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Gifts and their taxation treatment

1. Discuss the assessability for Susan of the receipt of the voucher

Susan is a full time childcare worker in Collingwood. She loves her job, especially since her best friend Adam has enrolled his child in Susan’s childcare. Susan was pleased to be able to work while looking after Adam’s child. This year for Susan’s birthday Adam and Susan went out for dinner. At the end of the evening Adam gave Susan a card that read:

‘Susan, thank you for your friendship. Thank you for also for putting in so much extra effort when teaching my child at childcare (you are so good at your job!). Happy Birthday and I hope you can use this gift to take a break from all your hard work. Love Adam’.
Inside the card was a $300 Jetstar voucher which could be redeemed online for any flights, in any name.

2. Briefly explain whether the following are ordinary or statutory income for the taxpayer


I. A monthly annuity payment of $5 000 received by the taxpayer ($4 000 of this was the return of the capital component).
II. A dividend of $400 received by the taxpayer who is an individual resident of Australia. III. The taxpayer’s receipt in Brent v FCT (1971).
IV. The receipt of $50 000 by the taxpayer (lawyer) who lived in Sydney, for agreeing to not work for any other law firm in Melbourne other than EasyLaw Pty Ltd, should they ever move to Melbourne (the taxpayer never moved to Melbourne).

3. Discuss whether the following amounts are assessable income for Donuts of Melbourne Ltd:


• $50 000 rent from Donuts of Sydney Ltd (1 mark);
• $2 800 000 payment from Hope Pty Ltd (3 marks).
Donuts of Melbourne Ltd (‘DM’) had a large donut and cake store in Melbourne operating since January 2015. The directors of DM wanted to expand their business and decided to open a subsidiary store in Sydney called Donuts of Sydney Ltd (‘DS’). In February 2017, DS was incorporated and started trading in Sydney. DS rented a shop from DM and in this financial year DM received $50 000 in rent from DS. This was the only rental property that DM owned.
In March 2018, DS required a loan from DM so they could buy more equipment, and DM subsequently loaned DS an amount of $4 000 000 (with a loan term of 8 years and interest payable at 9%). This loan agreement suited DM as they had already decided they wanted to move premises and they required an immediate amount of cash so they could pay an upfront amount to enter into a new lease agreement. As always planned, DM decided they would assign the right to interest on the loan to another entity, Hope Pty Ltd, in exchange for $2 800 000. In April 2018 DM received the $2 800 000.

4. Explain whether the following receipts are specifically exempt (please cite sections) from income tax

Taxation treatment of rental income


I. A club established for the encouragement of science that is located in Australia and is not carried on for the purposes of profit.
II. A tourism society (promoting the development of tourism) that is carried on for the purposes of profiting its individual members.
III. A family assistance payment (back to school bonus) paid to a Melbourne family.

IV. The receipt of a Prime Minister's Literary Award by a Deakin student.

5. Briefly explain whether the following receipt of $3 000 000 is ordinary income for the taxpayer :


The taxpayer purchased a large block of land for $500 000 on the outskirts of Melbourne. At the time of purchasing the land the taxpayer considered that he might be able to sell the land to a local shopping centre developer who he knew was looking to expand into the area. He also considered he could subdivide and sell the land in smaller blocks. He approached the shopping centre developer who stated that they were no longer interested in acquiring the land.


As such, the taxpayer decided that he would build a recreational facility on the land. He worked closely with the council to subdivide and arrange for the connection of necessary services such as pathways, power, sewerage and gas. He did not use an agent, and he kept prices down by sourcing material and contractors himself. He constructed a pool, a gym, and a yoga centre on the land. The development expenses were $1 500 000. Once it was completed the taxpayer decided to sell the facility to the local council for $3 000 000.

6. Consider the tax treatment of the following receipts: I.


II. $5 000 (1 mark) III.
Christine works at a small accounting firm in the suburbs. While checking her payslip at work, Christine realised that she had been underpaid an amount of $5 000 for work she had done for clients. She had also spent $70 on office supplies and wanted payment to cover those costs.
Christine reported these issues to her boss. Christine was so upset by these payment errors that she told her boss she was going to resign from work, and take them to court so she could recover her lost pay. Her boss decided he did not want to incur legal fees and decided to pay Christine the $5 000. He also gave her $70 to cover the money she had spent on office supplies. Christine was also paid by her boss an additional $2 000 for agreeing to not make any additional claims against the accounting firm.

7. Discuss the assessability of the $30 000 amount for River

Compensation payments and their taxation treatment


River Pty Ltd (‘River’) owned land in Victoria through which a large river flowed. River ran a business operating steamboat cruises and they also had a camping ground on their land on which visitors could stay.
A small landscaping company called Rock Pty Ltd (‘Rock’) approached River asking if they could remove some river rocks from their land (which they would then sell to landscaping clients). River agreed and entered into an arrangement with Rock where they could take as many rocks per month as they wished, at a cost of $150 per kilogram. There was no maximum that could be taken, but there was a minimum of 5 kilograms per month stipulated in the contract.
This financial year River received $30 000 in payments from Rock.

8. Discuss the tax consequences for the following amounts:


I. The $300 000 received by Mary (2 marks)
Mary was a chef at a local restaurant. A large newspaper called FoodNews came to the restaurant to try Mary’s food, and subsequently published an article stating that Mary’s cooking gave all her

customers food poisoning. This article was found to be untrue, it was published as payback by the newspaper for an earlier disagreement they had with Mary. As a result of the article, Mary lost her job and could not be hired again as a chef for a long time. She sued FoodNews and received a lump sum payment of $300 000.
II. The $75 000 received by Coffey (2 marks)
Coffey Pty Ltd (‘Coffey’) had 5 forward selling contracts for the distribution of ground coffee. One of these contracts was with Cafe? Pty Ltd (‘Cafe?’) for a term of 3 years, representing about 30% of Coffey’s annual profit. This year, Cafe? cancelled their contract with Coffey and paid them $75 000. Coffey were worried that they would not be able to continue trading without this contract, but luckily they were able to find another distributor quickly.

9. Consider whether Lucy is in a business for tax purposes and whether she has any assessable income as a result


Lucy is employed as a part time cleaner and wants to make some extra money. She decides to make her own liquor (alcohol) and sell it online and to restaurants. Lucy does not care that she does not have a licence for this, and she immediately commences implementing her plan to make the alcohol.
Lucy prints cards and drops off flyers in her neighbourhood advertising her product. She buys the necessary equipment and products and sets up a storage area in her home. She spends about 15 hours a week making this product. Lucy receives many responses to her advertising; one in particular is from a nearby restaurant.
By agreement with the restaurant, Lucy provides 4 bottles of alcohol a week for the restaurant and in return, she is given 5 free meal vouchers a week. The meal vouchers can only be redeemed by Lucy or her immediate family and Lucy calculates that these vouchers have a value of approximately $200.

10. With reference to the Federal Coke case, discuss how the Commissioner of Taxation could have applied section 6-5(4) of the Income Tax Assessment Act 1997, and how this may have affected the outcome of the case.

Gifts and their taxation treatment

Answer to question 1:

The Australian taxation office defines that an individual might receive amounts that are not subjected to tax. Therefore, the amount from gift are not included as the part of the taxable income. According to Australian taxation office a gift that is a mere gift does not possess the character of income. As evident in the current situation of Susan received a redeemable gift voucher of $300 with Jetstar for any flights.

As held in “Scott v Federal Commissioner of Taxation (1966)” a solicitor receiving a 10,000-pound gift from the wife of long standing client out of deceased’s estate will not be held as income. An individual receiving an unsolicited gift does become the part of income for the recipient simply because goodwill was inspired by the generosity. Similarly, in the case of Susan the receipt of redeemable voucher constitutes a mere gift and cannot be assessed as income.

Answer to question 2: 
  1. A monthly annuity payment – Ordinary Income
  2. A dividend of $400: Statutory Income
  • The taxpayers receipt in Brent v FCT (1971): Ordinary Income
  1. The receipt of $50,000 by taxpayer: Statutory Income
Answer to Question 3: 

An individual is required to include in their tax return the entire amount of rent or any other form of rental income derived from the rental property when an individual rent out their property. As evident in the current situation of Donuts of Melbourne, with the expansion of business Donuts of Melbourne rented out a shop to Donuts of Sydney and derived rental income of $50,000. “Section 6-5 of the ITAA 1997” defines that periodic receipts would be considered assessable. As held in the case of “Dixon v Federal Commissioner of Taxation (1952)” the periodic receipts would be considered assessable under the income as ordinary concepts. Similarly, in the case of Donuts of Melbourne the receipt of rent constitute ordinary income under section 6-5 of the ITAA 1997 and would be considered as for assessment.

On other hand it is noticed that loan agreement was suited to DM since they had already decided to move to new premises and required immediate cash to pay the upfront amount of new lease agreement. Later it was noticed that DM assigned the right of interest on loan to another party namely Hope Pty Ltd and in exchange received $2,800,000. The receipt of 2,800,000 by Hope Pty Ltd would be considered an assessable income.

Citing the reference of “California Cooper Syndicate v Harris (1904)” the gain on the sale of lease will be considered assessable since the transaction entered into by the taxpayer was to resale the lease and generate profit from it. Similarly, in case of DM the receipt of 2,800,000 by Hope Pty Ltd would be considered assessable because it constituted buying and selling of lease.  

Answer to question 4: 
  1. Section 50-5 of the ITAA 1997
  2. Section 50-45 of the ITAA 1997
  • Section 50-5 of the ITAA 1997
  1. Section 25-1 of the ITAA 1997
Answer to question 5: 

Taxation treatment of rental income

The current situation is based on determining whether the receipt of $3,000,000 would be considered as the ordinary income for the taxpayer. The current case takes account of the issue of business income and whether or not the subdivision of land by taxpayer and selling of land would be held as ordinary income or a capital in nature. The taxpayer initially wanted to sell the land to shopping centre developer however the shopping centre developer later declined to acquire the land. The taxpayer later subdivided and developed the land for sale.

As held in the case of “Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1982)” the federal commissioner assess the taxpayer based on the profits derived from the sale of various lots of land. The commissioner stated that the profit would be considered assessable under either “section 25 (1) of the ITAA 1936” as income from carrying the activities of land development or under “section 26 (a)” as the profits derived from carrying of a profit deriving scheme. Therefore, in the current case the taxpayer would be considered assessable under “section 25 (1) of the ITAA 1936” for carrying on the business of land development. The profits derived would be assessed under “section 26(a)” as ordinary income for carrying of a profit deriving scheme.

  1. $70: The sum of Christine constitutes a reimbursement payment that and would not be included in her assessable income. Reimbursements constitute payments that are made to the worker for the actual amount of expenditure that is already incurred and the amount received does not constitute assessable income.
  2. $5000: The sum of $5000 constitute retention payment made to Christine to remain employed in the job. Citing the reference of “Dean v Federal Commissioner of Taxation of (1997)” the retention payments made in considerations of key retaining the key employees for remaining employed would be considered as income. The sum received by Christine by would be held as ordinary income which is assessable under “section 6-5 of the ITAA 1997”.
  • $2000: The sum of $2000 by Christine are capital amounts and would not be held for assessment as income. Citing the reference of “Higgs v Olivier (1951)”amounts received for not to do something would not be held as income. Therefore, the sum would not be held as assessable.
 Answer to question 7: 

The current situation of River Pty Ltd will be considered as the primary producer based on the fact that River Pty Ltd was engaged in the activities of selling rock to Rocks Pty Ltd. An assertion can be bought forward by stating that amount received by River Pty Ltd from the sale of rock would be included in the assessable income. With respect to “subsection 6(1) of the ITAA 1936” rocks constituted a part of business assets that were sold by River Pty Ltd. The income derived by River Pty Ltd is an ordinary income from personal exertion and would be included for assessment in his taxable income.

Answer to question 8: 

I: $300,000 receipt by Mary

As evident in the current case of Mary she received a lump sum payment for the loss of employment due to false allegations. In case of the loss of employment, a compensation receipts payment however is classified as income since it constitutes a substitute for the lost income. As held in the case of “Federal Commissioner of Taxation v Allied Mills Industries Pty Ltd (1989)” the nature of the compensation receipts will be dependent for what purpose the amount is received for. Compensations are generally considered as capital item except on the circumstances where a substitute principle replaces what is lost. Therefore, in the current situation of Mary the compensation payment would be considered as income since the amount received by her represents a substitute for what was the lost income.

Compensation payments and their taxation treatment

II: The $75,000 receipt by Coffey

In compliance with “section 6-5 of the ITAA 1997” the receipt of compensation payment by Coffee Pty Ltd would be considered as income under ordinary concepts and would held taxable. Referring to the case of “F C of T (NSW) v Meeks (1915)” the receipt of amount relating to termination of trade agreement made while executing the business would be regarded as income. Evidently, Coffee Pty Ltd discovered an alternative distributor and this considerably does not lead to any considerable influence on the profitability of the firm. The contract does not effect the fixed income framework and the receipt of compensation is considered as revenue and would held for assessment.  

Answer to question 9: 

“Section 995-1 of the Taxation Ruling 97/11” defines business to take into the considerations any trade or business. The ruling provides business generally carries the purpose of commercial intent. In the case of Lucy, the selling of liquor constitutes business activities that is carried on by Lucy for the purpose of making profit.

“Section 6-5 of the ITAA 1997” defines the receipt of income that are directly related to any business or profession and would result in tax consequences as well. In the current situation of Lucy, the receipt of redeemable mean vouchers carries a market value of $200 and would be considered for taxation.

Answer to question 10: 

As held in the case of “Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977)” the commissioner applied the section 6-5 of the ITAA 1997 and held the amount as assessable income. The commissioner of taxation disagreed with the treatment of the Federal’s of the payments and included the same into the assessable income. The commissioner stated that income formed the part of the assessable income of the company for the associated years of income. The judge held that the receipts of the two instalment does not alter the character of in the hands of Federal and would therefore be regarded as the part of income.

Reference List: 

Barkoczy, Stephen, Foundations Of Taxation Law 2014

Brokelind, Ce?cile, Principles Of Law: Function, Status And Impact In EU Tax Law (IBFD, 2014)

Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013

Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business Taxation

James, Malcolm, Taxation Of Small Businesses 2014/15

Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia, 2013)

Sadiq, Kerrie et al, 2014

Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

Woellner, R. H et al, Australian Taxation Law 2014

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