Taxation Report 2022

Taxation
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Abstract
The report is considered tax topics in relation to issue of personal business service income as well as
income in nature of personal service income. The reports also discussed several issue in relation to
compensation receiived in respect of car accident from insurance company, discussion on taxability of
income arised form hobby and related expenses. spects.

Table of Contents
Introduction.................................................................................................................................................3
a) Advice to Thomas Hawks:....................................................................................................................3
 Issue 1 – PSI or PSB......................................................................................................................3
 Issue 2 – Cash or accruals............................................................................................................5
 Issue 3 – Business Expenses.........................................................................................................6
 Issue 4 – Compensation...............................................................................................................7
 Issue 5 – Business vs. Hobby........................................................................................................8
b) Computation of tax liability for the year ending 30 June 2020 of Thomas Hawks:.............................9
References.................................................................................................................................................11
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Introduction
In this report, we had discussed the case law and tax litigation of Thomas hawks by
categorizing their income and expense under the given head of income under income
tax. Thomas Hawks is running a business that is providing services in relation to
consultancy for the tax calculation of business entities as well as individuals. The
worked in relation to office has been done by him and also by hiring the intern. There is
also mentioned his client namely, Jenny Pty Ltd who is one of the major clients. The
revenue of firms consists of a 70% amount received from Jenny Pty Ltd. Other revenue
is earned through different clients. Thomas himself working to extent of 80% of the work
of the firm and remaining is being done by his intern.
The expenditure of Thomas includes the salary and wages paid to intern or accountant,
expenses incurred to maintain office such as cleaning and heating expenses. Purchase
of office supplies, interest paid on loan mortgaged and rents in respect of premises for
office, etc. Thoman also purchased computers, a machine such as printers and furniture
and fixture. These costs are in the nature of fixed costs.
Suddenly, Thomas has fallen due to a car accident due to which the working efficiency
of Thomas has been gone down. Thomas received compensation from the insurance
company as he is already covered under private health insurance in respect of such an
accident.
The car accident is the reason due to which he decided to move to another place in
Frankston and also reduce the overload work to an extent of 50%. Thomas started to
enjoy his hobby of photography from his new place. Due to more interest and his talent,
he is able to make rich by so many followers on Instagram. He also received an offer
from the manufacturing company during the current year. He earned income of $2500
from enriching such work.
a) Advice to Thomas Hawks:
 Issue 1 – PSI or PSB
o The task one involved issue in relation to determine whether the income of
Thomas is fallen under the income of business or income from personal
service. It is difficult to decide the nature of income without applying the
rules and regulations of income tax.
o In accordance with provision of Section 84.5 of ITAA (1997) which states
the provision in respect of income from personal service. As per this
section, any income which is earned by using the set of skills or effort of
his own can be deemed as income from personal service income. The
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personal service is directly linked with individuals only. Nobody corporate
can provide personal service income. Such income can be generating by
provision of service such as completing certain tasks or performing arts,
etc. It is not necessary that the condition should be received in
accordance with the agreement. Hence, consideration can be earned
irrespective of a contract of services. (ITAA 1997, s84-5(3))
o The income from the personal service business is regulated in section
87.15 of ITAA (1997). Where any person received income from the single
client of 80% or more of total income and also satisfies one of three PSB
tests by taxpayers, then such income shall be self-treated as income from
personal business service (Para 39, p. 11, TR 2001/8).
There are three test in respect of personal service business namely:
o Test which is in relation to employment
o Test which is in relation to clients which are not related
o Test in relation to premises of business (ITAA 1997, 87-15(2)).
Section 87.18 of ITAA (1997) states that results if a test for the purpose of
determination of personal service business. In accordance with this section, there
is a minimum of 75% income of personal service income, such income is
generated from users of equipment and the responsible for correction of defaults
done, then it is said to comply with the above test (ITAA 1997, s87-18(1)).
Section 87.20 of ITAA (1997) provides the description of a test in relation to
unrelated clients. The condition in relation to an unrelated client can be satisfied
if there is no relationship with the several clients from which income is earned.
The employment test is referred through section s87-25 of ITAA (1997). It states
that condition can be said to be satisfied only if he is engaged in service of more
than one entity and such entity is engaged in performing a minimum of overall
20% of the task. (ITAA 1997, s87-25(1)).
There is no restriction on hiring apprentice, Such work can be performed by
engaging interns too. Even the Intern has completed this work, it shall be
deemed that they fulfill the condition. (ITAA, 1997, s87-25(3)).
Where the individual has used the business premised to perform the personal
service, it can be said that they complied with the test of premises. It is further
provided that such a test can be satisfied only if business premised is used for
the whole of the tax year. (ITAA 1997, s87-30(1)).
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The following intrepretation can be obtained through application of above lasws
and provisions:
 In this instant case, thomas hawks being indivual is enagaged in business
of provision of consultancy in relation to taxation and accounting services.
It states that condition mentioned under section 84.5 of ITAA (1997) has
been satisfied. As such income is earned by him using his own set of
skills. Accordingly, it can be said that income earned is in nature of
personal business income.
 There may alienation of personal business incoem if individual fulfills the
conditions given under s87.15 of ITAA (1997).
 Hawks is in employment with jenny private limited from where he earned
income of more than 80% from such single client. It indicates hawks
satisfied result test.
 He earned income from various clients which are unrelated to
him.However he fails to meet considition specified for unrealted clients
test.
 However, he engaaged a intern to work in his consultancyfor the whole of
the year which indicates that he fulfills the condition related to employment
test.
 However, He fails to meet condition in relation to use of business of
premised. He used the business premises for the whole of the year.
 Accordingly, the condition referred under para 27of taxation rulling
(2001/8) provides that there is no applicationof alienation measure
doesnot apply on him and such income earned is in nature of “Personal
Services Business”. Accordingly, he will able to claim cetain deduction and
exemptions.
 Issue 2 – Cash or accruals
There is a lot of confusion that will arise where income is earned and the
receipt of such income is in different tax year. Accordingly, it is difficult to
determine the tax period in respect of which such income will arise. There
are two methods which prescribes a system of accounting. Namely Cash
method and accrual method. Under the cash method, income is taxed on
the basis of receipt of such income. It means it will be taxed in the year in
which such income is received by the taxpayer. Another method is the
accrual method where income is taxed in the year in which earned
irrespective of whether cash is received or not. (Para 2, p.1, TR 98/1,
2017).
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Accordingly, the time of receipt is key to determine the taxability period
under the cash method accounting system. (ITAA 1997, s6-5(4))
The accrual method considers the time of income earned rather than the
time of receipt of income. (Para 9, p.2, TR 98/1, 2017).
The case laws which are related to above include Carden's case,
Henderson's case, Brent's case and Barratt's case (Para 29, p.5, TR 98/1,
2017).
There is an application of the cash method of accounting system if the
taxpayer gained income by applying a set of skills and efforts. (Para 44,
p.8, TR 98/1, 2017)
Accordingly, the provision of personal business service in the case of
Hawkins requires the application of the cash method of accounting for the
purpose of calculation of income tax.
 Issue 3 – Business Expenses
Any expenses which are occured in respect of earning or generating
assessable income under business can be claimed as deduction for
calculation of taxable income (ITAA 1997, s8-1(1) (b)).
The ordinary expense as specified under section 8-1 of ITAA (1997).
There are two hands which consist one in relation to income which is
taxable and another the categories of taxpayer. Accordingly, both limbs
can be used by business taxpayers (Snowden & Willson Pty Ltd v FCT
(1958) 99 CLR 431).
Hence, Thomas Hawkins can claim deduction in respect of expenses
incurred for business purposes.
.
 Issue 4 – Compensation
The receipt of the amount in the nature of compensation is prescribed in
the taxation ruling 95/35 (2006) where the tax consequences have been
explained. Any income which is earned in the nature of compensation can
be added to the total income of the assessee. Please refer to the case law
for a detailed explanation (Para 1 TR 95/35, 2006).
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Para 3 of TR 95/35 (2006) further stated compensation receipts which
states that any amount which is nature of compensation such as cause of
action or any pending proceeding of action are considered. (Para 3 TR
95/35, 2006):
Para 3 of TR 95/35 (2006) further stated compensation receipts which states that
any amount which is nature of compensation such as cause of actio or any
pending proceeding of action are considered. (Para 3 TR 95/35, 2006):
 The types of asset underlined;
 All comepensation irrespective of order of court
 Any lumpsum compensation is received by the taxpayer which is not be
dissected.
Where the compensation is received from the insurance company in respect
of damage or personal injury to the individual and where such individual is
covered under health policy such as private health insurance policy is in
nature of income of capital gain. Such income is wholly taxed under section
160ZB (1). The exemption is provided irrespective of whether such personal
injury is proved by the taxpayer. There is no need to prove by the taxpayer of
such personal injury. (Example 17, Para 304, TR 95/35 2006).
In the instant case, there is personal injury to Thomas due to a car accident.
Accordingly, he had to reduce his working hours which indicates a decrease
in efficiency of Thomas. Hence Thomas can claim exemption of
compensation received from health insurance in respect of such income.
 Issue 5 – Business vs. Hobby
To determine whether hobby can be treated as business, we should consider the
follwoing points:
a) Whether the individual is contuining in hobby to earn in commercial
manner?
b) Whether intention of hobby to earn profits?
c) Whether such activities are in repetitive manner?
d) Whether hobby is simmilar in nature of conducting business?
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Generally, the provision of income tax provides an exemption in the nature of
income earned through hobby. However, income from such can be taxed if it is in
the nature of conducting business. The Australian tax law has defined the hobby
as an activity that is done in free time for the purpose of enjoyment and personal
satisfaction. It is not necessary to maintain or keep books of account in relation to
income which is earned through the hobby. No expense can be claimed as a
deduction where such expenses are incurred for the purpose of a hobby. It is not
necessary to declare income which is earned from hobby while filing income tax
return (Department of Industry, Innovation, and Science, Australia 2018).
In the instant case, Thomas has so many followers on social media. As they
started posting a photo which is taken while engaged in his passion for work. The
intention of Thomas is not to make a profit even he clicked several photographs.
Here, it is cleared that he is not involved in the business of photography.
Therefore, It can be said that he is pursuing is a hobby for personal satisfaction
and enjoyment. Such activity is not in the nature of the income of the business.
Such income earned of $2500 is not required to disclosed and also he cannot
claim exemption in respect of such income.
b) Computation of tax liability for the year ending 30 June 2020 of Thomas
Hawks:
Particulars Amount $ Amount $
Gross income earned from client as fee income 576,000
Less:
Business expenses:
Salary to employee 93,600
Expense for purchase of office supplies 5,019
Expenses for Cleaning and Heating 7,413
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Council rates on office premises and Mortgage Interest 17,486 123,518
Depreciation expense:
Existing assets ($15,000/5) 3,000
New asset ($5,000/5) 1,000 4,000
Taxable Income 448,482
Tax liability:
Tax on $18,200 -
Tax on ($37,000 - $18,200)*19% 3,572
Tax on ($90,000 - $37,000)*32.50% 17,225
Tax on ($180,000 - $90,000)*37% 33,300
Tax on ($448,482 - $180,000)*45% 120,817
Medicare levy ($448,482*2%) 8,970 183,884
Less: Tax withhold in the current year 113,680
Tax payable 70,204
Notes:
1) The cash method is applied for calculation of taxable income and tax liability
2) The effective life of assets for the purpose of calculation of tax is based on ATO
rules.
3) Thomas has covered under provate health insurance policy. Hence There us no
requirement to pay medicare levy surchage.
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References
Department of Industry, Innovation, and Science, Australia (2018). “A business or a
hobby?” Retrieved on 11th September from:
ICAI, Australia (2012). “Allowable Deductions – Essentials”. FCT v Snowden & Willson
Pty Ltd (1958) 99 CLR 431. Retrieved on 11th September from:
Income Tax Assessment Act (1997), s8-1(1) (b). “General deductions”. Retrieved on
11th September from:http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s8.1.html#targetText=INCOME%20TAX%20ASSESSMENT%20ACT%201997%20%2D
%20SECT%208.1&targetText=(b)%20it%20is%20necessarily%20incurred,offset
%20against%20other%20assessable%20income.
Income Tax Assessment Act (1997), s84-5(3). “Meaning of personal services
income”.Retrieved on 11th September 2019 from:
Income Tax Assessment Act (1997), s87-18(1). “The results test for a personal services
business”. Retrieved on 11th September from:
Income Tax Assessment Act (1997), s87-2. “The unrelated clients test for a personal
services business”. Retrieved on 11th September from:
Income Tax Assessment Act (1997), 87-15(2). “What is a personal services business?”
Retrieved on 11th September from:
Income Tax Assessment Act (1997), s87-25. “The employment test for a personal
services business ". Retrieved on 11th September from:
Income Tax Assessment Act (1997), s87-30. “The business premises test for a personal
services business”. Retrieved on 11th September from:
Taxation Ruling 98/1, (2017). “Income tax: determination of income; receipts versus
earnings”. Australian Government Office. Retrieved on 11th September from:
Taxation Ruling 2001/8) Para 39, p.11. “The Three Personal Services Business Tests”.
Australian Government Office. Retrieved on 11th September from:
Taxation Ruling 95/35 (2016). “Income tax: capital gains: treatment of compensation
receipts”. Australian Government Office. Retrieved on 11th September from:
https://www.ato.gov.au/law/view/document?docid=TXR/TR9535/NAT/ATO/00001#P1
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