Taxation Law 2 Assignment: Income Tax, Deductions, and Business

This taxation law assignment solution addresses three key issues. The first analyzes whether income from a personal service (an interview) is taxable under ITAA 1997, referencing relevant case law like Scott v Commissioner of Taxation and Brent v Federal Commissioner of Taxation, concluding that the income is assessable. The second issue examines the deductibility of child day care expenses under section 8-1 of the ITAA 1997, citing cases like Federal Commissioner of Taxation v Lunney and Lodge v Federal Commissioner of Taxation, and concludes that such expenses are not deductible. The third issue explores whether a taxpayer's activities constitute carrying on a business, and whether profits from isolated transactions are assessable under section 25(1) of the ITAA 1936, referencing TR 92/3 and Federal Commissioner of Taxation v Myer Emporium Ltd, concluding that profits from the isolated transaction of land purchase are taxable.

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
Issue:..........................................................................................................................................2
Laws:..........................................................................................................................................2
Applications:..............................................................................................................................2
Conclusion:................................................................................................................................3
Answer to question 2:.................................................................................................................4
Issue:..........................................................................................................................................4
Laws:..........................................................................................................................................4
Application:................................................................................................................................4
Conclusion:................................................................................................................................5
Answer to question 3:.................................................................................................................5
Issue:..........................................................................................................................................5
Laws:..........................................................................................................................................6
Applications:..............................................................................................................................6
Conclusion:................................................................................................................................7
Reference List:...........................................................................................................................8

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Answer to question 1:
Issue:
Will Jenny be held liable for taxation relating to the income received from the
personal service for appearing in the interview under section 6-5 of the ITAA 1997?
Laws:
1. “Scott v Commissioner of Taxation (1935)”
2. “Brent v Federal Commissioner of Taxation (1971) ATC 4195”
3. “Section 6-5 of the ITAA 1997”
4. “Hobbs v Hussey (1942) 24 TC 153”
Applications:
As defined under “section 6-5 of the ITAA 1997” ordinary income includes all the
income that are generally derived by the taxpayer from most of the sources (Murphy &
Higgins, 2016). As per section 6 of the ITAA 1936 an individual deriving income from
personal sources refers to the salaries, pension, fees or proceeds of business. According to the
decision in “Scott v Commissioner of Taxation (1935)” the term ordinary income refers to the
income obtained from majority of the sources namely that are in accordance with the ordinary
usage of the mankind.
Denoting from the current situation of the Jenny it is understood that she received in
advance a sum of $500,000 from the publisher that expressed an interest in knowing about
Jenny late husband Henry. Jenny appeared in an interview with the publisher for an agreed
sum of $1 million along with the advance payment of $500,000.
Referring to the definition stated under “section 6-5 of the ITAA 1997” that an
element that has the characteristics of the income when it comes homes for an individual

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(Schenk, 2017). An element of income under “section 6-5 of the ITAA 1997” is held
assessable up to the realisable value of the sum. The nature of income must be ascertained in
every situations depending upon the derivation by an individual taxpayer.
Referring to the judgement of high court in “Brent v Federal Commissioner of
Taxation (1971) ATC 4195” it was clarified that the sum of payment received narrating the
story of the train robber by the wife was held as taxable income based on reward for service
(Hill & Mancino, 2014). The wife of the train robber was granted a special right of telling the
story of her husband to a publication and the amount derived for such reward as held taxable
based on reward for service. In the present condition of Jenny the amount received by the
publisher for appearing in the interview attracts tax liability. The sum received will be taxable
with reference to “section 6-5 of the ITAA 1997” as income from ordinary sources based on
reward for service.
Alternatively if Jenny decides to write the biography herself and the payment that
would be derived from such publications would be held as royalties. As held in the case of
“Hobbs v Hussey (1942) 24 TC 153” where the taxpayer was regarded at the criminal and
received amount of £1500 for selling the serial rights of his autobiography that was published
in the article of twelve newspaper (Bloom & Joyce, 2014). Similarly in case of Jenny, if the
book was written by herself it would have amounted to autobiography and the amount
derived from such sale of book will be held taxable.
Conclusion:
Jenny would be held taxable since the amount received from exclusive interview is an
income that is earned from providing service and assessable under ordinary meaning “section
6-5 of the ITAA 1997”. Alternatively, if she decides to write herself the book then the
publications would amount of royalties that would attract tax liability.

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Answer to question 2:
Issue:
Will the taxpayer be entitled to claim deductions under section 8-1 of the ITAA 1997
relating to the cost incurred on child day care?
Laws:
1. “Section 8-1 of the ITAA 1997”
2. “Federal Commissioner of Taxation v Lunney (1958)”
3. “Section 8-1 (2) of the ITAA 1997”
4. “Lodge v Federal Commissioner of Taxation (1972) ATC 4174”
Application:
As defined in “section 8-1 of the ITAA 1997” a person is allowed to entitlement for
deductions given the expenditure is incurred in producing the income of the taxpayer
(Woellner et al., 2016). The high court in “Federal Commissioner of Taxation v Lunney
(1958)” explained that it is vital to ascertain the expenditure characteristics as whether it
forms an important prerequisite in generating taxable income (Bankman et al., 2017).
Denoting from the current situation of Sally who incurs an expense on a day-care to mind her
child at the time when she is work.
Importantly under “section 8-1 (2) of the ITAA 1997” a person is prohibited from
claiming a deductions for any form of expenditures that is related to private purpose or
capital purpose (Pope et al., 2014). Furthermore the section prohibits an individual taxpayer
from any entitlement for deductions for expenditure that are domestic or incurred in
producing the non-assessable non-exempted income. There should be an adequate association

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between the assessable income and the expenses to be allowed for deductions under any one
of the criteria stated in positive limbs.
Denoting from the current situation of Sally the expenditure that is incurred for her
child in the day-care centre would not be considered for deductions. This is because the
expenditure incurred by Sally to mind her child in the day-care does not bears any association
in derivation of the taxable income. The taxation commissioner in “Lodge v Federal
Commissioner of Taxation (1972) ATC 4174” explained that the taxpayer is prohibited from
any entitlement to claim allowable deductions relating to the expenditure that was incurred in
her child day care (Oishi et al., 2018). The expenditure does not holds any nexus with the
income producing activities and the expenditure were entirely private expenditure which is
non-allowable for deduction both under the positive limbs and under the second negative
limbs.
Denoting from the verdict of the court of law in the situation of Sally the child care
expenditure is held as purely a non-deductible private expenditure. The expenses is neither
regarded as relevant not it can be considered incidental in the derivation of taxable earnings.
Conclusion:
On a conclusive note, with reference to the “section 8-1 of the ITAA 1997” Sally is
prohibited from claiming allowable deductions for her child care expenditure. The
expenditure failed to meet the conditions of positive limbs nor it deductible under section
“section 8-1 (2) of the ITAA 1997”.

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Answer to question 3:
Issue:
Will the activities of the taxpayer amounts to carrying of business and the profits from
isolated transactions are assessable under section 25 (1) of the ITAA 1936.
Laws:
1. “Taxation ruling of TR 92/3”
2. “Section 25 (1) of the ITAA 1936”
3. “Federal Commissioner of Taxation v Myer Emporium Ltd”
Applications:
The taxpayer in the present situation is carrying on the business of plumbing. With the
objective of retiring a land of 20 hectare was purchased by Joseph to harvest wildflower and
selling the same to market. Based on preliminary arrangements the land was cleared with the
decision of not harvesting the first commercial crops for a period of five years. The “taxation
ruling of TR 92/3” provides guidance in ascertaining whether the profits generated from the
isolated transactions constitute income and hence taxable in “section 25 (1) of the ITAA
1936” (McDaniel, 2017). The isolated transaction includes the transactions that are out of the
ordinary course of the business of the taxpayer carrying on the business.
The full federal court in the “Federal Commissioner of Taxation v Myer Emporium
Ltd” stated that the intention of the taxpayer that was assigned the right of receiving the
income in the form of income from the loans made in return of lump sum (Barkoczy, 2016).
The high court remained dependent on the second strands and held that the amount received
by the taxpayer constitute income.

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Correspondingly in the current situation of Joseph the land was bought with the
intention of making profit. The land constituted a capital asset and the income derived from
such transaction carries the intention of making profit or gain. The transaction that was
entered into by Joseph was in the due course of carrying on of his profession of plumbing.
The taxation ruling of TR 92/3 explains that the objective of the taxpayer is not held as the
subjective intent or the objective of the taxpayer (Tan et al., 2016). Instead it refers to the
intention of the taxpayers that is determined from the objective of considering the facts and
situation of the case.
Similarly in the current case of Joseph it is not essential that the objective or the
purpose of making profit was the single or the dominant intention or the objective of entering
into the cultivation of wildflowers (Cao et al., 2015). The evidences obtained from joseph
sufficiently suggest that whether the profit making formed the significant objective. Joseph
held the requisite purpose at the time of purchasing the land and commence the operation.
The plantation of wildflower by Joseph is viewed as the sufficient purpose in making
sure that the venture results in profits. The purchase of land and commencing activities of
plantation reflects the evidence of profit making purpose even though it would take joseph a
five year time to harvest first commercial crop. For Joseph the profits generated from the
isolated transactions constitute income and hence taxable in “section 25 (1) of the ITAA
1936”.
Conclusion:
The purchase of land constituted a capital asset for joseph that carried the intention of
profit making purpose. Conclusively the profits generated from the isolated transactions
institute income henceforth, taxable in “section 25 (1) of the ITAA 1936”.

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Reference List:
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income
Taxation. Wolters Kluwer Law & Business.
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Bloom, I. M., & Joyce, K. F. (2014). Federal Taxation of Estates, Trusts, and Gifts.
LexisNexis.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ... & Wende, S.
(2015). Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
Hill, F. R., & Mancino, D. M. (2014). Taxation of exempt organizations.
McDaniel, P. (2017). Federal Income Taxation. Foundation Press.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage
Learning.
Oishi, S., Kushlev, K., & Schimmack, U. (2018). Progressive taxation, income inequality,
and happiness. American Psychologist, 73(2), 157.
Pope, T. R., Rupert, T. J., & Anderson, K. E. (2014). Prentice Hall's Federal Taxation 2015
Comprehensive. Pearson Higher Ed.
Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.
Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay
with their practitioners? Trust, competence and aggressive advice. International
Small Business Journal, 34(3), 329-344.

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Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation
Law 2016. OUP Catalogue.