Taxation Law For Section 4-1 Of ITA Act: Residency, Income, Superannuation, Gifts

Residence

Discuss about the Taxation Law for Section 4-1 of the ITA Act.

Issue

The issue is to determine whether Megan is resident for the purpose of tax.

The section 4-1 of the ITA Act 1997 states that every company, individual or other entities is required to pay income tax on their assessable income. The assessable income is classified as ordinary income and statutory income for the purpose of tax (Burkhauser et al., 2015). The ordinary income includes income of ordinary concept as per section 6-5 of the ITA Act 1997. The other assessable incomes that are not ordinary income are assessable income as per section 6-10 of the ITA Act 1997. A resident taxpayer is required to pay tax from income received from all the sources as per section 6-5(2) of the ITA Act 1997. The section 6-5(3) provides a foreign resident on the other hand is required to pay tax only on income that are received from sources within Australia. It is therefore important to determine the residential status of the taxpayer (McLachlan, 2013).

In this case, Megan is engaged with an Australian mining company and is required to spend eight months out of Australia. The ITA Act 1936 defines resident as an individual whose place of abode is in Australia or the individual is the member of a superannuation scheme. Meagan sacrifices a part of the salary for contribution to superannuation scheme and her regular place of abode is in Australia (Dowling, 2014).

Conclusion

Based on the above analysis it can be concluded that Megan is a resident for the purpose of tax.

Issue

The issue is to determine whether the assessable income should include the gross income received from an Australian company.

The assessable income of the taxpayer is classified into ordinary income and statutory income.  The incomes received by the taxpayer from property, business, employment and personal services are included within the meaning of ordinary income (Chalmers et al., 2013). In the case of Tennant v Smith 1892, FCT V Cooke and Sherden 1980 it was held that an income would be considered as ordinary if a real gain accrue to the taxpayer and the income is received in cash or cash convertible (Hopkins, 2016).

Megan worked for a mining company and received an income of $180000.00 during the income year. This income received from the mining company is a regular receipt and should be included in the assessable income of the taxpayer as held in the case of FCT V Blake 1984. In the case of Tennant v Smith 1892, FCT V Cooke and Sherden 1980 it was held that income from employment should be included as ordinary income (Schenk et al., 2015). The income that is received from mining company is for employment therefore it is an ordinary income and should be included in the assessable income of the Megan.

Conclusion

Based on the above discussion it is concluded that income received by Megan from mining company should be included in the assessable income.

Income received from the mining company

Issue

The issue is to ascertain the affect on the assessable income of the taxpayer due to salary sacrifice for contribution to superannuation.

The salary sacrifice arrangement is defined in Taxation Ruling 2001/10 as an arrangement between the employer and employee where employee forgo a part of the salary and in return receives benefit of similar value from the employer (Chang, 2016). The salary sacrificed for the purpose of contribution to the superannuation is an example of salary sacrificing arrangements (Acemoglu & Robinson, 2015). If the contribution to the superannuation is made within the prescribed limit then such contribution is taxed at a nominal rate of 15%. The salary that is included in the assessable income does not include the salary sacrifice for the contribution to superannuation.

Megan sacrificed $20000.00 for superannuation contribution and this sacrifice of salary should not be included in the assessable income as per the above discussion.

Conclusion

The assessable income of the Megan should not include the salary sacrifice component of $20000.00, as it will be taxed at a nominal rate of 15%.

Issue

The one off payment is received from the company and the issue is to determine whether it should be included in the assessable income.

The income is considered as ordinary income if the receipt of such income is regular as was held in the case of FCT V Blake 1984.  In the case of FCT V Harris 1980, it was held that assessable income would not include one off receipts. However, there are certain exceptions to this rule, as a lump sum payment received to do a particular job under a contract is included within the ordinary income (Chardon et al., 2016).

Megan received a one off lump sum payment from the mining company under a contract of not to work for any other mining company. This is an exception to the rule that held in the above cases so it should be included in the assessable income (Krever & Mellor, 2016).

Conclusion

The one off payment received by Megan should be included in the assessable income.

Issue

It is to be ascertained whether the fees received from freelancing should be included in the assessable income.

The incomes from all sources are included in the ordinary income. The definition of ordinary income includes the fees that are received by the taxpayer by providing freelancing services (Alm & Duncan, 2014). The GST or tax payable should not be included in the assessable income of the taxpayer as per section 17-5 of the ITA Act 1997. The section 17-5 also stated that the amount received that is to be included in the assessable income should be calculated after adjusting the GST payable (Hasseldine & Morris, 2013).

The fees received for providing freelance service includes GST amount. This GST amount should be adjusted before the freelance fees are included in the assessable income of the taxpayer (Allan et al., 2014).

Conclusion

The freelance received by Megan should be included in the assessable income after adjusting the GST payable amount.

Superannuation Contribution

Issue

The taxpayer has received gift in cash and gift in kind. The issue is to ascertain whether the gifts should be included in the assessable income of the taxpayer. 

It was held in the case of Tenant V Smith 1892, FCT V Cooke and Sherden 1980 that a gain that is not receive in cash or cannot be converted to cash then it is not an ordinary income (De Mooij, 2012).

In this case, Megan received two bottle of champagne and a cash gift of $5000.00. The two bottles of champagne are not convertible to cash so this are not included in the ordinary income (Cracogna & Henrÿ, 2013). The law provides that if a gift is received from income earning activity then such gifts should be included in the assessable income. In this case, Megan received cash gifts from clients so this gift amount should be included in the assessable income (Anthoine, 2013).

Conclusion

From above it can be concluded that two bottles of champagne is not an income and should not be included in the assessable income. On the other hand, cash gifts received from clients should be included in the assessable income.

Issue

The issue is to determine whether the assessable income should include the income received from sale of intellectual property.

The section 995 provides the definition of intellectual property rights. The definition provides that items that consist of equitable rights are considered as intellectual property right. It also means patent or a license as mentioned in the common wealth law. The owner of a design of a product or equipments is also included in the intellectual property owner (Burkhauser et al., 2015).

In this case, Meagan was the owner of then design of mining equipment that she sold for $121000.00. The income that is received from the design of mining equipment is the income from personal exertion for Megan (Dowling, 2014). The ITA Act 1997 provides that mining equipments include the intellectual property rights on the depreciating assets. The extents for the consequences of intellectual property right are based on the capital costs as mentioned under division 40 (Hopkins, 2016). The section 40 C provides that any income from the sale of intellectual property should be treated as revenue and should be included in the assessable income. In the case of Pacific Film laboratories Pty ltd V Federal Commissioner of taxation, it was found that intellectual property transferred is considered as sale and is subject to sales tax (Chang, 2016).

Conclusion

Then law provides that any type of income from sale of intellectual property should be included in the assessable income. The case law also provides that the transfer of intellectual property is to be considered as sale.

Issue

The income from sale of painting whether it should be included in the assessable income.

The section 84-5 of the ITA Act 1997 provides that if an ordinary income or statutory income is received from the personal effort and skills then such income are known as personal service income. The section 84-5(2) provides that only individuals can have personal service income (Chardon et al., 2016).

One off payment received

The Taxation ruling 2001/7 provides that analysis of ordinary income and statutory income is required in order to define personal service income as per Para 20 of the ruling. The Para 26 of the taxation ruling 2001/7 provides that for interpreting division 84 it is important to ascertain whether the income is received for personal effort and skill (Alm & Duncan, 2014). If the income is in fact received for personal skill and effort then it should be included in the assessable income. If the income is not received for personal effort or skill then it should not be included in the personal service income (Allan et al., 2014). In this case, Megan has received substantial income from painting activities. The painting skill of Megan was recognized in various art exhibitions and she earned an amount of $22000.00 during the current income year. The income from the painting is an income from personal exertion (Cracogna et al., 2013 ). This can be further classified as income generated from capital gain and income that are received from reward. The personal service incomes involve alienation measures and are subject to tax so they should be included in the assessable income of the taxpayer. In the case of New IT Pty ltd it was held that individual that is providing the necessary service to customer is providing then personal service for the purpose of the tax.  The income that is received from providing personal service is included in the assessable income of the taxpayer (Anthoine, 2013).

Conclusion

In this case, Megan has received income from selling paintings and rewards. She obtains these incomes from personal effort and skill so these are personal service income. The personal service income is taxable so it should be included in the assessable income of the taxpayer.

Reference

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