Bachelor of Accounting and Finance Research Essay

According to the Australian Tax Office

A citizen’s assessable incomes must include the following: “The incentive to the citizen of the majority of all stipends, tips, remunerations, benefits conceded to him in regard to, or for connection specifically or indirectly to, any work of recompenses, tips, pay, benefits, rewards and premiums permitted, given, or services rendered by him, regardless of whether so permitted, given or allowed in cash, merchandise, arrive,

Taxpayers and the revenue body however, have recently found themselves at odds. This is due to misunderstandings on the implications of certain transactions as far as tax liability is concerned. This paper delves into matters arising from the various case studies presented. Previous case laws will be given prevalence in determination of whether the incomes in dispute are to be subjected to taxation or not.

The case study closely examines two Australian residents; Allan and Betty. The first situation of a tax possibility is when they decided to sell their home in order to acquire a larger home. Such an incidence would either lead to a gain or a loss. The case study is very silent on whether they made a profit. In case they made a loss, there are no taxes that would apply on the monies received. However, if they made a gain, for the gain to be exempted from taxation, it would depend on whether they meet the conditions set by the revenue authority. The conditions require that; the family must have lived in the residence in the entire period they have owned it, the house must not have been applied for any commercial purposes whatsoever, and it should be on land which is 2 hectares or less (Mahoney, 2004). The house will also qualify for partial exemption from taxation if the following conditions are met: the residence was Allan and Betty’s main dwelling place for only part of the time they owned it, either of the members has another different home, the land in which the home is attached has been used to generate income in one way or another, and the land is more than two hectares (Mahoney, 2004). Therefore, the question of whether the proceeds from the house are subject to taxation or not, will depend on whether the above conditions have been met. Since the case study is very silent on whether the aforementioned conditions are met, it is probable that Allan and Betty will not be subject to any tax liability, from any potential gains arising from the transaction.

Betty’s part time job is taxable since the benefits she receives from the employment can be directly traced to her job. The tax legislation in Australia does not exempt any employment income from being subjected to taxation, whether it is a full-time job, part-time job or even a casual job (Campbell, 2010). The fees which Mr. Allan receives from offering services are fully taxable, as well as the gifts he receives from the elderly. The gifts are taxable because they are in relation to his profession. The rationale behind this is that he would not be given the cakes and scones if he were not offering the services. Under the tax laws in Australia, a gift such as wine, which Mr. Allan received, that is consumed at home and not at the work place or a social gathering, will be exempted from taxation if it is $300 or less. In this case, where the retail value of the wine was $360, the amount will not be exempted from fringe benefit tax.

Given the dynamic nature of businesses in the recent times and taxation alike it is imperative that a clear distinction between a hobby and a business be made, in order for the tax payer to do tax planning, so as to understand any potential tax liability that may arise in the future. For an activity to be classified as a business, it has to meet among other conditions. The activity must have been registered as a business with the relevant statutory body, the intent of the individual must be profit generated, the activity should be repeated severally, the activity must be large enough to be a likened to other activities in the same industry, the activity must be carried out in a planned manner and in such a way that business records are kept. On the other hand, a hobby is an activity which is carried out for leisure or to pass time. The major distinguishing factor between a hobby and a business is that the hobby is not carried out with the motive of making profits, whereas the business is carried out with the passion of making an extra dollar in mind (Mahoney, 2004).

An example of a case law regarding a hobby and a business is that between commissioner of taxation and Stone (2005). The respondent served in the police force and in addition participated in javelin as a hobby. In the year of income under review, she received some benefits in kind for her participation in various events and grants by the Australian Olympic committee and Queensland Academy of Sport, as fees for appearances she made and prize money. The appellant commissioner adjudged that all her receipts consisting of taxable income from the respective year of income are to be under review. The respondent however did not agree with this position, and decided to appeal. After many series of court appeals, it was finally held that the appearance fees she received constituted part of her taxable income for that year (Smith, 2006). The facts of the case are similar in that in both incidences the taxpayers turned a hobby into an income generating activity. Had they not carried their hobbies with an intention of generating revenues, the so generated incomes would not qualify as assessable. Otherwise the incomes are taxable.

Throughout the case study, there are several situations which give rise to tax obligation. Firstly, according to tax legislations, the expenses spent by Betty and Allan in order to gain knowledge on organic farming are an allowable expense against incomes generated. This is because it is directly traceable to the economic activity they are undertaking. The marmalade and relish incomes received by the residents will be subjected to a tax. Although their initial motivation was not to make profit, they ended up making excess money, and thus the profits will be subjected to taxation. Since they do not keep business records for their transactions, they will not be in a position to deduct allowable expenses from the expenses incurred in generating these incomes (Smith, 2006).

The case study also brings light to a barter trade situation which is simply carrying out trade transactions without using money. According to Australian tax laws, barter trade incomes and expenses incurred in the process should be treated just like the normal monetary expenses and incomes are treated. Thus, no special concessions are to be extended in barter transactions. The participants’ incomes from the barter will be subject to taxation. The expenses they incur will also be deductible for tax purposes (Mahoney, 2004). An example of a barter transaction case law is that between Taxology Pty ltd vs. commissioner of taxation (2016). In the case, the applicant (Taxology Pty ltd) had objected the decision by the revenue authority to assess the incomes made from barter transactions. The court held that such incomes under dispute were assessable as they constituted incomes received ordinarily from carrying out a business. The facts in the case are similar to the once in our case study given that the transactions presented herein are profit oriented and as such the profits made shall be subjected to taxation.

The $650,000 receipt from the transfer of property transaction will be treated as income received ordinarily in the process of carrying out a business activity. This is because Mr. Allan had already put the house for business use by renting the house to a third party. As such, it is an income which will be subject to taxation. It will be assessable under s 5-6.If the transfer of the property did not qualify as income received in the ordinary course of doing business, that is in both section 5-6 and section 15-15, then the proceeds received will not be subject to any taxation (source).

If the proceeds are not income by ordinary concepts then the way the cost of the land is valued will slightly change, as compared to if the transaction generated receipts in the ordinary way. The cost of land will include the upfront money paid to the initial owner, and also the necessary expenses incurred during the transfer process. This will include costs like stamp duty, legal costs paid for conveyance to be effected to the third party, the water rates and the council rates. An addition of these figures brings the total cost to $260,580.The cost of the house will be calculated by adding the cost of the land in which it is attached, and the expenses which were used during acquiring of the land. Addition of these figures provides a cost of $498,250.This implies that when calculating the capital gain which was realised under the transaction, the total cost will have to be subtracted from the gross proceeds. The court case of Hope v Bathurst City Council (1980) is the most suitable for this case. The respondent in the case had included his personal expenses while calculating the cost of the house he was selling. These expenses could not in one way or another be traced to the house. It was held that such behavior was repugnant and retrogressive. The respondent thus ought not to have included such expenses in determination of the cost of the residence (Auerbach, 2009).

In order to calculate the capital gain the total costs involved are subtracted from the incomes received. Subtracting $600,000 from $650,000 provides a capital gain of $50,000.This amount will be subjected to a tax. If the transaction in an unlikely event yielded a capital loss, the amount would not be taxable, but rather the tax payer would recover the losses from future transactions, if his/her business activity involves buying and selling of property. Capital losses are very rare due to the appreciating nature of property and land. The relevant case law can be drawn from the court case of F.C. of T. v McDonald (1987).In the court case, the respondent had been sued by the commissioner of taxes for failing to declare the capital gain he had made from the sale of his rental property. He had included expenses of capital nature in determining his capital gain/loss. In doing so, he found that he had a capital loss, and thus to him no tax liability was going to arise. However, it was held that items of capital nature should not in any way whatsoever be subtracted from the gross proceeds of a capital transaction. Instead, capital allowances should be claimed (Poterba).

The case of Allan and Betty highlights some of the situations that confuse taxpayers when filing their tax returns. Taxpayers should therefore acquit themselves of the existing tax legislations as well as previously determined court cases to avoid violating the tax laws of the country. The understanding of the tax legislations will enable them arrange their tax affairs prudently in a bid to reduce their tax liability.

Bibliography

Auerbach, A. (2009). Retrospective capital gains taxation. New York.

Brown, P. K. (2010). Stock return seasonalities and the tax-loss selling hypothesis: Analysis of the arguments and Australian evidence. Melbourne: Journal of financial economics.

Campbell, I. W. (2010). Casual employment, part-time employment and the resilience of the male-breadwinner model. Gender and the contours of precarious employment.

Devos, K. 2. (1999). Tax evasion behaviour and demographic factors: An exploratory study in Australia.

https://www.ato.gov.au/law/view/. Taxation.

Mahoney, D. D. (2004). Taxation in Australia. MELBOURNE.

Poterba, J. 1. Venture capital and capital gains taxation. Tax policy and the economy.

Smith, J. 2. (2006). Taxing popularity in Australia.