Hobby vs. Business Income Tax

This assignment analyzes the legal distinction between hobby activities and business ventures from a taxation perspective. It utilizes the case of Betty and Allan who earned income through selling homemade marmalade in a barter system to illustrate key concepts. The document delves into Taxation Ruling TR 97/11 and relevant case law to define the criteria for classifying activities as businesses. It further explores the application of the Income Tax Act 1997 and Goods and Services Tax (GST) regulations to barter transactions, emphasizing that such arrangements are treated similarly to cash or credit sales for tax purposes.

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................7
Section A......................................................................................................................................7
Section B......................................................................................................................................8
Section C......................................................................................................................................8
Section D......................................................................................................................................9
References:....................................................................................................................................10

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Answer 1
It can be mentioned that any benefit paid to employees in addition to the wages and salary
payable to them are referred to as Fringe benefits as stated in the Fringe Benefits tax Assessment
Act 1986. To establish the provisions of tax legislation dealing with fringe benefits and tax
liabilities of employees a beneficiary relationship between the employer and employee has to be
proved
It is to be mentioned that section 7 of the Fringe Benefit Tax Assessment Act 1986 deals
with the provision of the fringe benefit related to car. According to this section of the
aforementioned act it can be mentioned that if an employee is allowed to use the car, owned or
taken on lease by the employer, he will be held liable to pay fringe benefit tax. Even if the car is
used by the associates of the employee for private purpose and not used by the employee
himself, the employee will be liable to pay fringe benefit tax (Bravermanet al. 2015).
It is to be mentioned that statutory formula method or the operating cost method is to be
used for calculating the taxable value of the fringe car benefits. The same is stated in section 9 of
the Fringe Benefit Tax Assessment Act 1986. The real cost of the car is to be considered for
calculating the taxable value of the fringe benefits by the statutory formula method. However,
the operating cost of the car is calculated while assessing the value of taxable fringe benefits by
the operating cost method. Of the two aforementioned methods , the one which yields the lowest
value will be considered to ascertain the FBT. All necessary documentation is necessary for
using the operating cost method.

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Facts:
In this case study, Charlie is an employee of Shin Holmes Pty. Ltd. He has been provided
with a car which is defined as a four wheel drive sedan car. According to the provided facts of
the case it can be stated that the car was being used for private purposes as well as for work
purposes. Therefore it can be stated that car provided to Charlie by Shiny Pty ltd. will be
assessed for fringe benefit tax (Woellneret al. 2016).
As mentioned before there are two methods for to calculate taxable fringe benefit value to
ascertain FBT. It can be said that under the statutory formula the taxable value of fringe car
benefits is set at twenty percent. Therefore 20% of the value of the car is multiplied with the
value of the car which is the base value. To what extent the car has been used for private
purposes is not considered to be relevant while calculating the taxable value according to the
statutory formula method (Barkoczy 2017). However, under the method of operating cost, the
total operational cost of the car is separated and segregated proportionately into the categories of
private and work purposes in order to ascertain the taxable fringe benefit value of such car(Gale
and Samwick 2014).
Statutory method

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Operating Cost Method
It can be mentioned that the depreciation of the car is calculated at a rate of 25% by using the
formula as provided in sub-section 11(1).
However the interest is calculated according to the formula as provided in subsection
11(2). The interest rate has been fixed to 5.65% for the years 2016/2017

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The taxable value of fringe benefit for the car is lower if it is calculated using the
statutory formula method and therefore the same method is to be considered for ascertaining its
value. It can be said that in addition to this Shine limited had hired the car for wedding purpose
therefore the charge of which must be added to the taxable value of fringe benefits. Honeymoon
accommodation provided Shine ltd. is also a fringe benefit and therefore should be included in
the taxable value. However according to section 39 of the aforementioned act it can be said that
parking fringe benefits arise in case the car is parked in the premises which is not applicable in
this scenario.
Question 2:
Part A

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It is to be stated that Betty and Allen have decided on change of the tree, therefore the
sale of their house in Melbourne and acquisition of property in Central Victoria will not impose
any tax burden on them. Betty and Allan are part time accountant and locum doctors
respectively. Therefore their incomes will be subjected to income tax separately according to the
provisions as stated in Income Tax Assessment Act 1997. In this chosen case study it can be
stated that Allan is popular among the elderly clients and due to the same he receives homemade
cake and food as token of appreciation along with the fee charged by him. However, homemade
foods and cakes will not impose any tax burden as all these commodities are considered to
products which are non-commercial and without any market value. However, the wine received
by Allan is priced at 36$ dollars in the market and therefore will impose tax consequences as the
market price of the wine would be added to the income of Allan and taxed afterwards. The same
would be assessed to ascertain the income tax liability of Allan under the Income Tax Act, 1997
(Nijland and Dijst 2015).
Part (b):
The taxation Ruling TR 97/11 has some indicators to determine whether an individual
has been engaged in some business. The differences between the businesses and hobbies
according to the ruling of Taxation Ruling TR 97/11:
 The activity and its purpose is significant in determining whether the activity s
business or hobby. If activity of an individual has significant commercial purpose, it
would be considered to be a business activity
 If the purpose of activity of an individual is to earn profit it would be considered to
be a business activity.

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 In business activity there is an employer and employee relationship which is
nonexistent in case of hobbies
 Business activity involves investment of a large amount
 Business activity needs to be carried on in a premises which is not the case for
hobbies.
In the remarkable case Cooper Books Pty Ltd vs. Commissioner of Taxation of Commonwealth
of Australia the court clearly specified the criteria for distinguishing hobbies from business
activities (Kimet al. 2015).
Part C:
It is t be mentioned that if a client transforms his hobby into business activity and earns
significant profit then such client would be liable to pay income tax for the profit earned. In this
chosen case Betty and Allan converted their hobby of gardening into a business activity as they
generally received 500 to 600 dollars by selling marmalade (Woellneret al. 2016). This system of
barter is to be assessed by the provisions of Income Tax Act 1997.
Part D:
Barter transactions in Australia are charged under the provisions of GST and ITAA in the
country. It is to be mentioned that business transactions which involve barter are to treated as just
any other cash or credit transactions. Such barter transactions would be subjected to tax
computations under the provisions of GST and IITA. Therefore, it can be assumed in this case
that the barter system which was set up by Betty and Allan will be treated as any other cash or
credit transaction and will be subjected to income tax and GST (Akinset al. 2014).

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References:
Akins, B.W., Chapman, J.L. and Gordon, J.M., 2014. A whole new world: Income tax
considerations of the Bitcoin economy. Pitt. Tax Rev., 12, p.25.
Barkoczy, S., 2017. Core Tax Legislation and Study Guide. OUP Catalogue.
Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative
Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, p.1.
Gale, W.G. and Samwick, A.A., 2014. Effects of income tax changes on economic growth.
Kim, P.H., Longest, K.C. and Lippmann, S., 2015. The tortoise versus the hare: Progress and
business viability differences between conventional and leisure-based founders. Journal of
Business Venturing, 30(2), pp.185-204.
Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands:
Interrelationships and company, employee and location characteristics. Transportation Research
Part A: Policy and Practice, 77, pp.358-371.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law
2016. OUP Catalogue.