Student Sol 03 Assessable Income - Personal, Property Business PDF

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Taxation Law & Practice Workbook

Short Answer Questions 1- 5. Answer the following questions. 3.1

What are the conditions for $1,000 Employee Share Schemes (ESS) interest grant to be tax free? Employee’s must have Adjusted Taxable Income less than or equal to $180,000. They must also not own more than 5% of the issuing entity or control than more than %% of the voting rights. The scheme must also meet the Deferral Scheme conditions. ESS interests need to be subject to real risk of forfeiture or the employer receives no more than $5,000 under a salary sacrifice arrangement in a year.

3.2

When are Employee Share Schemes (ESS) grants taxable? ESS grants that are not eligible for reduction are taxed up-front when the ESS are acquired. This is when the interests vest and the employee obtains an indefeasible interest. When ESS interest are acquired under a deferral scheme they are taxable on the earlier of disposal or 7 years. Eligible ESS interests in small start-up companies may be deferred until disposal.

3.3

What is the effect of Personal Services Income (PSI) being earnt in a personal services business? PSI income that is earnt as part of a PSB is exempt from the PSI regime.

3.4

Explain the importance of the Personal Services Income (PSI) results test and employment test and when they are relevant? The PSI results test and employment test are considered when income is PSI. Meeting either test will qualify mean it is earnt in a genuine PSB. The third alternative test for a PSB is whether an ATO determination has been received.

3.5

What tax rates may apply to Personal Services Income (PSI) earned by a company and under what circumstances? PSI income that is not earned as part of a PSB is subject to the PSI regime. The PSI income that is earned by the company will need to be included in an individual’s income tax return and taxed at individual marginal rates, rather than the company tax rate.

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Chapter 3: Assessable Income – Personal, Property and Business

3.6

(Income from personal exertion) Frida is a resident taxpayer employed by Sharpe Office Supplies. The following transactions occurred during the 2019/20 income year: • Frida received a gross salary of $60,000. This was paid into a bank account held by her husband Ray. •

Frida did not take any annual leave during the 2019/20 income year. She had accrued 5 weeks’ annual leave as at 30 June 2020 which has a value of $6,000.

•

Frida won $3,500 from her share of a Powerball syndicate with her work colleagues.

•

In April 2020, Frida received $1,500 cash as a prize for employee of the month.

•

In May 2020, Frida also received a holiday to Fraser Island valued at $4,000 as a reward for attaining the highest sales figures at work.

•

In July 2019, Frida received a wedding gift from her work colleagues worth $750 to celebrate her marriage to Ray.

•

In January 2020, Sharpes Office Supplies reimbursed Frida $3,000 of selfeducation costs upon the successful completion of her work-related logistics course.

For each of these transactions indicate which amounts are to be included in Frida’s assessable income.

Solution Gross Wages

Assessable even though paid into husband's account.

$60,000

Accrued Leave Powerball winnings Cash Prize Holiday Prize Gift from Colleagues Reimbursement of Costs ASSESSABLE INCOME

Not assessable until received

0 0 1,500 0 0 0 61,500

Windfall, not related to work activities Similar to a cash bonus Fringe benefit, not assessable Private, not related to work activities Not assessable, possibly a fringe benefit

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Taxation Law & Practice Workbook

3.7

(Interest income) The following resident taxpayers received interest from a range of transactions: • • • • • •

Tennille received $9,600 from the maturity of a term deposit. The capital sum was $9,000 and the interest component was $600. Sam and Pam are credited with a total of $800 for interest on their joint savings account. Bernice received an amount of $1,484 interest. This amount is net of $1,316 of tax, which was deducted for not providing a tax file number. Amy received interest of $2,700 from an account held in Hong Kong. This amount is net of $300 withholding tax. Max has an amount of $70 from the ATO being interest credited to his 2018/19 income tax assessment for overpayment of tax. Hank, a business taxpayer, received an amount of $400 interest on a loan he has provided to his employee.

Indicate any amounts from these transactions that is assessable income.

Solution Tennille Sam and Pam Bernice Amy Max

Interest - term deposit Interest - joint account Interest - gross Interest - UK Interest - ATO

interest portion only 1/2 x 800 each 1,484 + 1,316 2,700 + 300

$600 400 2,800 3,000 70

Interest does not have to be from an investment, it can be any return on a capital sum.

Hank

Interest - loan to employee

22

400

Chapter 3: Assessable Income – Personal, Property and Business

3.8

(Income from rental property) Smokie Roberts owns a townhouse which he leases to tenants and derives rental income. The following transactions relate to the 2019/20 income year: •

Smokie received receipts totalling $23,000 from his real estate agent. This is a net amount. It comprised gross rent of $25,000 less agent’s fees of $2,000.

•

Smokie’s tenant paid $2,000 as a bond to the Rental Bond Board. This is a security deposit on the property that is refundable when the tenant leaves the property in satisfactory condition.

•

On 15 July 2019, Smokie received an amount of $20 being the tenant’s share of the lease preparation fee.

•

Smokie received amounts totalling $800 being the tenant’s reimbursement of the usage component of water rates.

•

As at 30 June 2020 the tenants owed $1,000 of outstanding rent for the period 16 June to 30 June 2020.

Indicate any amounts from these transactions that is assessable income for the 2019/20 income year.

Solution

Gross Rent Bond paid by Tenant Recovery of Lease Fee Recovery of Water Rates Rent Outstanding ASSESSABLE INCOME

23,000 + 2,000 not income - capital sum recovery of a deductible amount recovery of a deductible amount not assessable until received

23

$25,000 0 20 800 0 25,820

Taxation Law & Practice Workbook

3.9

(Calculation of tax payable from dividend income) Jim Dough, a single resident taxpayer, received the following amounts from investments during the 2019/20 income year: Fully Franked Dividends – Dynamic Ltd (franking credit $9,000) $ 21,000 Partly Franked Dividends – Static Ltd (franking credit $2,400) 15,000 Unfranked Dividends – Lost Ground Ltd 20,000 Jim had no other income or deductions during the year. Calculate Dough’s taxable income for the 2019/20 income year. Calculate Dough’s net tax payable or refundable for the 2019/20 income year.

Solution $ Dividends - Dynamic Franking Credit - Dynamic Dividends - Static Franking Credit - Static Dividends - Lost Ground Ltd TAXABLE INCOME

21,000 9,000 15,000 2,400 20,000 67,400

Tax on $67,400 3,572 + 32.5% x (67,400 - 37,000) Less: Low and middle income tax offset Add: Medicare Levy

2% x 67,400

Less: Franking Tax Offset TAX PAYABLE

9,000 + 2,400

24

13,452.00 1,080.00 12,372.00 1,348.00 13,720.00 11,400.00 2,320.00

Chapter 3: Assessable Income – Personal, Property and Business

3.10

(Calculation of tax payable, excess franking credits) Penny Hurt, a single resident taxpayer, received the following amounts from investments during the 2019/20 income year: Dividends – Healthy Ltd: Franked Amount $ 7,000 Franking Credit 3,000 Dividends – Struggling Ltd: Unfranked Amount 9,000 Penny had no other income or deductions during the year. Calculate Penny’s taxable income for the 2019/20 income year. Calculate Penny’s net tax payable or refundable for the 2019/20 income year.

Solution

$ Dividends - Healthy Imputation Credit - Healthy Dividends - Struggling TAXABLE INCOME Tax on $19,000 Less: Low-income Tax Offset and Low and middle income tax offset

7,000 3,000 9,000 19,000 19% x (19,000 - 18,200)

limited to

Less: Franking Tax Offset TAX REFUNDABLE

Note - any excess franking tax offset is refundable.

25

152

152 0 3,000 3,000

Taxation Law & Practice Workbook

3.11

(Income from various sources) During the 2019/20 income year, Selina Matterson (a single resident taxpayer aged 41) had the following receipts: Salary (net of $18,000 PAYG tax withheld) Fully Franked Dividend – PPP Ltd Unfranked Dividend – QQQ Ltd Interest (net of $846 TFN withheld)

$ 55,000 9,800 900 954

Selina had no deductions. She was covered by private hospital insurance. Calculate Selina’s taxable income for the 2019/20 income year. Calculate net tax payable by Selina for the 2019/20 income year.

Solution

Gross Salary Dividend - PPP Franking Credit Dividend - QQQ Interest TAXABLE INCOME

$ 73,000 9,800 4,200 900 1,800 89,700

55,000 + 18,000 9,800 x 30/70 954 + 846

Tax on $89,700 3,572 + 32.5% x (89,700 - 37,000) less: Low and middle income tax offset Add: Medicare Levy

20,699.50 1,080.00 19,619.50 1,794.00 21,413.50

2% x 89,700

Less: PAYG Withheld TFN Withheld Franking Tax Offset TAX REFUNDABLE

18,000.00 846.00 4,200.00

26

23,046.00 1,632.50

Chapter 3: Assessable Income – Personal, Property and Business

3.13

(Other receipts while conducting business) The following are resident taxpayers that derive income from conducting business. •

Quentin conducts business as a general medical practitioner. During the year, he received $79,000 in fees direct from patients, and $154,000 in receipts from Medicare.

•

Warren derives business income as a removalist. During the year, due to an error by his mechanic, Warren’s truck was off the road for 4 weeks and eventually written off as irreparable. All figures are exclusive of GST where applicable. He received the following amounts from his insurance company: Reimbursement of deductible truck repairs $ 14,000 Demurrage (compensation for loss of income) Proceeds for disposal of Truck (equal to book value)

16,000 75,000

Sandy operates a general food store. During the year, his store was subject to two armed robberies. He received the following amounts from his insurance company (exclusive of GST): Loss of cash sales from robberies $ 21,000 Loss of Trading Stock 7,800 Reimbursement of deductible shop repairs 3,200

•

For each taxpayer, calculate their assessable income from conducting business for the 2019/20 income year.

Solution Quentin

$

Ordinary income from business

79,000 + 154,000

233,000

Warren Recovery of additional repairs Demurrage Recovery of truck

capital

14,000 16,000 30,000

Sandy Recovery of cash Recovery of trading stock Recovery of shop repairs

represents cash sales deductible amount deductible amount

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21,000 7,800 3,200 32,000

Taxation Law & Practice Workbook

3.14

(Business or Hobby) •

Frank derives business income as a freelance photographer. During the year, he won an industry award for one of his photographs amounting to $4,000.

•

Marcie receives $600 for sales of pottery. The sales relate to items that she has made as part of a hobby (her expenses are in excess of $1,000). Wendy receives $200 as an award for the best painting in a local art exhibition. Wendy paints two or three artworks a year, which she displays at home or gives as gifts to family. Phil receives $4,800 from mowing lawns in his local neighbourhood. He does this each Saturday morning before his weekly game of golf.

•

•

Giving reasons, indicate whether each taxpayer is conducting a business or a hobby for tax purposes.

Solution Frank

$

Receipts from conducting business

4,000

Marcie Receipts from hobby

0

Wendy Not a business activity - therefore not assessable

0

Phil Business recieipts - recurring in nature

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4,800

Chapter 3: Assessable Income – Personal, Property and Business

3.15

(Other forms of income from conducting business) The following are resident taxpayers. Each of the following transactions is exclusive of GST: •

Troy operates an advertising agency. During the year, he has a ‘contra’ transaction with his solicitor to the value of $25,000.

•

Harrison derives business income as a barrister. He instructs one of his clients to pay his fee of $19,000 direct to Commonwealth Bank with whom his wife has a mortgage.

•

Karl conducts business as a contract plumber. He completes a subcontract job for a large construction company in return for airfares and accommodation to the value of $8,000 rather than a cash fee.

•

Rob conducts business as a lawyer. He drafts some changes to a Will for one of his clients and does not charge a fee but receives a $250 pair of cufflinks.

•

Petros conducts business as a property developer. As a result of extensive travel throughout the year, Petros receives 178,000 frequent flyer points which he is able to redeem in the form of air tickets to the value of $3,280.

•

Shannon trades as a furniture retailer. During the year, she receives $32,800 from a supplier as commission for selling goods on consignment.

•

Len trades as a carpet retailer. During the year, he receives cash subsidies and incentives from a supplier for selling over 2 kilometres of their carpet. This amounted to $36,000.

•

Shelley operates a coffee shop. Fiasca, a coffee supplier, gives her an espresso machine as an incentive to use their coffee. The machine is worth $12,000.

•

They also provide her with some outdoor umbrellas and furniture with the name of their coffee. These are valued at $8,000 but must be returned to Fiasca if she ceases to buy their coffee.

Indicate any amounts from these transactions that is assessable income.

Solution Troy

$

Income can be received via the extinguishing of a liability.

25,000

Harrison Constructive receipt.

19,000

Karl Non cash business benefit - Section 21A.

8,000

Rob The sum of non-cash business benefits under $300 in an income year are exempt.

-

Petros Frequent flyer points are not assessable as they are not convertible into cash - they have no tradeable value.

-

Shannon Ordinary income from business.

32,800

Len Subsidies relating to the conduct of business are assessable.

36,000

Shelly The coffee machine is a non-cash business benefit. Shelley may be able to claim a deduction under the capital allowance provisions. Outdoor umbrellas must be returned - not assessable.

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12,000 -

Taxation Law & Practice Workbook

3.16

(Assessable income from business, income in advance) Murray Arthur, a resident taxpayer, operates a dance school and operates on an accruals basis for tax purposes. During the year ended 30 June 2020 he had the following receipts: • •

Cash Takings from casual lessons Receipts from regular customers

$ 18,000 288,000

(all bookings are received in advance of the actual lessons)

• • •

Capital Contributed GST Received Fully Franked Dividend

5,000 35,300 8,400

Murray also had the following account balances (exclusive of GST): • Income Received in Advance as at 30 June 2019 • Income Received in Advance as at 30 June 2020

$ 22,000 28,000

Calculate Murray’s assessable income for the 2019/20 income year.

Solution $ Cash Takings from customers (18,000 + 288,000) Add: Opening Balance - income received in advance Less: Closing Balance - income received in advance Dividend Franking Credits ASSESSABLE INCOME

(8,400 x 30/70)

30

306,000 22,000 328,000 28,000 300,000 8,400 3,600 312,000

Chapter 3: Assessable Income – Personal, Property and Business

3.17

(Assessable income from business) Cate is an employee of her family’s medium-sized legal firm. Both of her parents are partners of the five-partner firm that operates the business. Cate has been employed for the past four years. In the current financial year Cate received several amounts in additional to her normal wage. Her normal wage was equivalent to other employees with the same responsibilities, experience and qualifications. One afternoon over lunch Cate’s mother asked her if she had any good ideas to develop the business client base. Cate had already been thinking about this and prepared a three page report of her ideas based on ideas. Her mother presented the paper to the other partners. Two of Cate’s ideas were adopted and resulted in some client growth. At the end of the financial year, Cate was surprised to receive a card from the partner’s thanking her for her report with a cheque for $3,000 enclosed. During the year Cate also announced her engagement. At her engagement party, Cate’s father handed her an envelope. It contained a congratulations card signed by all the partners and contained a cheque from the business bank account for $5,000. Cate’s parents also directly gave Cate a separate generous gift. Are either, or both, of the cheque amounts assessable income? Explain your answer by reference to ITAA and case law.

Solution: The question is whether the income is assessable ordinary income under s6-5 or a non-assessable gift. The $3,000 cheque appears to be a voluntary gift. It is not part of her wages that already directly and fully compensate her for services. It is not a one-off and infrequent. This does not preclude it from being ordinary income. It is paid without obligation and is in the nature of a gift. There is also a family relationship that may support it being a mere gift. However, there is a stronger case to say that the payment was the result of her extra effort. Cate’s parents do not hold a majority ownership. It appears to be an assessable gift. It is incidental to employment – Kelly v FCT, Smith v FCT. The $5,000 cheque is in recognition of her engagement. It is paid for Cate’s personal circumstances that are not connected with her position as an employee. It appears to be non-assessable because it is a mere gift. It is an engagement present independent of employment.

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Taxation Law & Practice Workbook

) Trent Brown, a resident taxpayer, had the following receipts during the 2019/20 income year: Income Tax Refund from 2018/19 income tax return...