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Australian Tax Office On Personal Exertion

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Question:

Discuss about the Australian Tax Office On Personal Exertion, Car Fringe Benefit, Capital Gain And Loan On Interest.
 
 

Answer:

This paper is seen to test the tax aspect and qualification of personal service income under different test evaluation steps, capital gain or loss on land and building property, car fringe benefit calculation using statutory method for Australian residence for tax and finally it analyses the aspect of interest on loan especially among family members.

Issue

Personal exertion income is earnings generated through use of own skills, tactics and talents Delany (2011. p.85.) Any income that is termed as personal service income is indeed deemed to enjoy special tax treatment especially at that time of accounting for it for tax deduction purposes. It is however prudent to know that not all incomes generated through use of individual skills is presumed to be part of personal exertion. This is because most of the professional and tertiary careers and jobs are done by individual who uses their skills and knowledge in combined force or dependently to achieve a target of course at a return Travers (2014. P.49.)

Therefore, in general the issue in question is whether the income earned by Hilary is fit to be classified as part of personal exertion. Incomes are seen to be earned by individuals using their skills thus tasking income that are to be classified as personal exertion income to be subjected to tests and evaluation that are done in step form for qualification purposes Indrayani(2018.P.23.)

Rule

For an income to be considered personal exertion the rule on ATO personal services income has to be applied generally is step form bit by bit. These steps are outlined by Australian Tax Office to be conducted in a systematic and consequential manner whereby the outcome of the precedence step dictates the procession to the next step hence if one step is not fulfilled qualification for personal service income ceases to take place hence automatically classifying the income as a personal business venture for tax purposes.

 

Application

Hilary is mountain climber who does this skillfully, out of talent and passion to the extent of getting recognition hence offered a deal with Daily Terror Newspaper upon doing a written life history article of course including mountain climbing history in it at a fee. The great concern at the moment is finding out whether all the income she earned relating to the article on her life history qualifies to be classified as personal exertion income hence a direct entry to personal income deduction consideration for tax purposes.

Hilary incomes that are to be tested for personal exertion purposes is the likes of 10000 Australian Dollars offer upon writing life history book, sales of copyright interest at 10000 Australian Dollars to the Daily Terror Newspaper, sales proceeds of 5000 Australian Dollars resulting from the life history books sold to Mitchel Library and finally is the income from sale of photographs she took while climbing the mountain amounting to 2000 AUD hence summing the total income to be 27000 AUD.

The tests to be conducted to determine whether these incomes qualify to form part of personal exertion are done on the conditions that incomes were earned upon the offered deal given by the Daily Terror Newspaper to do the writing and the other conditions is upon doing the writing at own satisfaction only to come and do income sales generating process afterwards. The first test step is finding out whether 50% of all the income earned results from own skills and efforts. In this case, all the revenue earned from the first condition of being paid to do the writing ideally more than 50% results from own skills hence the passage to the next step i.e. step 2 for this condition Woellner (2012. p.24.)

On the same issue of 50% threshold of income from it be informed that likewise if Hillary was to do writing herself and do sales later the income she would earn similarly will inclusively be more than 50% resulting from own skills, therefore, this is too subjected to the second test step. The second step on condition if she was doing writing herself is to find out whether the income she would earn resulted from a payment done to her to write, on those I think it is absolutely no since she will not have been paid to do this because she will be doing herself, for mistakes and other expense since she does not have anyone paying for her this too does not apply and finally is on whether there is any tool or equipment she is expected to provide this is absolutely no at 100% hence procession to step 3.

The Step 2 terms and conditions on the Daily Terror Newspaper sponsoring offer made to Hilary is clearly satisfied 100% or rather more than 75% since the first condition on whether Hilary was paid to produce result is satisfied since she was paid to do the writing, while for equipment production she was tasked to provide copyright interest for the writing and lastly is on whether the expenses were catered personally or by the sponsor in my view I presume it was never catered by the company hence the need to proceed to step 3.

Step 3 is on the percentage of income gotten from one source or rather the source of income. For the case of doing the writing for own need more than 80% might be becoming from one person because Hilary might decide to sell to one distributor hence the collapse of this option to process to step 4 hence qualify to be classified as personal business income.

For the case of Hilary being fund by Daily Terror Newspaper ideally all the income source are less than 80% i.e. for offer=10000/27000=37.03% similarly to the copyright one at 37.03,with  Mitchel library at 18.51% and 9.25% for photographs hence all are less than 80% procession to step 4.Step 4 on the unrelated persons interest and employee test as well as business test are likewise not applicable in the case of Hillary because the copyright take charge of everything hence a no for this condition and of course a qualification for personal exertion income.

 

Conclusion

Actually out of the two scenario i.e. that which it involves Hilary being sponsored by Daily Terror Newspaper and that which she will be doing the writing herself without any help it is only the income resulting from the scenario of Hilary being sponsored that is treatable for personal exertion deduction allowance for tax purposes.

Issue & Rule

Car fringe benefit is a special benefit offered to employees by the employer as stipulated in ATO rule on Fringe Benefit Tax. It is given to employee so as to help them in executing their tasks for revenue generation Butler (2018. P.670) the concern in the question or the issue at the moment is on how calculation of taxable value for Eric’s car fringe benefit is to be done using statutory method.

Application

Eric’s Fringe Benefit value that is taxable in nature is calculated as Hodgson (2015.p.839) =car cost base value multiply by fringe benefit percentage statutory rate then multiply by the duration time the car has been used for own purposes then the answer is divided by the number of the days in that year and lastly from the result we less the contribution done by the employee hence;

T.V.F. B= ((A × B × C) ÷ D) – E, where;

A=Vehicle cost value, B= fringe benefit % rate,

C=the period the car was used for own use in days, D= Aggregate no of days in that year of tax E=portion of expense done by the employee while T.V.F.B means Taxable Value for Fringe Benefit. Therefore, the calculation is;

Using 366 days’ tier

= {(50000X0.2X183)/366}-1000=4000AUD

Using 365 days’ tier

= {(50000X0.2X183)/365}-1000=4013.69AUD

Conclusion;

Erick is therefore eligible to enjoy a taxable car fringe benefit amounting to 4000AUD if he applies the 366days tier or 4013.69 for 365days tier

Issue; Accounting for interest earned as part of assessable income is indeed the concern of the question or rather the point in question.

Rule; Australian Tax Office regulations on loan lending among family people explain that all interest earned upon money lending business of course at a reasonable value should be reported as part of assessable income and of course, all relevant expense relating to it the likes of loan processing fee among others Bryant (2018. p.21.) The same law expects the lending process to be sealed by an agreement between the parties however close they are or relate.

 

Application:

In this case, a parent is seen to lend money to her son through the word to word agreement with term of the son to pay back the loan within the 5years period at an interest of 10000 i.e. =50000-40000=10000, this means that the interest if this deal of 10000 interest is honored will be

=10000/40000*100=25%, this interest rate in the first place is termed as unreasonable hence this payment of interest is not realistic. However, as agreed this was never honored instead the parent decided to ask the son to just pay the principal amount and forget about the interest but the son defiled this by paying an interest of 5% which is 40000*5%=2000 a rate that is reasonable and within the peripherals of the law Dunne (2016. p.609.)

The son indeed made the payment to the parent via bank details which of course is presumed to be the same means of payment that took place when she was receiving the loan from the parent hence a legal means of payment that has seen to leave evidence of the transaction. Although the parent did not want to be repaid the interest accrued upon loan issuing she has to accept the transaction and include the 2000 interest paid on it as part of her assessable income and subject it to tax upon the summation of this interest with other income earned. She can also claim all expenses that related to the issuing of the loan to the son as an interest expense tax deduction to relieve her tax burden Doss (2017. p.220.

Conclusion;

It should be agreed that many will say that there existed no written contract between the parent and son which of course I definitely conquer and agree with. However, this does not mean that in absence of this agreement one is not obliged to pay tax on any interest or income earned outside the agreement peripherals Brown (2016. p.670.) The parent should, therefore, include this 5% interest to form part of her assessable income while the son claims this expense as part of his deduction at his end upon keeping trail and back up evidence of these transactions.

Issue & Rule;

All these three parts of question 4 are all approaches that see into it that tax aspect relating to CGT is applied especially on disposal of assets as per regulation and tax concessions applicable.

Application;

(a)Net capital gain or loss is ideally the amount of taxable income that is seen to be reported as part of your assessable income during reporting Duncan (2018. p.20.) This item i.e. net capital gain is ideally what is of importance to this question and it is calculated by considering all the capital gain earned on disposal of an asset then less any capital loss if any on capital sale residual as well as any other capital gain discount and concessions applicable Travers (2014. p.259.)

Scott’s land and building asset value stands at =90000 value for land plus =60000 for construction cost hence the total cost value is =150000, this likewise make the base value of the asset to be 150000,

Conclusion;

Therefore the capital gain resulting from the disposal of property at the auction at 800000 ideally attracts a great tremendous gain probably as a result of revaluation factor hence the gain on sales proceeds is,

=800000-150000=650000AUD,

On this gains using the small business entity concessions, we can apply the 50% exemptions CGT rule on capital gains by calculating this as =650000X50%=325000AUD.

 

Capital Gain Less Capital loss less any CGT discount exemptions on SBE’S

Thus Net Capital Gain=650000                 less                      0              less                      325000

Net Capital Gain for Scott=650000-0-325000=325000AUD, this amount is what that ought to be included as part of assessable income for tax purposes an aspect that has relieved scot from paying a big amount of 625000.Using the concession of SBE on tax aspect CGT wise the calculation above relates to the Scotts CGT as a SBE with tax exemption of 50%

If Scotts sells the property at 200000 AUD, the gain on disposal will be of course this sales proceeds amount you less the base cost value of 150000 hence;

=200000-150000=50000, likewise by virtual of being a small business unity we can task it to the 50% tax exempt on the capital gain Arnold (2011. p.550.);

=50000*0.5=25000 hence instead of Scott paying 50000 in his assessable income as part of Capital Gain Tax income he will pay 25000 instead. There is a relief of 25000 that he is to include it as part of income for tax purposes Cave (2015. p.26.)

(c)If this was a company, for sure there would exist no issue like tax exemption on CGT at all hence the full amount of 625000 on capital gain will be transferred to be net capital gain and be subjected to 30% or 27.5% corporate tax directly.

 

References

Arnold, J.M., Brays, B., Heady, C., Johansson, Å., Schwellnus, C. and Vartia, L., 2011. Tax policy for economic recovery and growth. The Economic Journal, 121(550).

Brown, K.E., 2016. Related party LRBAs and PCG 2016/5: Recommendations for trustees for smooth sailing. Taxation in Australia, 50(11), p.670.

Bryant, G. and Spies-Butcher, B., 2018. Bringing finance inside the state: How income-contingent loans blur the boundaries between debt and tax. Environment and Planning A: Economy and Space, p.0308518X18764119.

Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use. International Tax and Public Finance, 25(3), pp.654-672.

Cave, R. and Williams, C., 2015. Capital Gains Tax Reliefs for Smes and Entrepreneurs 2015/16. Bloomsbury Publishing.

Delany, T., 2011. Personal Services Income: where to from here?. Revenue Law Journal, 21(2011), p.85.

Doss, S., 2017. Evaluation of Deposit Insurance Fund Adequacy Using Credit Risk Model—An Indian Experience. Chinese Business Review, 16(5), pp.211-233.

Duncan, A., Hodgson, H., Minas, J., Ong, R. and Seymour, R.G., 2018. The income tax treatment of housing assets: an assessment of proposed reform arrangements.

Dunne, J., Taylor, H., Batten, N. and Krapivensky, N., 2016. 2015 case review: High ATO success rate continues. Taxation in Australia, 50(10), p.609.

Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.

Indrayani, E. and Suhendra, E.S., 2018. The Influencing Factors of Personal Tax Compliance on Reporting Annual Income Tax Return. Jurnal Ilmiah Ekonomi Bisnis, 22(3).

Travers, G., 2014. Other federal court cases. Tax Adviser's Guide to Part IVA: A Practical Guide to the Application of the General Anti-avoidance Rule, The, p.259.

Travers, G., 2014. Personal services income. Tax Adviser's Guide to Part IVA: A Practical Guide to the Application of the General Anti-avoidance Rule, The, p.49.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2012). Australian taxation law. CCH Australia.

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