Taxation Law Problem: Income Tax Implications For Bob And Sally In The 2017/18 Income Year

Issue

This is the taxation law problem that is related to the determination of income tax consequences including the assessable income.

Issue:

Is Bob taxable under “section 6-5 of the ITAA 1997” for carrying on the business of professional athlete and such that the payments received would be included into the assessable income of Bob?  

Rule:

As per “section 6-1 of the ITAA 1936”, the receipt of salary, wages fees, commissions etc. by the taxpayer are treated as income obtained from the personal exertion which is included into the taxable income of the taxpayer. The majority of income that comes in to the taxpayer are held as ordinary income under “section 6-5 of the ITAA 1997”. In “Scott v CT (1935)” the law court held that receipts should be held as income and must be ascertained in compliance with ordinary concept.

The value of free overseas holiday that are non-transferable and non-convertible to cash is not held as income. Similarly, in “FC of T v Cooke & Sherden (1980)” value of free overseas holiday that are non-transferable was not an income because it is non-convertible to cash.

As per “taxation ruling of TR 97/11” characterising receipts in the form of ordinary income consists of two steps namely ascertaining whether the taxpayer is performing business or whether the consideration received constitute normal proceeds of the business. As held in “Stone v FC of T (2005)” the taxpayer was the policewomen and javelin thrower that made money from salary plus endorsement and prize money. The taxpayer was assessable for the receipts on the grounds that she was carrying on the business of professional athlete.

The court in “Moore v Griffiths (1972)” held that mere prize is not an income. However, in “FC of T v Kelly (1985)” held that prize received may be treated as income if the receipts holds appropriate connection with income earning activities of taxpayer.

Accordingly, under “section 6-5” payments received as a reward for services that were rendered for receiving payment is assessable. As held in “Brent v FC of T (1971)” the wife of the train robber was assessable for granting the media company with an exclusive right to publish the life story.

Payments received for relinquishing or restricting rights is not an income however it results in “CGT event D1 under section 104-35 (1)” since the taxpayer creates a contractual or other legal right in another entity. Similarly, in “Higgs v Olivier (1951)” lump sum paid to actor for not acting or producing another film for 18 months was not an income.

“Section 8-1” allows deduction for legal expenses to extent that they are incurred in gaining assessable income. In “Herald & Weekly Times Ltd v FC of T (1932)” legal expenses were allowed deductible since it arose as the taxpayer’s revenue generating activities.      

Application:

Bob reports the receipt of salary from his employment in CorpCo Ltd. With reference to “section 6-1” the salary income from employment is an income from personal exertion. Citing “Scott v CT (1935)” the salary would be included for assessment under “section 6-5 of the ITAA 1997” as ordinary income.

Rule

During 2017/18 Bob reported the receipt of free non-transferable holiday to Hawaii that valued $20,000. Citing “FC of T v Cooke & Sherden (1980)” the value of non-transferable free overseas holiday was not an income because it is non-convertible to cash. Bob also reports receipt of cash prize of $15,000 and $30,000 for appearing in other rowing events. Referring to “Stone v FC of T (2005)” the prize money amounts to carrying on the business of athlete that contains profit making purpose. Citing “FC of T v Kelly (1985)” the cash prize and appearance fees received will be taxable under section 6-5 because the receipts holds appropriate connection with income earning activities of Bob.

Bob appeared in media interview to narrate the near-death experience of his boat capsize and miraculously surviving by swimming to the shore. Citing “Brent v FC of T (1971)” the money received constitutes assessable under “section 6-5” as reward for service. Bob entered into agreement of not appearing in any similar interviews for 18 months in consideration of payment of $70,000. The amount constitutes “CGT event D1 under section 104-35 (1)” for creating a contractual right in another entity. Citing “Higgs v Olivier (1951)” the amount is not an income. Citing “Herald & Weekly Times Ltd v FC of T (1932)” the legal expenditure incurred will be deductible under “section 8-1” since it arose by Bob from the income generating activities.

Conclusion:

Conclusively, the payments received as the professional athlete will be included in taxable income of Bob for assessment within the ordinary concept of section 6-5.

Heading:

This is the taxation law problem that relates to claiming of income tax deduction under the provision of ITAA 1997.  

Issue:

Is the taxpayer allowed to claim for deduction under the general provision of “section 8-1 of the ITAA 1997” for the transactions incurred during the income year of 2017/18?   

Rule:

As per “section 6-1 of the ITAA 1936”, the receipt of salary, wages fees, commissions etc. by the taxpayer are treated as income obtained from the personal exertion which is included into the taxable income. In “Scott v CT (1935)” the taxation commissioner expressed that receipts must be treated as income and must be established in agreement with the ordinary concept of “section 6-5”.

The “taxation ruling of TR 93/30” allows deductions for home office expenses where the home is the place of business and connected to taxpayer income earning activities. In “Swinford v FCT (1984)” the self-employed scriptwriter as allowed deduction for the part of rent paid for her flat, where a separate room was dedicated for her business and she did not have any separate business premises.

As per “section 26-5 of the ITAA 1997” a taxpayer cannot deduct any amount of penalty ordered by the court to be paid for an offence against the Australian law.

According to “section 8-1 of the ITAA 1997” cost incurred in acquiring the ordinary items of clothing such as suit are usually not allowed for deduction. In “Mansfield v FC of T (1996)” the court expressed that usually the expenses on ordinary article of apparel would not be allowed for deduction, irrespective that the expenses are necessary to make sure an appropriate appearance in a specific profession or job. A solicitor might be required to dress in the appropriate manner by his or her employer however the fact that it would not result the expenses to be deductible.

Application

Under the 1^st positive limb, expenses incurred to obtain a new employment that are not in the direction of obtaining assessable income are non-deductible under “section 8-1”. As held in “FC of T v Maddalena (1971)” incurred expenses incurred for new employment were non-deductible since it was incurred at a point to soon.

A taxpayer under “section 25-35” is allowed to claim specific deduction for bad debt when the debt is actually written off or the amount was included into the taxpayer assessable income. As per “section 8-1” legal expenses are deductible if they arise as the outcome of taxpayer revenue generating activities and the legal expenses is not capital in nature. In “Magna Alloys & Research Pty Ltd v FCT (1980)” the taxation commissioner allowed the company deduction for legal expenses incurred in defending the directors against the claim of secret commission. The expenses were appropriate and undertaken for business ends carried on for deriving assessable income.

Application:

Salary derived as interior design consultant by Sally would be included for assessment as income from personal exertion under “section 6-1 of the ITAA 1936”. Citing “Scott v CT (1935)” the receipt of $90,000 for the song writing work in 2017/18 will be included for assessment under the ordinary meaning of “section 6-5” as income from business activities. Sally also leases an apartment for her interior design consulting work. Citing “Swinford v FCT (1984)” Sally can obtain deduction for her home office expenses as she dedicated a separate part of room for her consulting business. Sally further occurred parking fines of $700 for illegal parking and the amount will be non-allowable for deduction under “section 26-5 of the ITAA 1997”.

Sally reports an expense of $8000 on contemporary suit. Citing the opinion of “Mansfield v FC of T (1996)” the expenses on contemporary suit is non-deductible for Sally, irrespective that the expenses are necessary to make sure an appropriate appearance in a specific profession or job. Furthermore, referring to “FC of T v Maddalena (1971)” expenses incurred on airfares and accommodations for new job interview is a pre-commencement to income producing activities and non-deductible under “section 8-1”.

Interior design would be allowed specific deduction for bad debt under “section 25-35” because the debt was written off. While the legal expenses incurred in defending directors are deductible under “section 8-1”. Citing “Magna Alloys & Research Pty Ltd v FCT (1980)” the expenses were appropriate for Interior Design Ltd and were undertaken for business ends carried on for deriving assessable income.

Conclusion:

Conclusively, the earnings from salary and song writing is an ordinary income for Sally while the expenses on parking fines, contemporary suits and airfares are non-deductible. Interior Design Ltd can claim deduction for bad debt and legal expenses as they were incurred in course of business activities.

References:

Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business Taxation

Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

Krever, Richard E, Australian Taxation Law Cases 2014

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia, 2013)

Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook Co./Thomson Reuters, 2013)

Sadiq, Kerrie et al, Principles Of Taxation Law 2014

Woellner, R. H, Australian Taxation Law Select 2013 (CCH Australia, 2013).