Taxation Law Assignment: Analyzing Sarah's Income and Deductions

This taxation law assignment analyzes Sarah's tax liabilities for the 2018/19 income year, based on a provided case study. The analysis addresses various aspects of taxation law, including the determination of assessable income from employment, awards, and teaching, and the application of relevant sections of the Income Tax Assessment Act 1936 and 1997 (ITAA). It examines the tax treatment of fringe benefits, travel expenses, and prize money. Furthermore, the assignment delves into capital gains tax (CGT) implications related to the sale of collectibles and a holiday home, considering acquisition costs, initial repairs, and the development of the property. The assignment concludes with a summary of Sarah's overall tax obligations based on the facts and the application of relevant legal principles and case law.

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
Headings:...........................................................................................................................................2
Issues:................................................................................................................................................2
Rule:..................................................................................................................................................2
Application:.......................................................................................................................................3
Conclusion:........................................................................................................................................5
References:............................................................................................................................................6

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Answer to question 1:
Headings:
The case is based on the taxation issues relating to the tax liability of the transactions that is
occurred by the taxpayer in the release of service duties.
Issues:
The case involves the issues
a. Whether the taxpayer will be accountable for paying tax for the proceeds that is earned in
capacity of the employee under the ordinary sense of “section 6-5, ITAA 1997”?
b. Whether the taxpayer will be permitted to obtain deduction for outgoings that is occurred
while gaining the taxable earnings under positive limb of “section 8-1, ITAA 1997”?
Rule:
Proceeds which is associated to the performance of contract or the provision of service are
treated as income from individual effort under “section 6 ITAA 1936”. As held in “Hayes v FCT
(1956)” personal exertion amount is characterised is product or incidence of work or payment for
rendering services1. If the employer provides the employee any sort of fringe benefit, then the benefits
will be treated as non-chargeable earnings for the worker under “section 23L ITAA 1936” and the
boss would be accountable for FBT for the total value of benefits given to employee.
Payments which is related to employment constitute assessable ordinary income. In “Kelly v
FCT (1985)” reward for best player was related to the taxpayer’s effort and service. The amount was
taxable under “section 6-5, ITAA 1997” as ordinary proceeds in the hands of recipient. The general
rule explains that travel between work and home is not permitted as general deduction under “section
8-1, ITAA 1997”2. However, travel expenses may be deductible if occurred in course of employment.
In “FCT v Weiner (1978)” deduction for travel was allowed to taxpayer because it was incurred in
event of creating chargeable proceeds.
In view of court in “Moore v Griffiths (1972)” simple prize is not the earnings but might be
an income provided that there is adequate relation with income creating acts. Similarly, in “FCT v
Stone (2005)” the taxpayer was charged tax for endorsement and prize money received since the
taxpayer was conducting the business of professional athlete and receipts were income under ordinary
sense of “section 6-5, ITAA 1997”3. As per “section 21A, ITAA 1936”, a non-cash benefit might
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014
2 Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). Australian Taxation Law Select 2019: Legislation and
Commentary. OXFORD University Press, 2019.
3 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, Principles Of Business Taxation 2014.

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possess connection with individual services but if it is not alterable to cash then it is not an earnings.
As held in “Cooke & Sherden v FCT (1980)” non-cash benefit non-convertible cash is not an
income. Nexus is commonly recognized for regular items of individual services such as fees charged
for rendering services4. In “Brent v FCT (1971)” reward for services in the form of media interview
was an ordinary income.
A CGT event A1 occurs under “section 104-10 (1), ITAA 1997” when the CGT asset is sold.
As per the “section 108-15 (1), ITAA 1997” collectables that are purchased as set then they would be
dispose as a set and capital gains tax provision is applicable for the sale of CGT assets.
“Section 110-25, ITAA 1997” explains that purchase price of the asset includes the cost of
acquisition and the incidental cost in respect of acquisition such as stamp duty, legal fees etc. The
taxation ruling of TR 97/23 explains the situations where outlays occurred for repairs are permitted to
deduction under “section 25-10, ITAA 1997”. As per “section 25-10, ITAA 1997” repair implies
remedying or making the defects goods5. It usually involves the work that is done to preclude the
anticipated defects or corrosion in the property is not a repair unless the work is done to remedy the
defect or deterioration in the property. Expenses that are occurred on initial repair are treated as
capital expenses and non-deductible under “section 25-10, ITAA 1997”. A person is solitarily
allowed to obtain deduction for repairs when the property is let out for generating the assessable
earnings.
There are numerous situations where several establishments have confirmed that the taxpayer
that has the land which constitutes the capital asset and develops the asset in the enterprising way may
treat the profits from the realisation as the capital if the development amounted to not more than the
mere realisation of the capital assets. As held in the case of “Statham & Anor v FCT (1989)” the net
profits received from the disposal of subdivided lots does not amounted to assessable proceeds either
under the “section 25 (1) or 26 (a) of the ITAA 1936”6. Where an extraordinary and isolated
transactions that are not treated as ordinary income in relation to post 19 September 1985 would be
subjected to capital gains tax.
Application:
Sarah from her full time service received a salary of $120,000. Denoting to “section 6 ITAA
1936” receipt constitutes earnings from individual effort. Referring to “Hayes v FCT (1956)”
4 Kenny, Paul, Australian Tax. (LexisNexis Butterworths, 2013)
5 Krever, Richard E, Australian Taxation Law Cases 2015
6 Sadiq, Kerrie, Principles Of Taxation Law 2014.

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personal exertion amount is characterised is product or incidence of employment and will be taxable
as ordinary income in the hands of Sarah under “section 6-5, ITAA 1997”. She was also provided by
her employer with laptop for work purpose. The laptop given to Sarah amounts to benefits which will
be treated as non-chargeable earnings for her under “section 23L ITAA 1936” and the company
would be accountable for FBT for the total value of benefits given Sarah7.
She also received cash award for being the best accountant. Citing “Kelly v FCT (1985)”
reward for best accountant is related to the taxpayers work and employment. The amount was taxable
under “section 6-5, ITAA 1997” as ordinary proceeds for Sarah. During the year, Sarah reported
travel expenses from her accounting firm to college where she teaches on part-time basis. Quoting
“FCT v Weiner (1978)” deduction for travel is allowed to Sarah under “section 8-1, ITAA 1997”
because it was sustained in course of generating chargeable earnings8. While the part-time salary from
teaching constitute personal income from services rendered by her and will be chargeable under
“section 6-5, ITAA 1997” as ordinary income.
Sarah also participates in long-jump competition during her spare time and receives prize
money. Referring to “FCT v Stone (2005)” Sarah is held for tax relating to prize money received
since the she is conducting the business of professional athlete and receipts amounts to income under
ordinary sense of “section 6-5, ITAA 1997”. While referring to “Cooke & Sherden v FCT (1980)”
non-cash benefit in the form of coffee-machine is non-convertible to cash and henceforth it not an
earnings for Sarah9. Referring to “Brent v FCT (1971)” amount received for media appearance by
Sarah is a reward for service and hence it is an ordinary proceeds under “section 6-5, ITAA 1997”.
Sarah also bought a set of collectibles for a sum of $1,550. However, after a few weeks the set
of collectibles was sold for $4,400. The sale of collectibles resulted in CGT event A1 under “section
104-10, ITAA 1997”. Based on the set rule of “section 108-15 (1), ITAA 1997” the collectibles will
be taken as single set of asset and the gains made by Sarah will attract capital gains tax10.
Sarah also bought a holiday home in September 2017. She incurred legal fees and stamp duty
for the purchase of property. With respect to “Section 110-25, ITAA 1997” the cost base of holiday
home bought by Sarah would also include the legal fees and stamp duty since they are non-deductible
7 Robin, H. Australian Taxation Law. Oxford University Press, 2019.
8 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia,
2013)
9 Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook Co./Thomson Reuters, 2013)
10 Murray, Ian, et al. "Understanding Taxation Law 2019."

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acquisition expenses. Instead the amount will be included in total cost base for determining the capital
gains.
Soon after the purchase of property Sarah incurred initial repairs on the property for repairing
broken roof tiles and falling gutters. In light of the “taxation ruling of TR 97/23” the expenses that
are occurred on initial repair by Sarah is treated as capital expenses and non-deductible under
“section 25-10, ITAA 1997”11. In the later part of the event it is seen that Sarah constructed garage on
the property and later she entered into the contract for selling the property to the developer for a sum
of $1.2 million.
Referring to “Statham & Anor v FCT (1989)” net proceeds from sales received by Sarah
from does not amounted to chargeable earnings either under the “section 25 (1) or 26 (a) of the ITAA
1936”. The transaction that was entered into by Sarah does not amounts to extraordinary or isolated
transactions and should not be treated as ordinary income12. Rather the sales proceeds from the
disposal of the asset would attract CGT.
Conclusion:
Conclusively, based on the above stated facts, Sarah will be held chargeable with the ordinary
sense of “section 6-5, ITAA 1997” for the income obtained from the personal services because nexus
was clearly established with her personal income. While the expenses incurred for travelling is
deductible under “provision of 8-1, ITAA 1997”.
11 Woellner, R. H et al, Australian Taxation Law 2014
12 Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J. Australasian Tax Tchrs.
Ass'n 13 (2018).

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References:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business Taxation
Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Krever, Richard E, Australian Taxation Law Cases 2015
Morgan, Annette, and Donovan Castelyn. "Taxation Education in Secondary Schools." J.
Australasian Tax Tchrs. Ass'n 13 (2018): 307.
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation
Law (CCH Australia, 2013)
Murray, Ian, et al. "Understanding Taxation Law 2019." (2018).
Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.). Australian Taxation Law Select
2019: Legislation and Commentary. OXFORD University Press, 2019.
Robin, H. Australian Taxation Law 2019. Oxford University Press, 2019.
Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook Co./Thomson
Reuters, 2013)
Sadiq, Kerrie, Principles Of Taxation Law 2014
Woellner, R. H et al, Australian Taxation Law 2014