Holmes Institute Taxation Law Individual Assignment - T3 2019

This assignment solution addresses taxation law principles through a case study and problem-solving approach. The first part examines the tax liability of various income receipts, including tips, employment income, gifts, and fringe benefits, referencing relevant legislation and case law such as ITAA 1997 and cases like Calvert v Wainwright and Moorhouse v Dooland. The second part focuses on Capital Gains Tax (CGT), exploring pre-CGT assets, personal use assets, small business CGT concessions, and collectibles. It analyzes scenarios involving the sale of a house, a car, a photography business, furniture, and paintings, applying relevant sections of the ITAA 1997 to determine tax implications and eligibility for concessions. The assignment demonstrates an understanding of Australian income tax, CGT, and their practical application.

Running head: TAXATION LAW
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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:............................................................................................................................3
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................5
Answer A:..............................................................................................................................5
Answer B:...............................................................................................................................6
Answer C:...............................................................................................................................6
Answer D:..............................................................................................................................7
Answer E:...............................................................................................................................8
References:.................................................................................................................................9

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Answer to question 1:
Issues:
The case study will be taking into the account the tax liability of numerous receipts
that is received by the taxpayer derived in the course of employment.
Rule:
The taxable income of the taxpayer involves the assessable income following the
deductions. As given in the “sec 6-5 (1)” the assessable earnings includes the income in
agreement with the “ordinary concepts”. The general characteristics of income states that it
must be income and should convertible into money (James, Sawyer and Wallschutzky 2015).
Certain unanticipated or voluntary payment that a taxpayer receives in the form of incidence
of employment it is regarded as ordinary income. As noted in “Calvert v Wainwright
(1947)” tips that is received by the taxi driver taxable as ordinary income under “sec 6-5 (1)
ITA Act 1997”.
Where an employee gets any receipts that is related to employment and from
rendering any personal service then it is subjected to tax for the recipient or may amount to
fringe benefit for the employer. A relation or nexus with the receipts originating from the
taxpayer’s personal service amounts to ordinary income (Dixon and Nassios 2016). Nexus is
commonly established on the items of personal service such as salary and wages. The
taxation commissioner in “Moorhouse v Dooland (1955)” stated that amounts which a
taxpayer gets directly or indirectly from the personal service of taxpayer is regarded as
ordinary earnings.
Gifts that a person gets for their personal qualities cannot be regarded as ordinary
income and it is not included into the taxable income of the receiver (Evans, Minas and Lim
2015). Accordingly in “Scott v FCT (1966)” a solicited gift cannot be viewed as ordinary

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income only for the reason that it was prompted by appreciation for certain services, since
other factors should also be considered.
As stated under “sec 136 (1) FBTAA” a fringe benefit is viewed as benefit that is
given to an employee by an employer during any time or in relation to the tax year. Fringe
benefits normally includes any type of rights, interest in the real or personal property,
privilege services or facilities. The benefits commonly involves the non-salary benefits given
in relation to employment of employee. Under the “sec 66 (1)” the FBT is to be paid by
employer based on the grossed up assessable value of benefit (Kudrna 2015). The relation
among the employment and the benefit might be either direct or indirect. The law court in
“FCT v J&G Knowles (2000)” explained that there should be a reasonable and discernable
and rational connection amongst the benefit and the service.
Cash gifts that is received by a person is not held as ordinary income rather it amounts
to capital receipts. As noted in “Hayes v FCT (1956)” whether there is any kind of personal
relationship amongst the donor and the recipient, the presence of any pre-existing personal
relation would result the voluntary payment to be less likely an ordinary earnings (Graetz and
Warren 2016). Commonly, money given as gift from a member of family due to personal
reason and the gift is not related to any income generating activity then such amount is not
assessable and not needed to be reported in the tax return.
Application:
The case study provides that Emmi is studying accounting and works in part-time
basis in Crown Melbourne Restaurant. She reports the receipts of tips that amounted to $335
from her customers. The tips received by Emmi amounts to unanticipated or voluntary
payment that received in the form of “incidence of employment”. Citing “Calvert v

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Wainwright (1947)” it is regarded as ordinary income “sec 6-5 (1) ITA Act 1997” because it
holds essential relation with her income producing activity.
Later in the year Emmi also got a payment of $25,000 from her employment in Crown
Melbourne restaurant. Referring to “Moorhouse v Dooland (1955)” the receipts of income
for Emmi is related to her employment and from rendering any personal service (Ford and
Dibden 2019). A relation or nexus with the receipts is established with the personal service
and amounts to chargeable ordinary income under “sec 6-5 ITAA 1997”.
During the Christmas time, a customer of Emmi gave her an expensive perfume that
had the value of $250. The perfume that is received by Emmi is for their personal qualities
and cannot be regarded as ordinary income under “sec 6-5 ITA Act 1997”. Referring to
“Scott v FCT (1966)” it is a solicited gift and cannot be viewed as ordinary income only for
the reason that it was prompted by appreciation for Emmi’s services.
The employer of Emmi paid her every month with an entertainment event expenses.
Furthermore, the employer of Emmi also spend $380 on meals that was consumed by her.
Under the “sec 136 (1)”, the food and entertainment event is a non-salary fringe benefits that
is given in relation to employment of Emmi. Referring to “FCT v J&G Knowles (2000)” the
benefit is directly given to her and holds necessary connection with the service. As a result,
under “sec 66 (1)” the employer of Crown Melbourne restaurant is required to pay FBT
based on the grossed up assessable value of benefit.
Finally during the year Emmi received $15,000 as a Christmas gift from her father.
Referring to “Hayes v FCT (1956)” there is a personal relationship between Emmi and
father. Because of the presence of pre-existing personal relation, the voluntary payment is
less likely to be an ordinary earnings (Kenny, Blissenden and Villios 2018). The money was

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given as a result of personal reason and it is not related to any income generating activity.
The amount is not assessable and Emmi is not needed to report the same in her tax return.
Conclusion:
The above stated case of Emmi can be concluded by explaining that, her assessable
income would include the tips that is received by her in cash from her employment with
crown Melbourne restaurant. Her assessable income would also include the income derived
from working in the restaurant. While the Christmas gift received from her father and one of
her customer is not taxable as ordinary income because there is no nexus with her income
producing activity.
Answer to question 2:
Answer A:
The basic feature of CGT is that, it is applicable on the assets that is purchased on or
following the 20 September 1985. These assets are better known as “Post-CGT Assets” and
which have been subsequently sold and disposed (Hasseldine and Fatemi 2018). Assets
which is bought prior to 20 sept 1985 they are termed as “Pre-CGT Asset” and capital gains
or loss happening from the sale is to be simply ignored by the taxpayer.
In the year 1981 a house was purchased by Liu at an acquisition cost of $55,000. Liu
used the house as her main residence for the whole period of her ownership and finally sold
the house when it had a market worth of $630,000. The house will be classified as pre-CGT

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asset because Liu had purchased in 1981 for a sum of $55,000. Furthermore, the capital gains
which Liu has made upon its disposal will not attract any tax liability.
Answer B:
Accordingly in “sec 108-5 ITAA 1997” the definition of CGT asset include any type
of property or lawful rights which is not a property. The CGT asset of a taxpayer might be
categorized as collectables, personal use asset or other assets. Denoting “sec 108-20 ITAA
1997”, a CGT asset represents the personal use asset (besides collectible) that is used or kept
by taxpayer for their own use (Pert, Chen and Carvosso 2018). The special rules explains
under “sec 118-20 (1)” that capital loss should be ignored by taxpayer.
Accordingly Liu reported disposal of a car that worth $8,000. The car was originally
purchased by Liu for a sum of $37,000. Car must be categorized as personal use asset under
sec 108-20 for the reason that she kept the car for her own use and enjoyment. When the car
was sold a capital loss was suffered by Liu. Referring to the special rules given in the “sec
108-20 (1)”, Liu should ignore the capital loss suffered from selling her car.
Answer C:
According to the “Division 152 ITAA 1997” concessions is given to the small business
from capital gains (Dixon and Nassios 2016). In order to obtain concessions certain basic
conditions needs to be satisfied by the taxpayer of small business. These are;
a. A business should be small in size with the aggregate net worth of assets is not more
than $6 million.
b. The small business has successfully met the criteria that all its CGT assets are active
assets.
On meeting the above given eligibility criteria the small business are provided with
the access four concessions. These are;

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15-year exemption: The total sum of capital gains made from selling the CGT asset is
exempted given the owner of asset has held for a minimum of 15 years and the age of
taxpayer is 55 years or more.
50% reduction: The taxpayer that simply qualifies for concessions is allowed to lower the
capital gains by 50%, following the general 50% discount percentage.
Retirement concession: Under this concession a taxpayer is given the permission of
disregarding the capital gains following the sale of CGT asset related with the small business
up to a limit of $500,000, given the capital gains proceeds is used for retirement purpose.
Roll-over relief: Under this, the capital gains is deferred where the taxpayer simply
purchases a replacement asset.
As evident in the current situation it is noticed that Liu had a small business of
photography studio. The photography business was sold by Liu and a buyer had took over it
for $125,000. The sale price of photography asset involved $53,000 and goodwill amounted
to $50,000. Liu is eligible for claiming small business CGT concession because the net value
of the asset is within the limit of $6 million. Furthermore, Liu can obtain a 15-year exemption
under “Subdivision 152-B” because she owned the asset for greater than 15 year and also
ages more than 55 years old. As a result, Liu will be granted full exemption from CGT under
the 15-year asset ownership.
Answer D:
There are special rules which is applied on the personal use asset. Under the “sec
108-20 (1)” the capital loss happening from sale of personal use asset must be simply
disregarded by the taxpayer. Evidently in the current situation it is noticed that Liu had
bought a furniture for a sum of $4,800 which was sold for $2,000. The furniture is classified

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as personal use asset under “sec 108-20 ITAA 1997”. Therefore, the capital loss suffered
from selling the furniture should be disregarded by Liu under “sec 118-20 (1)”.
Answer E:
Namely under the “sec 108-10 ITAA 1997” collectible refers to those assets that is
mainly used by tax payer or kept by taxpayer for their private use and enjoyment (Pert, Chen
and Carvosso 2018). The list of asset given in “sec 108-10 (2)” includes antiques, jewellery,
rate stamp, coins, paintings, sculpture etc. Besides this there is also a special rules given for
collectables. Under the “sec 118-10 (1)” capital gains is required to be simply ignored when
the cost of the asset is not more than $500 or less.
Accordingly in the present case of Liu, it is found that she has large number of
paintings that she bought from a second hand shop. The cost of each painting is not more than
$500 and all the paintings were disposed for $28,000. Paintings acquired by Liu must be
categorized as collectibles under “sec 108-10 (2) ITAA 1997” because it was kept by her for
private enjoyment. Now, as the paintings fail to meet the cost base criteria, the capital gains
made by Liu from paintings will be ignored under “sec 118-10 (1)” because none of her
paintings costs more than $500. In addition to this, Liu also sells one of the paintings that was
purchased directly from the artist for $1000 however, the actual cost of paintings was $8,000.
The sale of painting has led to capital gains and will be considered taxable under “sec 102-5”
as statutory income.

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References:
Dixon, J. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia.
Centre of Policy Studies (CoPS), Victoria University.
Dixon, J. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia.
Centre of Policy Studies (CoPS), Victoria University.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An
alternative way forward. Austl. Tax F., 30, p.735.
Ford, S. and Dibden, A., 2019. Gifted assets, valuation and ordinary income. Taxation in
Australia, 53(10), p.560.
Graetz, M.J. and Warren, A.C., 2016. Integration of corporate and shareholder
taxes. National Tax Journal, Forthcoming, pp.16-36.
Hasseldine, J. and Fatemi, D., 2018. Tax practitioner judgements and client advocacy: the
blurred boundary between capital gains vs. ordinary income. eJTR, 16, p.303.
James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives
in Australia, New Zealand and the United Kingdom. eJTR, 13, p.280.
Kenny, P., Blissenden, M. and Villios, S., 2018. Australian Tax 2018.
Kudrna, G., 2015. Means Testing of Public Pensions: The Case of Australia. Michigan
Retirement Research Center Research Paper, (2016-338).
Pert, A., Chen, H. and Carvosso, R., 2018. 'Tech Mahindra Ltd v Federal Commissioner of
Taxation'(2016) 250 FCR 287. Australian Year Book of International Law, 35, p.276.

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