Determining Income Tax Liability For Dr. Jean And Gifts As Taxable Income

Assessable Income and Allowable Deductions for Dr. Jean

1.Dr Jean is a self employed medical practitioner with her own practice in Hawthorn. Dr Jean employees three casual staff who work as receptionists in her office. She also employees one qualified nurse on full time basis. The following information relates to her medical business for the year ending 30 June 2017.

Cash received from patients during the year ending 30 June 2017 400,000
Reimbursements from Medibank received during the year 50,000
Invoices sent to patients during the year totalled 425,000
Unpaid patient invoices at the 30 June 2016 25,000
Salaries paid to the casual staff during the year totalled 75,000
Salary paid to the nurse totalled 60,000
Other expenses incurred (all deductible) 55,000

Required: Advice Dr Jean, giving reasons, what her income tax liability is for the year ending 30 June 2017.

2.Noah, an architect, issued an invoice to his client for services rendered totalling $5,000. The client paid Noah by giving him a non – transferable travel voucher valued at $4,700 entitling him and his family to a free holiday in New Zealand.

Required : Discuss the income tax implications of being paid by a non transferable holiday voucher. What are the income tax implications if the voucher was capable of being sold or gifted by Noah to another person?

3.Mary is a talented employee in a public accounting firm who has completed two years of her university accounting degree with a further one year required to complete her studies. Her employer has offered to grant Mary a scholarship to attend university as a full time student for her final year. On completion of her studies Mary will rejoin the firm as a full time employee. The scholarship is 50% of her current salary and $400 for text books.

Required: Discuss the income tax implications (if any) for Mary if she accepts the scholarship. Would your answer be different if she wasn’t required to rejoin the firm on completion of her studies

4.Due to ill health Peter sold the goodwill of his accounting practice in Hawthorn for $400,000 plus he received a further $40,000 when he signed an agreement not to open another accounting practice within 10 kilometres of the Hawthorn business.

Required: Discuss the income tax implications for Peter of the receipt of the $400,000 and the $40,000

5.In November 2016 Elizabeth’s warehouse and its contents were destroyed or damaged. Following negotiations with her insurer she accepted $200,000 from her insurance company as full settlement for the loss. The claim she had made to the insurer comprised $180,000 for damages to the building, $50,000 for loss of trading stock.

Required: Advice Elizabeth, giving reasons, the effect of the amount she received from the insurance company on her assessable income. What difference would it make to her assessable income if the insurance company had paid her $230,000?

6.A surf life saver, who was on duty, rescued a drowning child from the sea. A greatful parent of the child gave the life saver a gift valued at $500. Surf life savers at this club are not paid for being on duty but do the work for the pleasure of helping swimmers in difficulties. Required: Advice the surf lifesaver if the gift she received from the parent is assessable income. Would it make any difference to your answer if

a) The lifesaver was paid by the club for being on duty or

b) If the gift had have been cash? 
 

Assessable Income and Allowable Deductions for Dr. Jean

1.The current study is based on the determination of the income tax liability for Dr Jean arising from the transactions reported for the year 2017. According to section 6-5 of the ITAA 1997 an individual assessable income includes the income in respect of the ordinary concepts that is known as ordinary income. As evident the receipt of cash from the patients would be considered assessable for Jean it is directly derived from the Australian sources during the income year. Additionally, it is noticed that Jean received a reimbursement from medibank of $50,000. According to the Australian taxation office if the reimbursement is covered by FBT then the amount would not be considered assessable. As held in the case of “R v Davis (1978)” an allowance generally consists of any payment made for carrying out the liability to account (Woellner et al. 2016). The amount of reimbursement is not a fringe benefit for Jean and these amount will be included in assessable income.

Computation of Taxable Income of Jean
For the year ended 2016/17
Particulars	Amount ($)	Amount ($)
Assessable Income
Cash received from Patients		400000
Reimbursements from Medibank		50000
Total Assessable Income		450000
Allowable Deductions
Salaries paid to casual staff	75000
Salary paid to nurse	60000
Other expenses	55000
Total Allowable Expenses		190000
Total taxable income		260000
Tax on taxable income		90232
Add: Medicare levy		5200
Total tax payable		95432

According to the Australian taxation office an individual can claim allowable deductions for most of the expenditure that is incurred in running the business (Barkoczy 2016). According to section 8-1 an individual can claim an allowable deduction from their assessable income if the expenses are incurred in executing the business activities with the objective of gaining or producing taxable income. As held in the case of “Ronpibon Tin NL v FCT (1949)” for an expense to be considered as deductible it is necessary in gaining or producing the taxable income (Tan, Braithwaite and Reinhart 2016). Therefore, Jean can claim an allowable deduction for expenses incurred in carrying out the business activities with total tax liability standing $95,432 for the year 2016/17.   

2.For the non-transferable vouchers or vouchers that are in the name of the specific recipient that is the holder is the only person that has actually acquired the voucher and no other person is entitled to supplies on its redemption. The supply of voucher will be considered as the taxable supply where the requirements of the “section 9-5 of the ITAA 1997” are met. Under the division, GST would be considered payable to the extent the considerations of the supply of the voucher has exceeded the monetary value (Cao et al. 2015). The value of the overseas free holiday received by Noah being a non-transferable that could not be considered as the into money will form the part sales incentive scheme and would not be considered as the assessable income.

Non-Transferable Vouchers and Overseas Free Holiday

According to the taxation ruling of TR 2005/13 in order for the gift to be considered transferable in the form of gift it must be having the voluntary nature of being transferred and should involve the act or the will of the giver (Braithwaite 2017). According to the judgement held in the case of “McPhail v Federal commissioner of Taxation (1968)” the gift deductions provision is taken into the considerations and it is used in the sense of ordinary parlance. If the gifts are sold or transferred by Noah a reduction will be allowed to Boah under section 30-220 of the Income tax assessment act 1997.       

3.According to the taxation ruling of IT 2581 scholarship income will not be considered as the allowable deductions under paragraph 23 (z) of the act based on the conditions that the recipient would is required to present in future to execute the work for the provider. As evident in the current case of if Mary accepts the offer of scholarship the scholarship income would not be considered to exempted under the paragraph 23 (z) based on the conditions that Mary works for the company.

As held in the case of “Federal Commissioner of Taxation v Hall 75 ATC 4156” the income tax exemption would not be considered for exemption since the payment in the form of Scholarships effect the payment that are in the nature of the remuneration for the present or future services (Miller and Oats 2016). Given the fact that Mary was the employer of the payer she is advised that her scholarship would be an assessable income and would require withholding tax of PAYG from the periodic payments. On accepting the scholarship Mary would be required to show the scholarship amount as the taxable income in her tax return. 

Alternatively, if Mary is not required to re-join the firm then the amount of scholarship would not be considered assessable since she is not required to re-join her service.

4.Goodwill is regarded as the capital gains tax asset under section 108-5. An individual might make the capital gain or loss if they dispose their business asset in the form of sale or transfer. An individual selling the business asset should include the net capital gain they make during the accounting period or the income year in their tax return. According to “taxation ruling of TR 1999/16” stated under part 3-1 of the ITAA 1997 capital gains and losses is applicable to the taxpayer conducting the business with goodwill and makes the capital gain or loss given the capital gains tax event takes place to the goodwill of the business (Saad 2014).  As evident in the current case the selling of accounting practice by Peter for a sum of $400,000 would attract capital gains tax.

Taxation of Scholarship Income

In respect of the taxation ruling of TR 1999/16 a restrictive covenants represents the covenant of agreement between the vendor and the purchaser for the sale of business or in the separate agreement through which the vendor agrees not compete in the business (Davison, Monotti and Wiseman 2015). A decision of this ruling has been reflected in the case of “Federal Commissioner of Taxation v Murry (1998)”. As evident from the current case study a restrictive covenant was entered into by Peter with the purchaser where he obliged not to compete or attract any clients. The receipt of $40,000 on the sale of business represents the restrictive covenants is entered into by Peter which will be regarded as the CGT event and would attract capital gains tax.

5.Insurance pay-outs are regarded as entirely the personal items and it does not require to be included in the tax return. However, the insurance payments that is received for the items that is used in generating the taxable income might be included in the taxable return. According to the Australian taxation office if an individual receives an insurance pay-out relating to the destruction of the depreciating asset that used in the production of income it is necessary to calculate the balance adjustment (Tran-Nam 2016).

As evident in the current situation of Elizabeth where she received value less than the actual value of the asset, Elizabeth can claim a deduction for the balance adjustment amount. This represents the differences between the amount of insurance pay out received by Elizabeth and the adjustable value of the building contents at the time when it was destroyed. Similarly, the payment that is received by Elizabeth under the policy relating to the loss of trading stock will be treated as the taxable income.

In an alternative situation where it is noticed that the amount of insurance pay-out of $250,000 received by Elizabeth shall be subjected to capital gains tax consequences. This is because the amount received will be treated as the recoupment of expenses made on the asset (Evans, Minas and Lim 2015). Therefore, the sum received by Eliza will be subjected to capital gains tax consequences.

6.As defined under the taxation ruling of TR 1999/10 a gift that is not the part of the person’s assessable income where the gift received for personal reason and not connected for any work purpose will not be included in the assessable income (McGregor et al. 2017). If the gift received is in respect of the work or employment related activities, then the gifts will be considered as the taxable income. According to division 30 of the ITAA 1997 any gift having a value of more than $2 will be considered not be considered allowable. Similar the receipts of gifts having value of $500 by the surf life saver would not be allowed as deductions since the value of gift is more than $2 (Lang 2014). The gift would form the part of the assessable income of the life saver.

Alternatively, an individual is not required to declare rewards or cash gifts in the assessable income. however, the in current case the cash gift received by Life saver will be considered as the assessable income. This is because the cash gifts received by life saver is in respect of the employment and will be included in the taxable income.    

Reference List:

Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Davison, M., Monotti, A. and Wiseman, L., 2015. Australian intellectual property law. Cambridge University Press.

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

McGregor-Lowndes, M. and Crittall, M., 2017. An examination of tax-deductible donations made by individual Australian taxpayers in 2014-15. Australian Centre for Philanthropy and Nonprofit Studies, Queensland University of Technology.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Tran-Nam, B., 2016. Tax Reform and Tax Simplification: Conceptual and Measurement Issues and Australian Experiences. In The Complexity of Tax Simplification (pp. 11-44). Palgrave Macmillan, London.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.