Taxation Law: Personal Service Income, Cash or Accrual Method, Business Expenses, Compensation, Business v Hobby

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

TAXATION LAW1
Table of Contents
Answer to question 1 (a):...........................................................................................................2
Issue 1: Personal Service Income:..........................................................................................2
Issues 2 – Cash or accrual method:........................................................................................2
Issue 3 Business Expenses:....................................................................................................3
Issue 4: Compensation:..........................................................................................................4
Issue 5: Business v Hobby.....................................................................................................5
References:.................................................................................................................................6

TAXATION LAW2
Answer to question 1 (a):
Issue 1: Personal Service Income:
Under “sec 6 ITAA 1936”, Receipts associated to the performance of the contract or
any provision of services are treated as taxable under in the hands of the recipient. The
income from personal services generally holds the satisfactory nexus with the amount and
earnings producing activity (Woellner et al. 2016). The law court in “Hayes v FC of T
(1956)” held that personal service income is usually treated as the product of business or the
incidence of employment or any kind of reward for services. Usually majority of the earnings
earned are viewed as ordinary income under “sec 6-5, ITA Act 1997”. Any amount that is
derived from the personal exertion might be considered as taxable earnings either under the
statutory or ordinary meaning.
Thomas Hawks here is carrying the personal service of business of tax and
accounting. During the present income year, he earned a sum of $648,000 from his main
clients. The operation of taxation and accounting business by Thomas as tax accountant will
be classified as personal service business income under “sec 6 ITAA 1936”. The receipts
earned from personal services business holds adequate relation between the amount derived
by Thomas and his business activity. Citing “Hayes v FC of T (1956)” the receipts should be
characterised as the product of business. The business receipts will be included for
assessment under “sec 6-5, ITAA 1997” as ordinary income.
Issues 2 – Cash or accrual method:
As per the taxation ruling of “TR 98/1” it is necessary to determine the income based
on the receipt or earnings method (Barkoczy 2016). Under the “subsection 6-4 (4), ITAA
1997” receipt method is viewed as cash received method. As per this method income is
usually derived when the taxpayer receives the money. The receipts method is most likely