Taxation Advice For Stella And Mia - Income Tax And Capital Gains Essay.

Stella's Income from Sports Participation

Stella is a full-time tax accountant at Hound Accounting Pty Ltd, situated in Ballarat, Victoria. Since she was 12 years old, Stella has been a keen runner. Firstly, competing weekly at Little Athletics, then Stella began entering competitions. Stella now competes nationally and internationally. Most recently competing at the Commonwealth Games in the Gold Coast, in April 2018. During the year, Stella has earned $85,300 from her running events. This has been mostly in the form of prize money; however, a component is from sponsorships and appearances leading up to the games. Stella used her annual leave to attend the games and returned to work immediately after their conclusion – returning to a multitude of emails from clients and meetings filling her calendar.

Her friend, Mia, who Stella met at Little Athletics also is a keen runner. Mia, however, has not been competing to the same extent as Stella, although Mia did earn $5,000 in prize money in February after competing in a regional event.

Mia in fact is a keen gardener. Although she is employed as a teacher at the local primary school, on weekends she has been nurturing avocado, fig and walnut trees she planted on a 7- acre piece of land she owns 15 minutes out of Ballarat. Although the trees have yet to produce, she saw a potential market for local produce. This arose after Mia undertook some research into organic farming methods arising from a conversation with the local nursery owner, who also caters for the organic market. Mia then acquired enough saplings to fill most of the land. Mia is currently looking into potential stalls at Sunday markets, environmentally friendly options for packaging and has set up a Facebook page labelled as Mia’s Hobby Farm Organics.

Two years ago, on the remaining 2-acres of land, Mia began constructing her house. The construction was completed in August 2017 and Mia moved in in September 2017.

Her previous house was sold for $360,000 in 2017, with the contract being signed in June 2017 and settlement occurring in October 2017. Her prior home was a Victorian era weatherboard situated on a 5-acre block overlooking the Yarrowee River, which she had purchased 10 years ago for $145,000, on 1 July 2007. Mia had lived in the house since 1 July 2010. It had remained unoccupied in the years beforehand whilst Mia undertook renovations. In total, Mia spent $45,000 on renovations.

Stella helped Mia clean up her old house before selling it, including making several trips to the tip and Salvation Army removing rubbish and unwanted goods. Mia found an antique mirror that she had acquired from an antiques fair five years ago for $600. Given it did not suit the look of her new house, she offered it to Stella as a thank you gift for the assistance. It is now worth

$1,500. After Mia had moved into her new house, Stella gave Mia a house warming gift. It was a piece of artwork valued at $550. Stella had originally purchased the piece for $300 at a local gallery event earlier that year. The artwork had been hanging in her lounge room. Once Mia moved in, she set up a separate room to organize her organic goods and equipment.

Advise Stella and Mia on the taxation issues arising from the above fact situation. Reference should be made to appropriate legislation, case law and rulings.

Stella's Income from Sports Participation

Stella received AUS$ 85300 from sports event participation:

Stella is an accountant by profession. So any income she is earning should be considered as salary. Any income she is earning from any other sources other than income should be considered as income earned from other sources.

As an Australian resident a person is liable to declare all income earned anywhere in the world that has been earned from any sources.

Therefore as per this requirement Stella must reveal the money she has received partly as a price money for jointing in an athletic meet and partly as sponsorship (Ato, 2018).

Generally price money earned by a person on an ad hock basis from a game show is not taxable in Australia.

But here Stella is a professional athlete and participating in the different sports events since the age of 12 years. Moreover she has received an amount of AUS$ 85300 partly as price money and partly from the sponsors for appearing g in the different games as she is recognized as a star running athlete with in the country. Thus the earnings of STELLA should be categorized as a recurring earnings from sport and therefore will not be considered for exemption from tax(Ato, 2018).

Therefore it can be suggested that with respect to the earnings of AUS$ 85300 that this amount should be revealed by Stella along with the salary income earned by him from her accounting profession while filling the return and tax will be charged  on the total amount as per the latest tax slab depicted below in pictorial format.

(taxsummaries.pwc, 2018)

Stella received a gift of an artefact whose market value is $1,500 from Mia. Mia purchased the artefact for an amount of $600.Then it can be argued that Stella has made a profit of $900.But as the amount of $1,500 is received as gift but the amount is so small, therefore the amount will not come under the tax net and revelation of this item  in return filing is not required.

The tax principles of the Australian taxation policy that are being applied for providing the above discussed taxation advice are as follows:

The Australian resident must declare all income earned by him anywhere in the world while filing Australian tax return

An Australian resident is entitled to the tax-free threshold, that is there is no tax on income of a individual up to a certain amount

Gift Received by Stella from Mia

An Australian resident may have to pay the Medicare levy

If an Australian resident received amounts that aren't subject to tax, then these income will not be included as part of the  assessable income. But this income may not be used in other calculations on your tax return.

The major categories in which the individual income that are being classified for providing

Tax treatment is as follows:

• Exempt income
• Non-assessable non-exempt income
• Other amounts that is not taxable
• Exempt income

The income that are being categorised as “Other Amounts that are not taxable” generally do not needed to be declared by an individual resident Australia

• Rewards or small gifts such as cash birthday presents that  are being received by the individual residents of Australia (however, gifts may be taxable if they are large amounts or you receive them as part of a business-like activity or in relation to your income-earning activities as an employee or contractor)
• Prizes an individual has won in ordinary lotteries, such as lotto draws and raffles
• Prizes an individual won in game shows, unless the resident regularly receive appearance fees or game-show winnings
• Child support and spouse maintenance payments received by an individual

Here in the present case scenario the earnings of AUS$ 85300 by Stella from sports participation is taxable under the category of regular receipt of appearance fees in the sports events.

On the other hand the gift receipt in the form of an antique gift worth AUS$ 1500 is not taxable as it can be categorized as “Other Amounts that are not taxable” and therefore need not to be declared for the purpose of taxation while filling the tax return.

Mia received $ 5000 from sports participation:

Mia is a teacher by profession and she is also a sports enthusiast and she is not a regular sports event participant. In that case if she had earned as AUS$ 5000 as price money from participation in a sports event then this income should be categorised as the income that an individual has earned as a price money from the participation in  a sports event on an ad hock basis. Thus such earnings are not a regular event and therefore should be categorised as “Other Amounts that are not taxable”. Therefore the earnings of AUS$ 5000 do not needed to be taxed or disclosed while filling the return.

Mia is a keen gardener and out of this hobby she is holding organic farming g in her 7-acre piece of land where she has planted and nurturing avocado, fig and walnut trees. The trees are yet to produce the return. But Mia is already seeing a possible profit making opportunity from the sales of products generated from organic farming .That is why she is currently looking into potential stalls at Sunday markets and also looking for environmental friendly options for packaging. She has also set up a face book page labelled as “Mia’s Hobby Farm Organics”

Now if Mia manages to generate some income from her organic farming hobby in near future then the income will probably come under the tax net as per the hobby income taxation requirement of the ATO (Australian Taxation Office) which are as follows:

1. The individual has registered a business name
2. The individual has an Australian Business Number
3. The main purpose of an individual is to make a profit
4. The individual is continuing the activity and is making repeated sales
5. The individual is expecting an increase in the activity so that the activity can be converted in to a fulltime commitment
6. The individual is having a separate bank account
7. The online presence of an individual looks like a shop with a brand name, paid set up, well developed business plan  and with ongoing  systems and processes in place.

Potential Taxation Implications for Mia's Hobby Farming

Among the above mentioned conditions MIA has already fulfilled the requirements of 3,4,5,7.

As Mia is looking for a potential market for the growing of the organic framings then it indicates that her main purpose is to make profit and therefore requirement-3 is fulfilled.

As Mia is all set to continue the activity therefore and to make repeat sales of her organic products therefore requirement-4 is fulfilled

Mia is also thinking of increasing the farming activity, which also fulfils the requirement of 5

Finally she had opened a face book page with a label that tantamount to a online presence with a brand name and therefore fulfils the requirement-7

In such a situation, if Mia started to earn substantial income then ATO may ask MIA to fulfil the entire requirement so that the hobby income can be identified as business income and to pay taxes.

Mia sold her house for $360,000 in 2017 which she purchased in 1 July 2007 for an amount of $145,000 and she gained as amount of AUS$ 215000 while signing the selling contract on June,2017.Thsu she is liable to pay the capital gain tax as per the following requirements of ATO (Australian Taxation Office)

If an individual sell a capital asset, such as real estate or shares, he or she usually makes a capital gain or a capital loss and  the difference between selling and acquiring cost of the asset is taxable

An individual should report any kind of capital gains or losses in their income tax return and should pay tax on capital gains. Although the tax is referred to as the capital gains tax (CGT), but in reality this is not an income tax or better to say not a separate tax.

Any kind of capital gain attained by an individual   is added to the assessable income of that person and this addition may significantly increase the tax amount payable by that individual.

In case of capital loss the individual can’t claim it against the other income but however an individual can use it to reduce a capital gain.

All assets you’ve acquired or sold are being subject to CGT unless specifically excluded from on 20 September 1985(Ato, 2018).

Here in the present case scenario it has been mentioned that Mia has spent $45000 for the renovation of the house which she had sold and it is worthy to mention that while calculating the reduced cost base any kind of maintenance cost cannot be included. Moreover Mia cannot even ask for a deductions on capital gain tax on the basis of the maintenance cost or renovation expense of AUS$45000.

According to ATO(Australian office of taxation) Costs of owning should not include rates , insurance, land tax, maintenance costs, interest on money  borrowed to buy or improve the property while working out the reduced cost base for real estate property to be sold or  for claiming exemption on the amount of capital gains tax payable.

Mia received a home warming gift from Stella which worth of $550 which Stella originally acquired at a cost of $300.This acquisition of gif t by Mia from Stella should not be considered as an income $ 250. Because this is a gift of very small amount and therefore it should  be identified as a “Other Amounts that are not taxable” and therefore there is no need of disclosing this receipt of gift for the purpose of taxation.

References

Ato (2018). Amounts not included as income. [online] Ato.gov.au. Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/Amounts-not-included-as-income/ [Accessed 24 Sep. 2018].

Ato (2018). Capital gains tax. [online] Ato.gov.au. Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 24 Sep. 2018].

Ato (2018). What income you pay tax on. [online] Ato.gov.au. Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Coming-to-Australia/Paying-tax-and-lodging-a-tax-return/What-income-you-pay-tax-on/#Australianresidents [Accessed 24 Sep. 2018].

Barrett, A. (2018). When do you have to start paying tax on your hobby?. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/banking-and-finance/when-do-you-have-to-start-paying-tax-on-your-hobby-20180420-p4zaph.html [Accessed 24 Sep. 2018].

taxsummaries.pwc (2018). Australia Individual - Taxes on personal income. [online] Available at: https://taxsummaries.pwc.com/ID/Australia-Individual-Taxes-on-personal-income [Accessed 24 Sep. 2018].