an amount of earning is received by the individual as a result of outstanding performance, and the earning is being regarded as incidental to work, a fringe benefit can be generated from that earning. In terms of incidental earning, the earning must be associated with the personnel skill of that individual for which he receives this amount in return. In the case of FCT v Stone, it was cited that if the individual is associated with some professional activity, and receives some reward or earning as an incidental income, the income will be regarded as a fringe benefit and thus, will be added to the taxable income (Schneider et al., 2015).
In case of the individual receives some non case benefits from the employee, it is required to measure if the benefits can be transferrable to cash or not. If the earning obtained by the individual cannot be transferred into cash, the earning will not be considered as a taxable income. As it stated in the case law of Payne v FCT, it was cited that the individual was redeemed the point given by the employer as a work related compensations will be considered as an income (Stiglitz, 2015). The non cash benefits or earnings obtained by the individual will be considered as taxable under the section 15-2 of ITAA 1997 and will be subjected to fringe benefit tax.
In case of the payments are paid by the employee and the amount is reimbursed to the employee, a payment fringe benefit occurs in such cases. The expenses paid by the employer are considered as deductable from the taxable income and this generates the taxable fringe benefits for the individual. If the employee occurred expenditure entirely for the purpose of performing the employment related duties, the expenditure would be entirely held deductible for the income tax purpose. In case of incurring the expenses for the employer by the employee is regarded as the fringe benefit (Vegh & Vuletin, 2015).
Application:
Salary income
In this segment, the fringe benefits gained from the salary income of Jamie and the tax consequences of the income will be discussed. Jamie works as a property agent and receives a salary over the contract. Last year, Jamie received a total salary of $50000 from the company. The received salary by Jamie will be regarded as an income obtained as personal exertion under section 6-1 of ITAA 1997. As this income is regarded as assessable income, it will be considered as taxable (Wilkins, 2015).
As the provisions stated in section 6-1, the incomes received as a salary will be included as an ordinary income under the ordinary concepts. In this regard, certain citations of case laws in which the stated point have been established are Scott v Commissioner and Dean v FCT. In both of the cases, it is stated that the salary or the remuneration received by the individuals will be regarded as ordinary income (Cremer & Pestieau, 2016).
Car Fringe Benefits
The next instance is related to the car used by Jamie and was used for both business and domestic purpose. The fringe benefits of the usage of assets are stated in the subsection 135 (1) of FBTAA 1986. This fringe benefit was offered to Jamie as an employment benefit. By getting these benefits, Jamie could use these assets within and without the working hour. Though Jamie had received this as a fringe benefit, Jamie will be liable for fringe benefit taxation (Berns, 2017).
Residual Fringe Benefit
Apart from the salary, Jamie is also being provided with a laptop of $2300, mobile phone of $1200 and entertainment allowance of $550. These benefits are being regarded as the fringe benefits provided by the employer to Jamie and will be considered as fringe benefit taxation under the legislations of FBTAA 1986.
Apart from that, the total price of $4800 was also allocated to Jamie as a reward for being the highest selling employee in last six months. Thus, as a prize, a brand new home entertainment system worth $4800 was awarded to Jamie. In this instance, the case law of Kelly v FCT needs to take into account. The citation of this case states that, as the reward of $4800 was an incidental payment received by Jamie, the reward will receive as an income and will be considered as a non-cash benefit which can be convertible into cash. The income will be taxable for Jamie as it serves as revenue to Jamie in term of being connected with the revenue generating activities of Jamie (Jimenez & Iyer, 2016).
Loan Fringe Benefit
The employer of Jamie has provided a loan of $ 100000 for purchasing home at a interest rate of 4% per year. In this case, Jamie is thinking of buying his own house by taking loan from the company. In such circumstances, a loan fringe benefit will be implicated as the interest rate of the loan provided by the employer is lower than the standard market interest rate. Upon taking the loan from his company, Jamie will be obliged with the loan fringe benefit due to getting the benefits of lower interest rate which is particularly available for the employees of the company (Adam Cobb, 2016). The difference between the market interest rate benchmark and the interest rate implicated by the company will be considered as the fringe benefits given to Jamie by the company. Upon this benefit, the taxable value would be calculated.
Conclusion:
In conclusion, it can be said that received salary of Jamie will be regarded as a fringe benefits by regarding it as an ordinary income under section 6-5 of the ITAA 1997. The use of car by Jamie regarded as a fringe benefit under the “subsection 136 (1) of the FBTAA 1986”. The sum of $4,800 resembles a reward for his employment service and would be held as the income since there are sufficient connection is existent with the Jamie’s revenue generating activities. Therefore, Jamie will be held taxable for the expense payment fringe benefit as his employee reimburses the expenses that are occurred.
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