Income Tax for Concept of Ordinary Income

Question:

Answer:

Introduction:

The receipt of $600,000 against the sale of the refurbished tennis courts is an ordinary income under section 6-5 despite the receipts are capital in nature because the property was purchased before two years and was with an intention to use for self and family and also a part to be converted to units to be sold for gain or profit so that the money used for purchasing the entire property will be covered to greater extent and as well Peta will also make some profits. The tennis courts were offered to be purchased from Peta is they are totally refurbished and repaired to its original state. According to section 6.5 of Income Tax Assessment Act 1997, the assessable income may be considered ordinary income if the receipt of the income is from ordinary source. The interpretation of Section 10.5 would give a proper idea of the assessable income. The ordinary income derived from any source for an Australian citizen to be considered as the ordinary income (austlii, 2016).

According to the Income Tax Assessment Act 1997 the income from the sales of capital assets is usually treated as Capital gain as Peta purchased the property is older than 12 months. Hence Peta will be eligible for 50% discount on capital gains arising out of the proceeds of the sale of the tennis courts. The case of California Copper Syndicate (Limited and Reduced) vs. Harris (1904) 5 TC 159 may be referred. However, the intention of the taxpayer, Peta is to resale the refurbished property. It was his intention to make profit out of it. Therefore the income out of the sale would be considered as business income. 

Concept of Ordinary Income:

There are various case references that can be used for the understanding of the nature of income. The hallmark characteristics of the assets are known as implicit in nature not the explicit in nature. The income has the characters of periodicity, regularity and recurrence. The mere receipt of any money cannot be considered as income. There is no specific factors that are relevant and important to ascertain whether the business income or the income is to be considered as business income.   

The case under High Court observed that the owner of the land was treating the land equivalent to stock although it has different character. Hence both High Court and Income Tax assessor agreed that land cannot be treated as stock and the court observed that the company is not having intention to do just business but to make profit out of these lands hence it charged the company with ordinary income out of net profit under section 6.5 of ITAA 1997. The relevance of ascertaining the ordinary income is as following;

The business is carried out and any receipt generated out of the business cannot be considered as business income.

The receipt of profit, which is the product of the business, can be considered as the business income.

There shall be sufficient connection which can establish that the receipt and the product of the business has substantial connection.

The profit or the gain from extraordinary transaction in course of the business, even if isolated or ‘one?off’ transaction generated profit is also to be considered as ordinary income.

Case laws to substantiate:

The actual consideration is being reflected in the judgment of FCT v Montgomery which says “If a profit or gain from such a transaction is treated as ordinary income, it would obviously involve only a net amount being income”. Based on that definition the following case will give an idea about ordinary income; Statham & Anor v FC of T 89 ATC 4070 case refers to 105 lots of land developed over four different phases and stages with an intention to acquire assets for capital asset realisation. Certain points are to be noted as per the ATO in such cases like;

Change of purpose with which the land or property is purchased.

If there is a business house with manager, office setup and printed letterhead.

If any further land is purchased and added to the existing land holding.

If there is any plan for making sub division of the existing land.

The inclusion of the land in the business accounts of the firm.

If any interest paid on money borrowed to purchase land is treated in accounts as expense or not.

If any plan is made to make subdivision with a purpose to build buildings on it.

Casimaty v FC of T 97 ATC 5135 case refers to a business known as Action View which carried out dairy production and some cropping activities. But with time the owner was getting too weak and feeble to continue business actively and started getting into losses. The owner does realised that he needs to sell his land into eight sub division to realise some profit to make the loss right. The Commissioner thus charged him with selling land to make profit and purpose of land development. On Appeal the owner gets relief that the sale of land thus made was with no intention to land development but to meet exigencies only (Carbone, 2016). 

Moana Sand Pty Ltd v FC of T 88 ATC 4897 case refers to that the party involved in purchase of land for sale of sand from the land and once the sand was exhausted the land was subdivided to make sales out of this and the Commissioner marked the company is making huge profit out land proceeds although the pain purpose of the purchase of the land was different and only sales is effected after the sand was exhausted. Despite the ruling is ambiguous the party accepted it as per the Commissioners stance.

2:(a)

The FBT or Fringe Benefit Tax is a tax in the hand of the employer incurred for various benefits given to its employees for the purpose of better functioning of the business or to say for better moral boosting for its employees or making rewards for their contribution in the business growth and development.

These FBT’s are of different types and of different usage and varies from person to person. The FBT is generally paid by the employer irrespective of the status of business nature (www.ato.gov.au, 2016).

Some of the thirteen different types of Fringe Benefit Taxes are as follows—

Car fringe benefit

Debt waiver fringe benefit

Loan fringe benefit

Expense payment fringe benefit

Housing fringe benefit

Living away fro home allowance fringe benefit

Airline transport fringe benefit

Car parking fringe benefit

Tax-exempt body entertainment fringe benefit

Property fringe benefit

Residual fringe benefit

Board fringe benefit

Entertainment

There are certain exemptions from fringe benefit for the employer also like religious institutions, public benevolent organisations, etc. The reduction of the FBT of ABC can be done if the entertainment expenses made by ABC but this will be same even it is 20 employees or it is 5 but this can be avoided by making this payment through reimbursement thus making payment indirectly by cash through the employees instead of ABC doing it directly, thus the impact of FBT will reduce in the hands of the ABC (ato, 2016).

As in the case of providing mobile worth $2000 to Alan could have been done indirectly by making this payment directly to Alan with salary and he will submit the bill to ABC with a prior approval to make such expense and will get the reimbursement for the same. Also for the payment of Alan’s children’s tuition fees for $20,000 which could have been directly included in the salary of Alan thus reducing the burden of FBT in the hands of ABC while there will be income tax burden in the hands of Alan (ato, 2016).

The other way to get exemption from the FBT is by way of getting the payment of FBT amount in each case realized from the employees by way of cash paid to the company here ABC and this will be treated as employee contribution towards the exact amount of the Fringe benefit tax involved in each such transaction. There is GST relief also in case acquisitions like the mobile purchased for Alan and for Food provided for all employees inclusive of GST (ato, 2016).

The following is the calculation of FBT;

Thus in this case ABC employed Alan for two years and provided him with;

Mobile phone                                                  Exempted as work related

Mobile Phone bill                                            Exempted as work related

Children’s tuition fees                         Taxable

Entertainment by food                        Taxable

The fringe benefit tax calculation:

Total Fringe benefit:

Children’s tuition fees             $20,000 (No GST Credit)

Entertainment by food                        $6,600 (GST Credit)

Total                                                                $26600

Type 1: higher gross-up rate (entitled to a goods and services tax (GST) credit)	Ending 31 March 2016 and 31 March 2017
FBT 49%	2.1463
Type 2: lower gross-up rate not entitled to claim GST	Ending 31 March 2016 and 31 March 2017
FBT 49%	1.9608

Children’s tuition fees    $20,000 x 1.9608 = $39216 x 49% = $19215.84 (FBT)

Entertainment by food            $330 x 2.1463 = $708.279 x 49% = $ 347.05671

(b)

The answer would be different if there were 5 employees present at the dinner. Then the dinner cost for every 5 employees would have been divided. The following FBT has to be paid;

Type 1: higher gross-up rate (entitled to a goods and services tax (GST) credit)	Ending 31 March 2016 and 31 March 2017
FBT 49%	2.1463
Type 2: lower gross-up rate not entitled to claim GST	Ending 31 March 2016 and 31 March 2017
FBT 49%	1.9608

Entertainment by food $1320 x 2.1463 = $2833.116 x 49% = $ 1388.22684 (FBT)

(c)

If the clients attended to the programme, FBT would have not been applied as it would have been considered as the business promotion expenses.

References:

Carbone, D., 2016. An Extraordinary Concept of Ordinary Income The Significance of FCT v Montgomery on What is Income According to Ordinary Concepts. [Online] www.austlii.edu.au Available at:   http://www.austlii.edu.au/au/journals/RevenueLawJl/2010/1.pdf  [Accessed 05 September 2016].

www.ato.gov.au, 2016. Do you need to pay FBT? [Online] www.ato.gov.au Available at:  https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/  [Accessed 05 September 2016].

www.ato.gov.au, 2016. FBT exemptions and concessions. [Online] www.ato.gov.au Available at:   https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/  [Accessed 10 September 2016].

www.ato.gov.au, 2016. How to calculate your FBT. [Online] www.ato.gov.au Available at:   https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/  [Accessed 05 September 2016].

www.ato.gov.au, 2016. Work-related items exempt from FBT. [Online] www.ato.gov.au Available at:   https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/  [Accessed 05 September 2016].

www.austlii.edu.au, 2016. INCOME TAX ASSESSMENT ACT 1997 - SECT 6.5. [Online] www.austlii.edu.au Available at:   http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html  [Accessed 30 Augustus 2016].

 

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