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  • Subject Name : General Law

Taxation Law

Table of Contents

Heading.

Issues.

Rule.

Application.

Income from Salary.

Traveling expenses.

Income from prize winnings.

Gain on Sale of Antique Furniture.

Gain on Sale of Holiday Home.

Conclusion.

Heading

The case of Sally for the financial year 2019/ 20 will be discussed. Sally has generated Income from various sources including salary income from two employers, prize money in cash and kind, gain on sales of antique furniture and capital gain on the sale of holiday home. Apart from that she incurred various expenses like travelling for her regular work and others during sale of holiday home.

Issues

  • Income From Salary
    • As an actuary in a firm
    • As a tennis coach in college
  • Traveling expenses
    • From home to firm
    • From firm to college
  • Income from prize winnings
    • In cash
    • In Kind
  • Gain on Sale of Antique Furniture
  • Gain on Sale of Holiday Home

Rule

  • Income from Salary: Sally’s income from salary will be considered to be ordinary income under income tax laws, because it is a source of income from her personal exertion. As per s 6-5 of ITAA97, ordinary income is a component of assessable income. Thus both the salaries of Sally are taxable by ATO.
  • Traveling expenses: As per ITAA97, to claim a deduction for travel expense, such expense must have the nature of business or working expense.
    • Travel expense between home and office is not deductible because there is no relation with activities of income-earning and are considered to be private in nature (Lunney and Hayley). These expenses are not deductible according to the decision in FC of T v Payne 2001 ATC 4027
    • Travel between workplaces: As per s 25-100 of ITAA97, since Sally is an individual, she can claim deduct for the transport expense between workplaces. That means from firm to college.
  • Income from prize winnings: As per tax ruling IT 167, the ATO has made it clear that prizes won after casual appearance in a competition will cannot be considered to be ordinary income. However, it is a point of argument that Sally has appeared in a tennis competition for which she is providing coaching services and generating earnings. Therefore as per s 118-37(1)(c) of ITAA97, since Sally has appeared in the competition as a coach rather than just a hobby. Therefore, prize money and the value of the top-of- the-range dishwasher will be regarded as ordinary incomes.
  • Gain on Sale of Antique Furniture: The word 'antique' has not been defined under ITAA 97. Therefore, the asset to be considered as antique is required to be determined in ordinary terms and usages. Antiques as per s 118-10 can be both collectables and personal use assets. Subsection 1 of s 118-10 talks about capital gain (or loss) in case antique is collectible.

However, Sally has purchased the 130-year old, antique bedroom furniture set which comprises of bed, bed side tables and a chest of drawers which all can be considered to be personal items. Therefore, s 118-10(3) will be applicable in the event of CGT. S 118-10(3) states that any capital gain that Sally made from her personally used assets (the bedroom furniture set), can be disregarded if cost base, or its cost (if it is a depreciating asset), is $10,000 or less.

Since cost base is less than $ 10000, therefore the capital gain can be disregarded

  • Gain on Sale of Holiday Home: The actual procedure for calculating a person’s net capital gain (or loss) is set out in s 102-5 ITAA97. s 104-10 ITAA97 (CGT Event) provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. As per s 108-5 ITAA97, the holiday home of Sally is a CGT asset. Therefore, the sale of the holiday home by Sally will attract taxation obligations and it is considered to be a CGT event.

Application

Income from Salary

Sally is generating her primary income from the source of salary. It is considered as ordinary income under income tax laws, because it is a source of income from her personal exertion. The tax law that is attracted by Sally is sec 6-5 of ITAA 97. It states that ordinary income is a component of assessable income. Therefore both the sources of salary of Sally are taxable by ATO.

 

Assessable Income

Non assessable Income

Legislation

Income From Salary

     

Working as an actuary

130000

 

As per s 6-5 of ITAA97, ordinary income

Working as a tennis coach

25000

 

As per s 6-5 of ITAA97, ordinary income

Value of Laptop for work

 

3000

The laptop is employers property and thus it can claim FBT deductions

Total

155000

3000

 

Traveling Expenses

Sally is spending money for traveling in two steps (as per case study), first, from home to firm and second, from firm to college. Now ITAA 97 states that in order to claim deductions for travel expense, it must be of the nature of business or working expense. The two steps have been discussed as follows:-

  • First, travel expense from home to firm: It is not allowed as a deductible expense because these expenses will be considered as private in nature as there is no relation of such activities with earning of income.
  • Second, travel expense from firm to college: s 25-100 of ITAA 97 states that an individual can claim deduction of the transport expense between its carious workplaces. For Sally, the two workplaces are firm and college and thus the travel expenses between these two places are deductible.
 

Deductible Expense

Non deductible Expense

Legislation

Travel Expense

     

Between home and firm

 

2500

As per ITAA 97, travel expense that are not related to generation of earnings are not deductible

From firm to college

2000

 

As per s 25-100 of ITAA97, an individual is allowed to claim deduction for the transport expense between its workplaces

Total

2000

2500

 

Income from Prize Winnings

As per tax ruling IT 167, prizes winnings due to casual appearance in a competition cannot be considered to be ordinary income. However, in the case of Sally, she is a tennis coach at a college and drawing salary from such coaching services. Also, she has appeared in the competition while serving as a tennis coach. Therefore as per s 118-37(1) (c) of ITAA 97, Sally has not appeared in the competition just as a hobby. Therefore, prize money and the value of the top-of- the-range dishwasher will be regarded as ordinary incomes.

Competition winnings ( National Women’s
Indoor Tennis Competition)

 

Assessable Income

Non assessable Income

Legislation

Prize money

20,000

 

As per s 118-37(1)(c) of ITAA 97,all the winnings in cash or kind other than mere casual appearance but as a professional sportsman or from which the winner is drawing some earnings is considered to be ordinary income

Value of dish washer

5000

 

Total

25,000

 

Gain on Sale of Antique Furniture

The application of taxation law gets applicable when a CGT event happens while talking about antiques (collectibles or personal used assets). Sally accumulated a 130-year old (more than 100 years), antique bedroom furniture set. The set comprises of a bed, two bed side tables and a chest of drawers. S 118-10(3) states that any capital gain that Sally made from her personally used assets (the bedroom furniture set), can be disregarded if cost base, or its cost (if it is a depreciating asset), is $ 10,000 or less.

The nature of the can be considered to be personal items. Therefore, as per s 118-10(3), capital gain can be disregarded because the cost base is $ 1550 which is less than $ 10000.

antique bedroom furniture set

Amount in $

Purchases

1550

Sales

4400

Capital Gain

2850

Gain on Sale of Holiday Home

As per s 108-5 ITAA97, the sale of the holiday home owned by Sally attracts a CGT event. Therefore, the sale of such property by Sally will attract taxation obligations and it is considered to be a CGT asset. Sally has to pay capital gain tax at applicable rates on the sale of her holiday home.

Capital gain

For the financial year 2018/19

For Sally

Holiday Home

Particulars

Amount

Purchase Price

1,000,000

Selling Price

1,700,000

Net Profit

700,000

   

Purchasing cost

10,000

Ownership costs

103,000

Sale costs

1,000

Total Ownership Costs

114,000

   

Capital Gain (Net Gain – Ownership Costs)

586,000

Conclusion on Sally Case Study

In the case of Sally for the financial year 2019/ 20, the relevant tax implications arising from various facts as discussed above has been discussed. In the above discussed points, Sally has generated Income from various sources including income from salary from two employers, prize money in cash and kind, gain on sales of antique furniture and capital gain on the sale of holiday home. Apart from that she incurred various expenses like travelling for her regular work and others during sale of holiday home. All these points have been discussed in the report.

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