Table of Contents

Question 1a

Reasoning

Calculation of Taxable Income

Question 1b

Question 1c

Question 1d

Question 2

References

Income Tax Law - Question 1a

Reasoning:

  • Signing Fees- Income arising out of personal service is assessable under section 6-1 of ITAA 1997 and is considered ordinary in nature under section 6-5 of ITAA 1997. According to the case of Jarrold v. Boustead, the court held that the payment was not ordinary in nature as it was advanced for giving up rights to play professional rugby rather than amateur rugby , therefore, it is not for a service rather just to attract to give service. Thus this has capital nature due to which it cannot be considered ordinary income. However, in the case of Pickford v. Federal Commissioner of Taxation it was held that the signing fees should be considered a payment which is made to to take up employment with a company and this implies a lump sum payment as compensation. Therefore, it is ordinary in nature which is assessable for taxation. Subsequently, under taxation ruling TR 1999/17 the commissioner of taxation held that a fee for signing on a player is part of ordinary practice of employing professional sportsmen. Therefore, it is not of a capital nature rather is ordinary in nature which is paid to ensure future service from the employed professional player.
  • Fees of agent- The fees that is paid to his agent is deductible as it was necessary to enable him to earn the signing fees. This is because it satisfies the positive limb of section 8-1 of ITAA 1997.
  • Gross salary- Gross salary is definitely a part of ordinary income under section 6-5 of ITAA 1997 as it is regular and periodic in nature. To determine the assessability of an income, there are three tests or requirements that can be used. First, in order to make an income assessable under section 15-2 of ITAA 1997 there must be an allowance, compensation or bonus. To be more specific there must be cash payment or some payment which is convertible to cash. In this case, the payment not only includes money to be received by the taxpayer but also the gifts and bonus from the employer. A "allowance" is an example of an object that meets the first condition. Allowance shall be a fixed sum granted to a taxpayer for a particular purpose. Where the taxpayer is not expected to refund any of the unspent sums. This is in contrast to a "refund" where only what he or she has invested is earned by a taxpayer. Practical value, since it would be tax neutral, either way. The second requirement for an income to be assessable under section 15-2 of ITAA 1997 is that allowance is directly provided to the taxpayer. Typically, this condition would be reasonably straightforward for the taxpayer to fulfil. For instance, if a taxpayer has received cash, property or a benefit such as free. The taxpayer would have been "paid" with accommodation and this second condition will have been met. Consequently, it is only in very few situations that it is unclear if this condition has been fulfilled. The third requirement implies that whatever amount is received, to make it assessable the amount has to be directly related to the service rendered by the taxpayer as decided in the case of Scott v. Federal Commissioner of Taxation which gave the reasonable nexus test.
  • Superannuation contribution- This is a compulsory payment made by the employer in respect of the services rendered by an employee under the Superannuation guarantee scheme. Superannuation contributions are made by vehicles known as insurance funds. Under trust deeds, most superannuation funds are formed as trusts. A limited number of funds are also provided for under the law.
  • Fringe Benefit- Fringe benefit has tax implication for the employer rather than the employee who receives the benefit from the employer in relation to the employment. However, apportionment is necessary where fringe benefit is provided both for employment purpose and private purposes.
  • Man of the match award- This is cash payment amounting to $5000 which is again a part of ordinary income as it a lump sum payment. Even though it is not periodic in nature, the case of Federal Commissioner of Taxation v. Dixon, makes this an ordinary and assessable income as there is reasonable nexus with the income producing service rendered. Payne also received a mobile phone costing $1250 but this is not part of assessable income as it a non cash benefit given the a sponsor of the rugby league.
  • Fees for tax return- The fees paid by Payne to complete his tax return is an expense for him which is not subject to earning income, therefore is not deductible as it does not satisfy the positive limbs of section 8-1 of ITAA 1997.
  • Appointment of personal assistant- The salary of personal assistant is an expense for Payne and the endorsement income of $105,800 is an assessable income. However, the amount stole by the personal assistant can be deducted from the income for income tax purpose.
  • Cost of Melbourne residence- Payne incurred an expense of $1,080,000 along with advertisement expense of $1790, airfare of $780, cleaning cost of $670 and repair cost of $890. Payne also paid property management fees of $1000.
  • Earning from rent- It is also considered an ordinary income under section 6-5 of ITAA 1997 as it is periodic in nature.
  • Winning Dream Casino- The amount of income received from this company is assessable as it has nexus with the appearance service rendered by Payne due to deal with the sponsors. He incurred expense of $6600 for airline ticket which is deductible as it has direct nexus with the income he received for this appearance. This travel enabled him to receive this income but the expense incurred for his meal and accommodation is not deductible because of the negative limbs or private nature of the expenses and having no reasonable nexus.

Calculation of Taxable Income:

Particulars

Amount ($)

Amount ($)

Gross Income

   

Signing fees

 

200,000

Salary

 

300,000

Superannuation

 

50,000

Man of the match award

 

5000

Endorsement income

Less: Stolen amount

(105,800- 58,00)= 100,000

 

100,000

Rent from Melbourne unit

 

20,500

Appearance Fees

 

25,000

   

(700,500)

Less: Expense and deductions

   

Agent fees for signing

50,000

 

PAYG

200,000

 

Personal assistance fees

45,000

 

Advertisement fees

1790

 

Airfare

780

 

Cleaning and repairs cost

1560

 

Property management fees

1000

 

Airline ticket

6600

 

Total expense

(306,730)

 
     

Net Income

 

393,770

Income Tax Law - Question 1b

The following are the assumptions made for the calculation of net tax payable by Payne:

  • Calculations are subject to Australian income tax rates
  • Medicare levy is not included is not included in the marginal tax rate and is calculated separately as Payne did not cover his health.
  • In case Medicare levy is applicable it is calculated at 2% of taxable income
  • The calculation does not include Medicare surcharge which is levied at 1.5%

Marginal tax rate: 45%

This means for an annual income of $393,770 Payne will pay:

No tax on income between $1 - $18,200 $0

19c for every dollar between $18,201 - $37,000 $3,572

32.5c for every dollar between $37,001 - $90,000 $17,225

37c for every dollar between $90,001 - $180,000 $33,300

45c for every dollar over $180,000 $96,196

Income tax payable $150,293

The above calculation is done on the basis of Australian progressive tax rates where the Medicare levy is not included as due to the fact that Payne himself does not want to opt for any Medicare scheme. In addition to that, Payne can offset the loss amount that was lost as his personal assistant stole $5800 from his endorsement earnings. However, he cannot offset the amount that he paid as interest for late filing of income tax return along with cost paid to the firm for filing the same.

Income Tax Law - Question 1c

Taxpayers also get compensation payments if they are experiencing commercial and other damages. The character of a receipt of compensation will typically depend on what the sum is earned for. Payments that cover, cover or compensate a taxpayer for loss of income products, or sums that would have been received on an income report, are usually payroll-type. Compensation earned in the form of 'interest' for the temporary loss of money usage would usually be of a type of revenue. In Federal Wharf Co Ltd v Federal Commissioner of Taxation, the High Court held that interest paid on a amount of money owed to a corporation under the Harbors Act 1913 (SA) as compensation for the compulsory acquisition of its land was revenue. "The Act measured interest" from the time the Minister joined the profession to the time when compensation was received. Rich J described the interest as a receipt of income on the grounds that it was a 'reward for lack of capital use during a time in which it earned income. In Riches v Westminster Bank Ltd, where a court granted taxpayer damages in relation to a dispute over a sum of money, a similar decision was drawn. The awards contained interest on the money from the date on which the object of the case occurred until the judgement date. The House of Lords found that the interest was of a revenue nature. The Court, however, held that 'post-judgment interest' owed on the remaining balance of the judgement was reasonably defined as income-related, because it was detached from the underlying personal injury action.

In this case, if Winning Dream Casino Ltd receives the compensation through the orders of court amounting to $3million and additional $1 million, that income will be considered as ordinary income under section 6-5 of ITAA 1997 and will be assessable to be taxed under ITAA 1997 and 1936. The intangible rights are eligible to be protected such as reputation and goodwill and loss of such rights can be compensated by other parties. Such compensation according to common law rule and precedent is said to be an income which implies the income tax treatment accordingly. Subsequently, in case Winning Dream Casino is not awarded damages by the court the above principles will not be applicable and will have to borne the damages by themselves for the public health safety as prescribed by the Australian courts.

Income Tax Law - Question 1d

Federal Commissioner of Taxation v Rowe is the leading Australian case concerned with reimbursements. This case involved a taxpayer who had received an ex gratia payout from the government of Queensland to compensate him for legal expenses incurred by him in connexion with a successful suit he had brought for unfair dismissal against the local council. The argument before the High Court was whether his assessable income should include the reimbursement of those expenses. The Court held that the reimbursement was not of an income type, since it was not a compensation for its services in any way. Whether such expenses are income or capital in nature is the key problem that occurs under the general deduction clause in relation to legal expenses. This problem arose, for example, in Hallstroms Pty Ltd v FC of T, where the taxpayer, a refrigerator maker, incurred legal expenses in challenging the application of a rival maker to expand its refrigerator patent. When it expired, the taxpayer was preparing to manufacture refrigerators based on this patent. In some subsequent cases dealing with the deductibility of legal expenditures, the business entity test, which was relied on by the minority at Hallstroms, was applied. In Broken Hill Theatres Pty Ltd v FC of T, for example, a taxpayer running a Broken Hill theatre was refused deductions for legal costs incurred in successfully challenging a rival 's application for a theatre licence. The High Court relied on the business entity test to conclude that capital in nature was the benefit of being free from competition. In this case, the expenditure was incurred for the purpose of maintaining and maintaining the profit of the company, according to the Court. The fact that the legal costs did not produce for the taxpayer any new assets did not preclude the expenditure from being regarded as capital.

However, all these principles were rejected when the intention and nexus test was brought into action through the case of Ronpibon Tin NL v FC of T, where the court held that it is important to consider whether the cost was incurred that would help the company or individual to earn more assessable income. If the answer is yes then it must be deductible under positive limbs of section 8-1 of ITAA 1997. Therefore from the application of this principle, it can be said that, the legal fees paid by Winning Dream Casino Ltd is deductible as it was incurred to defend their reputation and goodwill which will bring them more customer leading to more earning of assessable income.

Income Tax Law - Question 2

For the purpose of taxation, it is first essential to determine the residential status of an individual which will determine the the tax liability or the form of tax payable by the taxpayer. In the given factual scenario, Herman who has been offered a 24 month employment contract in Papua New Guinea will become a non-resident of Australia in case he accepts the offer of employment from WHO. Now, there are multiple tests for determining the the residency of a person. First is the resides test, which says that an individual is a resident if he has permanent dwelling place according to the ordinary meaning of dictionary. In the end, the place where a individual resides is a matter of fact as decided by the case of Federal Commissioner of Taxation v Miller. This must be calculated by comparison to all of the case's circumstances. In TR 98/17 the Commissioner claimed that the nature and character of a person's actions while in Australia would help to decide where he or she resides. The following considerations will be analysed by the Commissioner:

  • The intent or intention of the taxpayer to attend
  • The family and company of the taxpayer or job relations
  • The preservation and location of the properties of the taxpayer
  • Social and living relationships by the taxpayer

Another example is found in IRC v Lysaght, which concerned a taxpayer who retired as an English company's managing director and moved from England to Ireland with his family to live on a large estate. The taxpayer was subsequently appointed as the English company's advisory director and was expected to visit England each month for approximately one week. The taxpayer lived in hotels or at his brother's house while they were in England. The House of Lords again held that, on the facts of the case, it was open to the Inland Revenue Commissioners to regard the taxpayer as the UK's 'usual citizen.'

Herman according to these principles, intends to move to Papua New Guinea by selling his existing home in Australia which will change his place of dwelling imparting new citizenship of a country. The family of Herman will also move to Papua New Guinea with him for his job. After sale of Australian properties Herman will not have ties with Australia therefore becoming a non-resident. After starting to live in a new country Herman and his family will start to have new social and living relationship in Papua New Guinea which will negate their Australian residency.

Permanent Place of Abode test:

According to the case of R v Hammond, residency can also be decided according to the place of abode of an individual. In a variety of cases, it has been deemed whether or not a place of abode is 'permanent.' The cases show that the word "permanent" is not taken to mean "eternal," but rather "more than temporary or transitory." The authority for this concept comes from Federal Commissioner of Taxation v Applegate, which involved an Australian lawyer who had been appointed by his firm to set up a subsidiary in the New Hebrides. Even if a taxpayer's stay outside Australia is for a fixed time only, the taxpayer can still have a permanent place of residence outside Australia, as long as the stay is for a significant duration. This is illustrated in Federal Commissioner of Taxation v Jenkins, where a bank officer with his wife and family had been moved from Australia to work in the New Hebrides office of the bank for a three year period. The Supreme Court of Queensland, relying on Applegate, ruled that the taxpayer's permanent place of residence was in that country rather than Australia for the time that he served in the New Hebrides. Therefore, from the application of this principle, Herman will have his permanent place of abode changed from Australia to Papua New Guinea.

The 183 days test:

An person is a citizen of Australia if he has been permanently or intermittently in Australia for more than half of the year of income, unless the Commissioner is satisfied that his normal place of residence is outside Australia and that he does not wish to reside in Australia given in section 6(1)(a)(ii) of ITAA 1997. A taxpayer basically has to complete atleast 183 days in the country to become liable for paying income tax in Australia. But in this case when Herman will not be staying for 183 days since his leave from the country, no income tax implication will arise.

Superannuation test:

An person is an Australian citizen whether he or she is a:

  • A member of a pension scheme established in compliance with the 1990 Superannuation Act
  • A qualified employee for the purposes of the 1976 Superannuation Act
  • A spouse or a child under the age of 16 of a person protected by (a) or (b) section 6(1)(a)(iii)

References for Federal Commissioner of Taxation v Jenkins

Broken Hill Theatres Pty Ltd v FC of T (1952) 85 CLR 423

Federal Commissioner of Taxation v Jenkins 82 ATC 4098

Federal Commissioner of Taxation v Applegate 79 ATC 4307

FC of T v Rowe 97 ATC 4317

IRC v Lysaght [1928] AC 234

Jarrold v. Boustead (1963) 41 TC 701

Federal Commissioner of Taxation v Miller (1946) 73 CLR 93

Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634

Federal Wharf Co Ltd v FC of T (1930) 44 CLR 24

Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540

R v Hammond (1852) 117 ER 1477

Riches v Westminster Bank Ltd [1947] AC 390

Ronpibon Tin NL v FC of T (1949) 78 CLR 47

Scott v. Federal Commissioner of Taxation (1996) 117 CLR 514

Pickford v. Federal Commissioner of Taxation (1998) 40 ATR 1078

Taxation Ruling: 1999/17: Income tax: sports people - receipts and other benefits obtained from involvement in sport

Taxation Ruling: 98/17: Income tax: residency status of individuals entering Australia

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