HI6028: Taxation Theory, Practice & Law Assignment

Portfolio

HI6028: Taxation Theory, Practice & Law-Individual Assignment

QUESTION 1- (10 MARKS)

Emmi studies accounting at Holmes Institute and works part-time in Crown Melbourne restaurant. During the year Emmi has receipts as follows:

  1. Tips from customers of $335 cash; (1.5 marks)
  2.  Income of $25,000 from working in the Crown Melbourne restaurants; (1.5 marks)
  3.  An expensive perfume worth $250, from a regular customer gifted to Emmi at Christmas time. Emmi does not use the perfume and gave the perfume to her mother; (1.5 marks)
  4. A monthly entertainment event paid by the restaurant owner. The owner spends around $380 on the meals that Emmi consumed. Emmi enjoys these events and sees them as a reward for her hard work; (1.5 marks)
  5.  Emmi received $15,000 as Christmas gift from her father. (1.5 marks)

With reference to relevant legislation and case law discuss Emmi’s assessable income for the year.

Calculate Emmi’s Total Assessable income. (2.5 marks)

QUESTION 2 – (15 MARKS)

Liu is a 65 years old Australian resident but born in China, Liu is retiring from her business and decides to sell all of her Australian assets and moving home to China.

The assets that she is selling include:

  1. A house Liu purchased in 1981 for $55,000 and now worth $630,000. This house was Liu’s main residence for the entire period of ownership (03 marks).
  2.  Liu’s car which cost $37,000 in 2011 and is now worth around $8,000 (03 marks).
  3.  Liu’s has a small business enterprise, Monte Liu Photography Studio. She started the photography business herself and has found a buyer to take over the business for $125,000. The sale price includes $53,000 for all of the photography equipment, which cost $63,000, and $50,000 for goodwill (03 marks).
  4.  Liu’s furniture for $4,800. No single furniture item being sold cost more than $2,000 (03 marks).
  5.  Liu paintings for $28,000. All of her paintings were purchased in second hand shops or markets and no single painting cost more than $500. The one exception was a painting she purchased direct from an artist for $1,000. This painting being sold for $8,000 (03 marks).

Advise the capital gains tax (CGT) consequences of the above sales. Your answer should include appropriate
legislative references.

Answer 1:

Assessable income is the amount earned by means of provision of personal services, carrying out a trading activity or income from the property.  Such income is known as Ordinary Income. Apart from ordinary income, any income specified under taxation law will also be considered as assessable income (Classic.Austlii.edu.au, 2019). Revenue that is mentioned in income tax law includes interest upon over payment of federal tax and amount that is received by a lessee. However, there is the exception to the above where assessable income is said to be exempt. Section 6 in Income Tax Assessment Act 1997 defines ordinary income for an individual to be income from personal exertion which means income that is received as a wage, salary, commission, fee, bonus, superannuation allowance, and gratuities in respect of employment.

Personal income also included income obtained that is incidental to employment, which means related to employment. Finally, a lump sum or one-time payment is given to a person as a reward for his/her service. This reward does not necessarily mean that it is obtained as part of the employment. In the case of pf Brent V FCT, such a reward was received for giving an interview that was considered as service not employment. Moreover, prizes from gambling etc. that are obtained by luck only are not considered assessable income. However, prizes obtained by means of degree or skills would be considered as assessable income. The latter is confirmed by the case-law of Kelly V FCT.

a-Cash Tips from Customers

Emmi received $ 335 tips in cash from customers while working part-time in a restaurant. These tips are voluntary payments received as an incidence of being employed. Any receipt that is voluntarily received incidental to employment constitutes ordinary income. Calvert v Wainwright (1947) is the case confirming the legislation where tips received from a taxi passenger were ruled out to be assessable ordinary income even though the passenger was not obliged to pay the tip to the driver (Juriscentre, 2018).

b-Income from Crown Melbourne Restaurant

Emmi receives $ 25000 by means of providing services to the Melbourne restaurant. This income fulfils the basic criteria of personal income as it shows a sufficient relationship between her service and payment received. This is confirmed by the case of Scott v FCT (1966), where a solicitor received a fee from Mrs. Freestone for the provision of various legal services over several years. A gift from Mrs. free stone to the solicitor was not considered assessable ordinary income as there was no nexus between the gift and services provided. However, legal fees for services provided should have been   assessable income. In the case of Emmi, the salary would be considered as an assessable income.

c-Gifted Expensive Perfume

Gifts are considered as non-assessable income that is not taxable as per section 6 of the ITAA 1997. If gifts have been received from loved ones or on a special occasion without any employment contract between parties, only then would the gifted amount be exempt from taxation. However, if the gift is received as part of a business-like activity or related to income-earning activity, then the amount would become assessable ordinary income (Australian Taxation Office, 2019). Hayes V FCT (1956) shares transferred was considered as a gift.] Because these were transferred as a personal relationship was created between both parties. Emmi received the gift as part of income-earning activity but the out of personal relationships created between both parties. Hence the occasional gift of $ 250would not be considered as an assessable income.

d-Entertainment Paid by Employer

Emmi’s employer is spending $380 on her meals each month as part of the entertainment event that is held by the restaurant owner himself. Ordinary income received is not necessarily cash or bonus received but also rewarded for service in any form. Section 84.5 of the ITAA 1997 defines rewards received from personal efforts and skills as well as ordinary income. Whether or not a reward is personal service income is a matter of judgment. In the case of Emmi, she sees the meal paid for by the employer as a reward for her skills and services. The employers pay for employees when they are happy with her performances and wish to motivate them with such entertainment events. As per my judgment, Emmi’s view is right that the reward is based upon her efforts. As per section 84.5, this meal would be considered as ordinary income that is assessable and subject to income tax.

Under the Principle of “income from personal services” regarding “reward for services’, the case of Brent V FCT can be discussed. In this case, an exclusive right was given to a company related to the media who would publish stories of a robber’s wife. Robber’s wife appeared in the interview to tell her story and was paid for her services. Although this income was not generated as part of her employment as a reward for the service, she provided for the company to publish their story of the robber’s wife. Hence the income she received became assessable ordinary income and taxable under section 6.5 of the ITAA 1997.

e-Christmas Gift from Father

As per legislation set out in section 6 of ITAA 1997, gifts are not considered as ordinary income if there is a personal relationship between the donor and recipient. Gifts are only considered as part of ordinary income if given as a reward for service, under an employment contract, since the father-daughter relationship is obviously a personal relationship so the gift Emmi received from his father of $ 15,000 would not be considered ordinary income. Hence, the gift would be non-assessable for the purpose of income tax.

Answer 2:

The Income Tax Assessment Act 1997 defines rules and regulations that are applicable to Capital gains tax. Section 102.20 guides that a CGT is applied when a gain or loss is made when a CGT event occurs. CGT event is said to take place when an individual obtains a gain or loss when disposing off an asset that is classified as a CGT asset. Whereas section 102.5 defines assets that are said to be CGT assets. It says that CGT assets is an asset that holds an equitable right, but it is not a property. CGT assets are categorized into three parts:

  1. Collectables
  2. Personal use assets
  3. Other assets

Every CGT asset that are acquired on or after 20th September 1985 are subject to capital gains tax until and unless it is exempt. Exemption to CGT includes cars, bikes, man residence, real estate, leases, goodwill, depreciating assets, Licenses etc. Personal use items purchased for $ 10,000 or less is also exempt. Collectables purchased for $ 500 or less are also exempt (Michael Littlewood, 2017).

In the case of Liu, she made five disposals that will be assessed. Once these questions are answered one by one, they would have a clear direction to the right answer as per section 104 of the ITAA 1997.

  1. The subject item is CGT asset or not?
  2. Definition of the asset as per CGT categories of collectibles, personal use items and other assets.
  3. The occurrence of CGT event
  4. Gain or loss is assessable or exempt
  5. Acquired before or after 20th September 1985

Since Liu is an Australian resident, he is liable to pay his capital gains tax upon the items he is selling before leaving Australia. It makes no difference to his current liability if he is born in China and wishes to move back.

a-Sale of the main residence

Liu purchased a house in 1981 that makes it a post CGT asset and subject to capital gains tax. It was purchased for $ 55,000 and is selling for the proceeds of $ 630,000, which gives him a gain of $ 575,000. Although the asset is post CGT assets i.e. acquired after September 1985, it would not be assessable for CGT because it is her main residence. As per section 118.100, any capital gain or capital loss made from a CGT event that occurs on your dwelling that is considered main residence is ignored from capital gains tax law (CCH Australia, 2011). Based upon this section of the act, Liu’s capital gain upon his main residence will be ignored and not subject to CGT. In the case of COUCH & ANOR v FCT, it was ruled that capital gains from the dwelling are subject to CGT and not exempt under main residence exemption because the house was not fully occupied by the appellants.

b-Sale of Car

Liu purchased a car in 2011 for $ 37,000 and is now worth 8,000, which clearly shows that it is a depreciating asset as its value has dropped down over the 9 years it was used by Liu. As per section 118.24 of the ITAA1997, Capital gains or capital losses from an asset that is known to be depreciating asset would be completely disregarded for the purpose of Capital gains tax (CCH Australia Limited, 2011). There are assets acquired after 2nd September 1985 but not subject to CGT. These are known as exempt assets. The list includes a main residence, car and depreciating assets. Liu’s asset being sold is a car and a depreciating asset. Hence fulfilling the exemption criteria of a car as well, the loss main on its disposal will be disregarded.

c-Sale of Photography Studio

Liu is selling off her business in which photography equipment and goodwill are both CGT assets as per ITAA 1997. The gain or loss on disposal would be treated separately as well. Goodwill is the amount obtained at the disposal of a business and does not have any base cost. The full figure of goodwill that amounts to $ 50,000 will be considered as a capital gain and subject to capital gains tax. However, the equipment that Liu is selling for $ 53,000 is a depreciating asset. It cost $ 63,000 originally. Hence a loss of $ 10,000 is observed at this disposal. Being a depreciating asset, any gain or loss from this equipment will be disregarded for the purpose of Capital gains tax.

d-Sale of Furniture

Furniture is considered to be a personal use asset that is kept for use or personal enjoyment. Liu is selling off furniture for $ 4,800. None of the furniture cost more than $ 2,000. Section 118.10 guides that any personal use assets that were purchased for an amount of $ 10,000 or lesser will be disregarded for the purpose of capital gains tax (Commonwealth Consolidated Acts, 2019). It is clear from the case that each furniture of Liu did not cost more than $ 2,000. This fulfils the exemption criteria of $ 10,000 or lesser, making it an exempt asset with respect to Capital gains tax. Hence any gain obtained on this furniture would not be subject to any taxation as per ITAA 1997.

e-Sale of Paintings

A collectible is an item that is kept for use of enjoyment. This includes paintings, drawing, jewelry, coins, medals etc. Gains and losses obtained from the disposal of a collectible are subject to capital gains tax under section 118.10. However, the exception exit if a collectible is purchased for $ 500 or less (Ato.gov.au, 2019). All paintings that Liu is selling cost $ 500 or lesser except one. This one painting costs $ 1,000 and is being sold for $ 8,000 at a profit of $ 7,000. This gain would be subject to capital gains tax as per section 118.10. However, the rest of the painting fulfills the exemption criteria of $ 500 or less so any gain or loss obtained on those will be disregarded for the purpose of Capital gains tax.

Conclusion

In conclusion, we would say that Liu would be liable to pay capital gains tax upon the sale of painting, which gave a gain of $ 7,000 and the goodwill amount of $ 50,000 that was obtained while selling off photography business. Rest of the disposal including main residence, car, equipment, furniture and remaining painting would not be considered for the purpose of Capital gains tax. Any losses incurred from such assets cannot be used to set off gains from other CGT assets as well.

References

Ato.gov.au, 2019. CGT assets and exemptions. [Online] Available at: https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/#Personal_use_assets [Accessed 20 January 2020].

Australian Taxation Office, 2019. Amounts not included as income. [Online] Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/Amounts-not-included-as-income/ [Accessed 20 January 2020].

CCH Australia Limited, 2011. Australian Master Tax Guide 2011. CCH Australia Limited.

CCH Australia, 2011. Australian Income Tax Legislation 2011: Income Tax Assessment Act 1997 (sections 1-1 – 717-710). CCH Australia Limited. Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.100.html.

Classic.Austlii.edu.au, 2019. INCOME TAX ASSESSMENT ACT 1997 – SECT 6.5. [Online] Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html [Accessed 20 January 2020].

Commonwealth Consolidated Acts, 2019. INCOME TAX ASSESSMENT ACT 1997 – SECT 108.20. [Online] Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s108.20.html [Accessed 20 January 2020].

Juriscentre, 2018. CALVERT V WAINRIGHT (1947). [Online] Available at: https://juriscentre.com/knowledge-base/calvert-v-wainwright-1947-1-all-er-282/ [Accessed 20 January 2020].

Michael Littlewood, C.E., 2017. Capital Gains Taxation: A Comparative Analysis of Key Issues. Edward Elgar Publishing.

You May Also Like

The deadline is near. Don’t worry. The Best Writer is here for Help.

Contact Me for Help