Taxation Law Assignment: Income Tax, Statutory Income and CGT Analysis

This document provides a comprehensive solution to a Taxation Law assignment, focusing on the assessment of income and the application of relevant tax legislation. The assignment addresses multiple issues related to ordinary income, statutory income, and capital gains tax (CGT). It analyzes vari...Read More

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

1TAXATION LAW
Table of Contents
Answer to Part A:.......................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................7
References:.................................................................................................................................8

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Answer to Part A:
Issues:
Whether the taxpayer will be considered taxable for the receipt of income derived
during the year within the ordinary concept of “sec 6-5 ITAA 1997” or as statutory income
under “sec 6-25(2) ITA 1997”?
Rule:
According to “sec 6 (1) ITAA 1936” income derived from personal exertion
represents the income such as salaries, commissions, wages, pensions, superannuation
allowances, fees, bonus etc. that is received by the taxpayer for rendering any sort of services
(Murphy 2019). The personal exertion earnings should hold adequate nexus amongst the
amount received and personal exertion. The amount received should be the reward or product
of personal exertion. In “Dean v FCT (1997)” retention payments that was paid to the
taxpayer in consideration of vital staffs assenting to be employed for another twelve months
was held to be income. As a general sense under “sec 6-5 ITAA 1997” ordinary income
involves most of the income which comes to the taxpayer (Woellner et al. 2016). The
assessable income of the taxpayer normally involves income in agreement with the ordinary
concepts that is known as ordinary income.
Sign on (enticement) fees that is received as the part of normal practices to attract the
people in a new employment are regarded as ordinary income. In “Pickford v FCT (1998)”
payment received for future services were characterised as ordinary income by the law court.
As per “sec 6-5 ITAA 1997” gains that originates from performing any business activities are
held as ordinary business income (Braithwaite and Reinhart 2019). While gains that occurs
from the non-business activities such as hobby or pleasure activities are treated as non-

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assessable income. To characterize the receipts as the ordinary income from business
comprises of two-step procedure;
a. Ascertaining when the taxpayer is performing the business
b. Ascertaining whether or not the receipts are viewed as normal business proceeds
It is noteworthy to ascertain when the recreational or hobby turns into a business
activity. The law court in “Ferguson v FCT (1979)” have considered the common indicators
of business such as whether or not there is any profit making intention. While in another
example of “Thomas v FCT (1972)” whether the taxpayer has undertaken any commercial
approach amounts to more than a recreational activity (Barkoczy 2016). Common business
indicators also include the system and organization employed. Indicators such as extent of
planning and total time invested along with the delegation of duties would still be held as
carrying on of business activities.
Simple prize winnings cannot be treated as having the characteristics of income.
Conversely, the prize winning may be treated as income if there are adequate connection with
the income generating activities of the taxpayer. The decision of law court in “Kelly v FCT
(1985)” noted that the taxpayer was the trained footballer and received a prize from Channel
7 for being the “fairest and best player” (Braithwaite 2017). The amount was treated as
having nexus with his work and employment by club and also related to the use of skills.
Capital gains or loss happens when a “CGT event” happens to the CGT asset. As
noted in “sec 108-5 (1) of the ITAA 1997”, CGT asset usually denotes any sort of asset that
cannot be observed as property. Land is a CGT asset and its sale give rise to “CGT event
A1”. As noted in “sec 104-10 ITAA 1997” a “CGT event A1” occurs upon the disposal of
CGT asset. Subdivision of land do not imply sale of land under “sec 104-10 ITAA 1997”
(Arnold, Ault and Cooper 2019). A taxpayer when makes profit from carrying out a profit

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making undertaking or scheme in relation to a property purchased prior to introduction of
CGT is particularly contained within the assessable earnings based on “sec 15-15 ITAA
1997”. The decision made in “FCT v Whitfords Beach Pty Ltd (1982)” the law court held
the taxpayer assessable for the profits made from the disposal of subdivided land under “sec
25 (1)” because the taxpayer went beyond the simple realization of capital asset and its
activities were regarded as carrying the business of land development.
The statutory income is specified as income that are considered taxable within the
numerous provisions of taxation assessment acts particularly the capital gains which is
chargeable under “sec 102-5 ITAA 1997”. Dividends derived by the taxpayer from an
Australian sourced resident company are considered taxable as statutory income under “sec
44 ITAA 1936” while the franking credits that is attached with the franked dividends are
considered taxable under “sec 207-20 (1) ITAA 1997” but the franking credits can be
claimed as tax offset (Sadiq 2019). Interest that is received by the taxpayer are considered as
taxable ordinary earnings under “sec 6-5 ITAA 1997”. The law court in “Riches v
Westminster Bank Ltd (1947)” stated that interest is regarded as the return which flows from
lending of money and it is considered as compensation for the loss of using that money.
Application:
Rick is employed with DxP and receives a salary of $1.2 million per annum. Along
with the salary Rick on 15 June 2019 also received a performance bonus that amounted to
$400,000. Denoting “sec 6 (1) ITAA 1936” the receipt of salary and performance bonus
amounts to income derived from personal exertion (Morgan, Mortimer and Pinto 2018). The
personal effort earnings represents an adequate nexus amongst the amount received and
personal exertion. Discussing the circumstances of “Dean v FCT (1997)” the salary and
performance bonus is an income and will be taxable under “sec 6-5 ITAA 1997” as ordinary
income.

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DxP enticed Rick with a payment of $500,000 to join his company. The employment
contract was gladly signed by Rick and received the payment on 3rd May 2019. Discussing
the decision made in “Pickford v FCT (1998)” the payment received by Rick for joining DxP
must be characterised as ordinary income by the law court. The amount must be held taxable
under “sec 6-5 ITAA 1997” as ordinary income.
Rick enjoyed artwork made from his own hand and has the dream of being a famous
sculpture. In mid-2017 He made artwork from the old car parts to sell it during weekends in
order to cover the cost of materials. The sales receipts is non-assessable from such artwork of
Rick should be classified as hobby from mid-2017-18 because it was only for recreational
purpose. The owner of stylish art gallery in early July 2018 contacted Rick’s friend Mike to
make an arrangement for display of his work in Mike’s gallery. Soon there was a pile of
customers that liked the work of Rick and were ready to purchase it. Rick also employed
accountants to keep his books of accounts and developed plans for growing the revenue. In
the income year of 2018 Rick made $300,000. Referring to “Ferguson v FCT (1979)” the
activities of Rick from July 2018 onwards should be classified as business activity (Robin
and Barkoczy 2020). Citing “Thomas v FCT (1972)” employing of accountants and setting
up a website represents that a commercial approach has been taken by Rick. The gains made
by Rick will be considered as ordinary business income under “sec 6-5 ITAA 1997”.
Rick also reports the receipt of award of best new artist from the Australian Sculpture
Institute (ASI) amounting to $50,000. Discussing the decision made in “Kelly v FCT (1985)”
Rick should report the sum of $50,000 in his taxable return as the receipt has nexus with his
work and also related to the use of skills.
Rick held a vacant property which he acquired on 24th June 2015. Rick sought the
service of an architect who advised him to turn the vacant land into 15 townhouse. Rick sold

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the townhouse for a sum of $4.7 million. With regard to “sec 104-10 ITAA 1997” the vacant
land is a CGT asset. The construction of townhouse and selling the same has given rise to a
“CGT event A1” under “sec 104-10 ITAA 1997”. Reference to the judgement made in “FCT
v Whitfords Beach Pty Ltd (1982)” can be made in case of Rick to state that the profits
earned from selling the townhouse is a capital gains under “sec 102-5 ITAA 1997” which
will be taxable as statutory income (Taylor et al. 2017). This is because Rick has went
beyond in simply realizing the capital asset and attracts tax liability.
Rick during the year received dividends amounting to $70,000 from shares held in
BHP along with the franking credits of $30,000. The dividend received by Rick will be
considered taxable as statutory income under “sec 44 ITAA 1936” while the franking credits
that is attached with the franked dividends are considered taxable under “sec 207-20 (1)
ITAA 1997”. Rick, for the franking credits can be claimed as tax offset while filing tax
return. He also received interest of $15,000 for the money loaned to his sister. Citing “Riches
v Westminster Bank Ltd (1947)” the interest received will be included in Rick’s assessable
income as ordinary earnings which will be taxable under “sec 6-5 ITAA 1997”.

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Conclusion:
Rick will be considered taxable under “sec 6-5 ITAA 1997” and under “sec 6-25 (1)”
for the receipts made during the year. The total assessable income of Rick for the year stands
$40,15,000.
Particulars Amount ($) Amount ($)
Assesssable Income
Salary Income 1200000
Annual performance bonus 400000
Joining bonus 500000
Receipts from Sale of Sculptures 300000
Receipt of Award 50000
Australian sourced dividend income
Fully Franked (net) 70000
Gross up for franking credits 30000 100000
Interest from Sister on Loan 15000
Net capital gain on disposal of property
Proceeds 4700000
Cost Base
Add: Acquisition Cost 600000
Capital expenditure (Construction) 1200000
Total cost base 1800000
Gross capital gains (proceeds less cost base) 2900000
50% CGT Discount 1450000 1450000
Total Assessable Income 4015000
Computation of Taxable Income and Tax Payable
In the books of Rick
For the year ended 2019/20

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References:
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Braithwaite, V. and Reinhart, M., 2019. 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.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The
Australian National University.
Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.), 2020. Australian Taxation
Law 2020. Oxford University Press.
Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.
Taylor, J., Walpole, M., Burton, M., Ciro, T. and Murray, I., 2017. Understanding Taxation
Law 2018. LexisNexis Butterworths.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.