Question:
Discuss About The Taxation Policy Contexts Practice Rutledge?
The present issue is concerned with the determination of the taxability of the income that is received by Fashionista Pty Ltd for the promise made to an Australian clothing manufacturer for not trading in the territory of South Australia. According to the “taxation ruling of TR 94/D33”, it determines the consequences of the capital gains tax consequences relating to the considerations of the sum received for the purpose of granting restrictive covenants and trade ties (Barkoczy 2016). The “Taxation rulings of TR 94/D33” address restrictive covenants to the contracts or agreements that is formed exclusively based on the trade ties amid the two parties with the agreement that is entered into by the business entity by agreeing not to trade in the geographical region for a period of time.
The taxation ruling considers the former “subsection 160M (7)” is applicable to the present context of Fashionista Pty Ltd since the company agreed not to compete in the selected territory for a period of four years (Braithwaite, 2017). The amount that has been received by Fashionista Pty Ltd can be regarded as the restrictive covenant payments since the company abided by the trade promise of not entering the specified geographical area for trade. In the present context of Fashionista Pty Ltd it can be stated that the new “subsection of 160M (6)” is applicable for any transaction where the amount of money that is received is related to the contract for entering into the restrictive covenant along with the exclusive trade ties and the agreement of not to trade (Cao et al. 2015). The commissioner of taxation considers the purpose and the effect of the subsection that extends to identify the considerations as the benefit of mutual promises that is flowing towards the parties in the agreement.
Paragraph 17 of the ruling defines the view where the considerations that is received within the “Subsection 160M (7)” it is not restricted to the money or property. Instead the considerations extend to the assessable mutual promise that is flowing to the parties. As held in the case of Esso Petroleum Co. Ltd v. Harper’s Garage (Stourport) Ltd [1968] restrictive covenants under the general law represents to be regarded as the restraint of trade (Saad 2014). The judgement defines that the restraint of trade is applicable where an individual has contracted to surrender the freedom which could have otherwise been available. In the present scenario of Fashionista Pty Ltd it can be stated that the company agreed not to trade in south Australia represents a restraint of trade as giving up the freedom of trading in that the geographical boundary which could have been otherwise available for trade.
As held in the case of Bacchus Marsh Concentrated Milk Co Ltd (in Liq) v Joseph Nathan & Co Ltd [1919] a restraint of trade can be considered as the valid under the common law which is not held by an unreasonable restraint by the courts requires that the covenantee is under the obligations of protecting the interest (Lang 2014). Such interest is generally characterised as the interest in the property or the goodwill of the business. Additionally, from the current case of Fashionista Pty Ltd it can be stated that the business ties such as agreement of not trading in the particular territory is a restraint of trade that is valid under the common law. The amount that is received by Fashionista Pty Ltd could be considered for the capital gains tax purpose for the considerations of $440,000 received by the Australian company for grating the restrictive covenants and trade ties.
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Computation of Taxable Income |
||
|
Particulars |
Amount ($) |
Amount ($) |
|
Assessable Income |
||
|
Gross Receipts |
$ 4,40,000.00 |
|
|
Less: GST |
$ 40,000.00 |
|
|
Net Receipts |
$ 4,00,000.00 |
|
|
Total Assessable Income |
$ 4,00,000.00 |
|
|
Less: Company Tax 27.5% |
$ 1,10,000.00 |
|
|
Total Tax Payable |
$ 1,50,000.00 |
|
|
Net Income |
$ 2,90,000.00 |
As defined under the section 7 of the Fringe Benefit Tax Assessment Act 1997, it sets out the conditions in which the users of the car will be considered for taxation under the taxable fringe benefit. The act lay down the two alternative method of valuing the benefit. As evident from the present case study of Fashionista Pty Ltd it can be stated that car provided to Jane Jackson constitute fringe benefit where an employer’s car is used by the employee or the associate for the private purpose or that is available for the purpose of private use.
As held in the case of “Lunney and Hayley v FC of T (1958)”it is affirmed that the position of travel between an individual home and the place of work or business is considered as the ordinary private travel (Miller and Oats 2016). Fringe Benefit Liability is applicable to the all the private use along with the private home to work travel. As evident from the current scenario that private use under the “sub section 136 (1)” use of car made by the employee or the associate which is not in the course of gaining and producing the taxable income of the employee would be regarded for the private use of the car. Consequently, the car that was used by the Jane Jackson for travel from work to home would constitute private use, was not related in the process of gaining or producing the assessable income, and was not related for carrying on the business purpose.
In consistent with the present scenario it is understood that car expenses incurred on the employees can be considered as the Fringe Benefit Tax, which can be considered for allowable deductions. However, Jane Jackson would not be able to claim allowable deductions since the travel from work to home would be considered as the private expense and they do not constitute allowable deductions since it was not gained for producing the assessable income. Additionally, it is also found that Fashionista Pty Ltd had also reimbursed Jane $40,000 for the school fees and also paid the latest contribution that was due on her part for the outstanding HELP loan which can be considered as the payment to fringe benefit and the company can claim an allowable deduction for that expense.
As defined under the “Taxation ruling of IT 2631” owners of the rental premises especially in the districts of central business of the major capital cities of Australia, frequently offer incentives to induce businesses to enter in the lease of the premises (Davison, Monotti and Wiseman 2015). The “Taxation Ruling of IT 2631” takes into the considerations both the cash and non-cash lease incentives. In the present case of Fashionista Pty Ltd, it is found that the company moved from one premises to another premise and the sum received would be considered as the income.
As held in the case of “F.C of T v. Myer Emporium Ltd” the federal court defined that the a receipt would be considered as the income given that such income originates from the isolated business operations or commercial transactions that is entered into in the ordinary course of carrying on of a business. The judgement contained that the receipts would be considered as income so long the taxpayer entered in the transition intending to generate profit or gain from the transaction (Evans, Minas and Lim 2015). As evident from the decision where it is found that the taxpayer operates from the leased premises and the move of one premises to the another premises with the leasing of the premises occupied would be considered as the act of the taxpayers under the course of the business activity that results in taxpayer’s assessable income.
Additionally, the judgement of the federal court in the case of “F.C of T v. Cooling 1990”, where a taxpayer of the business is provided with the case incentives to enter in the lease of the business premises the incentive would be treated as income for the taxpayer (Woellner et al. 2016). In view of the current situation of the Fashionista Pty Ltd it can be defined that the taxpayer was provided with the cash incentive of entering in the lease of the new business premises and the cash payment received represents incentive in the nature of income and would be considered for assessable. In respect of the Fashionista Pty Ltd the transaction that is entered into by the firm should be treated as the commercial transaction. Furthermore, it formed the part of the business activity of Fashionista Pty Ltd a not an insignificant part of it was the obtaining of the commercial profit by way of the incentive payment. Accordingly, it can be considered as the payment will be viewed as income under the ordinary concepts and will be considered for assessment.
In the later stages it is found that the Fashionista Pty Ltd has to incur the expense on repairing the property. As stated under the “Taxation Ruling of 97 /23”, it provides the situations in which the person incurs an expense for repairs where allowable deductions can be claimed (Schreiber 2013). Additionally “Section 8-1 of the ITAA 1997” provides the provision that is related to gaining permission of taking into the considerations the deduction as the allowable deductions (Robin 2017). As defined under “Section 8-1 (2) of the ITAA 1997” a person is not allowed to claim deductions for loss or outgoings having the extent of the loss or outgoing is not capital in nature. Payments that is made by will not be allowed as deductions since the repairs that it is required to be made should be considered as the initial repairs.
Taking into the considerations the “Taxation rulings of 97/23” an individual would not be allowed to claim allowable deductions that has the nature of the capital works. As held in the case of “Hallstroms Pty Ltd v. FC of T (1946)” repairs having the nature of capital would not be considered for deductions (Blakelock and King 2017). As evident in the present case of Fashionista it can be bought forward that the initial repairs that is carried out by the company in the new lease premises are not treated as expense and they should be treated as capital work expenditure with no allowable deductions.
The “Taxation ruling of TR 95/25” is concerned with the deductibility of the interest in the form of outgoings that comprises interest under “Section 8-1 of the ITAA 1997” by satisfying the words of the section which represents that loss or outgoings forms the part of the appropriate apportionment (Vann 2016). The general principles govern the deductibility of the interest under “section 8-1 of the ITAA 1997” is that interest expense incurred by the taxpayer for the purpose of gaining and producing assessable income of the taxpayer with loss and expenses are not having the nature of capital, private or domestic in nature under the first limb (Kristoffersson 2014).
Another purpose that governs the deductibility of the interest is that it is necessarily incurred by the taxpayer for executing business activities with the objective of producing taxable income of the taxpayer and not having the nature of capital or private under the second limb (Barkoczy et al. 2016). As evident from the current situation of Fashionista Pty Ltd states that the interest expense has been incurred for the purpose of carrying on of a business with the objective of producing taxable income. The present case study clearly identifies that whether or not the expenses or outgoings that is incurred by the taxpayer satisfactorily meets the criteria of the section 8-1 being reliant on the facts and matter relating to the outgoings that is incurred by the taxpayer in the question.
As defined under the “section 8-1 of the ITAA 1997” the interest should possess sufficient amount of association with the functions and activities of the taxpayer that is more directly gained or produced by the taxpayer for the purpose of assessable income and not possessing the nature of the capital, private or domestic in nature (Grange et al. 2014). Additionally, “section 8-1 of the ITAA 1997” identifies that character of the interest for the funds borrowed should be generally decided by the reference to the circumstances of the borrowed money is used by the borrower (Tran-Nam and Walpole 2016). Nevertheless, regards should be paid in all the circumstances surrounding the character of the taxpayers undertaking or business together with the objective purpose of the borrowing having the nature of the transaction. A tracing of the borrowed money by the Fashionista Pty Ltd establishes that borrowed money was for the purpose of the income producing activities that reflects the connection between the interest and the income generating activities (Graetz and Schenk 2013). As evident from the case study, it establishes that fact that the sum of $40,000 that is borrowed by the Fashionista Pty Ltd as the interest on loan that is made by the foreign bank was for increasing the manufacturing capacity of the company.
As held in the case of FC of T v. Roberts the judgement of the court stated that interest on the borrowing to fund the repayments of moneys that was originally advanced by the partner and put into use as the partnership capital will be considered for deductions under “section 51 (1)” (Snape and Souza 2016). It will be considered for deductions up to the extent that the partnership capital was employed in the business for the purpose of producing or gaining taxable income.
As held in the case of Herald and Weekly Times Ltd v. FC of T (1932) at the time of determining the interest on capital to be considered as deductible appropriate regards should be given in respect of the commercial context for which the companies borrowed the relevant funds (James 2016). On applying the reasons full federal court in Smith v FC of T to companies will represents that interest on borrowing by the company might be considered for deductions where the borrowings of the funds would be considered as the repayment of the share capital to the shareholder. Interest on borrowing would be considered for deductions if it satisfies to meet the expenses of the business in gaining and deriving the assessable income of the company (Kiprotich 2016). As evident from the current case study, it can be stated that interest on borrowings can be considered for deductions under “section 8-1 of the ITAA 1997” for the purpose of gaining business income.
On the other hand, it is found that Fashionista Pty Ltd occurred a bad debt after a failed attempt by the company to recover the amount. As defined under the “paragraph 34-39 of the Taxation Rulings of TR 92/18” bad debt must be written off in the year in which the income is earned prior to making the bad debt allowable as deductions under “Section 63” (Pope, Rupert and Anderson 2016). Any form of business losses or outgoings having the nature of the revenue would be considered as the deductions that is allowable under “Section 51 (1) of the ITAA 1997” when incurred. In the present case study of Fashionista Pty Ltd the company can claim allowable deductions on the assumption that the bad debt was incurred in the income year. Furthermore, the losses or outgoings suffered by the Fashionista Pty Ltd comprised of the revenue in nature and would be considered as the allowable deductions (Morgan, Mortimer and Pinto 2013).
As evident from the present case of Fashionista Pty Ltd it is found that the company has acquired factory for $605,000. However, prior to the use of the factory Fashionista has to incur expenses on initial repairs the roof of the factory which costed the company $66,000. As held in the case of the “Law Shipping Co Ltd v IRC (1923)” initial repairs are not considered as the allowable deductions (Fleurbaey and Maniquet 2017). The reason for not considering the repairs as the allowable deductions is because the taxpayer might have received deductions in the purchase price of the asset and so appropriate to consider the expenses as the part of the acquisition cost (Krever 2013).
Initial repairs are not considered for allowable deductions even where the taxpayer is not aware of the defect at the time of purchasing the property (Pomp and Rodriguez 2015). In the present case study, it is observed that repairs that is carried out by the taxpayer was before the purchase of the factory and hence would not be allowed as deductions. Arguably, an assertion can be considered in the present context that the initial repairs that is performed on the purchase of new factory would be considered as the expense and such expense are viewed as the capital work expenditure. As defined under “section 8-1(2) of the ITAA 1997” a person is not allowed to claim allowable deductions for loss or outgoings to the extent that the loss or outgoing is having the nature of the capital or capital nature (Preez 2016). As held in the case of “FC of T Western Suburbs Cinemas Ltd (1952)” the full federal court passed a noteworthy judgement (Coleman and Sadiq 2013). The judgement stated that that any form of expenses that is incurred by the taxpayer in association with the asset having the outcome of functional improvements in the quality of the asset then the expenses would be considered under improvement and not repairs.
As the result of this, such expenses would be considered as capital nature where the deductions would not be allowed as deductions (Kenny 2013). Presently in the case of Fashionista Pty Ltd, the expenses of $66,000 incurred on initial repairs of roof of the factory would be considered under improvements and not repairs. Consequently, the expenses would be regarded as capital nature of expense and deductions cannot be claimed by Fashionista Pty Ltd.
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Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
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