This is solution for
Case Study One
1: Exchange of goods and services
- Whether sales of camera will be treated as ordinary sale of stock by Simone?
- Will income from sales or exchange of camera by Simone will be included in the assessable income of Simone during the income year?
- Whether Section 6-5 will be applicable?
- If income from the exchange of camera is assessable the any deduction is available to Simone?
- Whether market value ($ 900) or cost of camera ($ 600) will be taken as assessable value during the income year?
- Section 6-5: As per the applicable section the normal income of the tax payer is calculated and that income is included in the final assessable income which is earned in the normal course of business. The normal income will be included no matter from which source (direct or indirect) it is earned in the normal course of business.
- Section 8-1: Under this section the various available deductions and the terms on which the cost is incurred in earning the income are provided. The available deductions are deducted from the assessable income of the tax payer.
- Section 21:In the section, when any transaction occurs which do not include money into it and the consideration is made in any other mode except cash, then in that situation it will be considered as a cash transaction only for the purpose of including income in the assessable income of the Simone. Such type of transaction will be considered and measured ay arm length price.
- Section 70-80: This section includes the income of the tax payer from the other sources, which are income generated from sources other than the normal course of business activity but from the same stock
Joe provided its services to Simone and for the discharge of consideration Simone givers ist camera of $ 900 market value but cost of camera is $ 600. Since it is not ordinary course income therefore section 6-5 is not applicable. According to (Scott v. F C , 1966) for the calculation of the actual income or the assessable income of Simone, Section 70-90 will be applicable as he had sold his stock other than the normal course of business management. The cost which is incurred by Simone in earning this income will be taken as a deduction. The following statement shows the calculation of Simone’s income:
Amount (in $)
Assessable Value, as per section 70-90
Allowable deduction as per section 8-1
Income assessable for tax
The assessable value on which Simone is required to pay the tax is supposed to be $ 900, after the deduction of $ 600 which he got as per section 8-1 the actual assessable value on which the final tax will be paid by him will be $ 300.
2: Prize Money
- Whether car is assessable for the Sally?
- Whether this income comes in the ambit of ordinary income?
- Whether value of car shall be included in the assessable income of Sally?
- Whether any deduction can be taken from assessable income in terms of vale of car?
- Section 6-5: Ordinary income is taxable in this section. Ordinary income includes income earned in the ordinary coerces of business.
- Winfall Incomes:This income is earned by tax payer with is luck or without involving any human effort. Income from gambling, lottery income, prize won without any effort made, etc.
In order to include this income in assessable income of tax payer following conditions must be fulfilled:
- Scheme is voluntary announced by organiser i.e. bank has organised such scheme without any order.
- Prize money is ordinary income for tax payer: It is earned in dealing with bank not in ordinary course.
- There is no dependency of tax payer on prize: Since Sally is only customer of bank and does not depend upon this prize money.
- No services are rendered to organiser: Service to bank is not rendered by Sally.
- There is no solicitation of prize: Sally does not solicits such prize money.
Sally has won prize money by marinating account balance more than $ 10,000. This prize money does not constitute ordinary income for Sally and sally is not dependent on this money. This income has the characteristics of winfall gains and shall be liable to pay tax on. Therefore this income shall be included in assessable income of Sally.
From the above points it can be concluded that prize money won by Sally shall be included in the assessable income of Sally as its fulfils conditions specified above.
3: Capital Gain
- Whether ordinary income includes increased value of asset?
- Whether nature of asset includes its use?
- Whether non cash benefit constitute increased value of asset?
- Whether capital gain will be attracted in case of increase in value of asset?
- Section 6-5: Ordinary income is that income that is earned in normal course of business.
- Section 102-20: As per the section all those assets are exempted from capital gain which were purchased before 20th September, 1985.
The assets which were increased will be calculated as per the concept of arm length price or value of assets.
- Section 21a: As per this section all those consideration which are received by the assesse from any other mode except cash will be considered as cash transaction and will be included in the assessable income of the assesse.
- Under section 21a: This section talks about the deductions which are provided to the assesse, such deductions are equal to the amount of the total cost so incurred in order to increase the value of asset.
As per the case of Sally she had not earned any normal or ordinary income from the ordinary business, but without any inclusion of cash she had increased the value of her assets as she has constructed a caravan. At preset the actual value of the asset is $ 13,000 and Sarah is purchasing the same at $ 12,000. Sarah will be the only person who will be using the said asset for his personal use and because of which arm length price will be calculated. There is also the concept of on cash benefits which will be applicable in this case. According to (Federal Commissioner of Taxation v. Cooke and Sherden, 1980) the calculation of assets will be done on the arm length rate i.e. market price of asset or the actual value of asset. The below provided statement is representing the calculation of capital gain or loss of Sarah:
Cost (Building Work) in $
Market Value in $
Value of Asset
Cost of Asset
Capital gain / loss
Discount of 50%
Capital Gain Tax
Above calculated the capital gain payable by Sarah in this income year is calculated on the non cash basis will be $ 500. For the calculation of capital gain tax and for the purpose of calculating the value of the asset the use of arm length price is made. Here the discount of 50% is made because the value of asset is taken on the market value.
- Whether cash received from news paper be assessable for the year?
- Whether transaction undertaken by Charmaine attracts capital gain?
- Whether any deduction is available from capital gain?
Section 6-5: An ordinary income is the one which is earned in the ordinary course of business but such income is not earned in ordinary course of business hence, will not be considered to be ordinary income.
This section deals with the calculation of capital gain that has taken place during the year. Capital gain also applicable on copyright that has been taken by Charmaine.
Here the provisions of the section 6-5 of the income tax assessment act 1997 will be applied for ordinary income. According to the provision it is considered that if the content (Story) of the copyright is sold only for one time by the Charmaine then it will be considered as the ordinary income and will be included in the income of the Charmaine for the purpose of assessable income. According to (HEAVY MINERALS PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION, 1966) on the other hand if the income of $225,000 is treated as the capital asset then the provisions of the capital gain will be applied. This applicability of the provisions of capital gain will be made when the asset is treated as copyright for Charmaine. If there is any possibility of further sales of story, or when this selling is the one time selling, then the provisions of capital gain will not be applicable.
We can say that the nature of the income is required for the assessment i.e. in order to determine the correct source or head of income a proper care of the nature of the income is to be made. We have seen that there are two situations in the present case of Charmaine for the calculation of the assessable income. The income from the sale of story by Charmaine will be included in the assessable income only when such sale is made for one time. Only then this income will be included in the capital gain and the related provisions will be applicable only then.
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Case Study Two
- Whether deductions from assessable income will be available to Baz Baxter during the income year?
- Whether general deduction is i.e. under section 8-2 is available to Baz Baxter?
- Whether amount paid for upgrading grade of licence will be available for deduction?
- Whether expenses incurred during part time job is available for deduction from income year?
- Section 8-1: This section tells us about the provisions of the parts of the assessable income are, allowed and disallowed expenses which are incurred during the earning of the income. Such allowance and disallowance of expenses forms the part of the assessable income. Below are the provisions of section 8-1.
- Section 8-1 (1): As per this section the expenses incurred during the earning of income are allowed as deduction only when such expense is incurred for earning assessable income.
- Section 8-1 (2):Those expenses which are disallowed to be deducted are explained in this section:
- Expenditure or loss of capital nature.
- Loss or expenses of personal nature .
- Such deductions from the assessable income is not permitted as per the provisions of act
- Expense which are incurred for the purpose of earring exempt income.
- Ruling T/R 92/8: The rules related to part time employee or seasonal employees of the company are provided here. These provides with the provisions related to the deductions of expenses incurred by the Baz Baxter. Expenses related to education or improvement in education which can be used to increase employment in future, are included in these rules.
Under this case, Baz Baxter whose ultimate goal is to become pilot because of which he is presently employed as an air traffic controller for some time at the local airport. As presently also Baz Baxter is working in the same industry he will be in touch of his ultimate goal. He had also incurred expenses in order to procure a pilot license and maintain the same. According to Finn’s case for betterment in the present working at the job he had incurred such expenses of $1500 which will be treated as his cost. As there is no such mandatory requirement by the employment to obtain a pilot license but such license will help him in betterment in the present service. In order to earn the assessable income of the year a general deduction of $1500 is available under section 8-1 (1). In order to get a higher grade in pilot license there is another expenses incurred of $ 2000. As this income is not incurred to earn assessable income, hence o direct deduction of such amount will be provided to Baz Baxter. For the promotion of employees under ruling T/R 92/8 such deduction is available. As per this case the tax payer had indulged himself in learning of such programmers that would enhance his skills ad ability to perform well in at his workplace. Now Baz Baxter can claim expenses of $ 2000 as he had fulfilled all the conditions as per the provision. A great help and support could be obtained by Baz Baxter through these activities in order to increase his experience in term of employment.
As per the provision so explained above about the deduction of expenses from the assessable income of Baz Baxter, expenses of $ 1500 is spent by him for maintaining the pilot licence which will be beneficial for him in the course of his working at the present employment which can also be said to be a support for him in the earning of the income during the income year. In addition to the above deduction there is one more deduction which is provided to him i.e. related to the enhancement of his employment skills which will be helpful to him in his future. Such deductions, as available under promotion ruling, are advantageous to the Baz Baxter for calculation of assessable income.
Case Study Three
1: Capital gain
- Land is assessable as capital asset?
- Whether land constitutes main resident property?
- From capital gain what deductions are available?
- Whether sale of land be included in assessable income of tax payer?
- Whether land has short term gain or long term gain in this case?
Section 115-25: AS per the provisions of this section exemption from the payment of capital gain tax and for that some condition shall be fulfilled. This section had specified one condition for the exemption i.e. capital asset shall be 12 months old i.e. used or kept for at least 12 months. Capital assets shall be used in income generating activities for at least 12 months from the date of use.
Calculation of cost base includes following five elements:
- Cost paid to acquire asset.
- Incidental cost of capital
- Interest cost, maintenance cost,repair cost, other cost incurred to acquire asset.
- Capital expenses incurred.
- Asset title protection cost.
In this case Brett has borrowed money i.e. $ 100,000 for the acquisition of land but had sold piece of land in the same income year. Brett has not kept land for 12 months or more. Interest on borrowed money that Brett has to pay is of $ 2000. Main question arise in this case is of whether capital gain of earned by Brett shall be assessable or shall be included in his assessable income for the year and what deductions are available with him. Capital gain on the sale of land will be included in the assessable income. Since land is not retained for 12 or more months therefore no deduction or exemption is available i.e. of 50%. While on the other hand interest expenses on borrowed money will form part of cost of asset.
From the above points it can be concluded that deduction from capital gain income earned by Brett in the income year are not available for deduction of 50 % as he has not retained land (capital asset) for 12 or more months.
2: Insurance Payment
- What rule or provisions related to car, as a asset will be applicable?
- Will capital asset includes destroyed or loss asset?
- Whether insurance claim received from insurance company is assessable for the income year?
- Asset kept for income generating purpose or for other purpose form assessable income?
- Section 104-20:In order to be to be treated as destroyed or loosed asset following conditions needs to be fulfilled:
- Asset destroyed or lost shall be owned and controlled.
- Capital asset acquired before 20 September, 1985 is out of tax ambit.
- When companion of destroyed or loss asset is received then asset is deemed to be destroyed or lost for income tax purpose.
- If insurance claim is more than cost of asset then only capital gain will be included in the assessable income of tax payer.
- Section 118-5: As per provisions of section 118-5 of income tax assessment act 1997 there are few assets that are not taxable or does not include in the assessable income of tax payer and they are: car, motor cycle, vehicles and award for bravery.
- Section 118-300 (1):According to section 118-300 of income tax assessment act 1997 deduction will be available with tax payer i.e. compensation received from general insurance company for the income year.
Cindy has received insurance claim from insurance company towards its damaged car in the current income year. Although destruction of car taken place in previous year. But as per section 104-20 of income tax assessment act 1997 compensation received from insurance company will be assessable in the year when it is received. Cindy has purchased car in 1st May 1987 therefore provision of section 104-20 will not be applicable. As per section 118-5 car is not treated as capital asset for the purpose of capital gain. As per the provisions of section 118-300 insurance claims received from general insurance company will be exempt from capital gain tax.
From above points and section discuses it can be concluded that car does not fulfill condition of being capital asset and shall be exempt from capital gain tax. While compensation received from genera insurance company will be expect from including in assessable income during the year. Therefore in this case Cindy shall be liable for the inclusion of insurance claim received from insurance company during the year.
- Federal Commissioner of Taxation v. Cooke and Sherden, 10 ATR 696 (Federal Court of Australia April 16 , 1980).
- Heavy minerals pty. Ltd. V. Federal commissioner of taxation law, clr 512 (high court of AustraliaOctober 13 , 1966).
- Lunney v. Prodigy, 07342 (SUPREME COURT OF THE STATE OF NEW YORK September 24, 1998).
- Scott v. F C , 117 CLR 514 (High Court of Australia August 24, 1966).
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