This case study is about to calculate Jones assessable under Income Tax Assessment Act, 1936 and 1997 and provide guidance under various section and case law which are relevant to his current income, while calculating his assessable income.
Introduction This case study is about to calculate Jones assessable under Income Tax Assessment Act, 1936 and 1997 and provide guidance under various section and case law which are relevant to his current income, while calculating his assessable income. First I determine the nature of Jones Income under relevant sections of the ITAA 1936 and 1997 and case law and basis of accounting of his assessable income, than I discussed further about the various provision and section relevant to the Jones quiz show winning and test whether the income earned from quiz show and gift from the business relationship is assessable or not and later in the case study I describe about the share certificate proposals and Capital Gain Tax and at last I calculate the Jones total assessable income after evaluating the Jones income generating sources under ITAA and case law. Basis of Return of John Tax File: In Income tax Assessment Act 1997, there are two basis of assessment of income in a particular of period are cash basis and accrual basis. But there is no precise definition is given in the legislation. According to the Australian Accounting Standard Board (AASB) 107, Presentation of cash flow statement the ’Cash Basis’ accounting method is used when ” Income is recognised only when cash, or something capable of being turned into cash is received” . ( AASB 107 ) 1 1 AASB 107, Presentation of Cash Flow Statement. 1 | Page
Transcript
Introduction
This case study is about to calculate Jones assessable under Income Tax Assessment Act, 1936
and 1997 and provide guidance under various section and case law which are relevant to his
current income, while calculating his assessable income. First I determine the nature of Jones
Income under relevant sections of the ITAA 1936 and 1997 and case law and basis of accounting
of his assessable income, than I discussed further about the various provision and section
relevant to the Jones quiz show winning and test whether the income earned from quiz show and
gift from the business relationship is assessable or not and later in the case study I describe about
the share certificate proposals and Capital Gain Tax and at last I calculate the Jones total
assessable income after evaluating the Jones income generating sources under ITAA and case
law.
Basis of Return of John Tax File:
In Income tax Assessment Act 1997, there are two basis of assessment of income in a particular
of period are cash basis and accrual basis. But there is no precise definition is given in the
legislation. According to the Australian Accounting Standard Board (AASB) 107, Presentation
of cash flow statement the ’Cash Basis’ accounting method is used when ” Income is recognised
only when cash, or something capable of being turned into cash is received”. ( AASB 107 )1
And on Accruals Basis, “ Income is is recognized only when its earned and not as money is
received.”2
To calculate the assessable income for filing the tax return, its very important to determine the
basis of accounting of either a individual or a firm considering the nature of his/her business
activities. According to Dixon (Barkoczy & Evans, 2010)3, “cash basis in general is appropriate
to determine income derived from employment and investment”. In the historic leading Carden’s4
case, where it was said by the judge Dixon J that the correct method is to adopted is that which
“is calculated to give substantially correct reflex of the taxpayer’s true income”.
1 AASB 107, Presentation of Cash Flow Statement.2 Paragraph 27 AASB ( Australian Accounting Standard Board) 101,” Presentation of Financial Statement”.3 Baekoczy, W. & Evans, M. (2009). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.4 Commr of Taxation (SA) v Executor Trustee and Agency Co of South Australia Ltd ( Carden’s case) (1938) 63 CLR 108, 54 ; 5 ATD 98, 131.
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Its difficult to specify the true income of a professional providing a services across the threshold
to determine the appropriate method of returning the tax file. The Commissioner had issued the
‘Taxation Ruling TR 98/1’5, explained some factors those are:
Factors Nature of the Business Appropriate Basis of
Accounting
Employees Individual/Small Employees
Firms
Cash Basis
Trading Stock Incidental or Provisional
Large Transactions
Cash Basis
Accrual Basis
Nature of the Transaction Cash Basis
Credit Basis
Cash Basis
Accrual Basis
Capital Equipment Exploitation of Capital Asset Accrual Basis
Reliance on Circulating
Capital or Consumables
Manufacturing and
By-Products
Accrual Basis
Considering the ATO’s ruling and relevant case law such as historic decision in the Carden’s6
case, the High Court considered the position of the Dr. Carden, a medicial practitioner carrying
on private practice. The Judge Dixon J said, “Where nothing analogous to a stock of vendible
articles to be acquired or produced and carried by the taxpayer, where outstanding on the
expenditure side do not correspond to the outstanding on the earning side, where there is no
fund circulating capital but where, on the contrary, the receipts represents a reward for
professional skill to which the expenditure on the other side of the account contributes only in
a subsidiary or minor degree. I think according to ordinary conceptions the receipt basis forms
a fair and appropriate foundation for estimating professional income.” (Barkoczy & Evans,
2010)7,
5 Baekoczy, W. & Evans, M. (2009). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.6 Commr of Taxation (SA) v Executor Trustee and Agency Co of South Australia Ltd ( Carden’s case) (1938) 63 CLR 108, 54 ; 5 ATD 98, 131. 7 Baekoczy, W. & Evans, M. (2009). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.
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In the above case study, John is employed in a part time capacity as lecturer and runs a small
practice firm providing accounting and taxation services to the local business community. His
current financial year income derived from the various sources but largely on cash basis.
So, Its reasonably appropriate to take the cash basis accounting system to calculating the Jones
assessable income for filing the tax return.
Nature of Jones’s of Assessable Income:
In the context of Income Tax Assessment Act 1936 and 1997, Assessable income is made up of
ordinary income and statutory income.
According to the section 6-1 (1) ITAA 1997 assessable income consists of “ ordinary
Income and statutory income”, but excludes “exempt Income” and “non-assessable
non-exempt income;”
Under section 6-15(1) “an amount that is neither ordinary income nor statutory income
is not included in the assessable income;”and
Under section 6-15 (2), (3) “ an amount that are exempt income or non-assessable non-
exempt income are not included in assessable income.”
Ordinary Income is defined under section 6-5(1),ITAA 1997 “Income accrding to ordinary
concept.” Ordinary income is included in the tax payer income when its ‘derived’. According to
this terminology an amount can only be ordinary income (Barkoczy & Evans, 2010)8, of an
entity for an assessment year if it has ‘come in’ ( being realized) to the entity during the year.
Statutory Income is defined under section 6-10(1),(2),ITAA 1997 through comprehensive
tables of provision mention in both ITAA 1996 and ITAA 1997, under which statutory income
may accrue to a taxpayer for specific reason in a one assessment year. (Deutsch and
Fullerton,2010)9 The most important type of statutory income are capital gain, lump sum income
streams from superannuation fund etc.
8 Baekoczy, W. & Evans, M. (2009). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.9 Deutsch & Fullerton (2010), Australian Tax Handbook , Thomson Reuters.
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Evaluation of Jones Assessable Income under ITAA and Case law:
To evaluating the Jones different sources of income under ITAA and case law is presented
through below table:
SR.
NO.
AMOUNT
($)
BASIS OF
CLASSIFICATION
ARGUMENT UNDER ITAA 1936, 1997
AND CASE LAW
1. 42 000
(Salary)
Ordinary Income
Being employed as a lecturer generating regular
income from salary has the characteristics of
periodicity, recurrence and regularity comes
under the concept of ordinary income under
section 6-5 ITAA 1997. ( F. Gilders & T. Ciro,
2009)10
Keily v FCT 83 ATC 4248 (Barkoczy & Evans,
2010)11 was held that most social security
pension are assessable income as being regular
and periodic payments.
So Jones salary income is ordinary income.
2. 300 Ordinary Income
As interest derived from the saving bank account
during assessment year being taken as a ordinary
10 F. Gilders & T. Ciro, (2009), Understanding Taxation Law, LexisNexis Butterworths.11 Baekoczy, W. & Evans, M. (2010). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.
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(Interest) income under section 6-5 of ITAA 1997.
3.
30 000
(Professional
Fee)
Ordinary Income
This particular income comes under the head of
‘Carrying on business’ (pp. 99 Deutsch and
Fullerton, 2010)12. The term defined ‘Business’
is defined in section 995-1(1) of ITAA 1997 and
under section 6(1) of ITAA 1936, include any
profession, trade, employment or calling, but
does not include occupation as an employee.
Jones runs a small practice providing taxation
and accounting services to local business.
Income derived from carrying on profession has
sufficient nexus with an earning activity
( California Copper Syndicate Ltd v Harris
(1904) 5 TC 159 )13, So treated as business and
income derived from this operation comes under
the ordinary concept of Income.
It was outstanding in 2008/09, but received in
this financial year. Hence comes under the
concept of ordinary income as we discussed in
the above scenario and we already decided that
12 Deutsch & Fullerton (2010), Australian Tax Handbook , Thomson Reuters.13 California Copper Syndicate Ltd v Harris (1904) 5 TC 159
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4. 3000
( Professional
Fee)
Ordinary Income the Jones basis of accounting will be remain
cash basis. So when we received that amount
only then we assess it for tax purposes.
5. 5000
(Outstanding
Professional
Fee )
Not an Income
An amount can only be ordinary income of an
entity for an income year if it has ‘come in’
(being realised ) to the entity during the year. An
unrealised amount is not an ordinary income. In
the terminology of s 6-5 ITAA 97, an amount
has come in to an entity, if it has been “derived”
by the entity. (Barkoczy & Evans, 2010)14
Moreover, we taken the basis of Jones
assessable income on cash basis, So we will not
consider the remaining outstanding amount as a
Income for the current financial year.
6 Air Ticket Not an Income
To determine that whether the Air Tickets
provided by the Travelco to Jones will
assessable income or not, The Federal Court in “
FCT v Cooke and Shereden (1980)15 held that
non-cash business benefits could could only be
assessable income under s 25(1) of ITAA 1936
( now s 6-5 ITAA 1997) if the benefits were
convertible to cash and in the nature of income
according to the ordinary concept. The Court
also held that the benefits could only be
14 Baekoczy, W. & Evans, M. (2010). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.15 FCT v Cooke and Shereden (1980) 10 ATR 696.
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assessable income under s 26 (e), if the recipient
had rendered services to the provider. (pp.
106,Barkoczy & Evans, 2010)16
Travelco is the client of the Jones and Jones
rendered his services to him. But the issue is
silent about the convertibility of the tickets into
cash or whether the Jones redeemed the tickets
into cash or not.
So the Non-cash benefits that are not convertible
into cash are not assessable. For example, in
Payne v FCT (1996) 17 free air travel that
accrued primarily from work related travel under
the frequent flyer scheme was not tranferable or
convertible into cash.
7 8750*18 Ordinary Income
Jones derived this income from partnership with
his wife Joan. The system ‘J- Accounts’ has
been licensed and used by 175 local business at
a cost of $100 per year. So we assume that both
Jones and Joan are share equally in the
partnership firm and the income is derived by
16 Baekoczy, W. & Evans, M. (2010). Australian Taxation Law: 20th edition. CCH. Wolters Kluwer Business.17 Payne v FCT (1996) 32 ATR 516
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(J- Accounts
Software)
the partnership firm under the current financial
year on cash basis.
So this income comes under the head of
ordinary income and assessable under s 6-5
ITAA 1997.
8 2500*19
( Royalty) Ordinary Income
As Jones and his wife developed and licensed
the accounting software ‘J- Accounts’ and
Cashbooks agreed to pay $25000 the Joneses
(the partnership
Firm ) in return for the exclusive rights use the
program for five years after which the new
agreement may be signed.
Income derived from his licensed software is
come under the ordinary meaning of royalty
that’s defined under section 995-1 ( R. Fisher &
H. Hodgson (2009)20 , “Royalty or royalties
includes amount paid or credited is periodical or
not, to the extent to which it is paid or credited ,
as the same may be as consideration for:-
(a). the use of, or the right to use, any copyright,
patent. design or model plan, secret formula or
18 175 X $ 100 = $ 17 500/2 = $875019 $25000/ 5 years = $ 5000, $ 5000/ 2= $ 2500.20 R.Fisher & H. Hodgson (2009) Tax Question and Answer, Thomson Reuters
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process, trade mark, or other like property or
right…….
So income derived from the ordinary concept of
royalty is assessable under section 6-5 ITAA
1997 with the assumption that the Cashbooks
pay the $5000 to the Joneses in current financial
year and Joneses is agreed to give the exclusive
rights to the Cashbooks.
Treatment Of Quiz Show Winning
Under the ITAA 1936 and 1997, the windfall gains are excludes the concept of income, because
generally they lack the commercial elements evident in other income producing activities.
Windfall are the pure luck and good fortune ( F. Gilders & T. Ciro, 2009)21. They are not earned
form personal exertion nor received as a return from property its akin to gift ( Scott v FCT
(1966)22, ( R. Fisher & H. Hodgson (2009)23.
Appearance on the television quiz show will not normally result in the derivation of the income
because the activity does not amount to the business. This is so even if a contestant is successful
and enter into several times ( F. Gilders & T. Ciro, 2009)24.
Thus the income earned ($200,000 cash prize and Car valued $30,000) by the Jones in
participating and winning in the ‘Who Wants to be Rich’ television quiz show will not be
assessed under section 6-5 ITAA 1997 under the head of ordinary Income, because participants
21 F. Gilders & T. Ciro, (2009), Understanding Taxation Law, LexisNexis Butterworths.22 Scott v FCT (1966) 10AITR 367. 23 R.Fisher & H. Hodgson (2009) Tax Question and Answer, Thomson Reuters24 F. Gilders & T. Ciro, (2009), Understanding Taxation Law, LexisNexis Butterworths.
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are selected randomly and winning the show is purely luck and talent of the john having no
relation with the business activity.
Treatment of Share Certificate Proposal
As its mention on the case scenario that the Jones has interest in history and particularly
commercial history and hr purchased 500 old share certificate of the company that had been
liquidated in the 1930’s depression. We can say that the old shares owned by the Jones are
Antique in nature and according to the general concept, “An antique is an old collectible item. It
is collected or desirable because of its age, rarity, condition, utility, or other unique features. It
is an object that represents a previous era in human society. society.”
(en.wikipedia.org/wiki/Antiques)25 and because of having interest in those old shares certificate
and paying the purchase price to acquire them are the nature of the investment in particular asset.
Now Jones want to sell these old share certificate, According to California Copper principle it is
quite a well settled principle that where the owner of an ordinary investment chooses to realize it,
and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit
assessable to income tax. ( California Copper Syndicate Ltd v Harris (1904) 5 TC 159 )26 So the
gains arising from the sale of old share certificate a receipt that is structure (capital) related is not
ordinary income; a payment that is structure (capital) related is not deductible under s8-1.
(Dickenson v FCT (1958) 98 CLR 460)27
So from the above events we can say that the share certificates are the CGT asset which defined
under 108-5(1) ITAA 1997 “ (a) any kind of property; or (b) a legal or equitable rights that is
not property”. Section 108-5(2) precise more “part of or an interest in, any assets covered by
items (a) or (b) above; goodwill or an interest in it and an interest in an asset of a partnership.”
25 www.en.wikipedia.org/wiki/Antiques26 California Copper Syndicate Ltd v Harris (1904) 5 TC 15927 Dickenson v FCT (1958) 98 CLR 460
