Taxation Of Income Year Ended 2017-18: Assessable Income, Deductions, And Capital Gains

Assessable Income

Advise Kate regarding the tax implications, arising from the above facts in relation to the 2017/18 income year. In your answer, make sure you: (1) apply the HIRAC methodology and refer to any relevant cases, legislative provisions, and principles of tax law; and (2) show separately your calculation of Kate’s taxable income, and ‘basic income tax liability’, for the 2017/18 income year, fully explained by reference to any relevant legislative provisions.

The current headings provides the tax determination of Kate for the income year ended 2017-18 relating to the transactions that is reported.

Is the taxpayer entitled to claim permissible deductions relating to expenses occurred during the income year ended 2017-18 under “section 8-1 of the ITAA 1997”? Is the taxpayer would be held assessable for the income based on the ordinary concepts under “section 6-5 of the ITAA 1997”? The issue also brings up the situation whether the gains reported from collectible would considered for capital gains tax?

Meaning the explanation stated in “section 6-1 of the ITAA 1997” an individual taxpayer that derives their earnings from personal exertion constitutes income from salaries, wages, pensions, superannuation, allowance and revenue earned from any carrying on of business. Referring to the “Section 6 of the ITAA 1997” generally most of the income that is earned by the taxpayer is classified as the ordinary income (Hora 2014). Considering the judgement in “Scott v Commissioner of Taxation (1935)” receipts are ought to be held as income in relation to the ordinary concepts.

According to the “section 136 (1) of the FBTAA 1986” a situation of fringe benefit originates when the company offers any form of benefit to the employee in respect of their employment (Kiprotich, 2016). Stating the “section 20 of the FBTAA 1986” a fringe benefit expense event occurs when the employers pays the expenses of employees that is occurred by employees.

An important consideration of “section 6-5 of the ITAA 1997” is that receipt from prize winnings is not classified as income however it may be considered as income if the amount that is received has sufficient relation with taxpayers’ revenue generation activities (Jones and Rhoades-Catanach 2013). The commissioner in “Kelly v FCT” held that receipt of prize money by the professional football player for the fair and best player was regarded as taxable income. The prize received has sufficient relation with taxpayers’ revenue generation activities and his skills.

Deductions

Denoting to “section 6-1 of the ITAA 1997” receipt of income from the personal exertion is termed as assessable income based on either stator or ordinary income (Hart et al. 2017). Winning from prize is held assessable provided that there is link among the revenue producing activities of an individual. The court in the event of “FCT v Stone” found the taxpayer was a policewomen as well as the javelin thrower (Coleman et al. 2014). The assessment court suggested that the taxpayer was deriving income from salary and prizes from sporting engagement. The taxation commissioner assessed the amount received based on the ordinary concepts and held the taxpayer for carrying the business of professional sportsperson.

“Section 6-5 of the ITAA 1997” states that any kind of payment in the form of money that is received by the taxpayer from the public appearance or promotions is regarded as income which is taxable (Graetz et al. 2015). Mentioning the event of “Kelly v FCT” money received for making public appearance is taxable under ordinary concepts.

As per “subsection 108-10 (1) of the ITAA 1997” losses from collectible is only setoff against the gains made from the collectibles. As per “section 108-15 (1)” collectibles are usually disposed as set (Bittker 2015). Denoting to “section 108-15 (2) of the ITAA 1997”, collectibles are held as sole set and every disposal is regarded as the part of collectibles. However, gains from collectibles bought for less than $500 should be disregarded.

Receipts of rent is referred as periodical receipts, bringing up the judgement of court in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” receipt of rental income is held as taxable income (Hayek 2014).

An item of income character is derived beneficially when it comes home. Any form of reward for service is regarded as the assessable income. The example of “Brent v FCT” explains that the amount that was received by the wife of robber for telling her life story is regarded as taxable income under ordinary concepts (Jones and Rhoades-Catanach 2013).

Any type of payments that is obtained for restricting or relinquishing the rights is not an income but establishes a CGT event D1 (Rohatgi 2015). This events occurs when a contractual agreements or reasonable rights is made in other object. Similarly the expenses that are incidental costs to capital proceeds is considered for deductions under “section 8-1 of the ITAA 1997”.

Capital Gains Tax

Under the positive limbs of “section 8-1 of the ITAA 1997” expenses that are incurred in gaining assessable income are allowed as deductions (Basu 2016). While “section 8-1 (2)” of negative limbs prohibits a taxpayer from claiming deductions for preliminary nature. In “FCT v Madealena (1971)” no deductions was allowed to taxpayer for expenses that were reported in gaining a new employment as it does not has any nexus with the income generating activities.

Meaning the explanation stated in “section 6-1 of the ITAA 1997” receipt of salary by Kate is an income from personal exertion. Citing the reference of “Scott v Commissioner of Taxation (1935)” that income from salary would be held assessable as income from ordinary concepts (Sadiq et al. 2013). Furthermore, the employer of Kate is found paying on many occasions the taxi fares and such payment constitutes fringe benefit under “section 136 (1) of the FBTAA 1986”. Stating “section 20 of the FBTAA 1986” a fringe benefit expense event occurred for Kate since the employer paid the taxi fares which was in respect of her employment.

A sum of $5,000 was received by Kate for being the best accountant in Australian and referring to “Kelly v FCT” the prize money was regarded as taxable income because it has sufficient relation with Kate’s revenue generation activities and his skills (Freeland et al. 2014).

In latter part it was noticed that Kate regularly participated in sports competition and won a cash prize of $40,000 with a coffee machine of $3,000. Quoting the judgement of “FCT v Stone” it can be stated that Kate was carrying the business of professional sportsperson and the amount received would attract tax liability under “section 6-5 of the ITAA 1997”. However the coffee machine is not included in assessable income since it represents the nature of gift.

Kate later received a sum of $40,000 for making appearance in sporting events. Mentioning the event of “Kelly v FCT” money received by Kate for making public appearance is taxable under ordinary concepts (Rohatgi 2015). The amount would be held assessable under “section 6-5 of the ITAA 1997” since it was related to the income producing activities.

As evident Kate bought a Bed side lamp at a cost of $700 and later sold the same for a loss. With respect to “section 108-10 (2)” Kate should ignore the capital loss from the sale of antique assets (Hayek 2014). Simultaneously mentioning the “section 108-15 (2) of the ITAA 1997”  the capital gains that is made by Kate from the sale another antique lamp should be disregarded as well since the cost based of the collectible was less than 500.

Fringe Benefits Tax

In the later instance it is found that a rental receipts was obtained by Kate. Denoting the judgement of court in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” the receipt of rental income shall be held taxable as ordinary receipts under “section 6-5 of the ITAA 1997”.

Kate reports that she received an amount of $30,000 with the media channel for describing her life outside the sports. Quoting the example of “Brent v FCT” amount that is received by Kate for telling her life story is regarded as taxable income under “section 6-5 of the ITAA 1997” as income from ordinary concepts (Coleman et al. 2014).

In the later part of the case study Kate received a payment for not making any other appearance on the competitor television station. Receiving the sum of $20,000 for restricting the rights was regarded as the CGT event D1 and these amounts would form the part of her assessable income. Additionally the legal expenses that is incurred is are incidental costs to capital proceeds which is considered for deductions under “section 8-1 of the ITAA 1997”.

In spite of being employed Kate often looks for the new job and as a result of this she incurs a cost of travelling and accommodations for attending in a job interview in Melbourne. Quoting the judgement made in “FCT v Madealena (1971)” no deductions is permitted to Kate for expenses that were reported in gaining a new employment as it does not has any nexus with the income generating activities (Kiprotich 2016). The expenses are preliminary to the income commencement activities of taxpayer and non-allowable under “section 8-1 (2) of the ITAA 1997”. 

= $90,000 – $87,000 = $3,000

= $3000 x 37% = $1,110

= 19,822 + $1,110 = 20,392

Basic Income Tax Liability = $20,932

Conclusion:

Apparently it can be stated that during the year ended 2017-18 the tax liability of Kate stands $20,797 with the taxable income e of $90,000. Kate would be assessable for income derived under ordinary concepts while she would able gain deductions from her assessable income under “section 8-1 of the ITAA 1997”.  

Reference List:

Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Orbist, W. and Sadiq, K., 2014. Principles of taxation law.

Freeland, J.J., Lind, S.A. and Stephens, R.B., 2014. Fundamentals of Federal Income Taxation (pp. 27-30). Foundation Press.

Graetz, M., Schenk, D., Freeland, J., Lethrope, D., Lind, S., Stephens, R., Dickinson, M.B. and Bittker, B.I., 2015. Federal Income Taxation, Principles and Policies (University Casebook Series). Foundation Press.

Hart, G., Coleman, C., Jogarajan, S., Sadiq, K., McLaren, J. and Krever, R., 2017. Principles of taxation law.

Hayek, F.A., 2014. Law, legislation and liberty: a new statement of the liberal principles of justice and political economy. Routledge.

Hora, B., 2014. Principles of Taxation. Issues in Accounting Education, 19(1), p.150.

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

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

Kiprotich, B.A., 2016. Principles of Taxation. governance.

Rohatgi, R., 2015. Basic international taxation. Richmond Law & Tax.

Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst, W. and Ting, A., 2013. Principles of taxation law 2013. Thomson Reuters.