Taxation Law Assignment: Determining Fiona Johnson's Assessable Income

This assignment analyzes the tax liabilities of Fiona Johnson, a software designer, based on Australian taxation law. The analysis covers various aspects of her income, including salary, bonuses, capital gains from the sale of assets (shares and properties), and foreign-sourced income. The assignment examines the tax implications of fringe benefits (airline tickets and holiday), the application of CGT rules, and the treatment of restrictive covenant payments. It considers relevant legislation, case law (e.g., Scott v FCT, Dean v FCT, Jarrold v Boustead), and ATO guidelines to determine Fiona's assessable income and tax obligations, including the impact of pre-CGT assets, the 12-month ownership rule for CGT discounts, and the declaration of foreign income. The conclusion summarizes the key findings regarding Fiona's taxable income and the inclusion of foreign-sourced income in her Australian tax return.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................8
References:.................................................................................................................................9

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Answer to question 1:
Issues:
Is the taxpayer liable for assessment for the income derived by working in capacity of
the employee under “section 6-5, ITAA 1997”?
Rule:
“Section 6 ITAA 1997” explains that income that is derived by the taxpayers from the
private exertion comprises of the wages, salaries, bonus, commissions, gratuities etc. which is
received by a person for the services they render in capacity of the employee. As defined in
the “section 6-5, ITAA 1997” explains that the ordinary income represents the income that is
earned with regard to the ordinary concepts1. The court in “Scott v FCT (1935)” interpreted
that gains require appropriate characterisation and it should be interpreted in accordance with
the use of mankind and ordinary concepts.
A receipt derived by the taxpayer from the employment and rendering personal
service might be the subject of income tax for the employee and may constitute fringe benefit
for the employer. The court considered the remuneration from the employment in “Dean v
FCT (1997)” stated that the retention payment that is paid to the important employees so that
they will remain employed for the period of twelve even after the employment was
considered income2.
A gain cannot be treated as ordinary income if the amount is not cash or not be
converted into cash. The court in “Payne v FCT (1996)” held that the item should be readily
1 Barkoczy, S. (2018). Foundations of Taxation Law 2019 eBook. Melbourne: OUPANZ.
2 Grange, J., Jover-Ledesma, G., & Maydew, G. 2014 principles of business taxation.

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convertible into cash3. In light of above case, the frequent flyer point that is received by a
person as reward for the business expenses, then the sum cannot be treated as taxable income
because the flight reward is as a result of individual contractual relation. The recipt of flight
reward by the employee in the form of employer-paid expenses is not an income under
ordinary concept of “section 6-5, ITAA 1997”.
Payment that are received by the taxpayer for restricting their rights is not held as
income. This includes the payment that is received in agreement of not doing something. The
decision of court in “Jarrold v Boustead (1964)” explained that the payment that was
received by the rugby players for relinquishing the status of gentleman was not an income. As
an alternative, the restrictive covenant payment is considered as CGT event D1 under
“section 104-35 (1)” because the taxpayer under this circumstances creates a contractual
right with the another company.
The regimes of capital gains were introduced in 20th September 1985 and it is only
applied on CGT assets which is bought by a person on or after 20th September 19854. The
assets which was purchased earlier or prior to 20th September 1985 are treated as Pre-CGT
asset. Capital gains that are made from the pre-CGT asset is exempted from tax.
As per the ATO an Australian resident are necessarily to pay the tax for the income
derived from all across the world and from all the sources5. Where a taxpayer owns the asset
3 Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not
identified]: Cch Incorporated.
4 McSweeney, R. Taxation Legislation Amendment Bill 2014.
5 Sadiq, K. Principles of taxation law 2014.

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in foreign nation, then in such situation the person is required to pay Australian tax upon
making disposal. In addition to this, if the assets are not held in the taxpayer’s ownership for
a minimum period of 12 months then no capital gains discounted method will be applicable
to the capital gains made.
The ATO mandatorily requires the taxpayer to declare the income that they have
received from the overseas rental property for taxation purpose. These income includes the
complete amount of rent that is received and also includes the other amount of payment
which is received by the taxpayer or when the taxpayers are eligible to receive upon renting
out the property6. Similarly, if the taxpayer is the owner of the investment or asset that is
located in the foreign country then the taxpayer in this condition must declare the income
while they are filing the Australian tax return given they were in Australia. It also includes
the interest that is received from the foreign bank deposits or the bonds and rental income
from real estate properties.
Application:
The case opens with the situation where the taxpayer Fiona has arrived in Australian
to take up the employment with Australian Software Pty Ltd. When Fiona joined the
company she was provided with the Airline tickets and holiday to London by the employer
that had the worth of $10,000. In light of decision made in “FCT v Payne (1996)” the value
of flight tickets and overseas holiday to London is a not a cash convertible benefits7. The
receipt of flight reward by Fiona is in the form of employer-paid expenses is not an income
under ordinary concept of “section 6-5, ITAA 1997”. Furthermore, the flight reward and
6 Stevens, M. Taxation of financial products and transactions, 2014.
7 Weltman, B. (2014). J.K. Lasser's small business taxes 2014. Hoboken: Wiley.

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overseas holiday will be considered as the fringe benefit that will be non-taxable income
within the legislative provision of “section 23, ITAA 1997” and the employer here would be
required to pay the FBT for the fringe benefit provided8.
For the income year ended 2018/19, Fiona reports the receipt of salary from her
employment which stood $150,000. The salary income derived by Fiona under “section 6,
ITAA 1997” is an income from the personal efforts. Citing the decision of commissioner in
“CT v Scott (1935)” the salary received by Fiona is an income with respect to the ordinary
concepts and will be included into the computation of assessable income under “section 6-5,
ITAA 1997”.
Fiona also reports that upon leaving or termination of her employment with Australian
Software Pty Ltd she will be entitled to get a lump sum payment of $200,000 as an agreement
for not operating a similar business in Sydney. With reference to the case of “Jarrold v
Boustead (1964)” the payment of $200,000 that is received by Fiona is a relinquishing
payment that is not held as income9. As an alternative, the restrictive covenant payment that
would be received by Fiona will be considered as CGT event D1 under “section 104-35 (1)”
because the taxpayer under this circumstances creates a contractual right with her present
company.
Fiona in July 1984 while her stay in Sweden bought a shares in Swedish company for
a cost of $5,000. The shares were sold in 2019 and Fiona made capital gains from the sale. It
must be noted that the shares were bought prior to introduction of CGT regimes therefore the
8 Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
9 Bankman, Joseph, et al. Federal Income Taxation. Aspen Publishers, 2018.

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capital gains made from these shares are exempted from tax10. Later she also bought an
investment flat in Sweden for a cost of $185,000 while the flat was sold in June 2019 for
$210,000. The investment flat in Sweden was not under the 12-month ownership rule.
Therefore, the capital gains that is made by Fiona will be included into her Australian tax
return as assessable income but she will not be allowed to avail the CGT discount method to
reduce her capital gains tax liability.
Fiona also bought an investment property in Melbourne that was sold for $550,000 on
June 2019. She purchased the property on 1st April 2016 prior to selling the same in June
2019. The property was under the 12-month ownership rule and the sale of property resulted
in the CGT event A1 under “section 104-10 (1), ITAA 1997”. Since 12-month ownership is
satisfied by Fiona, she will be eligible to obtain the 50% CGT discount to determine the net
amount of capital gains tax payable11.
Fiona from her employment with Australian software Pty Ltd was entitled to receive a
sum of $40,000 from the bonus plan. Fiona however, elected to only take $10,000 while the
remaining amount to be credited to her on 5th September 2019. In light of the decision given
under “Dean & Anor v CFT (1997)” the bonus that is received by Fiona would be treated as
ordinary income which will be considered taxable in accordance with the ordinary meaning
10 Braithwaite, Valerie, and Monika Reinhart. The Taxpayers' Charter: Does the Australian
Tax Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research
School of Social Sciences, The Australian National University, 2019.
11 Mumford, Ann. Taxing culture: towards a theory of tax collection law. Routledge, 2017.

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of “section 6-5, ITAA 1997”12. The bonus that is received is having connection and nexus
with the receipts originating from the personal service of the taxpayer.
Following the departure from Sweden Fiona also received rental income from the flat
that she has let out. With reference to the guidelines given under the ATO, Fiona must
declare the overseas rental income in her Australian tax return as if they were in Australia.
Finally, she also reports the receipt of bank interest from the Sweden bank deposit. The
amount will be included as overseas investment income and hence taxable within ordinary
concepts.
12 Mertens, Karel, and José Luis Montiel Olea. "Marginal tax rates and income: New time
series evidence." The Quarterly Journal of Economics 133.4 (2018): 1803-1884.

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Conclusion:
The income derived by Fiona from her employment with the Australian Software Pty
Ltd will be considered taxable income. Additionally, the foreign sourced rental income and
bank deposits will be included into her Australian tax return as ordinary income under
“section 6-5, ITAA 1997”.

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References:
Barkoczy, S. (2018). Foundations of Taxation Law 2019 eBook. Melbourne: OUPANZ.
Grange, J., Jover-Ledesma, G., & Maydew, G. 2014 principles of business taxation.
Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not
identified]: Cch Incorporated.
McSweeney, R. Taxation Legislation Amendment Bill 2014.
Sadiq, K. Principles of taxation law 2014.
Stevens, M. Taxation of financial products and transactions, 2014.
Weltman, B. (2014). J.K. Lasser's small business taxes 2014. Hoboken: Wiley.
Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
Bankman, Joseph, et al. Federal Income Taxation. Aspen Publishers, 2018.
Braithwaite, Valerie, and Monika Reinhart. The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School
of Social Sciences, The Australian National University, 2019.
Mumford, Ann. Taxing culture: towards a theory of tax collection law. Routledge, 2017.
Mertens, Karel, and José Luis Montiel Olea. "Marginal tax rates and income: New time series
evidence." The Quarterly Journal of Economics 133.4 (2018): 1803-1884.