Tax Assignment Question Answer 2022

Running head: TAX ASSIGNMENT
Tax Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Sale of Property............................................................................................................................2
Sale of Business Share.................................................................................................................4
Additional Payment......................................................................................................................5
Answer to Question 2...................................................................................................................6
Bibliography...............................................................................................................................10

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Answer to Question 1
Sale of Property
Issue
In the given situation, an accountant called Jason and his wife Kylie sold their house in
Melbourne for $820000 on 15 June 2019. This house was provided to Jason by his grandmother
through her will. She passed away in 2011. At the time of her death, the value of the property
was $480000. This property was initially purchased in November 1984 for $70000 and was used
for residential purposes ever since. The tax liability of Jason is to be determined in this case.
Law
According to the taxation guidelines in Australia, a property which is an inherited dwelling is
exempt from tax depending on the time of acquiring the property, time of the death of the owner
of the property and the residential status of the owner at the time of their death ("Inherited
dwellings", 2019). It also depends on the purpose for which the inherited property was used for.
Due diligence has to be applied to know whether the property was used for residential purposes
or for the purpose of renting it out to others. In order to determine the amount of tax, there are a
number of issues to be considered to determine the amount of tax in the hands of Jason. The
rules of the Australian Tax Office suggest that for a property purchased before 20 September
1985 by the deceased person and the inheriting of the property also occurs before 20 September
1985, any capital gain on dispose of the asset is exempt from Capital Gains Tax ("CGT
exemptions for inherited dwellings", 2019). Another situation is where the property was acquired
on or before 20 September 1985 and the death of the person occurs on or after 20 September
1985 and if the dwelling was not used for any other income producing purposes other than

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residence, then the entire capital gains tax would be exempt. In case if the property was sold
within two years of the death of the person, then the property would have been exempted from
capital gains tax. The fact whether the property was used as a main residence or not is irrelevant
here. If the property was not sold within two years from the death of the person, then the fact that
whether the property was the main residence of the person acquiring it from the deceased is
considered. If the property was the main residence of the acquirer and it was not used for any
other income producing activities, then the capital gains tax would not be applied. Otherwise,
only a partial exemption would be allowed. Hence, it can be suggested that the entire amount of
$82000 is exempt from capital gains tax in the hands of Jason. For a property acquired after 20
September 1985, Capital gains tax is disregarded if the property was transferred before, on or
after 20 August 1996 and was used only as a main residence and not for producing any business
income.
Application
The property was acquired in November 1984 by Jason’s grandmother. This was before
20.9.1985. She transferred the property to Jason in 2011 and the sale took place in 2019. Hence,
the sale of the property took place after more than two years of transfer of the property. Ever
since purchasing the asset, it was the main residence of the grandmother and Jason until the sale
of the same. It was not used for any other purposes other than for residential use before the death
of the grandmother. Even after the death of the grandmother, until the date of signing the
contract for the sale of the property, it was not used for anything other than residential purposes.
No business income was generated through the use of the property.
Conclusion

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From the above mentioned case rules, it can be suggested that as the property, ever since
its transfer to Jason from his grandmother was not used for anything other than residential
purposes. Even before 2011, the grandmother resided in the property and transferred it to Jason
through her will. Even though the property was sold after 8 years after the death of the
grandmother, it was not used either partly or fully for any income generating purposes and meets
all the other guidelines regarding the regulations guiding residential properties obtained through
a will. Hence, it can be suggested that the entire amount of $820000 is to be exempted from tax
in the hands of Jason.
Sale of Business Share
Issue
The sale of the house was not the only sale that took place during the year. In order to
purchase an Accounting business in Merimbula, Jason had to sell his share in the Accounting
partnership in Melbourne to his partners for a consideration of $900000 for his share. This
consisted of his share in the plant and equipment of $100000, $500000 for work in progress and
the balance amount of $30000 as a part of the goodwill.
Law
Part IIIA of the Income Tax Assessment Act 1936 is related to the application of capital
gains and capital losses provisions to the disposal of partnership assets and partnership interests
by the partners who hold a share in the partnership. According to the general law guiding
partnerships in Australia, a partnership is not a separate legal entity and cannot be distinguished
from the partners who comprise it. As held in the case of F.C.T. v. Everett (1980) 143 CLR 440,
“A partner does not have any title to the specific property owned by the partnership, he has a

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beneficial interest in each and every asset owned by the partnership firm.” Once a partner quits a
partnership, the ownership and access of the mentioned assets lies with the old partners and the
departing partners have no access to the existing assets of the old firm ("Legal Database", 2019).
According to subsection 25(1) of the Income Tax Act, 1936 an isolated transaction refers to
those transactions that occur outside the ordinary course of the business of a taxpayer carrying on
a business and transactions entered into by non-business taxpayers. With regards to isolated
transactions, the most important aspect to determine is the profit making intention of the
taxpayer. If the intention of the taxpayer for entering into a transaction is to earn profits, then it
would be considered to be income earned in the ordinary course of business. If it is received as a
part of a payment received to further carry on a business, then the amount received by the
taxpayer is to be calculated as a part of the capital account.
Application
In the given situation, Jason has sold his share in the business as a part of his relocation in
which he is moving to the town of Merimbula and leaving the town of Melbourne. He has
received a payment of $900000 for his share in the partnership and it also includes the amount
received for plant and equipment, work-in-progress and goodwill. Although this is not a
transaction that takes place in the ordinary course of business, the amount being received by
Jason in the purchase of a new accounting business. The structure and set-up of the new business
is also different from that of the old firm in which he was operating as a partner. As has been
stated, the new amount is being used by Jason as an investment to purchase the new business.
This income is not being used for any other purpose or to enjoy the profits earned from the sale
of shares in a manner that is not related to the business. Hence, the amounts received by him are

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to be charged to the capital account as they are received as a part of his efforts in setting up a
new business and not in any other manner.
Conclusion
In the given case, Jason is a partner in a partnership. However, in order to facilitate his
move to Merimbula and acquire a new accounting business in that area, he has sold his share of
assets and goodwill in the firm. The amounts are to be included as a part of the payments
received for setting up a new business and not in any other manner. These are to be included in
or charged to the capital account as the amounts are not earned during the ordinary course of
business.
Additional Payment
Issue
After selling his share of assets and other amounts in his old business partnership, Jason also
received an amount of $100000 from his old partners as a part of an agreement through which he
was not allowed to approach any of the clients belonging to the old partnership to join his new
business for a period of two years. This was a move on the part of the firm to ensure that losing a
partner does not have an immediate significant impact on the business and its shares.
Law
In order to determine the correct amount of taxation in this case, it is imperative to
understand whether the amount was received as a part of the ordinary income under section 6-5
of the Income Tax Act 1997 (ITAA 1997). As held in the case of Transport Workers Union of

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Australia (1989) 34 IR 179, parties are free to determine the nature of contract between
themselves. However, their own characterisation of the contract cannot be deemed to be
conclusive. A court is free to look at all the terms of a contract to be able to determine their
nature and need not take the description of the parties into consideration. Hence, it is of primary
importance to determine whether the income generated by the parties under an agreement signed
by the parties under the non-compete agreement in this case constitutes income or not. In the
case related to Allied Mills Industries Pty Ltd v. Commissioner of Taxation (1989) 20 FCR 288;
89 ATC 4365, the taxpayer received a huge lump sum from the company for giving up his right
to manufacture a certain product ("Legal Database", 2019). The Federal Court held that the
amount received by the taxpayer was income. This was because the amount received by the
taxpayer did not part with the right to carry on another business or did it dispose the fixed
structure which was being used to carry on the business. This payment was characterised by the
court as a payment for the loss of profits.
Application
In the given situation, Jason has given up his right to approach the old clients as a part of
an agreement with his former partners. Though, he has received a payment of $100000 for the
losses incurred by him for not competing with his former partnership. As suggested above, the
amount is being received by him as a compensation for the losses incurred by him and is being
used in further carrying on a business which was acquired by him as a part of an agreement. The
situation is similar to that of the Allied Mills case. This will be a part of the revenue account as
the amount is being received by him to compensate for the ordinary course of income being lost
by him. Although it does not occur in the daily business, the estimate is paid for over a period of

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two years and is to be taken as part of the income received during the ordinary course of
business.
Conclusion
As Jason has given up his right to approach the clients of his old business, he has given
up a right to make profits from his business. However, as he is receiving a compensatory
payment for the same, no loss is being incurred by him. Hence, this can be considered to be a
payment being received in the due course of the business and is to be charged for taxation
purposes under the revenue account.
Answer to Question 2
Fringe Benefits
Fringe benefits are the benefits provided by employers to employees. They are usually
provided to attract and retain employees who have been performing on a very high level ("Fringe
Benefits Tax (FBT)", 2019). Fringe Benefits Tax is separate to that of income tax and is
calculated on the monetary value of the fringe benefits provided. Some of the fringe benefits
include discounted loans provided to employees, reimbursement of expenses incurred by
employees, providing benefits like usage of vehicles for work and private purposes to employees
by employers. However, this does not include salary and wages, shares purchased under
employee stock acquisition scheme and other related factors.
Issue
In the given case, Kylie is working as a car salesperson for BMW. She earns a fixed
annual income of $60000 and also gets a commission of 10% on any cars in which she is directly
involved in the sale. It has been stated that she is very good at the job she does and hence earns a

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variety of benefits as a part of the employment contract. She drives one of the latest models of
BMW which cost her $78000. This car can be used for her private purposes and also on
weekends. Other benefits provided to Kylie include a fully paid mobile phone worth $1500 per
year and a laptop whose worth is $2400 per year. Apart from these, she also receives a clothing
allowance of $1000 and a dry cleaning allowance of $500. This is because she is required to
dress in a professional manner, which is one of the most important requirements of her job. Due
to the fact that Kylie is exceptional at her job, she also received an all-expenses paid holiday to
Thailand, which was worth $8000. The tax liability of these expenses is required to be
determined in this case.
Law
According to the Fringe Benefits Rules in Australia, for vehicles to be exempt from
fringe benefits tax, they should either meet the definition of a business vehicle or should be
mostly used for work related and work to home travel, with only minor, infrequent or less private
usage. According to the guidelines mentioned by the Australian Taxation Office, a car is either a
sedan or a station wagon or a goods carrying vehicle with a capacity of less than one tonne and
any other passenger-carrying vehicle with a capacity of less than nine passengers. In case the
vehicle is not a car and the employee uses it for private purposes, then the vehicle may be
referred to as a residual fringe benefit and not a car fringe benefit. Another important aspect to
note in this situation is the private use by an employee. A car is said to be used for private
purposes if the employee or their associates use it for private purposes on any given day. Even if
the employee does not use it, it would regarded as kept for private use even if it is parked at the
garage of the employee on a given day. Other fringe benefits provided by the employers that are
exempted include mobile phones and laptops. These are exempted only if they are put to use

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primarily as a part of the person’s employment. If the items are identical in usage, then the fringe
benefits are limited to one item. In case of a replacement item, then benefits are available in case
of both the devices. In case of clothing, fringe benefits are exempt if the taxpayer is able to prove
that the clothes were used as a part of the job description like uniforms, protective clothing and
other forms of distinctive clothing. However, written records must be kept for claim amount
exceeding $150 and total claim for work-related expenses exceeds $300. In this case, the amount
of deduction is available only for the actual amount spent on clothing and dry-cleaning. While
there is no specific provision for amounts related to entertainment fringe-benefit tax, providing
employees or their associates with entertainment through food, drink, accommodation or travel
with regards to such entertainment forms a part of the fringe benefits provided in Australia. This
includes meals, drinks and other forms of staff associations like Christmas parties, staff
gatherings and office parties. Providing employees with tourist weekends and paid holidays is
also a part of the fringe benefits. In case, the value of the fringe benefit provided to employees
exceeds $300, then the small benefit exemption will not be available to the employees. This is
also applicable to all paid holidays provided by employers to employees as a part of their
employment.
Application
In the given situation, Kylie is provided with a large number of fringe benefits by her
employer. However, the fringe benefits do not include the amount of $60000, which is her fixed
salary per annum and also does not include the amount of 10% commission received by her on
the sale of cars. This is because the amount is a part of her employment contract and hence,
cannot be included under fringe benefits provided by the employer. Some of them include
entertainment fringe benefits, car fringe benefits, clothes and laundry related fringe benefits

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along with mobile phone and laptops. The taxability of these fringe benefits differs with regards
to various benefits. As for the car provided to Kylie, there is no exemption available as the car is
being put to personal use by her on weekends and non-office hours. As per the fringe benefits tax
rules mentioned above, no exemption is available to Kylie in this regard. Hence, the entire
amount of $78000 is computable for tax purposes and no exemption is available in this case. As
mobile phone and laptop are very necessary for her to carry on her business and keep a track of
the business conducted by her, the entire amount of $4000 is exempt from fringe benefits tax in
the hands of Kylie. Clothing and laundry are also of primary importance to her in conducting her
job in a successful manner. Although, the expenses related to both the expenses exceed $300 in
this case. The laundry costs $500 per year and the clothing expenditure exceeds $1000 on an
annual basis. Hence, Kylie is required to maintain written records on an annual basis. These
records would be useful in claiming deductions from the amount to be paid as a tax. Otherwise,
Kylie would be liable to pay tax on the entire amount of $1500. With regards to the
entertainment related fringe benefit provided to her by the employer, there is no tax deduction
available. This is because the amount of entertainment benefit provided by the employer to Kylie
exceeds $300. Hence, this is not covered under minor fringe benefits. Hence, it can be advised to
Kylie that the entire amount of $8000, which has been provided to her as a part of an all-
expenses paid trip to Thailand, will not be allowed as a deduction from the amount of tax
payable by her in the given year.
Conclusion
After taking all the laws related to fringe benefits in Australia into consideration and
applying them to the situation of Kylie, it can be suggested that the majority of the benefits
received by her are not allowed as an exemption. The salary received by her and the 10%

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commission received by her are not covered under the Fringe Benefits Tax Law. Hence, they are
not to be considered for taxation purposes in this situation. The taxable amounts include the
value of the car, entertainment allowance provided by the employer and in case she fails to
maintain appropriate records, the amount of clothing and laundry related benefits. The amounts
received for mobile phones and laptops are allowed as a deduction because they are covered
under the items directly related to her employment. The amount of the all-expense paid trip
provided to her by the employer is not allowed as a deduction. This is because the amount
exceeds the limit of $300, which would have been allowed as a minor fringe benefit deduction.
However, as the amount exceeds $300 and is at $8000, the amount is taxable in the hands of
Kylie.

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Bibliography
Inherited dwellings. 2019. Retrieved 10 August 2019, from
https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/
Inherited-dwellings/
CGT exemptions for inherited dwellings. 2019. Retrieved 10 August 2019, from
https://www.ato.gov.au/general/capital-gains-tax/deceased-estates-and-inheritances/
inherited-dwellings/cgt-exemptions-for-inherited-dwellings/
#Deceasedacquiredthedwellingbefore20Septe
Legal Database. (2019). Retrieved 10 August 2019, from
https://www.ato.gov.au/law/view/document?locid=%27JUD/80ATC4076%27&PiT=200
71017000001
Legal Database. (2019). Retrieved 10 August 2019, from
https://www.ato.gov.au/law/view/document?docid=AID/AID2003105/00001
Fringe Benefits Tax (FBT). (2019). Retrieved 10 August 2019, from
https://www.business.gov.au/finance/taxation/fringe-benefits-tax