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Taxation Law Research Assignment

Question:

Advise Sarah regarding any relevant tax implications arising from the above facts in relation to the 2018/19 income year. In your answer, make sure that you apply the HIRAC methodology and refer to any relevant cases, legislative provisions, tax rulings and principles of tax law, and include any relevant calculations.

Solution:

Introduction -
This report provides advice for Sarah about tax implications that incurred in the year of 2018-19. It makes use of the HIRAC methodology to analyse XX types of tax items based on relevant rules and cases.

Heading: Assessable income and allowable deductions for Sarah in the year of 2018-19

Issue 1 -Are the $ 120,000 salary from the accounting company and the $ 20,000 salary from the community college assessable income?
Rules -
PP's 11:Section 6-5(1) of Income Tax Assessment Act, 1997, states that assessable incomeis the income received regularly or periodically, rather than in a one-off manner.Assessable income includes all the ‘ordinary incomes' which are earned by the individual during the tax year.
FC of T v Dixon : The court held that the war veteran received ordinal income from his previous employer because of its regularity and the reliance of the taxpayer.
Application -a strong nexus presents between Sarah and the jobs of accounting and teaching.
Conclusion -$ 120,000and $ 20,000 are considered as her assessable income which will be taxable for the relevant tax year 2018 -19.

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Issue 2- Is the $5,000 cash awardreceived by Sarah from Chartered Accountant Association accounted for income tax purposes?
Rules - Section 6-5(1) includes incomes from personal skills and exertions to be a part of assessable income.
Application -The cash award of $ 5000 will be assessable income received by Sarah as incomes received from third parties forms a part of ordinary income if the amount is recognizable and incidental to employment or profession of the recipient.
Conclusion -The $5,000 cash award also becomes part of ordinary income of Sarah and hence it will be considered as her assessable income which will be taxable for the relevant tax year 2018 - 19.

Issue 4 - Is travelling cost incurred by Sarah from accounting firm to college an allowable deduction teaching job from the community college?
Rules - Section 25 - (100) of Income Tax Assessment Act, 1997, travel expense between workplaces where income is being produced and none of the place is the assessee's home, then the travel expenses are allowed as deduction.
Case law -F C T vs Payne
Application - according to the section 25 - (100), the travel expense incurred by Sarah for travelling between accounting firm to college is allowable deduction because neither of the lace is the tax payer's home . the case of Sarah is quite different from Payne case because in Payne case out of the 2 travel place one was his home so the travel expense were not allowed as deduction but here in case of Sarah both the travel places are work places and travel expenses of $ 2000 will be deductable from the taxable income for the relevant tax year 2018 - 19.

Conclusion-Sarah's travel expenses will be allowed as deduction from the taxable income.

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Issue 5 - Is price money of $ 40000 received by Sarah from long jump competitions and the money received for appearing at various major sports event amounting to $ 40000 bea part of assessable income of Sarah for the tax year 2018 - 19? She also received a coffee making machine whose market value is $ 3000 is this also a part of Sarah's assessable income?
Rules - Section 15 - (2) of Income Tax Assessment Act, 1997, states that assessable income of the tax payer include any allowance, compensation, bonuses, premiums, gratuities and benefits which are provided to a tax payers in relation to his / her employment either directly or indirectly. The benefit received in cash and in kind both will be considered a part of assessable income of the tax payer, and will be a part of his / her taxable income and will be liable to tax.
According to section 23 L of Income tax assessment act, 1997, where any income received by an assessee which amounts to be derived from non cash business benefit in the year of tax and the total amount of such non - cash benefit is $ 300 or less then this non - cash business benefit is an allowable exemption.
Case law / tax ruling -I T 167 - states that any reward or price won by the tax payer and this reward is incidental to the income producing activity of the tax payer, then in such circumstance the reward, either in cash or in kind will form a part of tax payer's taxable income. In instance where assessee makes regular appearances' in events, t. v, radio then the reward or honorarium will be a part of his / her assessable income. Where the award or / and reward is provided to the assessee in kind the market value of the award will be included in the assessable income of the assessee.
Application -in the given case Sarah is a professional long jump athlete and has participated in many events and won prizes hence the income earned on these eventswill be assessable income for Sarah.
Moreover she received a high quality coffee making machine, the market of which was $ 3000. So the total assessable income from sports and appearances for Sarah will be $ 83000. This income will be taxable in the tax year 2018 - 19.
Conclusion-the money received from participation in sports and award of coffee machine will be taxable and added in the assessable income.

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Issue 6 - Is sale of antique furniture a C G T or not?
Rules - Section 108-10 (2) of Income Tax Assessment Act, 1997, as per section 180 - 10 (2) collectables are defined in the category of C G T assets which are held for personal use by the tax payer for example - art work, painting, antiques and jewellery and so on.
Section 108 - 10 (1), of Income Tax Assessment Act, 1997, states that any gain or loss from the sale of collectables which will amount to $ 500 or less will be disregarded and not included in the taxable income of the tax payer.
Moreover as per section 108 - 15, where the below mentioned 3 conditions are satisfied then the collectable comes under the ambit of C G T and the sale of collectable becomes a taxable event liable for tax. The 3 conditions are as follows -
1. The collectable is a set
2. If disposed off it will be disposed off as a complete set.
3. If the disposal is done in one or more transactions to get the $ 500 exemption under section 108 - 10 (1)
Application - Sarah disposed of the collectable per piece which was actually a complete set so that she would get the exemption under s108 - 10 (1), but s108-15 overrides the s108-10(1) so the sale is considered as sale of complete set of collectable and the exemption will not be given because the collectable set was purchased at a higher rate than $ 500. The event of sale becomes a C G T and the amount of capital gain is $ 2850 ($ 4400 - $ 1550), liable to tax.
Conclusion -capital gain will be charged on the sale of collectable.

Issue 7 - Will sale of Holiday homes, Central Coast result in C G T gain / loss?

Rules - Section 104 - 10 of Income Tax Assessment Act, 1997, deals with C G T event A 1. The time of event is when the contract is entered in to and not at the time of actual sale or when the sales consideration is received. In cases where there is no contract the event A 1 takes place when the ownership exchanges hands.
Section 116 - 20 , of Income Tax Assessment Act, 1997, states that the capital proceeds will include the money received plus the market value of the property received, if any
Application -in case of Sarah the contract was entered in to tax year 2018 - 19, that is May 18 though the sales happened in July 19, which is irrelevant. In the given case section 116 - 20, of Income Tax Assessment Act, 1997, will also apply and the total sales proceeds of Sarah will be $ 1.5 million ($ 1.2 million value for holiday homes and 0.3 million complex value).

Computation of capital gain from sale of holiday homes -

Sales consideration                                                          $ 1,500,000

Less - cost of purchase                                                -   $ 1,000,000

Less - legal fees and stamp duty (purchase)                -         $ 7,000   

Less - legal fees (sales)                                             -          $ 1,000

Less - Initial repairs                                                     -           $ 3000

Less - interest on mortgage                                         -       $ 100,000

Less - capital improvements                                        -         $ 50,000

Capital gain / loss                                                                $ 339, 000

The C G T discount of 50% will be applied because the property for more than 12 months.

Taxable value of event = $ 169,500

Conclusion -capital gain on sale of holiday home will be taxable.

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