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Relevant Income Tax Rules And Formulas

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Questions:

Giving reasons, indicate any amounts that would be included as assessable income of the following resident taxpayers for the 2016/17 tax year:

(a) Nick Addison is employed by Lazarus Holdings Ltd. His net weekly wages totalled $78,000 for the year. Total PAYG tax withheld from Nick’s weekly wages from Lazarus and forwarded to the ATO amounted to $19,000?

(b) Additional wages paid to Nick as a Christmas bonus of $6,000 (net of $4,200 PAYG tax withheld)?

(c) Reimbursement of out-of-pocket travel costs of $1,200 that Nick incurred during his employment?

(d) A travel allowance totalling $2,800. No PAYG was withheld from this amount?

(e) Lazarus paid health insurance premiums for Nick and his wife to the value of $2,750?

(f) $10,000 superannuation contribution to Lazarus Holdings Superannuation Fund on behalf of Nick?

(g) Chris receives casual wages as a freelance journalist. On 4 July 2016 Chris was seriously injured when he fell down seven flights of stairs whilst jogging one morning. He received $50,000 during the year from his sickness and accident insurance policy for loss of income?

(h) Chris also received $8,000 from his health insurance policy towards various operations and rehabilitation that he required?

(i) Chris received a $70,000 lump sum under a trauma insurance policy for his right foot, which eventually required amputation?

(j) Chris received a cheque for $5,400, which represented long service leave that he had accrued from several years as a part-time copywriter. This amount is net of $1,600 PAYG tax withheld?
 
 

Answers: 

a) Nature of income (Amount): Assessable (78000+19000= $ 97,000)
Relevant Section/Case Law: Section 6(5), ITAA 1997
Explanation: Wages tend to be employment income which tends to form an integral part of the ordinary income for the taxpayer.

b) Nature of income (Amount): Assessable (6000+4200= $ 10,200)
Relevant Section/Case Law: Section 6(5), ITAA 1997
Explanation: Christmas bonus tends to arise because of the employment relationship with the employer and thereby would be termed as ordinary income.

c) Nature of income (Amount): Non-Assessable
Relevant Section/Case Law: Hochstrasser v Mayes [1960] AC 376 &
Explanation: The taxpayer is not gaining anything as the reimbursement is just providing the work related expenses that the taxpayer has borne out of his pocket. Hence, not income.

d) Nature of income (Amount):Assessable ($ 2,800)
Relevant Section/Case Law: Section 6(5), ITAA 1997, TR92/15, Eisner v. Macomber (1920) 252 US 189
Explanation: Allowances are fixed payments which the taxpayer would receive and it would lead to a gain in the overall income as this is extend irrespective of the actual related expense. Further, it is of continuous nature and hence forms part of employment income.

e) Nature of income (Amount):Non-Assessable
Relevant Section/Case Law: Section 20, FBTAA 1986
Explanation: Health insurance premium is a expense of private nature which is being paid by the employer which results in application of fringe benefit. These are taxable at employer’s end only with no implications for the employee.

f) Nature of income (Amount):Assessable ($ 10,000)
Relevant Section/Case Law: Section 6(5), ATO ID 2014/31, Hochstrasser v Mayes [1960] AC 376 &
Explanation: Employer is mandated to contribute to the superannuation fund for employee while the employee is also required to make a contribution. However, the fact that employer is making a payment for the part which ought to be met for employer ensures real gain and predictability and hence reimbursement leading to actual gain.

g) Nature of income (Amount):Assessable ($ 50,000)
Relevant Section/Case Law: Section 6(5), TR 2016/D1, Sommer v FCT 2002 ATC 4815
Explanation: The compensation benefits tend to assume the same nature as the payments they provide compensation for. Since, loss of income refers to ordinary income loss, thus, compensation benefits recognised as ordinary income.

 

h) Nature of income (Amount):Non-Assessable
Relevant Section/Case Law: TR 2016/D1, Sommer v FCT 2002 ATC 4815
Explanation: Payments directed at providing reimbursement and ensuring that earning capacity is not impaired due to lack of treatment. Hence, the payments lack revenue nature.

i) Nature of income (Amount):Non-Assessable
Relevant Section/Case Law: TR 2016/D1, Sommer v FCT 2002 ATC 4815
Explanation: The compensation benefits tend to assume the same nature as the payments they provide compensation for. The payment is directed to provide compensation for earning potential loss which is an asset and hence making these payments as capital receipts. The capital gains implications have been ignored.

j) Nature of income (Amount):Assessable ($ 5,400 + $1,600 = $ 7,000)
Relevant Section/Case Law: Section 6(5), SGR 2009/2
Explanation: The long service leaves are accrued only on account of the employment relationship with the employer and thus is a benefit arising directly which may be readily converted into cash and hence ordinary income.

k) Nature of income (Amount):Assessable (79000+ 154000 = $ 233,000)
Relevant Section/Case Law: Section 6(5)
Explanation: Income generated by a medical practitioner based on personal exertion in the field of skill would lead to ordinary income.
l) Nature of income (Amount):Assessable (14000 + 16000 = $ 30,000)
Relevant Section/Case Law: Section 6(5), TR 95/35, TR95/18, Sommer v FCT 2002 ATC 4815, Liftronic Pty Ltd v. FC of T 96 ATC 4425; (1996) 32 ATR 557
Explanation: The reimbursement of deductible expenses lead to inflow which has revenue nature and hence terms as ordinary income. Demurrage related compensation seek to compensate for income loss and due to ordinary income of the underlying income, the compensation receipts in this regard would be assessable income. Truck is an income generating asset for the company considering the business and it has suffered permanent damage and hence proceeds would be capital with no capital gains since the compensation and book value of truck is same.

m) Nature of income (Amount):Assessable (21000 + 7800 + 3200 = $ 32,000)
Relevant Section/Case Law: Section 6(5), TR 95/35, TR95/18, Sommer v FCT 2002 ATC 4815, FC of T v Wade (1951) 84 CLR 104
Explanation: The cash sales loss amount to loss of business income which is ordinary and hence compensation derived from the same also ordinary income. Trading stock is a revenue asset and hence the underlying receipts on disposal of the same would be revenue giving rise to assessable income. The reimbursement of deductible business expenses lead to inflow which has revenue nature and hence terms as ordinary income. Medical expenses are a personal nature expense and hence compensation does not lead to assessable income.

n) Nature of income (Amount):Assessable ($ 25,000)
Relevant Section/Case Law: IT 2668A
Explanation: Services offered by way of contra transactions do lead to assessable income as non-cash benefit has been extracted on account of the service offered.

o) Nature of income (Amount):Assessable ($ 19,000)
Relevant Section/Case Law: Section 6(5)
Explanation: Income derived from profession is ordinary income irrespective of the beneficiary account in which it is diverted provided the consent of service provider has to be present.

p) Nature of income (Amount):Assessable ($ 8,000)
Relevant Section/Case Law: Section 6(10)
Explanation: Payment in non-cash benefit taken for extension of services and hence this would amount to statutory income and would be assessable.

q) Nature of income (Amount):Assessable ($ 250)
Relevant Section/Case Law: Section 6(10), TR 2005/13
Explanation: Payment in non-cash benefit taken for extension of services and hence this would amount to statutory income and would be assessable. Extension of cufflinks is not gift since it arises from business relations and is not voluntary.

r) Nature of income (Amount):Assessable ($ 3,280)
Relevant Section/Case Law: TD 1999/6
Explanation: When travelling is part of business and forms deductible business expense, then the customer loyalty program related benefits are termed as assessable in nature.

s) Nature of income (Amount):Assessable ($ 30,000)
Relevant Section/Case Law: TR 2009/5
Explanation: Trade incentives which are offered so not lead to a downward adjustment in the cost of trading stock. Such trade incentives are considered assessable income as these are linked to particular performance.

 

 

t) Nature of income (Amount):Non- Assessable
Relevant Section/Case Law: TD 2009/5
Explanation: It is common practice for suppliers to extend a host of material and goods for their sale promotion but these are essentially linked to generation of a particular sale figure. In these cases, this would make contributions to assessable income. However, this is not the case here as despite closure of business, the seller would continue to keep the machine and other promotional accessory hinting that the receipts are not assessable.
OR

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