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Application

Discuss about the Environment and Planning for Government and Policy.

In the given case, Michael is a surgeon by profession and has keen interest in gardening. Michael has taken various gardening courses and he often sells his flowers to friends. During the year, Michael has earned $350000.00 per year as a surgeon and $8000.00 from the sales of flower. In this case, the issue is to determine whether the income received from sales of flower is assessable in hands of Michael.

In the given case, the sections of the act, Taxation Ruling and the court case that has been applied for determining the issues are given below:

  • section 4-1 of the Income Tax Assessment Act 1997;
  • section 4-10 of the Income Tax Assessment Act 1997;
  • section 4-15 of the Income Tax Assessment Act 1997;
  • section 6-5 of the Income Tax Assessment 1997;
  • section 6-10 of the Income Tax Assessment 1997;
  • 6-20 of the income tax Assessment Act 1997;
  • section 8-1 of the Income Tax Assessment Act 1997;
  • Taxation Ruling 97/11;
  • Evans V FCT (1989);
  • Martin V FCT (1953);
  • Ferguson V FCT (1979);

The section 4-1 of the Income Tax Assessment Act 1997 states that income tax is required to be paid by every individual, company and other entities. The section 4-10 of the Income Tax Assessment Act 1997 states that on each financial year the taxpayer is required to pay tax. The determination of tax payable is determined after referring to the taxable income. The section 4-15 of the Income Tax Assessment Act 1997 provides that from assessable income  the deduction under section 8-1 of the Income Tax Assessment Act 1997 is deducted to calculate the taxable income. The assessable income is further classified as ordinary income and statutory income. The section 6-5 of the Income Tax Assessment 1997 states that income according to the general concept is regarded as ordinary income.  The section 6-10 of the Income Tax Assessment Act 1997 states that the income that are not covered under section 6-5 of the ITAA 1997 is regarded as statutory income. The section 6-5 and section 6-10 states that for resident Australian the income received from all the source is assessable. In this case, Michael a resident Australian therefore all income received from Australian sources are taxable if not specifically exempted under section 6-20 of the income tax Assessment Act 1997. Therefore, the income of $350000.00 received as a surgeon is taxable. However, in case of income from gardening it is important to determine whether he is engaged in business or hobby. It is important because the tax liability and reporting obligation changes depending on whether the activity is business or hobby. In case the activity is hobby, then there is no requirement to pay any additional tax and there is no reporting obligation.

The Taxation Ruling 97/11 provides an outline to determine whether a particular activity is to be regarded as business or hobby. In Para 13 of the Taxation Ruling 97/11 it is stated that it was held by the court that the following indicators are important to determine whether the activity is business or hobby:

  • It is to ascertained whether the activity has significant commercial purpose;
  • It is to be ascertained whether the taxpayer has the intention to engage in the business;
  • It is to be determined if the activity is conducted with the purpose of making profit;
  • It is to be determined whether the activity is regularly repeated;
  • It should be determined if the activity is conducted in the similar manner as the ordinary activity of the business;
  • It should be determined if the activity is planned, organized and is carried in the same manner as a business;
  • It is necessary to ascertain the scale, size and stability or permanency of the activity;
  • It should be determined if the activity is best described as a hobby or sporting activity.

Conclusion

In the case of Evans V FCT (1989), it was held that one indicator is not considered as decisive and often it is found that significant indicators over lapses each other. In this case therefore various indicators should be evaluated to determine whether gardening is hobby or business. In this case, Michael sells most of flower to friends and other who approach him for arranging the flowers. However, most of the flowers are for distribution in weeding, birthday etc therefore it can be said that there is no significant commercial purpose in taking the activity. From the case, it can be seen that Michael has no intention to carry in the activity as business as it is provided in the case that Michael takes this activity for relaxation. On analyzing the case this can be said that the Michael does not carry on the activity in a systematic and planner manner like a business. Therefore, in order to draw the conclusion the indicators should be combined as a whole and then it should be assessed whether the activity carried on is a business as mentioned in the case of Martin V FCT (1953). It is important to verify if the activity has a commercial flavor as per provided in the case of Ferguson V FCT (1979).


Based on the above discussion and the application of Taxation Ruling 97/11 it can be concluded that after considering all the factors as a whole as required in the case of Martin V FCT (1953) it can be said that Michael is not engaged in the activity of business. Therefore income received form gardening is not assessable income as per the ITAA 1997.

In this case, Peter Ellis is a financial advisor and he was implicated by Global news as providing fraudulent investment schemes. Peter sued global news and court held that the news report was untrue. He was awarded a compensation of $100000.00 as damage. The issue in this case is to determine whether the compensation amount received for damage should be included in the assessable income. 

In this case, the flowing laws have been applied in order to ascertain whether the compensation received is taxable:

  • section 6-5 of the Income Tax Assessment Act 1997;
  • section 6-10 of the Income Tax Assessment Act 1997;
  • Taxation Ruling 94/D20;
  • Taxation Ruling 95/35;
  • FCT V Sydney Refractory Surgery Centre Pty Ltd (2008);

The compensation or damages that is received is taxable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 or statutory income as per section 6-10 of the Income Tax Assessment Act 1997. Therefore, based on this provisions it is necessary to determine whether the compensation received should be assessable. The Taxation Ruling 94/D20 deals with the income tax liability of the “Compensation payment for personal injury”. The Para 3 of the Taxation Ruling 94/D20 states that lump sum or revenue compensation payment received is assessable depending on whether the receipt is of capital nature or that of income nature. It should be noted that the character of receipt in the hands of the recipient is the main determinant for taxability of the compensation. In this case, it can be seen that Peter was awarded the damage and he has received the claim of $100000.00 in lump sum. The Para 28 of the Taxation Ruling 94/D20 further provides that whether a receipt is to be considered as assessable income depends on the nature of receipt. The receipt can be of capital nature or that of income nature and this is determined after considering all the circumstances. The Taxation Ruling 95/ 35 deals with the dealing of compensation received by the taxpayer as result of personal injury. The Para 19 of the Taxation Ruling 95/35 states that any compensation    that is received by an individual for any personal injury or wrong that is suffered to the profession or vocation is exempted. The compensation that is received by Peter is for the damage that has been caused to personal injury that has been suffered to the profession or vocation. In the case of FCT V Sydney Refractory Surgery Centre Pty Ltd (2008), it was held that if the taxpayer for defamation receives the damage then it is not an assessable income. In this case, the Global news has damaged the reputation of Peter and hence it can be said that compensation is received for defamation.

Reference


Based on the above discussion it can be said that the compensation received is for defamation. Hence, the damage received is not taxable as per the case of FCT V Sydney Refractory Surgery Centre Pty Ltd (2008).

In the given case, the Mabel Renshaw is a successful sales person and she has worked for a company for the last 10 years. She had an excellent knowledge of the product and the company feared that she has the ability to persuade customers to business with her instead of the company. Therefore, the company has paid a sum of $70000.00 to Mabel with the condition that she will not engage in the same business for a period of 5 year. The issue in this case is to determine whether the amount paid to Mabel is an assessable income.

The issues in this case is determined after considering the various provisions of the law under ITAA 1997, Taxation rulings and case laws. The laws that have been applied are given below:

  • Brent V Federal (1971);
  • section 6-5 of the Income tax Assessment Act 1997;
  • Taxation Ruling 94/D33;
The Australian employer uses various clauses that restrict the right of the employees post employment. This clause contains various restrictions or restrictive covenants. These clauses are applied to limit the capacity of the employee to compete against the company. In this, case the company has entered into contract with Mabel and it restricts her right to enter into the same business. Therefore, it can be said that the agreement entered into by the company and Mabel is of the nature of restrictive covenant. The common law doctrine stated that it is not appropriate to restrict the rights of others to enter into business and any such agreement to restrict the competition is considered as void. The restrictive covenant is complementary to the common law because under this agreement the restrictive clause that is applied to an employee for a period is valid in the eyes of the common. Therefore, it can be said that the agreement that is made by Mabel with the company is valid. That means it needs to be determined whether the compensation received for restriction is assessable or not. In the case of Brent V Federal (1971), it was consider whether the income is of ordinary nature or that of capital nature. The case also determines whether the income is assessable when it was earned or derived. The case held that the amount received in the nature of restrictive covenant is taxable in the hands of the receipt. The agreement amount should be treated as ordinary income under section 6-5 of the Income tax Assessment Act 1997.


Conclusion

Based on the above discussion it can be said that the agreement between the Mabel and the company is in the nature of restrictive covenant. It is because the right of Mabel was restricted by the agreement to enter into the business. The compensation that was given by the company to Mabel was assessable as per the case of Brent V Federal (1971).

Reference

Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.

Binning, C. and Young, M., 2015. TALKING TO THE TAXMAN ABOUT NATURE CONSERVATION_Proposals for the introduction of tax incentives for the protection of high conservation value native vegetation.

Brown, C., Handley, J. and O'Day, J., 2015. The dividend substitution hypothesis: Australian evidence. Abacus, 51(1), pp.37-62.

Everingham, J.A., Pattenden, C., Klimenko, V. and Parmenter, J., 2013. Regulation of resource-based development: governance challenges and responses in mining regions of Australia. Environment and Planning C: Government and Policy, 31(4), pp.585-602.

Forsyth, P., Dwyer, L., Spurr, R. and Pham, T., 2014. The impacts of Australia's departure tax: Tourism versus the economy?. Tourism Management, 40, pp.126-136.

Frecknall-Hughes, J. and McKerchar, M., 2013. Historical perspectives on the emergence of the tax profession: Australia and the UK. Austl. Tax F., 28, p.275.

James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280.

O'Connell, A., Martin, F. and Chia, J., 2013. Law, policy and politics in Australia's recent not-for-profit sector reforms. Austl. Tax F., 28, p.289.

Onji, K. and Tang, J.P., 2015. A nation without a corporate income tax: Evidence from nineteenth century Japan. ANU Centre for Economic History Discussion Paper Series, (2015-09).

Peres, M.A., Luzzi, L., Peres, K.G., Sabbah, W., Antunes, J.L. and Do, L.G., 2015. Income?related inequalities in inadequate dentition over time in Australia, Brazil and USA adults. Community dentistry and oral epidemiology, 43(3), pp.217-225.

Richardson, G., Taylor, G. and Lanis, R., 2013. Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms. Journal of Contemporary Accounting & Economics, 9(2), pp.136-150.

Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.

Sawyer, A., 2013. Rewriting Tax Legislation-Can Polishing Silver Really Turn It into Gold. J. Austl. Tax'n, 15, p.1.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1), pp.1-15.

Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.

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