Income Tax Assessment: Questions And Answers

Question 1: Definition of Income and Assessable Income

Question 1:

Which of the following give rise to “Income”?

1.A dentist swapping dental work valued at $600 with a retailer for a video which has a market value of $550 (but only cost the retailer $300)
2.A pensioner swapping surplus eggs valued at $150. (for the year) with a neighbour for surplus vegetables grown in a home garden.
3.A builder helping you at weekends to erect your home, doing so on the basis that he can have your caravan (which cost you $10,500 on 1 January 1997) when you move into the home.  Assume the value of the builder’s work was $11,000 and the caravan had a market price of $12,000 when you handed it over on 1 January in the current income year.
4.Volunteering your accounting expertise to a local charity which in turn arranges for someone to clear rubbish from your yard.  Would your answer be different if you were unaware of the charity’s intention to clear the rubbish?

Question 2:

Discuss whether the following amounts are assessable.  Include references to any relevant provisions in the ITAA 1997 or ITAA 1936.

1.A car valued at $15,000, given as a prize to a depositor of a building society.  The competition was open to all those who could maintain a minimum balance of $10,000 for the year.
2.An exchange gain (not of an income character) of $1 million made by a large industrial company on repayment of long-term loans.
3.A travel allowance of $4,500 (paid at 45 cents per kilometre 10,000 km travel) paid to an employee by an employer because the employee was carrying out tasks required by the employer.

Question 3:

In your hurry to get to a tax lecture, you park your car poorly and, in the process, badly damage the Vice Chancellor’s car.  As the accident is clearly your fault and you do not have any insurance, you agree to meet the costs of any necessary repairs.  After obtaining three quotes, the Vice Chancellor informs you that the cost will be $2,000, which you pay to her when the work is complete.

Required: Is it possible that this transaction could have any Capital Gains tax implications for the Vice Chancellor?

Question 4:

Mr & Mrs Martin each hold two shares in a family company.  The company was established in 1980 for the purposes of conducting a retail business premises in Bendigo.  The Martins have twins (a boy and a girl) who will turn 18 on 1 July.  Present plans are for each of the twins to receive one of the shares in the family company with Mr Martin transferring one of his shares to his son and Mrs Martin transferring one of her shares to her daughter.

1.What capital gains issues, if any, arise?  How would your answer differ if, instead of the above share transfer arrangement, the share transfer occurred on Mr Martin’s death, one share being transferred to each of his children? (Mrs Martin would retain both of her shares).

2.What are the implications for the family company if the Martins are considering:

(a) Buying vacant land in Bendigo; or
(b) Buying a retail business (operating through leased premises) in Queensland

Assume that in each case it is the family company that will acquire the assets and that within five years both assets would be sold.  Also assume that the shareholders would want to participate in any gains which accrued.

The section 6-5 of the Income Tax Assessment Act 1997 provides that income according to the ordinary concept is known as ordinary income.  The fee that is received by the dentist for providing professional services is an ordinary income and it is taxable under section 6-5 of the Income Tax Assessment Act 1997. The dentist has received fees for personal exertion and it should be included within the meaning of income.  It should be noted that it is not a necessity that the income should always received in money (Saad, 2014). If goods is received other than cash as a fees for performing the service then it should be included in the assessable income. In this case, the dentist has received the video for providing the dental work. The video received by the dentist should be treated as an income as it is a compensation for providing the service of dental work.  On analyzing the retailer, it can be seen that the retailer has obtained the dental service in lieu of the video. The dental service of $600 was exchanged for the video costing $300. The market value of the video is $550 so the income of the retailer is $220 for the purpose of tax.

The Income tax law provides that there is a need to determine whether an activity is a business or hobby because the rules applied for each activity are different. It should be noted that if the activity that is carried on by the individual is determined to be hobby then there is no required to pay taxes. The Taxation Ruling 97/11 provides the rules for determining the nature of the activity (Binning & Young, 2015). The rules states that if the activity is carried on by the taxpayer without the intention of making profit then the activity should be regarded as the hobby. Therefore, it can be seen that the primary consideration of determining whether the activity is business is to ascertain whether the activity is carried on with the intention of making profit. In this case, the gardening activity of growing vegetables was not carried out with the intention of making profit. Therefore the swapping of eggs for surplus vegetables that is grown in home garden should not be regarded as income as the gardening activity is hobby and not business.

In the Income Tax assessment Act 1997 it is provided that assessable income of an individual include ordinary income and statutory income. The income from personal exertion is an ordinary income so it should be included in the assessable income. It should be noted that it is not mandatory that income should always be received in cash. The income can also be received in kind. In the current scenario, a builder is helping in erecting a house and expects to receive caravan of value $12000 in return for the service provided (Braithwaite, 2017). Therefore, it can be said that the value of the caravan should be included in the income of the builder. On the other hand, for the individual disposing, the Caravan as consideration for service provided by the builder the capital gain should be calculated and it should be included in the income.

Question 2: Assessability of Various Amounts

The payment or benefit that an individual receives as volunteer is not subject to Income Tax. In this case, the individual has volunteered for providing accounting services to a local charity. The charity in return has arrange for cleaning the yard of the individual (Taylor & Richardson, 2013). Therefore based on the above discussion it can be said that cleaning service provided by the charity should not be treated as income for accounting service provided as a volunteer by the individual. The answer would have remained the same if the individual did not knew the intention of the charity for cleaning the rubbish.

It is provided in ATO ID 2002/664 that ordinary income and statutory income does not include the prize that is received from competition or lottery. Therefore, it can be said that under section 6-5 and section 6-10 of Income Tax Assessment Act 1997 the amount received as prize should not be included in the assessable income. The section 26 AJ of the Income Tax Assessment Act 1936 provides that prize that is received from the investment related lottery should be included in the assessable income (Fitzsimons & Carr, 2014). The lottery in which the chance of winning the prize arise due to the investment held by the taxpayer with an investment body is known as investment related lottery. It is provided that the assessable income should include the benefits or prizes received from the lottery that is organized by the bank, credit unions, building society and other investment bodies. In this case, it was necessary to maintain a balance of $10000 in the competition. Therefore, the prize that is received as car of value $15000 by the building society depositor is an investment related lottery should be included in the assessable income. The timing of taxing the prize depends on the fact whether it is received in cash or kinds. In the current scenario, the car is received as prize so the assessable income shall arise from capital gain at the time of disposal of car (Forsyth et al., 2014).

The forex realization gain arising from forex related transaction is required to be included in the assessable income under section 775-15 of the Income Tax Assessment Act 1997. The gain arising from the fluctuation of foreign exchange rate in the loan account should be included in the assessable income (Carney, 2014). In the current case, there has been an exchange gain of $1 million due to fluctuation of exchange rate at the time of repayment of long-term loan. Based on the above discussion it can be concluded that the exchange gain that is made should be regarded as forex realization gain under section 775-15 of the Income Tax Assessment Act.

The assessable income on the taxpayer includes the value of compensation, allowances, gratuities and benefits that are provided by the employer to an employee for the service rendered under section 15-2 of the Income Tax Assessment Act 1997. In order to cover the incidental expenses for performing the duties the employer provides travel allowances to an employee. In this case, the employer has paid travel allowances for carrying out the employment related task. The assessable income of the employee should include within the salary the amount received as travel allowances from the employer for carrying out the employment related task. Therefore, it can be said that in this case the travel allowance is an assessable income (Ghamgosar et al., 2014).

Question 3: Capital Gains Tax Implications

It is provided in section 100-35 of the Income Tax Assessment Act 1997 that if the amount received from the capital gain tax event is more than the cost of acquiring the assets then it is a capital gain. The capital gain or loss can only arise if the asset sold is a capital gain tax asset. In section, 100-25 of the Income Tax Assessment Act 1997 there is a list of capital gain tax asset that has been provided. The law provides that the sale or disposal of the assets provided in the list will give rise to capital gain or loss (Raftery, 2014). The section 118-5 of the Income Tax Assessment Act 1997 states that any capital gain or loss that is made from the disposal of car should not be considered for the purpose of capital gain tax. In this case, the repairing expenses that have been incurred for vice chancellors car cannot be considered as capital gain as provided under section 118-5 of the Income Tax Assessment Act 1997.

The list of common capital gain tax asset is provided in section 100-25 of the Income Tax Assessment Act 1997. In the list, it is provided that the shares are also part of capital gain tax assets. Therefore, the event of sale or transfer of shares is a capital gain tax event and any gain or loss made in the tax event should be included in the assessable income (Borowski, 2013). It should be noted that law exempts any capital gain or loss made from the pre CGT assets.  In the current scenario, parents have transferred the shares of family company to the children. This event of transferring the shares of the company qualifies to be a capital gain tax event.  As per the above discussion, the assessable income should include the capital gain or loss made from the transfer of share. In this case, the business was incorporated prior to application of capital gain tax that is before September 1985. Therefore, it can be argued that as the shares were acquired prior to application of capital gain tax so no capital gain tax will be applicable for transfer of shares of the company (McLachlan, 2013). However, there is an exception that if the pre capital gain tax asset are shares then these exemptions does not apply. Based on this discussion it can be concluded that the shares transferred Mr. & Mrs. Martin will be subject to capital gain tax. On the other hand, the shares that are inherited as a part of the deceased estate will be treated as normal capital gain tax assets. If the shares that are part of the deceased estate are purchased before the application of capital gain tax then at the time of transfer the shares will be valued at the market price of the day the person holding the share dies. Therefore, if Mr. Martin is deceased and his shares are to be transferred to his son and daughter then the price at which the shares will be transferred is the market price of the day Mr. Martin died. The capital gain tax event will take place if the children sells the inherited shares.

The business have acquired the vacant land and it should be treated as capital gain tax asset as per section 100-25 of the Income Tax Assessment Act 1997. The capital gain or loss that arise from the sale of vacant land should be included in the assessable income under section 102-5 of the Income Tax Assessment Act 1997.

The business is not included within the definition of capital gain tax assets. The income that has been derived from the purchased business should be included in the assessable income as an ordinary income under section 6-5 of the Income Tax Assessment Act 1997. The selling of shares in the business or capital assets will give rise to the capital gain tax event (Lignier et al., 2014). In the current case, the retail business is being purchased by a family business. The income arising from the retail business should be included as an ordinary income. In the event of selling of shares of business or assets of the business, it will be regarded as capital gain in the year the sales or transfer takes place.

Reference

Binning, C., & 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.

Borowski, A. (2013). Risky by design: The mandatory private pillar of Australia's retirement income system. Social Policy & Administration, 47(6), 749-764.

Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Carney, T. (2014). Where Now Australia's Welfare State?.

Fitzsimons, J. A., & Carr, C. B. (2014). Conservation covenants on private land: issues with measuring and achieving biodiversity outcomes in Australia. Environmental management, 54(3), 606-616.

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

Ghamgosar, M., Erarslan, N., & Williams, D. J. (2014). Assessment of rock mechanics parameters for improved waste disposal management and containment. In 7th International Congress on Environmental Geotechnics: iceg2014 (p. 272). Engineers Australia.

Lignier, P., Evans, C., & Tran-Nam, B. (2014). Tangled up in tape: The continuing tax compliance plight of the small and medium enterprise business sector.

McLachlan, R. (2013). Deep and Persistent Disadvantage in Australia-Productivity Commission Staff Working Paper.

Raftery, A. M. (2014). The size, cost, asset allocation and audit attributes of Australian self-managed superannuation funds (Doctoral dissertation, School of Risk and Actuarial Studies, University of NSW).

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

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