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Assessable Income and Hobby

Discuss about the Legislation Vs. Regulation for Political Campaign.

The current case study is concerned in assessing the assessable income of Michael who is a practicing surgeon, takes up the hobby of gardening, and sells flowers as hobby. An individual’s income is based upon their tax return. A large number of the information is pre-filled from the details received Assessable income can be defined as that income which is taxable in nature. Usually while computing the assessable income an individual is required to include the amount earned during the ordinary course of business such as selling from trading stock or providing services (Ato.gov.au 2016). On the other hand, Hobby can be defined as an individual’s pastimes or activities taken up for leisurewith the objective for recreational basis or in the form of contentment. Consequently, one shouldnecessarily understand the differentiationinvolving a hobby and a business for taxation, insurance and legal purposes. In order to classify the income under the heads of hobby or business there are several key elements, which needs to be considered while assessing assessable income. These are as follows;

Is the activity taken with business objective

Whether an individual has the intention of taking activity with the objective or with the prospect of making profit

Does the individual regularly or reputedly plans to take up the activity

Does the individual plans, organise or execute the activity in the form of business (Ato.gov.au 2016).

The case study gives clear evidence that Michael is by profession a surgeon, which constitute as ahecticprofession. To reduce his stress Michael decided to engage himself in gardening upon his “1-hectare land”. Michael decided to enrol himself in the course of designing and flower arrangement. Michael often sold flowers to his friends for wedding, funerals and other special occasions. By engaging himself in such hobby, Michael earns $8000 and simultaneously works as surgeon.

As stated under the rulings “TR 93/30” that any part of the house is used in connections with the tax payer income earning activities however does not constitute a place of business. The rulings provide that expenses associated with the taxpayer’s home are of private and domestic in nature does not qualify for in the form of deductions for taxation purpose. Referring to the case of “Thomas v Federal Commission of Taxation (1972) ATR 165” where the appellant included Farm Statement in his tax return, which provided the details of certain expenditure and depreciation arising out of the taxpayers land (K Sadiqet al. 2016). It appeared that the taxpayer did not made any income from such primary production during the tax year. 

ITAA 1997 and Excluded Income

The activity gardening and selling flower undertaken by Michael does not make up a full time business as the basic purpose of indulging himself in such activity is to reduce his strain. Amount generated from selling of flowers does not falls under the assessable income and this can be classified under the heads of hobby (Woellneret al. 2016). The study reflects that the activity of Michal is not related to any supplementary reporting or any tax since Michael asserts his activity of selling flower as hobby. Michael clients might ask him to provide them with ABN at the time of making imbursement for supply of flowers or any kind of services made to them since Michal hobby constitutes hobby.

The case study also provides that Michael does not bear any ABN and his activity of flower sellingis entirely based on his hobby (Slemrod and Gillitzer 2013). Michael should make use of the “statement by a supplier” form since it will help in keeping away from the business, which he is supplying to hold back the amount from payment to Michal. The practice of selling flower hardly has any kind of resemblance to his profession of surgeon. It is noteworthy to denote that the hobby of Michael does not constitute business and he is not entitled to an ABN. Therefore, Michael must lay down the evidence that his activity is based on his hobby, which may otherwise enable the payer to hold back 49% of his payment (K Sadiqet al. 2016).

“Section 6-5 of the ITAA 1997” lays down the incomes, which is in accordance with the ordinary income.

The ordinary income derived either from direct or indirect source.

Other ordinary income, which is included in the provision of an individual’s assessable income.

While computing the assessable income an individual is necessarily required to establish the income earned throughout the ordinary course of business. This comprises of the disposing of the stock or rendering services. Under the normal state of affairs a person is under the obligation of including the following amount, which are as follows;

Amount earned from isolated transactions outside the ordinary course of business if an individual intends to earn profit.

Incomes generated from the written value from the sale of depreciation assets or items

Compensation received in the form of “workman compensation” or any sort payment received from losses incurred in trading stock, trade disruption and cessation of contract (Ato.gov 2016).

Defamation and Compensatory Damages

Any sum received from incentive namely cash received from letting off of business premises; and

Interest received from business investment and interest received upon extra payment or early payment of tax.

According to the “ITAA 1997”, there are incomes which does is not assessable during computation of tax and are usually excluded (Ato.gov 2016). This income includes;

Incomes earned from hobby

Amount from gifts which is bestowed upon a person

Income from prize which is not the part of business

Winnings from betting or gambling, unless it is found that the person has the actual business of betting or gambling

Amounts received from any borrowing of sum (Ato.gov 2016).

From the above stated test it is found that Michael earnings from hobby of selling flowers does not falls under the heads of assessable income. Therefore, Michael’s earning from his hobby should be excluded while calculating taxable returns.


The term defamation is understood as an all-encompassing term, which considers any such statement made to hurt an individual’s reputation. If any statement made in writing or any form for publications such defamation constitute “Libel” which is an attack on a person’s reputations (Parkeset al. 2013). The existing case study is concerned with Peter who is a reputed financial advisor. Peter sued Global news because of defamation charges for releasing a statement against him, which claimed Peter to have indulged in deceitful investment proposal. Statement made by Global news against Peter was false and constituted personal injury to his reputation for which he was awarded $100,000 for damages caused. Therefore, the compensatory sum received for damages from Global news does not constitute an assessable income. It is noteworthy to denote that the awards or settlement received from settlement of cases based on personal injury or defamation is not taxable.

A person is also not required to attach his compensatory damages claims arising out of personal injury. The statement released by Global News against Peter constituted personal injury since it is an assault on his reputation. Usually a person can recover the amount from damages arising out of defamation and slender (Sartori, Orrù and Zangrossi 2016). In order to collect the compensatory damages by the plaintiff, the plaintiff must prove this in the court by stating the statement made by the slender does not bear any ground.

The federal court of Australia held in the case of“FCT v Sydney Refractory Surgery Centre Pty Ltd [2008] FCAFC 190” that treatment of tax was turned down upon defamation damages and should be awarded to the corporate taxpayer. It was held that the damages received by the taxpayer for defamation is not assessable in the form of income since they were received for injury caused to its business reputation and not upon the lost profit (Grant 2015). The court held that while assessing the compensatory damages it should be determined in the nature of cause of actions, which gave rise to them and not the manner in which they are computed. 

The case further provides that the company be provided with compensatory damages of $812,000 because of defamation. The commissioner wanted to treat the amount as income since the damages was computed upon lost profits and were aimed to amend the profit of the corporation. It should be noted that the nature of injury and the character of payment received does not change according to the way in which the resultant loss is measured. The company’s business status was equivalent to goodwill and was based upon capital asset. The case provides that the injury harmed the business reputation as well as the capacity to drawcustomers (Burton and Sadiq 2013). Any kinds ofbusiness or injury claims hampering the reputation of business constitutes capital claim. However, under the ordinary concepts, personal injury claims are not taxable as income.

It is noteworthy to denote that if a person uses the amount received from settlement or compensatory damages in the form of award to earn profit, then a person is under obligation to state those incomeswhile filing tax return. Therefore, any income generated from the compensatory claim such amount will be taken into the consideration while computing tax. For example, a person upon receiving the compensatory sum following the winding up of claims arising out of personal injury makes the use of the settlement amount to begin his own business then income derived from such income would constitute taxable (Aprill 2014). Therefore, a person is under the obligation to declare such income in his taxable return.


According to the “common law” defamation and slender falls under the heads of personal injury law, which constitute a loss of personnel reputation or character. An action can be bought in the court of law for an individual being the victimised under defamation and slender against the party aggrieved (Miller and Oats 2016). Hence, under the current case study of Peter it is discovered that plaintiff suffered an injury to his reputation against the defendant Global News and proved in the court of law that his statement constituted damages upon his reputation and his personal character. Sum received for compensatory damages by Peter will not constitute assessable income (Austlii.edu 2016). It should be noted that damages for settlement or award will not be taken into the consideration for assessing tax. Any such claim arising out of the defamation damages having based on personal injury will not constitute assessable income for Peterregardless of how compensatory income is measured,.

Australian employers largely make use of the clauses post-employment period of an employee. These causes consist of the restraint clauses or restrictive covenants. Restraint clauses or restrictive covenant isgenerally followed in that type of employment, which are contractual,and it is concerned with professionals, seniors and administrative employees. Distinctive restraint clauses are applied on the employee to limit them in an any capacity to compete with their previous employer as a competitor for a limited periodfollowing the end of the employment (Law.ato.gov 2016). Such measures are usually taken by the employer to protect their clients, staff and other parties from using their employer’s trade secrets and confidential business information.

The existing study of Mable, it is found that he entered into a contract with Excelsior for $70,000 to restrict him any manner from establishing her own business, which may otherwise forbid him from establishing any form of competition against his employer. Restrictive covenants clauses generally functions as complementary to “Common law of doctrine” consisting of “restraint of trade”. The doctrine signifies that a restraint clauses is specifically directed to protect the interest of the employer from safeguarding his trade secrets and business goodwill (Law.ato.gov 2016). It is noteworthy to denote that the court would not uphold the restraint clause from limiting the competition as this unduly establishes an interference with the employee’s right to sell his or her own labour.

As stated under “Subsection 25 (1)” if the restrictive covenant co-relates with the current stage of service and phase after the end of the service the degree of such consideration received is assessable since it co-relates with the time of service. As stated under “sub section 160 M (7)” such services would either fall under the old subsection or under the new “sub section 160 (m)”. This states that whether the “restrictive covenant” was entered into “prior to 26 June 1992” or subsequent to the period. It is supposed that the sum received by Mable consist of an active asset at the time of entering into the contract (Law.ato.gov 2016). As stated in the case of “Brent v. Federal 1971, 125 CLR 418 ATC 4195” Commissioner of taxation, the case consider the nature of income whether or not it assessable as ordinary income or capital in nature (K Sadiq et al. 2016). Furthermore, if the income is assessable when it was earned or derived.


The contract entered into clearly states that the business information, trade secrets or worth of business goodwill will not be shared on establishing the business which is or otherwise identical to that of his employer. “Sub section 160 ZA (4)” is applied to cut down any sort of capital gain to an extent where is sum received is computable under the heads of ordinary income. Mabel segment is associated with the stage after the end of his employment and the sum received by him is assessable under the new “sub section of 160 M (6)”. Neither old “sub section 160 M (6) nor the old sub section 160 M (7)” is applicable to the extent of contract entered into by Mable (Demerjian and Owens 2015).

The sum received by Mable for entering into the restrictive covenant tends to restrict her ability from future earnings. The sum received by her is in lump sum usually consisting of capital in nature and it will not be regarded as income. Any sum received for reimbursement on cessation of termination or surrender of rights based on contract for agreement or service or surrender of any kind of pensionable right is regarded as capital and not ordinary income (Kabinga2015). In addition to this, if a sum is paid on termination of service in consequences of taxpayer’s employment it will be considered as taxable under the special rules, which is applicable upon termination of employment.

Mable had entered into the restrictive covenant contract with his employer Excelsiorthat will forbid him from any kind to compete with his employer. The contract is aimed to restrict any form of interference for a specified period following the end of employment. The contract entered into by Mable is usually related with his business so that he cannot take away his clients, customers or staff from Excelsior (Demerjian and Owens 2015). The sum received by Mable upon entering into the contract is considered as earnings and such incomes are liable to be taxed. As stated under new “sub section 160 M (6)”the degree of such consideration is associated following the end of Mable employment and it will be considered for assessment.

Reference List:

Aprill, E.P., 2014. A case study of legislation vs. regulation: defining political campaign intervention under federal tax law. Duke Law Journal, 63, p.101.

Atkinson, A.B. and Stiglitz, J.E., 2016. The design of tax structure: direct versus indirect taxation. Journal of public Economics, 6(1), pp.55-75.

Ato.gov.au. (2016). Income you must declare. [online] Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/ [Accessed 31 Dec. 2016].

Austlii.edu.au. (2016). Sadiq, Kerrie --- "Judicial and Legislative Considerations in the Taxation of Compensation Receipts: An International Comparison" [2001] JlATax 4; (2001) 4(1) Journal of Australian Taxation 98. [online] Available at: https://www.austlii.edu.au/au/journals/JlATax/2001/4.html [Accessed 31 Dec. 2016].

Burton, M. and Sadiq, K., 2013. Tax Expenditure Management: A Critical Assessment. Cambridge University Press.

Chamberlain, T.W., Butt, U.R. and Sarkar, S., 2014. Accruals and real earnings management around debt covenant violations. International Advances in Economic Research, 20(1), p.119.

Christie, M., 2015. Principles of Taxation Law 2015.

Demerjian, P.R. and Owens, E.L., 2015. Measuring the probability of financial covenant violation in private debt contracts. Journal of Accounting and Economics.

Denis, D.J. and Wang, J., 2014. Debt covenant renegotiations and creditor control rights. Journal of Financial Economics, 113(3), pp.348-367.

Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.

Grant, G.M., 2015. Claiming justice in injury law. Monash UL Rev., 41, p.618.

Jones, S. and Rhoades-Catanach, S., 2013. Principles of Taxation for Business and Investment Planning, 2014 edition. McGraw-Hill Higher Education

K Sadiq, C Coleman, R Hanegbi, SJogarajan, R Krever, W Obst, J TEOH, and A Ting.2016 "Principles of Taxation Law".

Kabinga, M., 2015. Established principles of taxation. Tax justice & poverty.

Law.ato.gov.au. (2016). TR 94/D33 (Finalised) - Income tax: capital gains: application of subsections 160M(6) and 160M(7) to restrictive covenants and trade ties (As at 4 August 1994). [online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR94D33/NAT/ATO/00001 [Accessed 31 Dec. 2016].

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Parkes, R., Mullis, A., Busuttil, G., Speker, A. and Scott, A., 2013. Gatley on libel and slander. Sweet & Maxwell Ltd..

Sadiq, K., 2014. Unitary Taxation of the Finance Sector.

Sartori, G., Orrù, G. and Zangrossi, A., 2016. Detection of Malingering in Personal Injury and Damage Ascertainment. In Personal Injury and Damage Ascertainment under Civil Law (pp. 547-558). Springer International Publishing.

Slemrod, J. and Gillitzer, C., 2013. Tax systems. MIT Press.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. Oxford University Press.

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