According to “section 6-1, ITAA 1936”, personal exertion income includes income that is derived from wages, salaries, gratuities, superannuation allowance etc. by working as the employee or from business activities. According to “section 6-5, ITAA 1997” most of the income that is earned by the taxpayer is treated as ordinary income. According to the taxation commissioner in “Scott v CT (1935)” income should be not be viewed as the word of art instead the receipts must be determined based on in relation to the ordinary concepts and usage (Maley, 2018). Jane reports the receipts of gross salary from her employment. The gross salary amounts to income from personal exertion by Jane under “section 6-1, ITAA 1936”. Citing the court judgement in “Scott v CT (1935)” the gross salary is an ordinary income based on the ordinary concepts of “section 6-5, ITAA 1997” and it is included for taxation purpose.
As per the nexus test a sufficient relation should be present between the receipts and provisions of services namely the reward or the ordinary incidence of service. The court in “Dean v FCT (1997)” held that receipt of retention payment by employee to continue employment for twelve more months following the takeover constitute an ordinary income (Barnes, 2018). The performance bonus of $25,000 received by Jane is treated as taxable income because the bonus holds adequate nexus with the occupation. She also received from Milton Hotel her clothing allowance of $4,500. The amount has been included for assessment as ordinary income under “section 6-5, ITAA 1997” as the sum is received by Jane during the course of her employment by working in capacity of employee.
According to “Section 8-1, ITAA 1997” expenses occurred in purchasing ordinary clothing items namely suits are non-deductible expenses. The court in “Mansfield v FCT (1996)” stated that cost occurred on ordinary articles of apparel is not allowed for deduction notwithstanding if the expenses are necessary to assure that a proper appearance is maintained in a particular job (Braithwaite, 2017). The jewellery expense of $7,500 is non-deductible under “section 8-1, ITAA 1997” for Jane since it is an ordinary item of apparel which is not related to work.
A simple winning of prize is not held as income unless the receipts forms the part of taxpayers income generating activities. The court in “FCT v Kelly (1985)” held that receipt of award for being the fairest player was treated as taxable income since it was related to employment and use of taxpayer’s skills (Miller & Oats, 2016). The receipt of award by Jane for being best Australian financial controller is a taxable receipts since it is related to her profession and work. Jane also received a computer in her award that valued $2,550. Citing “Cooke and Sherden (1980)” gains which are non-convertible to cash is not held as ordinary income. The computer received by Jane as an award is a gain which is easily convertible cash. Therefore, it is included into the taxable income as ordinary income under “section 6-5, ITAA 1997”.
If the employer gives an employee with the benefit then in such case the benefit will be treated as non-taxable income for the employee under “section 23 L, ITAA 1936” whereas for employer the value of benefit given to employee will be considered as FBT. Milton Hotels Ltd paid Jane’s membership fees (Woellner et al., 2016). The amount will be treated as non-taxable fringe benefit under “section 23 L, ITAA 1936” for Jane whereas Milton Hotel Ltd will be liable for fringe benefit tax.
As stated by ATO a taxpayer is permitted to obtain a permissible deduction for expenses that is occurred for attending seminars, conferences and workshop education that is associated to work purpose (Awasthi, 2017). Any private part of the expenses must be excluded that is occurred on trip. Jane with her husband attended a finance conference. The expenses consisted of registration, air fares, accommodation and visiting historical places. Jane is permitted to claim deduction for the registration, accommodation and air fares for her portion while the visit to historical places and air fare for husband is non-deductible expense because it is a private expense.
The legislative response of “section 25-100, ITAA 1997” allows a taxpayer to obtain deduction for expenses that is occurred relating to travel between two related work places (Picciotto, 2015). The travel must be related directly amid the work place where the revenue generating activities are carried on and none being taxpayers home. The court in “FCT v Wiener”, held that the taxpayer was the teacher and her employment required her to travel five different schools for teaching purpose (Schmalbeck et al., 2015). The commissioner found that work duties of taxpayer was itinerant in nature and travel formed the part of her employment duties, therefore a deduction was allowed. Travel expenditure reported by Jane include traveling from Milton Hotel to her taxation practice place at Kingsford where the income producing activities were performed. Therefore, a deduction is permitted for travel under “section 8-1, ITAA 1997”.
According to “taxation ruling of TR 98/1” receipts and earnings basis of accounting are two commonly used method for determining income during a relevant year. According to “section 6-5 (4), ITAA 1997” income is derived as soon as it is received under receipts method (Schenk, 2017). Under the earnings method income is derived as soon as it is earned. The court in “Barratt v FCT (1992)” held that where payment comprises of extending the credit and collection of debts then it is appropriate to follow the earnings method of accounting.
Accordingly in case of Jane receipts from her taxation practice involved both the billed and unbilled sum of $45,000 and $5,000. Furthermore, she also reported receipts from the investment property where she derived rent. The rental property receipts constituted ordinary income and represented the concept of regular flow. Quoting the judgement of “FCT v Barratt (1992)” the earnings method of accounting is appropriate method for taxation purpose because it would help in providing a true reflex of Jane’s taxation practice and investment property income. The income obtained from her taxation business and investment property is included for taxation purpose on the basis of earnings method because the income was derived as soon as it is earned by Jane in the relevant income year (Murphy & Higgins, 2016). A point of derivation happened for Jane for both the taxation practice and rental investment property when a recoverable debt was created by her for unbilled and accrued value of business fees and rental receipts. While the expenses incurred for both taxation practice business and investment property is allowed for deduction under “section 8-1, ITAA 1997” as the expenses were incurred while generating taxable income.
Jane reports income from dividends. The dividends is considered for taxable purpose under “section 44 (1) of the ITAA 1936”, while the franking credits attached with dividends is included for taxable purpose under “section 207-20(1), ITAA 1997” as statutory income (Deutsch, 2018). An income tax offset for the franking credits can be claimed by Jane to reduce her tax liability.
Jane reported capital gains from the disposal of CBA share. Quoting “FCT v McNeil” the capital gains obtained from CBA shares is treated as ordinary income for taxable purpose (Jover-Ledesma, 2014). Whereas the disposal of BHP shares resulted in capital loss. The capital gains from BHP shares is offset against the capital gains made from CBA shares. The donation to Sydney University and Cancer Council Australia is a deductible gift recipients, therefore a deduction for the same has been claimed.
The facts surrounding “FCT v Cooke and Sherden, (1980)” states that the husband and wife under partnership separately distributed door to door soft drinks based on the franchise agreement formed with soft drinks manufactures (Kenny et al., 2018). An incentive scheme was sponsored by the manufacturers that enabled their distributors to win a domestic or an overseas holiday trips. The trips incentives was such that it cannot be transferred nor it can be converted into cash. However, if the winners decides not take the trip then no other benefits was given to the distributors. The taxpayer here won several holiday trips during the past number of years. The commissioner of taxation considered the amount of trips relevant to the taxable income for the taxpayers. The court however in its unanimous decisions stated that the trips cannot be considered as taxable income.
For taxation purpose, an argument was raised which stated that the value of overseas holiday trips won by the taxpayer will be considered as taxable income under “section 25 (1), ITAA 1997” as the ordinary income (McCouat, 2018). The court decided that the holiday trips was received by the taxpayers as the outcome for providing services to the manufacturers and on applying “section 26 (e)” the holiday trips may be treated as taxable income.
As per “section 25 (1)” the court held that gratuitous benefits received in kind which is non-convertible to cash is non-assessable ordinary income. As per the law court gifts or benefits of such type is only treated for taxation purpose given the benefit is acquired in cash or can be converted to cash (Sadiq et al., 2018). The court also stated that it was regardless whether the expenses that might have incurred given the taxpayer had to pay for the trips and the same cannot be treated as ordinary income.
As per the law court it may not often happen that the benefit that is to be enjoyed by the taxpayers cannot be converted into pecuniary account, if the benefit is surrendered or the same is used in acquire some sort of right of commodity (Taylor et al., 2018). Where the claims of benefit is non-convertible to cash, cautious evaluation should be made to determine if any type of indirect attempt of obtaining the benefit is made such as money or money’s worth. By citing the example of “Abott v Philbin (1961)” the commissioner stated where the option was not provided however the right for calling of shares was held as having the worth of money because the same can be used as a means of borrowing money.
Referring to “section 26 (e)”, the commissioner stated that no kind of services was rendered to the manufacturers by the taxpayers. Rather the taxpayer distributed soft drinks and were conducting their business activities for their personal benefit. Therefore, the benefit of free holiday trips could be treated as income under the ordinary concepts as it was non-convertible into cash.
The case of “FCT v Cooke and Sherden, (1980)” is still treated as relevant case since the verdict announced resulted in the enactment of “section 21A” (Sadiq et al., 2018).
As per “section 21A” non-cash business benefits received as a result of business relation which is non-convertible to cash will be treated as convertible into money and such benefits will be bought under the purview of taxable income, provided such benefits is having income character.
An identical verdict was made in “FCT v Payne (1996)” where the frequent flyer points was not held as ordinary income because it was non-convertible to money. The points were neither transferable nor convertible and was subjected to cancellation if it is sold.
References:
Awasthi, A. (2017). Transformation of Tax Laws: A Global Perspective. Intertax, 45(2), 175-181.
Barnes, J., (2018). On the ground and on tap—law reform, Australian style. The Theory and Practice of Legislation, pp.1-32.
Braithwaite, V. (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.
DEUTSCH, R. (2018). Australian tax handbook 2018. [Place of publication not identified]: THOMSON REUTERS AUSTRALIA.
Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.
Kenny, P., Blissenden, M., & Villios, S. (2018). Australian Tax 2018.
Maley, M. N. (2018). Australian Taxation Office Guidance on the Diverted Profits Tax.
McCouat, P. (2018). Australian master GST guide 2018.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage Learning.
Picciotto, S. (2015). Indeterminacy, complexity, technocracy and the reform of international corporate taxation. Social & Legal Studies, 24(2), 165-184.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., & Obst, W. et al. (2018). Principles of taxation law 2018.
Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.
Schmalbeck, R., Zelenak, L., & Lawsky, S. B. (2015). Federal Income Taxation. Wolters Kluwer Law & Business.
Taylor, C., Walpole, M., Burton, M., Ciro, T., & Murray, I. (2018). Understanding taxation law 2018.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.
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