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Issue

Discuss about the Federal Income Taxation Of Partners.

The issue here revolves around ascertaining the consequences of tax for both ABC Sports Pty Ltd and John. The issue here would take into the deductibility or the assessability of the recipts and expenses caused during the ordinary business course or during the employment course.

  1. “Federal Commissioner of Taxation v Wiener (1978)”
  2. “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)”
  3. “Scott v Commissioner of Taxation (1935)”
  4. “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)”
  5. “Higgs v Oliver”
  6. “J & G Knowles v Federal Commissioner of Taxation (2000)”
  7. “Marana Holdings Pty Ltd v Commissioner of Taxation (2004)”
  8. “Toyama Pty Ltd v Landmark Building Developments Pty Ltd”

As stated under the “subsection 6-5 (2) of the ITAA 1997” any sum that is received by taxpayer represents income under ordinary meaning if the sum is obtained from direct or indirect sources in the income year (Chardon, Brimble and Freudenberg 2017). Any sum received in respect of termination of contract or an agreement formed in the ordinary business course is usually regarded as income if the sum that is substituted would have been an income. Alternatively, termination of an agreement leads to an effect on business framework or results in a loss of substantial business part then the receipt of such termination payment is regarded as capital receipt.

The current case study of ABC Sports Pty Ltd states that the receipts of compensation for the termination of contract that comprised of 40% of the sporting goods supplies is regarded as the taxable income. The situation of ABC Sports Pty Ltd explains that the management was able to locate another supplier and presumably the termination of contract did not result in significant business loss of impact on profitability of the firm. The cessation of agreement is assumed to have not resulted in substantial effect on ABC Sports Pty Ltd profitability though it impacted the sales revenue marginally.

The contract amid the ABC Sports Pty Ltd and supplier did not constitute the entire business which was carried on by ABC Sports Pty Ltd. Referring to the judgement stated in “Californian Oil Products Ltd v Federal Commissioner of Taxation (1934)” following the number of arrangements an agreement was formed between the taxpayer and the agent for the sale of petroleum products (Schenk 2017). Following the mutual consent, the agreement was terminated and in return a compensation payment was received by the taxpayer.

The sum was not calculated by referring to the lost earnings even though the sum was to paid in instalments. The high court of Australia held that sum received was capital and non-assessable. Similarly, in the situation of ABC Sports Pty Ltd it is understood that compensation receipts under “section 20-20 (2)” was regarded as the recoupment of loss (Epstein 2017). Hence, the compensation of $200,000 will be held as assessable income in terms of ordinary concepts under “section 6-5 of the ITAA 1997”.

Laws

As stated under “section 8-1 of the ITAA 1997” a person is entitled to claim allowable deductions for work related expenses from their taxable income incurred in producing or gaining the assessable income (Samansky and Smith 2017). A deduction is allowed to the taxpayer given the expenses is necessarily incurred in carrying on of a business for producing assessable income.

The legislative response under “section 25-100 of the ITAA 1997” explains that a person is entitled for deductions for cost of travelling amid two work places and none of the place being the home for taxpayer. Referring to the judgement held in “Federal Commissioner of Taxation v Wiener (1978)” the taxpayer was entitled for deductions for expenses incurred for travelling between two work places (Bankman et al. 2017). Similarly, the cost of travelling was in the course of employment by John and he will be entitled to deductions under “section 8-1 of the ITAA 1997”.

Likewise, in the current circumstances of John an expense was occurred in traveling in course of work. The expenditure was for evaluating the market that were in employment course for gaining or producing the assessable earrings (McDaniel 2017). The expenses occurred by John carries adequate connection with the outgoings and either of the positive limbs therefore the same will be allowed as deductible expenses.

Instance provides ABC Sports Pty Ltd has occurred costs for relocating its few stores to Brisbane. A sum of $125,000 was occurred. As stated under “Section 8-1 of the ITAA 1997” deductions is allowed for expenses that positively meets the positive limbs criteria. Expenses occurred in producing taxable income is a deductible expense (Oishi, Kushlev and Schimmack 2018). However, a deduction is not allowed for expenses that constitute capital in nature. A business incurring expenses for altering or extending the present facilities and the cost incurred in that respect is regarded as capital expenses because it does not relate to business activities of the taxpayer’s profit making arrangement.

As held in “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” deductions is not allowed to taxpayer for expenses occurred in moving or relocating the plant and equipment was regarded as capital expenses (Schenk 2017). Evidently in the situation of ABC Sports Pty Ltd the expenses of relocating the stores to Brisbane constitute capital expenses and the same is non-deductible for taxpayer.


According to “section 6-1 of the ITAA 1997” income from personal exertion refers to income derived from earnings, salaries, wages, superannuation or revenue from the business are regarded as taxable income (Murphy and Higgins 2016). Evidently, “Section 6-5 of the ITAA 1997” explains that majority of the income obtained by the taxpayer is regarded income under ordinary concepts. Referring to the case of “Scott v Commissioner of Taxation (1935)” income must be ascertained based on ordinary concepts and use of mankind.

Application

Likewise, any sum obtained by the taxpayer is held as income from personal exertion and is accounted for tax based on either statutory or ordinary concepts. The receipt of salary by John together with superannuation contribution represents income from personal exertion (Schmalbeck, Zelenak and Lawsky 2015). Therefore, the amount of $125,000 is held as income under ordinary meaning of the section 6-5 of the ITAA 1997.

According to the “Section 136 (1) of the FBTAA 1986” the expression of word benefit consists of any rights or services that given as the arrangement of performance of work (Burke 2016). Under the present case study of ABC Sports Pty Ltd the company paid John with the school fees of his sons. The Australian Taxation Office states that the employers are liable for fringe benefit tax related to employment. However, “Section 65 (a)(ii) of the FBTAA 1986” explains that a deduction in taxable value of the benefit is provided given the expenditure incurred on employee child is in respect of employment.      

The Australian high court passed its verdict in “J & G Knowles v Federal Commissioner of Taxation (2000)” by stating that the expression “in respect of” hardly carries any fixed impact (Hudson, Lind and Yamamoto 2016). The court of verdict stated that there must be adequate relationship between the employment and the benefit. The expenses in child fees benefit given by ABC Sports Pty Ltd is “in respect of” full time study of John child. Therefore, the expenses has appropriate association with the child education expenses.


For John who is the recipient of the expenditure is in relation to the full time employment and the ABC Sports Pty Ltd is eligible for reducing the tax liability under “section 65 of the FBTAA 1986”. As stated under “Section 7 (1) of the FBTAA 1986” car fringe benefit arises when the employer provides a car to the employee relating to the private use (Simmons et al. 2017). Evidently “section 136 of the FBTAA 1986” provides that private use of the car represents any form of usage that is not related in the derivation of taxable income. The private use of the car is omitted while determining the assessable income and any expenditure in business use of car is liable for deductions. Similarly for John receiving car by ABC Sports Pty Ltd represents fringe benefit based on “section 7 of the FBTAA 1986.

As stated in “section 58 Y (2) of the FBTAA 1986” expenses related to membership fees or subscription is an exempted expenses from fringe benefit regardless of fact that the benefit is provided directly to the employee or by means of reimbursement (McNulty and McCouch 2015). Evidently in the present state of John, the membership expenses was paid by his employer ABC Sports Pty Ltd therefore these expenses would be held as exempt benefit based on “section 58 Y (2) of the FBTAA 1986”.

The rulings as stated in “subdivision 108-C” an asset of personal interest is represented with a non-collectable utilization which are mainly considered for personal enjoyment. Such items may include assets like household items, furniture or a private boat (Barkoczy 2014). The rulings prescribed under “section 108-20 (2)” holds the right to acquire any asset which is considered under the criteria of personal use and enjoyment. It needs to be further discerned that the costs pertaining to such assets does not include the cost of ownership primarily which is seen as the interest. As per the rulings of “section 118-10 (3)” any nature of capital gains is not taken into consideration where that acquired asset is lesser or equal to a value of $ 10,000. This depicts that the deck still needs to possess the relevant details of purchasing an asset, in case the acquisition cost is greater than $ 10,000. Based on the depictions of the present situation it needs to be understood that John bought a Yatch bearing a value of $500,000, thereby incurring an added on installation fees of $ 600,000. It is also seen that at the same time John owned a horse which was used to fulfill his equestrian hobbies by participating in the equestrian events. This particular asset needs to be included as an asset of personal use. At a later date John sold the horse at a price of $ 30,000 which gave rise to capital gains.

As stated under the rulings of “section 110-25” the cost base of an asset comprises of capital expenditure which is responsible for preserving or increasing the asset value (Coleman and Sadiq 2013). In the present case, the cost of installation of the mast in the yacht was priced at $ 600,000, which forms the cost of this of the associated asset. The various types of expenditures associated to the asset was done to improve its value. John often made use of the Yatch for personal use and race events. This resulted in a considerable amount of CGT and further led to event D1 as per “(section 104-35) (1)” for John for participating in race event from Sydney to Hobart. Due to this, the selling of yatch constituted in a CGT associated to the use of asset for personal use and this needs to be considered as a single CGT asset relating to $ 10,000 threshold limit.

Similarly, the rulings under “Section 108-20 (1)” depicts that on event of any asset of personal use sold for a loss shall not be allowed to claim any tax offset due to the loss against capital gains. As discerned in the case of “Higgs v Oliver” the taxpayer was able to make a capital gain as a result of selling of assets held for personal use, which resulted in CGT event D1 (Krever 2013). Based on the verdict of the court it was stated that CGT event D1 cannot be allowed for discount in capital gains as per “section 115-25 (3)”. 

The purchase of the boat made by John which was used for inclusion on purposes was done way back in 2008. At a later date sold it for $ 8,000 and resulted in a loss of $ 4,000. By denoting to the rulings under “section 108-20 (1)”, John cannot be allowed to ignore such losses and offsetting the same against any capital gains.

“Subdivision 108-B” denotes that the total collectible represents the assets which are held by the taxpayer for personal use (Woellner et al. 2014). In the given situation, John owns an antique table since 2006 purchased at $ 12,000. On a later date he gave this to his mother and market value of the collectible at that time amounted to $ 18,000. As there is no CGT event occurred is not constituted under CGT.

The rulings under “GSTR 2012/15” refers to the goods and services tax consequences of residential premises. Under the rulings of this law, the main subdivisions related to the tax consequences is discerned with the application of “subdivision 40-B” and “subdivision 40-C” prescribe as new GST regime for supplies of residential premises as introduced in 1999 (Kenny 2013). The relevant rulings under “section 40-65 of the GST Act 1999” relates to the sale of residential premises and entirely utilized for residential purposes.


In the given situation, John bought the house for the value of $ 300,000 and spent the weekend in the same property. However, in 2014 rezoning of land for residential purposes took place. The initial decision to subdivide the land was not executed and the property was sold for $ 300,000. The sale of the property is regarded as input taxed and not taken into account for GST purpose in case the accommodation is used for residential accommodation.

The rulings under “section 40-65 of the GST Act 1999”, depicts that setting of real property is only considered for residential accommodations (Sadiq et al. 2014). As referred to in the case of “Toyama Pty Ltd v Landmark Building Developments Pty Ltd”, the law held that the main term to be used for residential purpose reflects the subjective intent of purchaser for using the property. Moreover, “Section 195-1 of the GST Act 1999”, determines “residential premises” as any space which is occupied for the purpose of residential accommodations.

By referring to the case of “Marana Holdings Pty Ltd v Commissioner of Taxation (2004)”, ALR 190 considered the sale of “strata title residential property” which was developed as per the GST amounted from a motel (Woellner et al. 2014). The main rulings considered the definition of “residential premises” pursuant with “section 40-75 of the GST Act”, and input tax credit was applied to the tax credit. The selling of house by John needs to similarly considered for input tax under “section 40-65 of the GST Act 1999”. 

“Section 26-5 of the ITAA 1997”, denotes that individual taxpayer are not permissible to claim any deduction associated to penalty as imposed as a consequence for breaching Australian law (Coleman and Sadiq 2013). This consists of several types of business fines. By referring to the present scenario of “ABC Sports Pty Ltd” the fines imposed on breach of trade practice are relating to “section 26-5 of the ITAA 1997”, which cannot be allowed for any deduction.

Conclusion:

It can be concluded by stating that the receipt of compensation on termination of agreement would attract tax liability for ABC Sports Pty Ltd while costs of relocation would be held as non-deductible capital expenses. Additionally, ABC Sports Pty Ltd would be able to lower the FBT liability of tax for expenses on school fees of John sons and charges on subscription. Alternatively John would be assessed on income generated from the personal exertion whereas selling the residential property to a property developer attracts input tax.

Reference List:

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Barkoczy, S. 2014. Foundations of taxation law.

Burke, K., 2016. Federal income taxation of partners and partnerships in a nutshell. West Academic.

Chardon, T., Brimble, M. and Freudenberg, B., 2017. Tax and superannuation literacy: Australian and New Zealand perspectives [Part 1]. Taxation Today, (102), pp.17-25.

Coleman, C. and Sadiq, K. 2013. Principles of taxation law.

Epstein, R.A., 2017. Dual Sovereignty under the Constitution: How Best to Protect States against Federal Taxation and Regulation. Ariz. St. LJ, 49, p.935.

Hudson, D., Lind, S. and Yamamoto, K., 2016. Black Letter Outline on Federal Income Taxation. West Academic.

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

McDaniel, P., 2017. Federal Income Taxation. Foundation Press.

McNulty, J. and McCouch, G., 2015. Federal estate and gift taxation in a nutshell. West Academic.

Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.

Oishi, S., Kushlev, K. and Schimmack, U., 2018. Progressive taxation, income inequality, and happiness. American Psychologist, 73(2), p.157.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A. 2014. Principles of taxation law.

Samansky, A.J. and Smith, J.C., 2017. Federal Taxation of Real Estate. Law Journal Press.

Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.

Simmons, D.L., McMahon, M.J., Borden, B.T. and Ventry, D.J., 2017. Federal Income Taxation. Foundation Press.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law.

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[Accessed 13 July 2024].

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