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BLO06 Tax Law & Practice
Assignment
Question 1
a) As a result of Joanne receiving $5000 for the cancellation of one of her employment contracts, it is deemed to be ordinary assessable income. The reason that it is ordinary assessable income, is because the payment was for income that Joanne had lost, upon one of her contracts being cancelled. Furthermore, since Joanne also had another employment contract in which she was receiving income, she relied upon those payments to base her lifestyle. In other words, the compensation payment covered the amount that Joanne was going to receive throughout the six month period, even if one of her contracts was not cancelled.
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The compensation payment of $5000 was convertible into cash, which further emphasizes the fact that the payment is assessable income, under the ordinary usage of the word. The only time that the compensation payment would not be ordinary assessable income, is under Section 6(e) of the 16 act, as stated by the master tax guide (001,p.47) . However, the tax commissioner would not accept the compensation payment being ordinary income, where the entitlements are placed into a lump sum which will be described as compensation for lost earning capacity, which is also outlined in the master tax guide (001, pp.48-4) . In this case, it would be classified as a capital receipt and not ordinary assessable income.
According to the Core tax legislation (001,p.175) , Section 6.5 of the 17 act, classifies compensation payments as a result of a contract being cancelled, as being ordinary assessable income. However, this particular section does not go into any real detail of defining the term Ordinary Income. Instead, the common law provides grounds as to what falls under the Ordinary Income definition, which is; 'The word income is not a term of art, and hat forms of receipt are comprehended within it…. must be determined in accordance with the ordinary concepts and usages of mankind'. This definition was generated from Jordan CJ, who presided over the case ofScott v Commissioner of Tax (NSW) (15) 5 SR 15 at 1, asstatedby Kobetsky, Dirkisand O'connell (001,p.64) .
An example of a case which supports the $5000 compensation payment that Joanne received as being ordinary assessable income is Californian Oil Products.ltd v FCT (14) 5 CLR 8 ( ATD 10), which is outlined by Kobetsky et.al (001,p.176). Itinvolveda case where the company was appointed to act as an exclusive agent over a 5 year period for selling a particular brand of petroleum products in NSW. It was agreed that the company would not sell a competitor's petroleum products. The contract was cancelled during its first year, and as a result, the company received compensation in ten half-yearly installments. Therefore, the commissioner argued that the compensation payments received were ordinary assessable income. The High Court ruled that the payment was a capital receipt on the grounds that the business was terminated. However, Kobetsky et.al (001,p.176)highlights that their honours rejected this and ruled that the compensation payments as ordinary assessable income, which ultimately agrees with the fact that the compensation payment received by Joanne is indeed ordinary assessable income.
b)Given that Peter was a dairy farmer, the distinction between a capital receipt and ordinary assessable income is related to the effect of the structure ofthe business and that which is part of the product of the structure of the business. According to Sections 70-75 and 70-110 of the 17 act as discussed in the core tax legislation (001,p.7 & 400) , this transaction is deemed to be a capital receipt because the bamboo is not part of the trading stock of the business and the bamboo was removed outside the ordinary course ofPeter's dairy farm business. Therefore, since the facts state that Peter accepted $00 for every truckload of bamboo that was removed, it is a capital receipt.
This scenario is related to the difference between a fruit tree and the fruit of the tree. The fruit tree is known as the structure of the business, while the fruit of the tree is the product of that business structure. This means that the bamboo is a product of Peter's dairy farm business structure. Even though the information largely suggests that it is a capital receipt, further information is needed because it must be known as to whether Peter relied upon the bamboo as a source of earning income under Section 70-10 of the 17 act, despite the definition not including whether a specific part of farmland is trading stock and therefore, being ordinary assessable income. It also must be known that if Peter received the $00 for every truckload of bamboo removed was in the nature of regular and recurrent payments. In other words, if the payments received came on a periodical basis.
However, under Section 6-5 of the 17 act, it states that if Peter had an expectation of payment, then it is likely to be assessable income. An appropriate conclusion cannot be reached as a result of the facts not stating whether the bamboo was used as a source of earning income within the ordinary scope of the business. An example of a case as outlined by Kobetsky et.al (001,p.168), which illustrates the conflict between a Capital receipt and Ordinary assessable income is that of Westfield.ltd v FCT (11) 1 ATR 18. According to Kobetsky et.al (001,p.168) , the structure of Westfield's business was the design, construction, letting and management of shopping centres. Therefore, Westfield purchased a large block of land that was adjacent to one of its shopping centres, so it could be used for future development. Before this was done, Westfield sold its present shopping centre to AMP and negotiations were initiated with AMP over the adjacent block of land.
Westfield generated profit from the sale of the block of the land and the tax commissioner had assessed Westfield on that profit, which the commissioner had classified as ordinary assessable income. As a result, Westfield objected to this assessment, based on the argument that the profit generated, was a capital receipt. Initially, the courts dismissed Westfield's appeal in which the profit was not ordinary assessable income. However, Westfield appealed to the Full Federal court and the Judges unanimously ruled that the profit generated from the sale of the land was a capital receipt. Additionally, Kobetsky et.al (001,p.168)states that the sale of the land did not fall within the ordinary scope of Westfield's business activities or even a necessary incident of their business. During the time that Westfield purchased the block of land, there was no intention to resell the land. As a consequence, the profit that Westfield generated was a capital receipt.
From this particular case, the payment that Peter received for every truckload of bamboo that was removed, it is of a capital nature, as the transaction does not fall within the ordinary scope of his business activities, and prior to the zoo approaching Peter, he did not have any intention to have the bamboo removed from his land, as illustrated in Westfield's case. Even though that Peter is clearly running a business, the bamboo was not used as a means of generating profit as dairy farmer. The only way that Peter could be assessed on the $00 that has been received for every truckload of bamboo removed, was if it was not on a restrictive covenant basis, and if the bamboo was actually used within the day to day runnings of his business.
c)Martha's early retirement package of $47,000 falls under the eligible termination payment (ETP) scheme ofthe 16 act, Section 7B to 7H. Therefore, the eligible termination payment (ETP) scheme qualifies as ordinary assessable income. The reason that the $47,000 early retirement payment package is ordinary assessable income is that under Section 7E of the 16 act, as outlined in the core tax legislation (001,p.788) , the early retirement of employees is an approved early scheme if
-the scheme is offered to all employees within a class that is identified by the employer;
-the scheme is entered into with a view to rationalizing or reorganizing the employer's operations with specific objectives; and
-the commissioner has approved the scheme prior to its implementation.
This means that Martha may have retired voluntarily after working for Ansett for 1 years. As a result, the tax commissioner could treat the eligible termination payment (ETP) scheme as approved early retirement where special circumstances exist, such as where the scheme was introduced because of a delay in processing an application for its approval or it could be implemented without approval, because the employer was unaware of the tax implications. Furthermore, Martha must have decided to retire early, because her employer would not have been aware that when they paid Martha the $47,000, it was not part of her superannuation fund.
Nevertheless, the $47,000 will be ordinary assessable income on the additional grounds that
-if the employer and the taxpayer are not dealing at arm's length in relation to the termination, the ETP must not be greater than an amount which could be reasonably expected to have been paid, if the parties were dealing at arm's length; and
-at the time of termination, there should not be any agreement between the employer and employee to re-employ them after that time, which are all outlined in the master tax guide (001,p.).
Another reason that Martha may have taken early retirement although it has not been specified, could be her age. However the master tax guide (001,p.4), also states that early retirement can also be classified as a bonafide redundancy payment, which means that it is part of an ETP, which is made to a taxpayer, upon employment termination which is greater than an amount, that the person could reasonably expect to have received. This could be as a result of Martha voluntarily resigning.
The retirement payment package would not have been ordinary assessable income, should Martha have been sacked. The word "Redundancy" means where an employer no longer needs the employees to perform a particular kind of work at a certain location. It normally occurs in a scenario where the dismissal has not been caused by any consideration, in which the employee perceives it to be in unusual circumstances. Therefore, it will not extend to an employee being dismissed for personal or disciplinary reasons, or because that the employee was performing inefficiently.
Furthermore, an eligible termination payment (ETP) which is made as a consequence of the termination of a person's employment due to redundancy according to the master tax guide (001,p.4) , must satisfy the conditions that are outlined in the criteria for early retirement scheme payments, before it is treated on a concessional basis. In other words, if the $47,000 early retirement package was made in the conditions that are stated above, then Martha could only end up paying 5% of that $47,000. This is because that the payment was made after the 1st of july 14 as part of the early retirement scheme. This means, that Martha gets to keep 5% of the $47,000 early retirement payment package, and only 5% is ordinary assessable income.
d)Even though that Nigel is an accountant by profession, the payments that he receives through his activities as a keen gardener is enough to suggest that it is generated through providing a personal services business. Therefore, these receipts are ordinary assessable income through Nigel selling roses on a weekly basis and would fall under the personal services income category. Since that Nigel sells his flower bouquets from $0 upwards and in which he would supply 5 or 6 flower arrangements each week, this constitutes that the receipts are received on a periodical basis.
However, the scenario does not indicate whether Nigel relies upon the receipts to base his lifestyle. Given that Nigel is an accountant, it would be deemed that the income in which he receives from that occupation would be relied upon by him. Nevertheless, his receipts from selling flower bouquets is still ordinary assessable income on the grounds that the receipts are received on a regular basis and despite the fact that gardening is a hobby of Nigel's. The additional reasons for the payments being ordinary assessable income, is that it satisfies the criteria that is outlined as being income under the ordinary concept by Kobetsky et.al (001,p.65) , these are
-the income is normally received on a periodical basis;
-the amount must be income in the hand of the taxpayer;
-income must be received by the taxpayer and must belong to them;
-income must be cash or a gain that is convertible to cash;
-the income must be a gain which is realized by the taxpayer; and
-the income is normally derived from the provision of services, as a return from property or from a business.
Inorder to further emphasise the fact that Nigel is carrying on a personal services business, the cases according to common law, which are used to support this argument is Walker v FCT (185) 16 ATR 1 and also Ferguson v FCT (17)ATR 87. In Walker v FCT, Walker was a farmer who intended to breed a special type of goat. Therefore bought an Angora goat in the hope that he would generate a profit from selling the offspring of the goat. As a result, Walker entered the Angora goat industry and set up a small stud farm. However, his activity was not successful as the goat died shortly after only producing two kids. One of them also died without producing. The goat who survived was used to breed offspring and ended up producing two kids. Walker then decided to end his activities after three years and in which he sold the three remaining goats. The only income that Walker received was the Proceeds from the sale of the goats. The court had held that Walker was carrying on a business despite making a loss. However, the court was satisfied that Walker had set up the stud farm with the intention of generating profit, and in which his activities were on a regular basis.
A similar outcome arose in Ferguson v FCT, in which Ferguson intended to set up a primary production business. He entered into an agreement to lease five cows over a four year period. Ferguson also made arrangements with a company for managing the cows over a ten year period. The court referred to Section 6(1) of the 16 act in basing their decision in which the business includes any profession, trade, employment or vocation, but excludes the occupation as an employee. Therefore, Kobetsky et.al (001,p.14) states that the decisions in Walker and Ferguson demonstrate that the courts attached limited weight to the scale of operations upon the determination as to whether a person is carrying on a business.
As a result, the decisions in Walker and Ferguson are enough to justify that Nigel is carrying on a business, by providing flower bouquets on large occasions. The issue of the hot houses also adds more strength to the fact that Nigel has set up these inorder to ensure a year round supply of flowers on his property, to enable him to sell them.
Therefore, Nigel has been carrying on a business through generating income from his hobby on a regular and intentional basis, which concludes that the receipts he receives through selling these flower bouquets is ordinary assessable income, and not a capital receipt.
Question
Given that Paul has started up his own company inorder to work in conjunction with Yoyo Pty.Ltd, it is considered to be an alienation of income. However, under section 87 of the 17 act, the income that Swindon Pty.ltd receives cannot be alienated, due to that income being derived from Yoyo Pty.ltd. Therefore, the $75,000 that Paul's company receives is coming from one single source, which is known as personal services income (PSI). Inorder for Swindon Pty.ltd to be classified as a personal services business (PSB), it needs to be known whether the personal services business is in force, in other words if Swindon Pty.ltd was set up for the sole purpose of undertaking contract work for Yoyo Pty.ltd. Given the facts that are stated in the scenario, this is quite clearly the case.
Even though that Paul's company is clearly a personal services business, it must also be known as to whether that Paul is providing his own equipment under Section 87(18) and where the company's premises is located. For example, whether the company is located at Paul's home or at another location. Also under section 87 of the 17 act, it must also be known whether Paul is employing any other people besides his wife. However, under section 86-1 of the 17 act according to the core tax legislation (001,p.40) , the salary of $40,000 in which Paul receives from the rendering of personal services through his company will be treated as income under the ordinary concept. This is because that according to Kobetsky et.al (001,p.151) , receipts that are connected to the ordinary scope of a person's business is income according to the ordinary concept. This means that Paul's $40,000 salary and the $75,000 that Swindon Pty.ltd receives from Yoyo Pty.ltd is ordinary assessable income.
According to Section 86-1 of the 17 act, this will only be the case when the income belongs to Swindon Pty.ltd and the full amount is not promptly paid to Paul as a salary. Section 86-1 will not apply if the other entity (Yoyo Pty.ltd) is conducting a personal services business. However, there are limits which apply to the entitlement of dedudtions for Swindon Pty.ltd inorder to offset against the $40,000 which is treated as Paul's income. Section 86-5(1), demonstrates the following for the alienation of personal services income, as exhibited by the core taxlegislation(001,p.404)
(Swindon Pty.ltd)
Performance of
the personal
services
Supply the contract Contract Payments
(Yoyo Pty.ltd)
Salary PaymentsOther income
contract distributions
(Paul)
Therefore, Section 86-5() states that it has the effect of attributing thepersonal services entity's income (Swindon pty.ltd), from the personal services to the individual (Paul) who performed these services (unless that income is instantly paid as a salary). There are also certain deduction entitlements of the personal services entity (Swindon pty.ltd) which can reduce the amount of the attribution. Under Section 86-0(!) of the 17 act as outlined by the Core taxlegislation (001,p.405)_,the amount of Paul's personal services income, which is included in his assessable income under Section 86-15 could be reduced by an amount of certain deductions to which Swindon Pty.ltd is entitled. This deduction comprises of the $11,000 in operating expenses which Swindon Pty.ltd has incurred. As a result, the $75,000 that Swindon has received from Yoyo Pty.ltd will be assessable income because Paul dad formed the company for the sheer purpose of performing contract work for Yoyo Pty.ltd.
An example which emphasizes these tax consequences for Paul is in the case ofGP International Pipecoaters Pty.Ltd v FCT (10) 1 ATR 1. This is in which the company succeeded in gaining pipe coating work for the State Electricity Commission of Western Australia (SECWA). As outlined by Kobetsky (001,p.151), , the company was only created for the purpose of performing the contract, and as a result, the construction payments which were received by the company was within their ordinary scope of business. Therefore, the court ruled that the payments were income under these circumstances. This means that under Section 86-15(5) of the 17 act, the $40,000 which Paul has received would be assessable income.
As a result, if the only income in which Swindon Pty.ltd receives is from its contract with Yoyo Pty.ltd, then it is clearly assessable income.
By Adric Limneos
56400
000 Words.
BIBLIOGRAPHY
1.Kobetsky.M, Dirkis.M, O'Connell.A, (001),
Income Tax Text, Materials & Essential Cases, rd edn,
The Federation Press, Sydney.
.Barkoczy.S, (001),
Core Tax legislation & Study Guide, 4th edn,
CCH Australia.Ltd, Sydney.
.Australian Master Tax Guide, (001)
nd edn, CCH Australia.Ltd, Sydney.
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