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1: Which of the following give rise to “Income”?

a) 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)

b) A pensioner swapping surplus eggs valued at $150. (for the year) with a neighbour for surplus vegetables grown in a home garden.

c) 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.

d) 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?

2. Discuss whether the following amounts are assessable.  

a) 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.

b) An exchange gain (not of an income character) of $1 million made by a large industrial company on repayment of long-term loans.

c) 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.

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?

Sources of Income and their Taxation Implications

1. a) As the dentist is delivering the professional service and he receives fees for it, this income will be taxable as per the section 6-5 of the Income Tax Assessment Act 1997 (Taylor & Richardson, 2012). The dentist provides physical effort for getting fees and thus, his income is subject to tax liability. It is not necessary that income can only be received as the form of money. There are many cases where goods and services are also considered as income. Thus, as per the case, the received video needs to be considered as income as he gets it by providing dental work. It is considered as the dental work compensation. On the contrary, the retailer exchanged the video as the fees of the dentists; the cost of the video is $300 and fees of the dental work are $600. $550 is the market value of the video. Hence, the taxable income will be $220.

b) It is needed to determine that an activity is whether hobby or business activity as the tax treatment for each activity is different. Tax will not be charged in case an activity is carried on as hobby. Taxation Ruling 97/11 says that in case someone carry an activity without having any intention of making profit, needs to be treated as hobby instead of business activity (Millar, 2013). As per the provided case, the process of swapping the eggs for the vegetables that are grown in the garden will be considered as hobby instead of business. In this case, gardening needs to be considered as hobby as the vegetables are grown in the garden without having any intention of making profit and selling.

c) According to the taxation law, the income received with the help personal exertion needs to be considered as taxable income. The income can be received in the form of cash and others. As per the provided case, the builder is helping in the erection of the house in order to get the caravan worth $12,000. These amount needs to be considered as the service provider income. Hence, in this regard, the income from the disposal of the caravan needs to be included as the capital gain income (Oats, 2012).

d) The income in the form of payment and benefits received as a volunteer is not considered as taxable income. As per the provided case, volunteering accounting services in order to clean the yard should not be considered as income. In case, the intention of the charity in order to clean the rubbish is unknown, the answer is similar as the above (Davis et al., 2015).

2. a) According to ATO ID 2002/664, prize received from competition or lottery is not considered as statutory or ordinary income. Hence, under section 6-5 and section 6-10 of Income Tax Assessment Act 1997, prize should not be considered as taxable income. However, as per section 26 AJ of the Income Tax Assessment Act 1936, prize received from the source of investment lottery needs to be considered as taxable income (Erasmus, 2013). In the process of investment related lottery, due to the investment of the taxpayer with the legal investment body, he/she wins the lottery. In addition, any income from the prize of lottery of banks, credit unions, building societies, financial institutions and others needs to be considered as taxable income. As per the provided case, the depositor of the building society receives the car worth $15,000 as prize. As per the rules of the competition, maintain a minimum balance of $10,000 was necessary. Hence, this income can be considered as an income from investment lottery; and as per section 26 JA of the Income Tax Assessment Act 1936, it needs to be considered as taxable income. At the time of taxation, it is needed to determine that whether the prize is received in cash or in asset. In this case, as the prize is received in asset, the income is subject to capital gain.

Assessable Amounts and their Taxation Implications

b) According to section 775-15 of the Income Tax Assessment Act 1997, the gain of forex realization from foreign transactions needs to be considered as assessable income. The foreign realization gain arises for the fluctuation in the loan account exchange rate needs to be considered as assessable income. In the provided case, due to the exchange rate fluctuation in the long-term loans, there is an exchange gain of $1 million. Thus, as per section 775-15 of the Income Tax Assessment Act, this exchange gain needs to be treated as Forex Realization gain (Saad, 2014).

c) According to section 15-2 of the Income Tax Assessment Act 1997, the value of compensation, allowance, gratuities, benefits, premiums and bonuses need to be included in the income of taxpayer. The employers provide these to the employees for their services. Traveling allowances are provided to the employees in order to cover incidental expenses. As per the provided case, in order to carry the task of the employer, travel allowance is paid. Hence, the travel allowance received from the employer needs to be considered as assessable income at the time of salary. Hence, from the above discussion, travel allowance needs to be considered as assessable income (Taylor & Richardson, 2013).  

3. According to section 100-35 of the Income Tax Assessment Act 1997, in case the received amount from capital gain tax event is greater than the total cost of assets, capital gain is made. Section 100-20 of the Income Tax assessment Act 1997 states that capital gain or loss happens in the presence of capital gain tax assets. A list of capital gain tax assets is provided in section 100-25 of the Income Tax Assessment Act 1997 along with the rise of capital gain or loss. The capital gain or loss from car needs to be disregarded as per section 118-5 of the Income Tax Assessment Act 1997. According to section 118-5 of the Income Tax Assessment Act 1997, the vice chancellor cannot claim capital gain for the repairing expenses for the car (Lignier & Evans, 2012).

References

Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2015). Do socially responsible firms pay more taxes?. The Accounting Review, 91(1), 47-68.

Erasmus, D. N. (2013). An Analysis of Challenging the Commissioner’s Discretionary Powers Invoked in Terms of Sections 74A and 74B of the Income Tax Act 58 of 1962, in Light of the Constitution of the Republic of South Africa 108 of 1996 (Doctoral dissertation, University of KwaZulu-Natal).

Lignier, P., & Evans, C. (2012). The rise and rise of tax compliance costs for the small business sector in Australia.

Millar, R. (2013). Smoke and Mirrors: Applying the Full Taxation Model to Government Under the Australian and New Zealand GST Laws.

Oats, L. (Ed.). (2012). Taxation: A fieldwork research handbook. Routledge.

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

Taylor, G., & Richardson, G. (2012). International corporate tax avoidance practices: evidence from Australian firms. The International Journal of Accounting, 47(4), 469-496.

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.

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