Taxation Of Income Under The Australian Income Tax Act

Case study: Taxation of Income of an Australian Actress

Questions:

Part A

1. Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker’s dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.

2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mother’s recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They don’t keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600.

3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter’ system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home. No money changes hands. Suzie would receive a credit to her account of 15 to 20 ‘barts’ that she can exchange for goods or services of equal value from other registered participants in the scheme (fruit, vegetables, child minding, lawn mowing etc.).

Required 1:

• Advise Allan and Betty of any income tax implications arising in paras 1, 2 and 3 above.
• Advise the participants in the barter scheme of any income tax implications.
  

Part B

Nicole Grownman is an Australian actress who has had a number of roles in films and guest appearances in serials. During the year the following events occurred:

i) Nicole was offered a role in a telemovie set in the 1950s. She was required to put on 10 kilograms to play the part offered and would be awarded the role only if she put on weight. Nicole increased her food intake dramatically, dining-out several times a week and eating ‘fast food’. She estimated she spent $1,000 on food that she would not normally have eaten. She was paid $50,000 for her role.

ii) As a result of her weight gain Nicole had to buy new clothes at a cost of $2000. At the end of filming she wanted to loose weight and get back into shape so hired a dietician at a cost of $1,000 and a personal trainer ($2,500) and spent a week at a health clinic ($1,500).

Sources of Income under the Income Tax Act

iii) Nicole was paid $2,000 by Woman’s World for an interview in which she spoke about the new telemovie as well as her personal life. She donated the money to the Royal Children’s Hospital.

iv) The telemovie received critical acclaim and Nicole was offered a small role in a Hollywood movie. Under the contract she was to receive $AU20,000. She flew first class to the United States at a cost of $5,000; economy class would have been $2,000. After filming she spent a week visiting agents in Hollywood in the hope of securing more roles. Nicole regarded the week as a ‘working holiday’ and she treated herself to ‘five star’ accommodation at a cost of $6,000.

v) A well know gossip magazine Eye Spy published a story about Nicole that contained a number of untruths. Ordinarily she would not have bothered about such thing but with her career blossoming she was concerned that her reputation might be tarnished and future roles lost. She spent $10,000 in legal fees, sued the magazine for libel and was successful in securing damages of $50,000.

vi) A short break in acting followed and at her manager’s suggestion Nicole paid $1,000 to a voice coach to improve her voice projection.

vii) In the expectation that her career was to take off at last, Nicole shifted to a rented town house. She specifically selected a two bedroom unit so that one room could be set aside for exclusive use as a study/office. There she could read scripts, deal with correspondence and meditate. Her manager suggested she would be entitled to a tax deduction for an apportionment of the rent.

1) First of all we will summarize the points mentioned in the given case:

a) Allan and Betty were living together in Melbourne.

b) They decided to sell their home at Melbourne and purchased a large country home

c) Allan is a locum doctor and Betty is a part time accountant.

d) People generally used to given Allan their home made cakes along with fees for his treatment

e) On one occasion while treating a local wine vendor dog who was bitten by a snake, he got a bottle of wine amounting to 360$.

As per Income Tax Act of Australia, the Income of the Individual taxpayer is considered mainly to be derived from three sources:

1. Personal Earning (Salary & Wages)
2. Business Income, and
3. Capital Gain.

Personal Earning also include the ordinary Income.

The tax liability arises as per the situation as given in question is as follows:

1. As per Income tax act of Australia any gain arising from sale of house property is taxable under the head capital gain. Further, Australian Income tax Act also provide exemption in respect of any gain arising from the sale of house property which has been used by the as main residence by the seller or his family member and the house was not use for income earning purpose. Therefore, gain arising from sale of Melbourne house is not taxable.

2. The Salary earned by the Betty from working as Part time accountant is considered as Ordinary Income as per Section 6-5 of the income tax act of Australia.

Taxation of Sale of House Property

3. The Fess received by Mr. Allan who is a locum doctor will be assessable as Business Income.

4. As per Sec 21 of Income Tax Act of Australia any non cash business benefit derived in the business which will be convertible to cash shall be treated as if they were converted to cash and will be chargeable to Income tax. In the given situation Allan get home made cakes and scones which are not be possible to convert to cash therefore, they were exempt. Further, the amount of cakes and scones is not likely to exceed $ 300.

But in case of Wine given by the Wine makers for his dog treatment is easily convertible to cash and its value also exceed $300, therefore this is taxable as assessable Income.

As Per Income Tax Act of Australia any profit earned from selling of product is only taxable id there is an intension to earn profit. Because the business require a huge Investment in some form and also requires the enough consumer to consume the product sold.

However, mere sale of Product as a hobby will not be taxable as Business Income. Hobby is pastime activity which is perused for recession and fun.  In the given case Mr. Allan and Mrs. Betty enjoy gardening and also used to attend continuing education course on organic farming.

Suddenly Mrs. Betty started making marmalade and relish using her mom recipes which turn out to be popular and she started to sell it at stall at Newtown Growers market every second Sunday of the month and not regularly which is considered to be hobby and hence the Income will not be Assessable.

But now when they started selling the product regularly to three retailers will now considered as business activity and not just a hobby. Therefore, estimated gross receipt of $500- $6oo in a moth now considered to be receipt for selling of the product and will be taxable under Business Income. But where overall profit motive of the assesses seems to be absent and the activity does not look like that it will earn profit than it is unlikely to treat the activity as Business Income.

Since in the given case also there is no profit motive of Allan and Betty and further receipt of $500 - $ 600 is also considered to be very low. Therefore, the same may not be considered as Business Income as decided in case of Ferguson v. FC of T (1979) 37 FLR 310 at 325

Australia Income tax Act gives same treatment to the transaction incurred in barter System as it were incurred in normal cash and credit Transaction. It does not differentiate between transactions. No special deductions are allowed. However, in case of barter system all transactions are valued at fair value. In the given case Allan and Betty decided to set upa barter system in the area. Since the Business is opened by Allan and Betty for profit motive therefore, the profit earned by her will be taxable.

Taxation of Salary and Business Income

 Upfront fees of $50 paid to Allan and Betty as a charge for keeping of administrative records is taxable. And also profit earned from the barter system is also taxable. Further, GST will also need to be paid by Allan and Betty on the business. Further, records also need to be maintain by them for barter system.

Barter is a system in which goods and services are exchanged with each other without transacting the same in money. Some of the tax implication which arises to the participantof barter system is as follows:

1) Transaction under the barter system is assessable for the income tax purpose and deduction is also allowed to same extent by considering it as transaction other than cash and credit.

2) GST liability along with Income tax will also arise if the entity is trading under this system as a member of trade exchange.

3) The transaction carrying in barter system is generally valued at market price or at arm’s length value.

4) The Payment between trade exchange and member is done by debiting the respective accounts.

5) Tax Invoice need to be issued by the exchange in case of barter system and the invoice must show GST amount and payable in each invoice.

6) All the record of the barter system need to be maintained by the exchange and exchange also need to offer an explanation in respect of every transaction carried under barter system.

i) As Per section 8-1 of Income Tax Act of Australia any Expenditure which has been incurred in earning the Income shall be allowed as deduction. However, the expenditure which has been incurred for personal purpose will not be allowed as deduction.

In the given case Nicole is an actresses who has been offered a role in television set in the 1950s. To get the role she need to put on weight To Increase the weight she increased her food intake dramatically by dinning out outside eating junk food e.t.c. This will lead to increase her expenditure on food and according to her estimation she has spent $1000 on food. She was paid $50,000 for the role

As per the Situation mentioned Income of $50,000 from role will be taxable as Business income. Further, Expenditure of $1,000 incurred by her on food will not be treated as his personal expenditure and will be allowed as deduction as the expenditure was incurred in earning income which qualifies for the special circumstances as decided in the case of FC of T v. Edwards (1994) 49 FCR 318; in which the expenditure incurred by the assesses on clothing to earn is allowed as deduction.

ii) As per Section 8-1 of Income Tax Act of Australia if the nature of expenditure is private and domestic, or the expenditure is incurred in earning exempt income then deduction will not be allowed. Since In the given case Expenditure incurred by Nicole to buy new clothes for $ 2,000 and cost incurred on hiring dietician and a personal trainer and also incurred on a health clinic totaling to $5,000 will not be allowed as deduction and considered to be personal in nature. The same decision is also decided in case of FC of T v. Cooper (1991)in which the expenditure incurred on wearing the clothes as per expectation is not allowed as deduction

Treatment of Non-Cash Benefits and Gifts

iii) Any Income which has been earned by the taxpayer as his personal earning will be considered as ordinary income expect otherwise provided in the Income Tax Act. In the given case Nicole was paid $2,000 for an interview by the Woman’s World will be considered as ordinary income as fees for service provided as per Section 6-5 of the Income Tax Act of Australia

Further Australian Income Tax Act also provides deduction in respect of donation made by the Taxpayer. As per Division 30 of the Income Tax Act claim for donation is allowed for $2 or more if the donation is made to the approved donee. Assuming Royal Children hospital is an approved institution, therefore donation made by Nicole is allowed as deduction.

iv) As per Section 8-1 of the Income Tax Act of Australia deduction of expenses will be allowed if the same is incurred in earning income. However, for claiming an exemption there must be outflow or loss and the Expenses incurred will not be domestic, capital and private in nature. Only work related expenses will be allowed. Further record need to be maintained if the expenditure incurred exceed $300.

In the given case Nicole received $AU20,000 under contract for role in Hollywood movie which will be treated as ordinary income as per section 6-1 of the income Tax Act. Nicole incurred expenditure on travelling amounting to $5,000 which not exceeds the income and the expense was incurred in earning the income. Therefore, the same will be allowed as deduction if proper is being maintained.

Further she spent $6,000 on accommodation in a five star hospital which will not be allowed as deduction since she declared that she was on holiday during the week. Therefore the expense will be considered as personal.

v) As per Section 8-1 of the Income Tax Act of Australia deduction of expenses will be allowed if the same is incurred in earning income. In the given case Nicole sued Eye Spy magazine that contained a number of Untruth about her. She was Successful in securing $ 50,000 from the magazine company as damage which will be considered as capital receipt as the compensation received for personal injury is exempt. Further, Expenses which was incurred by her amounting to $10,000 will also be allowed as deduction as the expenditure was incurred to secured her ability to earn income. If the Suit was not filed and legal expenses was incurred then Nicole may start losing the work which will affect her Income earning capability. Therefore deduction will be allowed.

vi) Amount paid by Nicole amounting to $1,000 to a voice coach to improve the voice projection will be treated as personal expenses and no deduction will be allowed to Nicole in respect of such expense.

vii) The situation is summarized as follows:

Nicole is an Actresses

a) In expectation that her career was to take off she shifted to a new house

b) New House has two bed room.

c) One room was set aside for exclusive use as study / office.

d) Nicole is Self employed and has income from Business

e) It has been assumed that the house is used both for personal and business purpose as one of the room is being set aside for work / study.

f) Therefore, she will be eligible for deduction on the apportioned rent which are used by her in her Business.

References

Berlin, R. (n.d.). What are payroll taxes? Retrieved January 17, 2015, from Alllaw.com: https://www.alllaw.com/articles/tax/article5.asp

Guide to Superannuation for employers. (2014, may 23). Retrieved 2015, from Australian Taxation Office: https://www.ato.gov.au/business/employers-super/

PayG withholding. (2014, July 25). Retrieved 2015, from Taxpayers Australia Limited: https://www.taxpayer.com.au/KnowledgeBase/10163/Small-Business-Tax-Super/PAYG_withholding