ASSESSMENT 1- INDIVIDUAL ASSIGNMENT

PRINCIPLES OF TAXATION LAW

LAWS20060

LECTURER: Michael William Blissenden

COURSE CO-ORDINATOR: Dominic Lococo

CAMPUS: Sydney

6th September,2017

Submitted by:

Student ID:

Question 1
Answers:

i. One of the requirements to be ordinary income is it needs to be cash or convertible to

cash. Those receipts which are not convertible to cash are not ordinary income. Here,
web jet frequent flyer points obtained by a business analyst is not ordinary income
and they are not assessable under s 6-5 of ITAA 1997 as points received are not
convertible to cash and also it is clear that the benefit is not connected with personal
exertion as business analyst earned the points in course of travelling for the business
purpose which travel expense is paid by the firm[CITATION Sad17 \p 141 \l 1033 ].
We can relate this case with the case of Payne v FCT(1996) 32 ATR 516, where
Foster J of the Federal Court declared that the free flights earned by Payne were not
ordinary income which were generated as result of frequent flyer points through
work travel. This is because the tickets were not of money worth and also they cannot
be sold or converted into money[CITATION Sad17 \p 142 \l 1033 ].

ii. Amounts received by a crane hire company from its customers for a damage crane
depends on whether the crane has been damaged permanently of temporarily. If the
crane has been damaged permanently the amount received can be considered capital
in nature as in case Glenboig Union Fiercly v IT Commissioner. But if the crane has
been damaged temporarily, then the amount received by a crane hire company from
its customer can be treated as assessable income as in case of Ensign Shipping Co Ltd
v IR Commissioner of Inland Revenue (1928) 12 TC 1169 [CITATION Sad17 \p 297 \l
1033 ].

iii. A free overseas holiday received by a nightclub manager from an alcohol supplier is
not an ordinary income as it is free overseas holiday might have given for the
personal quality of night club manager. It is not an ordinary income but personal gift
as it cannot be considered as income flowed from a source such as capital and also it
 is not the income that flow from the night club manager’s capacity to work and or the
employment contract. It can be supported by the case: Scott v FCT (1996) 117 CLR
514 the High court declared that the gift of $10,000 was a personal gift not ordinary
income which was paid by client to Mr. Scott (a solicitor) [CITATION Sad17 \p 136 \l
1033 ]. In this case, $10,000 was considered as personal gift as that is product of
personal characteristics or friendship. Scott was provided with full salary for his
services separately from payment held the case that the $ 10,000 was a personal gift.
Also Scott had not expectation of the gift also supported the case that $10,000 was a
personal gift. Here also a free overseas holiday received by a night club manager
from an alcohol supplier can be considered as personal gift as that might be product
of personal characteristic rather than from service, similarly, night club manager
might not have expectation of gift of free overseas holiday. Thus, all these point
supports that a free overseas holiday to night club manager is a gift not assessable
income.

iv. The money return to its members of excess funds raised by a canoe club for the
purchase of additional canoes will be matter to the mutuality principle and can not
consider as assessable income for the members. It can be explained by the help of
example: a wine- testing club has collected a total of $3000 fees from its member in
past. Wine-tasting tour is organized for its member by the club. Club has $2000 in
fees collected unspent in the bank out of the $3000. The decision regarding refund of
$2000 to its member is made as the club winds up. And the money which was
refunded to the members will be subject to mutuality principle and would not be
assessable income for the members[CITATION Sad17 \p 128 \l 1033 ].

v. A payment made by a television station to an Australian footballer for being named

the best and fairest in the AFL is a kind of prize related to the professional sport
activities and they are consider as ordinary income in which footballer must pay the
tax. In case of Kelly v FCT, Kelly, a football player played at the best level in the
Western Australia competition and it was broadcasted publically that the winner will
be paid $ 20,000 by a local television station. Supreme Court of Western Australia
 declared that $20,000 was an ordinary income which is assessable for tax purpose. It
was announced as ordinary income even though it was unexpected and paid by an
unrelated third party and it was directly related to Kelly’s employment as footballer.
Also he was a member of the football club as well as he was awarded the prize
because of his abilities and skills.

Here a payment made by television station to an Australian footballer for being

named the best and fairest in the AFL is similar to the case Kelly v FCT, Hence, it is
most possible that all winnings and prizes related to their sporting activities will be
ordinary income which is achieved through better profile of professional sporting
people. But, when the activity is not related with employment or professional
activities the difference between non- assessable prize and a prize that is related to
personal exertion is more difficult. Factors like the degree of professionalism,
whether the reward is for services rather than for personal qualities, whether the
rewards is paid before or after service and whether the reward is related to the
taxpayer’s contract are used to make distinction between non-assessable prize and the
prize that is related to personal exertion [CITATION Sad17 \p 141 \l 1033 ].

vi. Expense relating to a building qualification for a building apprentice is deductible as

it relates to taxpayer’s income producing activities. Such expense can be associated to
the taxpayer’s production of assessable income if the education will improve the tax
payer’s prospects of promotion or earning higher income in the tax payer’s current
career. In case of FCT v Hatchett (1971) 2 ATR 557, the high court declared the
expenses incurred relating to the Teacher's higher Certificate is deductible as it had
sufficient connection to his income –producing activities. Here, the expenses did not
fall within the negative limbs of the predecessor to s 8-1and the positive limbs of the
predecessor to s 8-1 were satisfied. Hence, expense relating to a building qualification
for a building apprentice will also be allowed for deductions as it had sufficient
connection to income producing activities i.e. building apprentice. This expense in
building qualification for building apprentice will improve the taxpayer’s prospects of
 earning a higher income in the taxpayer’s current career or getting promotion which
is the positive limbs of s 8-1[CITATION Sad17 \p 407 \l 1033 ].

vii. Expense relating to a short course in art management in the hope of becoming an art
director can be consider as self-education expenses relate to new career. Here the cost
of art management course is not deductible while calculating taxable income as it is
related to a new career and it is incurred at a point too early to be considered as
incurred in producing assessable income. And the positive limbs of s 8-1 are not
satisfied[CITATION Sad17 \p 408 \l 1033 ].

viii. Expenses relating to work make-up and work dresses might be deductible or not
deductible. It depends on whether the clothing expense was a domestic use or such
expense on work make-up and dresses are created by taxpayer’s working conditions
or environment. If such expenses are of domestic use, they are not deductible but if
such expenses are created due to taxpayer’s working condition, they are deductible
while calculating taxable income.

In case of U80 (1987) 87 ATC 470, the taxpayer working at David Jones was
required to wear all black dress while on duty. The dress was not that distinctive and
that can be worn outside the taxpayer’s employment. The AAT declare that as the
dress were of conventional attire, the expense related to work dress were a private or
domestic .And such expense were not deductible due to second negative limb of the
predecessor to s 8-1[CITATION Sad17 \p 420 \l 1033 ].

But the expense on such work dresses may be deductible if the need for such dress is
created by the taxpayer’s working conditions or environment as in case Mansfield v
FCT (1995) 31 ATR 367, the taxpayer was a flight attendant who has expenditure on
shoes, stockings, moisturizer, cosmetic, hair dressing. The taxpayer showed that her
shoes were a half-size bigger than her ordinary shoes due to the swelling caused by
cabin pressure and the moisturizer was required due to dry cabin air. All the expense
were incurred in gaining or producing assessable income as she was needed to be well
 groomed as part of her job. And the Federal Court allowed taxpayer a deduction of
expenses relating to shoes and moisturizer as the need for them was created by
taxpayer’s working conditions i.e. cabin pressure and dry air of an aeroplane. But did
not permit the deduction for cosmetics and hairdressing expense as that was
considered to be a private expense as a result of taxpayer’s personal choice and not
due to taxpayer’s working environment[CITATION Sad17 \p 423 \l 1033 ]

ix. Expenses relating to travel between home and office are not deductible under s 8-1 of
ITAA 1997 as in case: Lunney v FCT; Hayley v FCT (1958) 100 CLR 478; Ruling IT
112. Expenses associated to travel between home and offices are regarded to be
acquired in placing the taxpayer in a position to gain or produce assessable income,
rather than in the production of assessable income. Positive limbs of s 8-1 are not
satisfied by such expenses and second negative limb as private or domestic expense
further prevents the deduction of such expense[CITATION Sad17 \p 396 \l 1033 ].

x. Expenses related to travel between one employer and another employer is deductible
or not depends on whether two employers relate to the same income-producing
activity or different income producing activity. Expense incurred in travelling
between two places of work are deductible if two work places are related to the same
income-producing activity, under s 8-1 of ITTA 1997 as the travel is undertaken in
making assessable income. However, if the two places of work relate to different
income-producing activities, the expenses related to travel between those places are
not deductible as the High Court in FCT v Payne (2001) 202 CLR 93 declared that
under s 8-1 expenses incurred on such travel are not deductible as the expenses are
incurred in putting the taxpayer in a position to generate assessable income, rather
than gaining or producing assessable income. As such, the positive limbs of s 8-1 are
not satisfied[CITATION Sad17 \p 401 \l 1033 ].
Question 2

Answer:

Calculation of taxable income of Manpreet

Taxable income= Assessable income - Deductions

= ($45,000+$10,000) - $500

= $54,500

Now, calculation of tax payable

0 -$18200 = no tax payable

$18,201 -$37,000 =19% * $18,800 = $3,572

$ 37,001 -$87,000 = 32.5 %*> 37000 = $5687.5

Total tax payable = $3,572 + $5687.5=$9259.5

Now, there is foreign tax offset of $1,000

Manpreet has low income that qualifies for the low income tax offset. Her taxable income
for the year 2016/2017 is $54,500.

She is entitled to following rebate:

$445-(( $54,500 -$37,000) * 0.015)=$182.5

Total tax offset= $1,000 +$182.5= $1182.5

Now, Net tax payable = Total tax payable - Total offsets

 = $9259.5 - $1182.5

= $8,077

Therefore, Manpreet’s net tax payable for the financial year is $8,077

Reasons for including or excluding specific items in calculation.

i. $45,000 salary has been included in calculation of taxable income as it is ordinary the
income form personal services and employment or personal exertion. Amounts
earned by taxpayer’s personal exertion will constitute ordinary income: Moorhouse v
Dooland (1995) 1 AII ER 93; Brown v FCT (2002) 49 ATR 301 [CITATION Sad17 \p
131 \l 1033 ]. Here, Manpreet has earned $45,000 from the job by working as an office
assistant at an Accountant’s office. There is nexus between the amount received and
work performed. So, the amount earned is an ordinary income under s 6-5 of ITAA
1997. Here Manpreet’s salary is product of employment so it is an ordinary income.
Therefore, we have to include as assessable income in the calculation.

ii. $20,000 received by Manpreet from her parents to assist her with living expenses is
excluded while calculating net tax payable as it has not any nexus with an earning
source .It is not income from any personal service, neither income from business nor
income from property. This has also become clear from the case of Scott v FCT
(1966) 117 CLR 514 and Hayes v FCT (1956) 96 CLR 47 where it has been said that
a receipt is not ordinary income if it is not product of employment or rewards for
service[CITATION Sad17 \p 132 \l 1033 ] . Also it does not have any characteristics of
ordinary income as it is not a regular payment and also does not flow from any
underlying source. It is just one-off receipts which can be clear from case of FCT v
Harris (1980)[CITATION Sad17 \p 120 \l 1033 ] . Hence, $20,000 is not included in
calculation.
iii. $10,000 is considered as income as Manpreet received from a trust account set up in
India by her grandmother as Manpreet is considered as resident of Australia for tax
purpose. She is entitled to income from trust as she is entitled and not under a legal
disability so the income from all sources from inside Australia or outside Australia is
considered to be income that is taxed under the Australian tax rate for
resident[CITATION Sad17 \p 622 \l 1033 ] . Therefore, $ 10,000 must be considered as
assessable income while calculating taxable income.

iv. $1,000 is included in calculation of net tax payable as tax offset which Manpreet paid
as foreign tax in the amount $10,000 the income made from trust account set up in
India by her grandmother. The income gained by Manpreet from trust of $10,000
from India is taxed in the source county i.e is India and if it taken as assessable
income of Manpreet while calculating taxable income then it will be taxed in
Australia as well. So, to prevent double taxation of the income $10,000 from trust in
India , Austraila provides Manpreet with a tax offset equal to foreign tax levied on the
income: s 770-10 of the ITAA 1997[CITATION Sad17 \p 504 \l 1033 ]. Thus, $ 1000 is
regarded as tax offset.

v. $18,500 expense on her studies is not deductible as it is private or domestic in nature.

This expense is incurred too early as Manpreet has already decided to study
accounting so the expense is not connected to Manpreet’s production of assessable
income as she worked part time as an office assistant at an Accountant’s office to
gain work experience. Expense on education is not incurred for enhancing or
developing her current career instead it has been incurred before she started doing
work as an office assistant. Since, expense on Manpreet’s Education satisfy negative
limbs of s 8 -1 of ITAA, the expense on her education i.e. $18,500 is not deductible
and not included in calculation[CITATION Sad17 \p 414 \l 1033 ].

vi. $2,000 expense on a computer and printer for educational purposes are not deductible
under s 8-1 as it is capital expense. Expense incurred in acquisition of such assets
provides Manpreet with a lasting benefit and are considered as capital expense. Such
 expenses are not deductible immediately under s 8-1 but might be deductible over a
period of years under the capital allowances regime[CITATION Sad17 \p 414 \l 1033 ].
Thus, $2,000 is not included in calculation.

vii. $500 expense on a new mobile which was requires for work purpose is included and
deductible as expense on a new mobile is a kind of capital expense and the expenses
are deductible under s 8-1 of ITAA 1997 if they are capital in nature [CITATION
Sad17 \p 425 \l 1033 ] . Mobile is expected to last for number of years and may be
deductible over number of year. Also they are purchased for the working purpose as
the need for the mobile is created by Manpreet’s working condition or environment:
Mansfield v FCT (1995) 31 ATR 367[CITATION Sad17 \p 423 \l 1033 ]. Thus, the
expense on mobile is deductible while calculating taxable income.
References
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., et al. (2017). Principles of Taxation
Law. 19 harris Street Pyrmont NSW 2009: Thomson Reuters Australia Limited.