Taxation Law For Local Public Hospital: Advice For Nurse Peter Petrelli

Inclusion of Income in Assessable Income

Discuss about the Taxation Law for Local Public Hospital.

The advice in this paper is for Mr Peter Petrelli who lives in Armidale New South Wales (NSW) and is employed as a nurse at the local public hospital. Peter is an Australian resident but has no clear understanding of the legal implications concerning his assessable income and any relevant statutes which can affect his income from other sources. As per the information provided by Peter, it is clear that Goods and Service Tax (GST) and Fringe Benefits Tax (FBT) are not applicable on his incomes earned during the income year. Peter’s tax payments are calculated by the accountant of the company where he is employed. Peter has approached me to take advice on matters other than his tax liability and has listed the following issues on which he would like to be guided with respect to his obligations under the taxation laws.

Peter’s annual salary for the financial year from the hospital was $76,000.

This amount received by you is to be included by you in your income statement for the income year as this is your ordinary income under Section 6-5 of the Income Tax Assessment Act, 1997 (ITAA, 1997) and shall be considered as your Assessable Income by the Australian Taxation Office (ATO) under Section 6-1 (1)[1]. Things which are to be taken into account in this context are your allowances, if any, any compensation amount paid by the hospital to you to compensate expenses incurred by you on behalf of the hospital. Another important aspect connected with this income is the amount of PAYG deduction. You must clarify from the administration whether the correct amount of PAYG has been deducted and deposited with the ATO[2].

At Christmas all the employees of the hospital received a hamper worth $100 from a local community organisation to thank them for their dedication in helping the local community.

Sometimes it is difficult to distinguish between voluntary payments, which can be taxed as ordinary incomes and gifts which are not taxable. But in your case, this amount paid by the local community organisation on Christmas to all employees does not come under the purview of Section 6-1 (1) of ITAA, 1997 and is not to be included by as an income in your income statement. This has been acknowledged by the ATO in the case of Scott (1966) where an amount paid to an employee, whether in cash or in kind, does not constitute as ordinary income at the hands of the employee if it has no relationship with the services being rendered by the employee[3]. This is also relevant in your case, because the amount paid in kind to all employees of the hospital was in no way connected with the services but was an appreciation of their services.

Tax on Gifts

Peter received $130 interest from his Eastpac bank account in Australia. He received $3,000 from his term deposit in a United Kingdom bank. Peter reminds you that Australia has a double tax agreement with the United Kingdom.

Section 6-5 (1) of ITAA, 1997 states that the place where the income is received shall be considered as the source of that income. Accordingly, as per this statute, all incomes earned by a taxpayer are classified by the ATO on the basis of their source. This is ascertained by the ATO on the basis of relevant case laws, such as FCT v Cooke & Sherden, and Payne v FCT. Taking into consideration these case laws and the mentioned statute, your interest receipt of $130 from Eastpac Bank account shall be considered as your ordinary income, as it has been derived in Australia, where you shall be assessed for income tax under Section 6-1(1)[4]. However, your receipt of $3,000 from a United Kingdom bank against your term deposit in that bank shall not be considered as assessable income at your hands as the source of income is outside Australia.

On 25 April 2016, ANZAC Day, Peter made $500 from playing Two-Up at the ex-services club. Peter reminds you that Two-Up is legal to play in NSW on ANZAC day and other commemorative days.

You must understand that although the game is given a legal status on certain commemorative days, just to encourage participants, Two-Up nevertheless is recognised as a Gambling Game by the ATO. Because of its classified nature under the taxation statutes, such type of Gamblers’ winnings are not considered as taxable incomes in Australia[5]. There are two reasons given by the authorities for this classification:

Gambling is not recognised as a profession, but is treated either as a recreational activity or as a hobby.

The Australian taxation authorities consider gambling gains not as income but earnings because of good luck of the individual contestant. It is argued by the authorities that even if one individual is winning big money, there are scores of others who are also losing a lot in gambling sessions.

On the contrary, the taxation authorities tax the gambling operators for running such activities.

On the basis of this revelation, your Two-Up winning shall not be considered as ordinary income at your hands and you are not required to report the same in your income statement for the year.

Source of Income for Foreign Bank Accounts

Peter umpires games in the local basketball competition. Peter had to complete an umpiring course before he could begin. The competition organisers did not pay him a salary but they did give him season tickets for the Sydney Kings NBL team, valued at $250.

You have stated that before taking up this role of umpiring to judge basketball matches at the local competition level, you had to undertake an umpiring course. This implies that you had to acquire a skill of judgement before becoming an umpire. According to the ATO, all incomes derived from acquired skills are classified as Personal Services Income (PSI) under Section 84-5 of the ITAA, 1997[6]. Although the Act and relevant Division 84 do not allow any deductions connected to PSI services, it is subjected to assessment as income at the hands of the individual who is receiving the benefits, whether in cash or in kind. Hence, the season tickets worth their market value of $250 received by you from the organisers of the competition shall be treated as ordinary income at your hands[7].

Peter and his family were contestants on the television game show Family Duel. They won $24,000 and agreed to split the winnings evenly between the four of them.

Although winnings from gambling are not taxable in Australia, winnings by participants in TV game shows or winnings from raffle and lottery are taxed at the maximum rate. All such amounts are considered as ordinary income at the hands of the winner under Section 6-5 of the ITAA, 1997 and it is mandatory for the winner to report all such winnings in their annual income statement for the year in which such amounts have been won. This is irrespective of the fact that the winning amount has been received or not. To avoid such discrepancies in reporting and to avoid the onus of a heavy burden of payment falling on the winner, the ATO has ruled that the organisers of such TV shows or promoters of the raffles or lotteries are responsible for deducting the maximum applicable tax rate from the winner’s bounty and deposit it with the ATO at the time of disbursing the winning amount[8]. Hence, your winning amount of $24,000 from the TV show ‘Family Duel’ is liable to taxation. Since, this amount has been shared equally among the four family members, you are required to report your share of $6,000 in your income statement for the year. You should also report the amount deducted by the organisers under your Paid Taxes column.

Taxability of Gambling Winnings and TV Game Show Winnings

Most weekends Peter works on designing apps for smartphones. He doesn’t have any formal training in designing apps but he finds it an enjoyable means to relax. He hopes that one day one of his apps will make him rich. In the past he has not declared income or claimed expenses on the venture. Moreover, he does not keep records of the venture’s expenses because he believes the main cost is his time. He set up a separate bank account into which money is transferred every time someone downloads an app from the App Store. In the financial year he made $1,400 on the sale of apps.

As per our discussion revealed I could assess that you were not clear about the assessable income and the possible implications of your part-time activity of designing apps which are used in smartphones[9].

You wanted to know whether it was like carrying on a business or would be considered as a part-time non-business activity, which you think it is. The terminology used to describe a business, as pursued by the ATO is defined in Section 995-1 of the ITAA, 1997 and states that any activity pursued either as a profession, employment, trade or vocation but is not taken-up as an employment or as an occupation is business. All incomes from business are to be reported in the income statement by the taxpayer as stipulated in Section 6-5. In your case, you do not maintain any accounts of this activity, nor do you claim any expenses which you incur in pursuing this activity nor is your activity pursued in a business-like manner as is the practice adopted by others pursuing the same activity. You are also not following the industry trends which are associated with such type of activities[10]. Hence, it is very mush clear that your activity is in the ‘Hobby’ category as defined by the ATO in TR 97/11. On the basis of this and as has been ruled by the ATO in other similar case such as that of Thomas (1989), Babka (1989) and Evans (1989), it is quite clear that the amount of $1,400 which you earned in this income year from the sale of your apps shall not be treated as ordinary income at your hands. Hence, it is not mandatory for you to report this amount as an assessable income in your income statement for the income year[11].

One of Peter’s colleagues, Dr Claire Bennett, did some work designing a logo for Peter’s app venture. Peter asked the hospital to pay $750 of his salary directly to Claire instead of him.

I must make it clear to you that in case you claim this amount as a deduction against the amount of $1,400 earned by you on the sale of your apps during this income year, then it would be a case of running an activity which is very much like a business. Under such circumstances, you shall be falling in the same category as was the case of Brajkovich (1989), who was pursuing gambling and hence could not claim deductions for the losses he suffered since he was not reporting the winnings he derived from gambling activities. You would also be following the case of Ferguson (1979) and hence, you will be entitled to declare as assessable income under Section 6-1(1) the amount of $1,400 which you earned in order to claim this deduction of $700 under Section 8-1 which you paid for designing a logo for your app making activity[12]. I would advise that you should not claim this amount as a deduction, as this will set a path for you to follow in the coming years and report all your app related activities as a business venture.

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