Analyzing Income Assessment and Taxpayer Liability Under ITAA 1936

This case study delves into the income assessment and taxpayer liability of Jenny Steward, a personal trainer, under Australian taxation law, specifically focusing on Section 25(1) of the ITAA 1936 and Section 6-5 of the ITAA 1997. It examines various income sources, including fees from personal training lessons (both pay-as-you-go and advance payments for 12-week sessions), prize money from a bodybuilding competition, and an unsolicited gift from a client. The analysis applies relevant legal principles established in cases like Scott v CT, Arthur Murray (NSW) Pty Ltd v FC of T, and Stone v FC of T to determine whether these receipts constitute assessable income. The study concludes by assessing Jenny's tax obligations based on the nature and source of her income, differentiating between taxable income and non-taxable gifts, and considering the timing of income recognition based on recoverable debt principles. Desklib provides access to similar case studies and resources for students.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
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Table of Contents
Answer to question 1:.................................................................................................................2
Issue:..........................................................................................................................................2
Rule:...........................................................................................................................................2
Application:................................................................................................................................5
Conclusion:................................................................................................................................8

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Answer to question 1:
Issue:
Will the taxpayer be held liable for fees derived under the “subsection 25 (1) of the
ITAA 1936” as income from the ordinary concepts? The case study also revolves around the
issue regarding whether the prize winning from body building would be treated as ordinary
income under the ordinary concepts of “section 6-5”? Will the taxpayer be held taxable for
the gifts received from Doreen?
Rule:
“Section 25 (1) of the ITAA 1936” explains that taxable income of the taxpayer must
include the gross income that is obtained directly or indirectly from all the sources. This
includes the situations where a taxpayer is the resident of Australia or non-resident of
Australia and held assessable for all the source in Australia1. Under the “subsection 6-5 (2)
of the ITAA 1997” the taxable earnings of a taxpayer would comprise of ordinary income
that is derived during the income year.
As per “section 6-5 of the ITAA 1997” majority of the earnings that comes to the
taxpayer is treated as ordinary income. As per the judicial concept, the meaning of income is
explained in “Scott v CT (1935)” where receipts must be viewed as income and must be
treated based on the ordinary concepts and use of mankind2. An item that has the nature of
income will be treated as earnings up to the sum of realisable value.
1 Pinto, Dale. "State taxes." Australian Taxation Law. CCH Australia Limited, 2013. 1763-
1762.
2 Barkoczy, Stephen, Foundations Of Taxation Law 2014

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The question of fee income is obtained under the “subsection 25 (1) of the ITAA
1936” and should be ascertained by the orientation of evidences in every cases. Particularly,
reference must be made to the contract terms or the arrangements that is entered into by the
person providing service and the recipient of service3. As a general rule, it is vital to ascertain
on the appropriate grounds of the contract that the arrangement is a recoverable debt and it is
created in a manner that an individual providing service is not indebted to undertake any
additional steps prior to being entitled for payment. A fee is regarded as the recoverable debt
in the applicable sense even though time for payment has been allowed4. An exception to the
rule is that income from fees is held taxable when a recoverable debt is created. Furthermore,
the receipts is only held as income when the income from fees is obtained in advance or the
fees is related to the work.
A specific contract is created in a manner that the recoverable debt obligation for the
professional work done is established when the business persons bills the customer. An
arrangement for work is where the contract or terms of arrangement are not expressed in
writings5. Under such situations income from fees is obtained in the income year where the
business persons bill the clients. A fee income is held as recoverable under the relevant
situations if the clients has been allowed time.
Under the arrangement of the contract, a recoverable debt might be formed and the
business person is not required to bill the customer once the work is entirely finished. If such
is the situation, earnings from fees is obtained during the income year where the work is
3 Brokelind, Cécile, Principles Of Law 2013.
4 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
5 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013

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entirely completed. The law court in “Farnsworth v FC of T (1949)” held that income is
considered taxable under the accrual basis when it is derived under “subsection 25 (1) of the
ITAA 1936”6.
While the court of law in “Henderson v FC of T (1970)” held that a fee is
recoverable based on the relevant instance that if the time has been allowed to pay. An
exception to the rule was stated in “Arthur Murray (NSW) Pty Ltd v FC of T (1965)” that
income is obtained when the recoverable debt is created. An amount is only received in
advance when the goods are supplied or services are provided7.
A business person would at times obtain fee in advance for the work to which it is
related. If the arrangement of the contract requires that the fee should be paid in advance,
then earnings from fees is derived in the year when the business person finishes the work.
Whereas, if a client pays the fees in advance then income from fees is derived when the
recoverable debt is created.
The law court in “Moore v Griffiths (1972)” held that the mere prize is not held as
income. An exception to this rule is that it may be held as income if there are any sufficient
connection with the income generating activities of the taxpayer. The law court in “Kelly v
FC of T (1985)” held that the professional footballer received the award for being the best
and the fairest player8. The amount was held as taxable income since the receipt of award was
regarded as incidental to his work or employment and was also related to the usage of his
skills. Similarly, the court of law in “Stone v FC of T (2005)” held that the taxpayer was the
6 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
7 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
8 Jover-Ledesma, Geralyn, Principles Of Business Taxation 2015 (Cch Incorporated, 2014)

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policewomen and javelin thrower who made approximately $39,000 in the form of salary
along with endorsement and prize money9. The taxpayer was held assessable for the income
made from the business of professional athlete since the amount that was received constituted
income.
A gain that is a mere gift does not have the nature of income. As held in the case of
“Hayes v FC of T (1956)” an accountant received the shares in the business from the former
boss or business owner and the same was not held as income. Similarly, in the case of “Scott
v FC of T (1966)” a solicitor received the sum of $10,000 pound as a gift from the wife of
longstanding client out of her husband estate was not regarded as income10. The unsolicited
gift does not turn out to be part of the income of the recipient simplicity because of the
generosity was inspired by the goodwill.
Application:
As evident in the present situation of Jenny she ran a business of personal trainer and
charged from its clients in two ways namely paying after the lesson is provided or in advance.
The taxpayer also made the arrangement to provide lesson to the clients who wanted to take
lesson continuously and to the new members that wanted to take lesson before using the
equipment of fitness in the gym. The taxpayer derived a sum of $6,000 from providing the
occasional lesson and also derived $28,800 from the 12-week lesson. “Section 25 (1) of the
ITAA 1936” is applicable on Jenny as the taxpayer is required to include the gross income
that is obtained directly or indirectly from all the sources. The fees that is obtained by Jenny
from her business of personal trainer constitutes receipts under the ordinary concepts11. The
9 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
10 Christie, Michael. "Principles of Taxation Law 2015." (2015): 814-816.
11 Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

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fees that is obtained by her has the character of income and will be held as income up to the
amount of realisable value.
The instances obtained from the case study provides that the clients of Jenny were
required to pay in advance for the 12 lessons even though she would refund the money if she
fails to provide her client with lesson. The contract creates a recoverable debt in a manner
that Jenny is not obliged to undertake any additional steps prior to becoming entitled for the
payment. In such a situation income from fees is obtained in the income year where the
business persons bills the client. Similarly in case of Jenny, receipts from fees is obtained in
the income year when she bills her clients. A fee income is held as recoverable debt under the
relevant situations if the clients has been allowed the time12.
As evident in the situation of Jenny a recoverable debt is created and she cannot bill
her client until she renders 12 lessons for the fees that is received in advance. Citing the
reference of “Henderson v FC of T (1970)” the receipt of $6,000 and $28,800 will be held as
income under the ordinary concept of “section 6-5 of the ITAA 1997” since it is obtained
during the income year of 30 June 1980 where the work is entirely completed13.
In the later part of the case Jenny reported the receipt of $7,800 for the 12-week
lesson commencing from 1st June 2018. Citing the reference of “Arthur Murray (NSW) Pty
Ltd v FC of T (1965)” the receipts constitute an income for Jenny since a recoverable debt
was created and the amount that was received by her was “receivable as advance” relating to
the service that she provided14. As the part of her business activity Jenny obtain fee in
12 Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and
practice. Routledge, 2016.
13 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
14 Sadiq, Kerrie, Principles Of Taxation Law 2014

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advance for the gym training lesson. The arrangement of Jenny contract was such that where
the client that seek to obtain 12 weeks training were required to pay the fee in advance. The
fee income was derived by Jenny during the income year in which she completes the work for
which the fees is related. With reference to “subsection 25 (1) of the ITAA 1936” the
assessable income of Jenny would include the gross receipts from her training lessons since a
recoverable debt was created and training was completed in the year in which the services
were provided.
In the later instances it was noticed that Jenny won a sum of $5,000 in body building
competition. Citing the evidence of “Stone v FC of T (2005)” the winnings sum of $5,000
from the competition would be held as the taxable income. Referring to the case of “Kelly v
FC of T (1985)” the winning from the body building will be considered as the taxable
income since it was as incidental to her work and was also related to the usage of her skills.
Jenny also earned a sum of $8,000 from working as the physical trainer.
The receipt of $8,000 by Jenny from working as the physical trainer constitute income
under the ordinary concepts. Referring to the judicial concept of income explained in “Scott
v CT (1935)” the receipt of $8,000 will be held as income and should be treated based on the
ordinary concepts “section 6-5 of the ITAA 1997”15.
Jenny accidently damaged her treadmill at the time of providing lesson that valued
$500. As a mark of appreciation, Jenny unexpectedly received a sum of $1,000 from Doreen
whom she had provided training and has recently won a bodybuilding competition. Referring
to the case of “Scott v FC of T (1966)” the receipt of $1,000 from Doreen by Jenny does not
constitute income rather it should be considered as receipt of gift16. Citing the instance of
15 Woellner, R. H, Australian Taxation Law Select 2013 (CCH Australia, 2013)
16 Woellner, R. H et al, Australian Taxation Law Select 2014

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“Hayes v FC of T (1956)” the sum of $1,000 will not form the part of Jenny’s tax liability
since the amount cannot be not held as income.
Conclusion:
On a conclusive note, under “subsection 25 (1) of the ITAA 1936” the assessable
income of Jenny would include the gross receipts from her training lessons provided because
a recoverable debt was created and the training was completed in the year in which the
services were provided. The winning of prize from body building and working as the physical
trainer should be held as income under the ordinary concepts of “section 6-5 of the ITAA
1997” while the sum of $1,000 constitute gift which cannot be held as taxable income.

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