Question 8.

5 ORDINARY INCOME

Issue

Peeta purchased house with two tennis court down the back which were in old condition. The
intention of Peeta was to live in house and build three tennis court unit and sell them at profit.
However, Peeta accepted offer made by next door tennis club to reconstruct court and sell them.
After reconstruction she sold tennis court for $600,000. The major issue is whether receipt of
$600,000 is ordinary income under section 6-5.

Rule

1
As per section 6-5, assessable income includes ordinary income that are derived directly or
indirectly from all sources. Ordinary income under s6-5 are the income according to ordinary
concept. Various judicial concept and case law has determined certain characteristics and
prerequisites that are necessary however not sufficient condition to consider certain receipts as
an ordinary income. So, presence of both characteristics and prerequisites is required to make
receipt more likely an ordinary income. Receipts comes into ordinary income under section 6-5,
if the if the amount received by entity is derived by entity, so the amounts that are unrealised is
not classified as ordinary income.

Ordinary income include income generated from carrying on trading activities, rendering
personal services and sales of property, specified as income under income tax law. The ordinary
income of the taxpayer includes the profit arising from the sales of the property, which was
acquired by taxpayer with the purpose to generate the profit through sales of property or to
carrying out trading activities/business (Federal Commissioner of Taxation v. Whitfords Beach
Pty. Ltd., 1982)2.

Application

There is no exact meaning for the for the phrase ordinary income under s6-5, rather the
characteristics of receipt are generally used for determining nature of income. A regular flow of

1
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
2
https://iknow.cch.com.au/document/atagUio549860sl16841994/federal-commissioner-of-taxation-v-whitfords-
beach-pty-ltd
cash is more likely to be consider as ordinary income rather than lump sum income. So, the
receipt from the sales of business or asset are more likely to be consider as capital rather than
ordinary, however when ignoring capital gain such receipt are more likely to be regard as
ordinary income3.

Peeta acquired the property with the objective to generate profit. The primary intention of Peeta
was to construct tennis court and sell for profit. Development of the tennis court involved great
deal of work and she invested $100,000 for resurfacing the tennis court. The $600,000 receipt
from the sales of tennis court can have ordinary concept when ignoring capital gain.

This fact include commercial transaction and intention of profit, which are major requirement for
ordinary income under FCT v. Whitfords, for recognising income from disposable of property as
ordinary income. Although the receprt from sales of tennis court is not a part of Peeta direct
income rather it is part of indirect income, most importantly the receipt is investment income for
Peeta.

Conclusion

The receipt from the sales of tennis court earned by Peeta will be considered as ordinary income
under ITAA 1997, Section 6-5. However, this is only under the condition when ignoring the
capital gain concept from the circumstances.

Question 7.4 FRINGE BENEFIT TAX

Issue

Material fact of case concerning ABC Pty Ltd (ABC):

 ABC provides an employee Alan with mobile phone bill ($220 per month), children's
school fees ($20,000 per year) and latest mobile phone, which cost $2,000.
 ABC organised for dinner at local restaurant for 20 employee and their partner, total cost
$6,600 including GST.

The major issue of the case of ABC Pty Ltd (ABC) is concerned with material fact are:

a) FBT consequences arising

3
https://www.researchgate.net/publication/228153704_The_Ironic_Australian_Legacy_of_Eisner_v_Macomber
 b) Application if ABC only had 5 employees
c) Application if clients of ABC also attended the end-of-year dinner

Rule

In Australia the fringe benefit tax (FBT) is governed by legislation Fringe Benefit Tax
Assessment Act 1986 (Cth). Fringe benefit includes payment/service/facility provided to
employee in other form than wages or salary.

Fringe benefit is different than the income tax and FBT is calculated based on the fringe benefit
taxable value rather than assessable income. Employer is responsible to self-assess fringe benefit
provided to employee and other relevant member and lodge FBT return4.

In Australia, FBT liability are determined based on gross up rate or lower gross up rate. Gross up
rate (2.0802) rate is applicable when the entity is entitled to GST credit of the fringe benefit
provided. Whereas, lower gross up rate is applicable when the entity is not entitled to GST credit
of the fringe benefit provided. The FBT rate in Australia is 47%.

Application

Other payment facility provided to employee by ABC Pty Ltd (ABC) other than salary and
wages can have FBT consequences. All the payment/facility do not have FBT consequences.

5
Work related items are exempt from the FBT such as portable electronic device, computer
software, protective clothing, briefcase and tools of trade. Especially, items provided to
employee primarily for the purpose of employment. The benefit provided by ABC to employee
Alan including payment of mobile phone bill ($220 per month) and latest mobile phone, which
cost $2,000, are provided for the work related purpose, thus, this benefit is FBT exempt for
ABC.

6
As per the chapter 3, the employer-sponsored for the child care of employee are exempt from
the FBT, when such facility are provided on business premises, however, employer is

4
https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/
5
https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/work-related-items-
exempt-from-fbt/#:~:text=Subject%20to%20the%20limitations%20below,computer%20software
6
https://www.aph.gov.au/Parliamentary_Business/Committees/House_of_representatives_Committees?
url=fhs/workandfamily/report/chapter7.pdf
responsible for FBT if such facility are based on external schooling. Thus, ABC is liable for
benefit provided to Alan in respective to children's school fees ($20,000 per year).

FBT liability (lower gross-up rate) = $20,000 * 1.8868 * 47% = $17,735

7
Business is responsible for FBT liability for meal entertainment provided to large number of
employee. ABC is liable for FBT for $6,000 meal entertainment provided to 20 of its employee.

FBT liability (gross-up rate) = $6,000 * 2.0802 * 47% = $5,866

8
However, if the meal entertainment provided to small number of employee are FBT exempt.
9
Common entertainment provided to client are not subjective to FBT. Thus, event such as meal
entertainment provided to small number of employee and for client are FBT exempt for ABC.

Conclusion

ABC is liable to lodge FBT for the child care payment and meal entertainment provided to large
number of employee. Whereas, under event such as meal entertainment provided to small
number of employee and for client are FBT exempt for ABC.

Question 11.7 CAPITAL GAIN TAX

Issue

The issue is concerned with the consequences of capital gain tax (CGT) for an investor an
antique collector, particularly when the client is not carrying business.

Rule

In Australia, based on ITAA 1997 part 3-1 and part 3-3, CGT is levied on sells or disposal of
capital assets, particularly those assets with CGT event. Capital gain is not tax separately, rather,
it is added within assessable income or loss is deducted to reduce taxable income. Based on
ITAA 1997Section 108-5, any property are acknowledge as CGT assets, whereas, legal and
equitable right are not determined as property.

7
https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00015#:~:text=Specifically%2C%20the
%20provision%20of%20meal,the%20employee%20for%20the%20above.
8
https://www.ato.gov.au/law/view/document?DocID=SAV%2FFBTGEMP%2F00015
9
https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/in-detail/fbt-and-entertainment-for-small-business/?
anchor=H10
Application

Block of vacant land: The building and land is recognised as CGT assets if not used for
carrying a business. The asset is not an exempted class or pre CGT asset as it was purchased
after 20 th September 1985, thus block of vacant land will be recognised capital asset under
ITAA 1997, Section 108-5 and evaluated as per Section110-25.

Cost for disposal of asset $320,000

Less: Cost base

Acquisition cost $100,000

Council, water bill and sewerage charge $20,000

Total cost base $120,000

Net capital gain $200,000

Thus, net capital gain from the disposal of block vacant land is $200,000, as the asset is held for
more than 12 month, discounted method (50%) is applicable.

Antique bed: Collection are considered as CGT assets under ITAA 1997, section 108-5.
Collection asset comprise of manuscripts, jewellery, stamps, paintings and other antique piece.
The antique bed of client is also considered as CGT asset collection. The asset is not part of pre
CGT asset, and its value is more than $500 so it is not part of CGT exempt asset under section
104-20.

As he bed was stolen and insurance company paid $11,000 as insurance, this value will be
regarded as cost for disposal of asset.

CGT under indexation method

Index
 a. Index of quarter while bed was acquired 21st July 1986 = 43.2
b. Index for quarter of incidental cost 21st October 1986 = 44.4
c. Index of quarter when bed was lost = 12th November 2017 = 112.1

Index of cost base = 112/43.2 = 2.295

Index of incident cost = 112.1/44.4 = 2.525

Net capital gain/loss for antique bed:

Cost of acquiring after indexation = $3,500*2.595 = $9,082.5

Incidental cost after indexation = $1,500*2.525 = $3,787.5

Total cost base = $9,082.5 + $3,787.5 = $12,870

Cost for disposal of asset $11,000

Less: Cost base 12,870

Net capital loss $1,870

Painting: Painting is considered as collectable CGT assets under ITAA 1997. The painting was
purchased on 2nd May 1985. In Australia, CGT assets are only recognised if assets are
purchased after 20th September 1985. As the painting was acquired prior to this period, the
painting will be recognised as CGT exempt assets. As CGT exempted assets, the capital gain or
loss of painting is not required to be reported.

Shares: Share are also considered as part of CGT asset. If the share are associated with carrying
business share are part of ordinary income under ITAA 1997, part 3-a, and 3-b. But a share held
in personal portfolio is part of CGT.

Net capital gain/loss from sales of share:

(i) Common Bank Ltd

 Net capital gain/loss = Cost of disposal – (purchase cost + stamp charge)

= (47,000-550)+(15,000+750)

= $30,700

(ii) PHB Iron Ore Ltd

Net capital gain/loss = Cost of disposal – (purchase cost + stamp charge)

= (62,500-1,000)-(30,000+1,500)

= $30,000

(iii) Young Kids Learning Ltd

Net capital gain/loss = Cost of disposal – (purchase cost + stamp charge)

= (600-100+(6,000+500)

= ($6,000)

(iv) Share Build Ltd

Net capital gain/loss = Cost of disposal – (purchase cost + stamp charge)

= (25,000-900)+(10,000+1,100)

= $13,000

Net capital gain (share) = $30,700 + $30,000 + ($6,000) + $13,000 = $67,700

Violin: Violin is recognised as CGT asset under section 108-5. Client acquired violin for $5,500
in 1st July 1999. The asset is not part of pre CGT asset, and its value is more than $500 so it is
not part of CGT exempt asset under section 104-20.

Cost for disposal of asset $12,000

Less: Cost base

Acquisition cost $5,500

Net capital gain $6,500

Conclusion

Overall capital gain to be reported for client:

Net capital gain:

Block of vacant land $200,000

Antique bed $6,000

Shares $67,700

Violin $6,500

Total capital gain $280,200

Less: capital loss and set off $8,500

$271,700

Discounted (50%) $135,850

Capital gain $135,850

Therefore, client should report $135,850 capital gain for taxation purpose.

Question 13.5 SPECIFIC DEDUCTIONS

Issue

The issue concerned with the potential amount that Big Shoes can deduct in relation to the unpaid
invoices.

Rule

Application

Conclusion