Sample taxation assessment paper that advises Amber and Jamie who is a real estate agent working for ‘Houses R US’ on taxation consequences based on the transactions that they make.
Taxation Assessment Item
Sale of Boutique and Capital Gain Taxation
The issue in the first Amber case is whether the sale of the boutique chocolate shop in Sydney attracted any capital gain taxation or any form of exemption
The Div Income Tax Assessment Act 1997 (ITAA97) defines a number of capital gain events with one of these events being event A1 which occurs when a capital gain tax (CGT) asset is disposed by the taxpayer. A CGT asset according to s 185-5(1) includes any kind of property which includes shares, land, premise, and goodwill among others. The aspects regarded assets were clarified in the Queen v Toohey clarified that property refers to something which can be transferred to others including both intangible and tangible items. This makes patent, copyright, and goodwill to qualify as property. Capital gain based on s 104-10 (4) is recorded by tax payer when the capital acquired from the disposal is more than the base cost of the asset.
Capital loss on the other hand is recorded when the capital proceeds from the disposal are below reduced cost base of the asset. S 102-5 incorporates a net capital gain occurring in a year to the taxpayer assessable where by any capital gain in the income year is reduced by year capital losses (Barkoczy, 2017). The remaining capital gains are in addition reduced by earlier years’ net capital losses. They are then discounted where necessary, reduced under concession and the remaining amount is regarded as net capital gain of the year which is taxable. In case of net capital loss after the property disposal, s 102-10(2) the taxpayers are not eligible to deductions, though capital losses can be carried forward to lower net capital gains in the years to come as per s 102-15. However, based on s 104-10(5) capital loss or capital gain is disregarded in case it associates to a CGT asset was obtained before 20th Sep 1985.
Amber purchased the shop in 2010 and sold it in 2018. The initial purchase according to the provided case took place after 20th Sep 1985 and thus according to s 104-10(5), the transaction is guided by the Income Tax Assessment Act 1997 (ITAA97) and thus, the transaction cannot be disregarded but it is eligible for taxation as per the CGT laws. Based on Div ITAA97, the 2018 transaction event of Amber boutique chocolate shop in Sydney was a capital gain tax event which involved selling of the boutique chocolate shop property at $440000.
The original price of the property was $2400000, meaning that the disposal price was higher than the cost base price and hence the event involved net profit gain as per s 104-10 (4). As per the case study, the purchase price included $110,000 stock and $130 000 goodwill, which according to Queen v Toohey qualify to be defined as property. The February sales comprised of $280000 goodwill and $160000 as the cost of stock. This implies that Amber made a capital profit gain of $200000 which is taxable based on the guide line provided by s 102-5. This implies that that $200000 will be included in Amber assessable income where capital losses will be deducted, concession and discounts reduced and eventually the net capital gain will be taxed as per the range of Amber’s assessable income.
Amber transaction took place in 2010 and 2018 and thus qualifies for taxation. The transaction involved properties that qualify as asset, and it recorded a capital gain worth $200000, which is supposed to be included in her assessable taxable income for the year 2018, but with no noted exceptions requirements.
The issue in the second case of Amber is whether the compensation provided to restrict her from opening similar business within 20km radius for the next 5 years is part of assessable income or not
According to Osborn’s Concise Law Dictionary, compensation refers to a payment made to make amends for injury or loss to property or person or compensation for some deprivation. In this case, Amber is compensated for restrictive covenants, where she is restricted on her right to work or open similar business within 25 kilometer of the current business for 5 years. Under ITAA97 s 6-5, in case a compensation payment substitutes an amount which would have been received as ordinary income, it will be reckonable as ordinary income. Under ITAA97 s 6-10 and s 15-30, an amount is considered as stator income in case payment of compensation would have been considered as statutory income when received but falls outside ITAA97 s 6-10 and s 15-30.
Based on the two rules, compensation is assessable, considered as a regular income and hence it is taxable based on the Australian law. Assessable income according to section 6-5(2) includes ordinary income derived indirectly or directly from all sources, in the income year, whether out of or in Australia. In section 6-10 (1 and 2) assessable income can as well include certain amounts which are not ordinary income. This amount is regarded as statutory income. As based on section 6-15, in case an amount is not statutory income and ordinary income law.
To determine the taxability of compensation, the nature of compensation is also regarded to determine whether the compensation can be regarded as an income and whether it is assessable. A compensation that is income in nature as per the case of Phillips (1936) is regarded as assessable and hence it is taxable. In this particular case, the taxpayer received the compensation payments in series and the payment were to be settled at the same consistent periods as salary could have been paid, in case the original agreement service continued. The regularity and recurrence element of the payment made it income in nature and hence assessable.
However, a compensation payment that is not regular in nature. However, when compensation is not income in nature it is normally regarded as non-assessable. Based on this case, compensation payment is not regular and adapting a certain system cannot be regarded to be assessable. Higgs v Olivier (1951) also supports the non-assessable nature of compensation given for restriction covenant, particularly restriction on the work right. In this case the payment was made once to restrict the taxpayer from opening a similar business within a certain area for a certain time period. The court held that the income was not assessable since it was not regular and it placed restriction on the future capacity of income earning of the tax payers. The restriction order limited the taxpayer ability to apply personal skills to earn more in the future. Thus the compensation given in this case is not income in nature but capital in nature, and hence it is not taxable.
In this particular case, amber is made to sign a contract restricting her from establishing another similar business as the sold one within 20 km radius for the next 5 years. TO adhere to this contract, she is paid $50000. This amount is paid once and it is paid to restrict her ability to earn cash using her skills within the region for five years. The income is not recurrence in nature and hence it cannot be regarded as income but capital and hence non-assessable. Moreover, the cash is meant to restrict her from making future earnings and hence it is not given as profit. Based on Higgs v Olivier (1951) case, this compensation is non-assessable and hence it is not taxable.
Thus the compensation payment for restricting amber from opening similar business within 20km radius for 5 years is not an income but a capital payment and thus it is not assessable, which implies that the amount cannot be taxed
Purchase and Sale of Residential Asset
To determine whether capital gains from sale of personal asset inherited from a relative and purchased after 20th Sep 1985 is eligible for exemption
An asset acquired for personal use is normally a CGT asset which is kept or used mostly for the taxpayers’ personal enjoyment or use. According to s 108-20(2) this includes rights or choice to obtain such assets, particular debts in regard to such non-business or non-income-producing debts and assets. To lower compliance costs, distinct rule apply to assets of CGT which are grouped as assets for personal use.
Based on s 108-20(1) personal use assets capital losses are disregarded and thus they cannot be utilized against capital gains. Moreover, a capital gain from asset of personal use is ignored in case the CGT asset was purchased for a price not exceeding $10000. According to s 108-55(1), a structure or building on a land purchased after or on 20th Sep 1985 is regarded as a distinct CGT asset from a land in case certain provisions balancing adjustment apply to the structure or building. Capital loss and gains for an asset acquired before or on 20th Sep 1985 should be disregarded and hence CGT does not have retrospective impact on the capital gains or capital loss of such a property. S 118-110 defines one of the most significant exemptions provided by the regime of CGT associated to taxpayer’s main residence.
This section offers that a capital loss or capital gain made in association with a dwelling which is a main residence of a taxpayer is disregarded. Main residence has no main definition though according to the Capital Gains Tax ATO, main residence can be determined by a number of factors which include time the taxpayer lived in the place, where tax payers belonging are kept, the taxpayer main address in electoral role and where mails are directed. Main residence can also be defined based on Couch & Anor v. FC of T where the couple intended residential home sale was taxed on the basis that, they did not live in it due to work related reasons, despite having purchased it as their main home residence. In case of spouse who does not live in the same residence, or with two residences, they should nominate one residence to act as the main residence for tax payment purpose.
According to s 118-185 the main residence has pro-rated exemption in case the dwelling acts as the main residence just for the part of period of ownership. Subdivision 118-B has various special rules associated to dwelling obtained under estates of deceased.
Section 118-195 dictates that a capital loss or capital gain from a CGT event which happens in association to a dwelling might be ignored in case the tax payer is a person who obtained interest of ownership in the dwelling as a trustee or beneficiary of a deceased estate. This is only fulfilled in case the deceased must have obtained his interest of ownership in the residence before 20th Sep 1985 or the deceases had acquired the dwelling ownership interest after the 20th Sep 1985, and the residence must have been the main residence of the deceased shortly before his death and must not have then been utilized for the purpose of making assessable income.
The other requirement is that the current owner must have disposed of her ownership interest in two years of death of the deceased, or the dwelling need to have been, from death of the deceased until the ownership interest ends of the taxpayer, the main residence of spouse of the deceased, a person who had right to dwell in it based on the deceased will or the taxpayer. In case where the above conditions are not adhered to, only partial exemption might be provided based on s 118-200 (2).
In this particular case, Amber purchases a new and bigger house to accommodate the growing family. To make this purchase, Amber and her husband use some of the money acquired after selling the boutique, with the rest acquired from a sale of apartment amber had inherited from her uncle following her uncle’s death in October 2013. Amber’s uncle had purchased the house in 1992 for $180000 and lived there until his death. Amber had lived in this apartment since she inherited it, but now needed a bigger house as the family grew bigger. Based on this information, it is clear the one bedroom apartment has been Amber’s main residence, since she has been living in it since she inherited it from her uncle.
In addition, it is clear that the apartment was Amber’s uncle main residence he was living in the apartment until his death. This certify that Section 118-195 requirements for an inherited dwelling to be exempted based on the fact that the apartment the apartment was purchased after 20th of September 1985, it was the uncle’s main residence from the date of purchase till his death, that amber claimed it immediately after uncle’s death, and did not dispose the apartment within two years after her uncle’s death.
Amber used the apartment as her main residence from the day she inherited it to the date of sale, which was five years later. Moreover, she never used the apartment to acquire any kind of earnings. Thus the apartment capital gain will be fully exempted since it qualifies to the exempted after satisfying all legal requirements.
Amber sale of her inherited one-bedroom apartment inner-city apartment was fully exempted from capital gain taxation after certifying all the requirements for exemption and hence Amber will enjoy the entire profit of selling the property unlike in a situation where there was no exemption.
Which part of Jamile income or compensation is taxable based on Australia Taxation laws and which one is not
Taxable income represents the base of tax under the income tax system. The taxable income of an entity for an income year is computed by subtracting income year deductions from its assessable income for the financial year as provided by s 4-15 ITAA97. The deductions and assessable income concept are fundamental to the income tax systems operations and a huge part of the provision in the ITAA97 and ITAA36 are regarded with these concepts. Assessable income as provided by Div 6 ITAA97 contains statutory income and ordinary income, but does not incorporate statutory or ordinary income which is non-assessable non-exempt income or exempt income as provided by s 6-1, s 6-15n ITAA97.
Ordinary income does not have legislation definition and hence it is determined based on various case laws. However the main examples of ordinary income include wages and salary, bank deposit interest, receipts of ordinary business, and property investment rent (Barkoczy, 2017). It includes income from personal exertion which comprises of employment remuneration and rewards for offering personal services. Statutory income is also included in assessable income under ITAA97 s 6-10(2) provision.
Some of the statutory incomes based on Div 10 ITAA97 include allowances in association to employment, work in progress payments, net capital gains, trading stock, superannuation benefits, dividends, unused annual and long service leave, return to work payment, and recoupments among others. An amount of statutory or ordinary income is exempted income in case it is made exempt or non-assessable non-exempt based on the ITAA97 provision, ITAA36 provision or any other common law as provided by s 6-20(1) ITAA97 and s 6-23 ITAA97 respectively. Div 8 ITAA97 focused on deductions which include specific deductions and general deductions.
General deduction provision in s 8-1 ITAA97 permits taxpayer deductions for outgoings and losses to the level that they are incurred in producing or gaining the assessable income of taxpayers. However, capital outgoings and losses are not deductible based on s 8-1 general deduction provision. Specific deductions based on s 8-5 ITAA97 focuses on covering specific forms of expenditure and other amount which might not be deductible under the provision of general deduction. Some these specific deductions include tax-related expenses, borrowing expenses, pensions, retiring and gratuities allowances, gift, capital works, trading stock, capital allowances, balancing adjustment, blackhole expenditure and tax losses.
An employee may also receive some of allowances which are not in monetary form. To determine whether those allowances are taxable or not the law determines whether the allowances or earnings are directly related to the services provided during the employee operation and whether they are easily convertible to cash. In case the allowances cannot be converted into cash, they are then regarded as capital and hence they are not taxable as indicated in Eisner v Macomber case, and in case the payment is not related to individual work are not regarded as taxable as indicated in FC of T v Harris. Allowance provided in form free housing as indicated in Tennant v Smith was found not to be taxable since it was not convertible to cash.
In this particular case, Jamie an employee of Houses R Us receives a base salary of $50000 per year plus 10% commission on all properties sold with direct connection to him. This according to Div 6 ITAA9 is an ordinary income which Jamie receives as salary or wages and hence it is assessable for taxation. Beside this Jamie is also offered with a car whose cost is fully catered for by the company. This is given as a privilege for the services offered by the company. However, the car still remains as the company’s property. Free car can be equated to free housing in Tennant v Smith which employee cannot convert into cash and where not using it will not result to extra income.
This implies that the privilege is capital in nature and hence it cannot be included in Jamie taxable income. Jamie’s salary package also includes laptop and a phone costing $2300, and $1200 respectively per year. These are capitals that can easily be converted into cash and hence the two will be included in taxable income. Other Jamie allowances entertainment allowance of $2000 per year. All these are allowances associated to Jamie’s work or employment and hence they are taxable based on Div 10 ITAA9.
Jamie also received a reward for high sales which comprised of tech home entertainment system worth $4800. This award according to Eisner v Macomber can easily be liquidated and unlike in FC of T v Harris case, it is directly related to Jamie’s work related activities. Thus the amount is taxable and will be included in his taxable income. Jamie is issued with a housing loan of $100000, and interest rate of 4%.
According to s 8-5 ITAA97 borrowing expenses are regarded as special deduction and hence they will be exempted from taxation. In addition payment for membership of association is as well regarded as a special exception. However, in this case, the company is offering a refund of $550 from Jamie subscription, meaning this amount should be taxed (Barkoczy, 2017, p. 122)
Jamie salary and allowances are subject to income taxation, deductions and exemption. Among all recorded income transactions, Jamie will be exempted from the car allowance since it cannot be converted to cash. He will also have deductions from borrowing expenses. However, all other transactions will be taxable including a reward for high sales and other yearly privileges entertainment allowance.
Which part of Jamie income, allowances and benefits are fridge benefits
According to Fringe Benefit Tax Assessment Act 1968 (FBTAA) s 136 (1) fringe benefit are benefits offered at any time in respect of or during the tax year to an employee’s associate or to the employee by the employer associate or the employer, or a third party with employer arrangement, in respect of worker employment. Fringe benefits comprise of any right in association to an interest in personal or real property, facility, service or privilege. However, fringe benefits do not include wages and salaries payment, commission, allowances or bonuses.
An employer paying FBT is entitled to deduction of income tax based on the amount paid (Barkoczy, 2017). However, according to H&G Knowles case, there must be a discernible, reasonable and rational connection between the employment and the benefit. Examples of FBT based on FBTAA include car benefits, loan benefits, expense payment benefits, housing benefits, car parking benefits, and board benefits among others. According to s 7 FBTAA a car fringe benefit happens when an employer offers a worker with a car available for private use. The car owner handles all related car cost including maintenance, insurance, fuel, repairs, registration, and depreciation. As per s 16, loan fringe benefits occur when a provide avails loan for the employee. FBT also includes miscellaneous exempt benefits as per 253 to s 58Z which include mobile phones, laptop computers, tablets and note book computer in s 58x.
Jamie has been provided a number of benefits which are not in monetary form. Most of these benefits qualify as FBT. Jamie is provided with a car to be used for business purposes and car maintenance fees which is exclusively done by the company. He is also provided with laptop and mobile phone to use in his work related activity and also a loan with low interest rate to cater for future housing. All these are regarded as Fringe benefits as provided by FBTAA Div 2 s 7, div 13 s 58X and Div 4 s16 respectively. As provided by H&G Knowles case, the benefits are provided to aid in Jamie contribution to his work related operations, and hence they are eligible for FBT treatment.
Jamie has a number of Fringe Benefits which are provided by the employer to aid in his work operations. These FBT include car and car maintenance, mobile phone and laptop, and also a housing loan.
Commonwealth common law
Fringe Benefits Tax Act 1986 (Cth)
Fringe Benefits Tax Assessment Act 1986(Cth)
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997 (Cth)
Brent v FC of T 71 ATC 4195
Couch & Anor v. FC of T 2009 ATC
Dean & Anor v FC of T 97 ATC 4762
Eisner v Macomber (1920) 252 US 189
FC of T v Harris 80 ATC 4238
Higgs v Olivier (1951) 33 TC 136
J & G Knowles & Associated Pty Ltd v FCT (2000) 44 ATR 22
Tennant v Smith  AC 150
The Queen v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327,
Barkoczy, S (2017). Foundation of Taxation Law 2017, (10th edition), Oxford University Press.