Tax Law Take Home Exam PDF

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Take Home Exam/Assignment, received 18/20...

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TAKE HOME EXAM

Part A The issues for Fergal are to determine whether or not he is considered as carrying on a business for tax purposes, and if so, at what point he would be considered generating income from business, and therefore what income is considered assessable. More specifically, the issues relate to Fergal’s involvement with the company Eerie Energy and the sale and promotion of their product, EerieVibe Bracelets. The relevant law firstly includes Ferguson v FCT (1979) 9 ATR 873 which sets out the characteristics which the courts consider in determining whether an individual is carrying on business. These include the intent or purpose of profit making, repetition and regularity, businesslike approach, the type of activity and the size of the operation. S995-1 of the Income Tax Assessment Act 1997 (ITAA97) provides the definition of business which “includes any profession, trade employment, vocation or calling but does not include occupation as an employer”. S6-5 of the ITAA971 sets out ordinary income and defines salary from employment as ordinary income. Relevant cases include Stone v FCT (2005) 59 ATR 50, which concludes that it is not necessary for the intent of profit making to constitute carrying on business. The FCt v JR Walker (1985) 16 ATR 331 case explains the importance of the organised and commercial approach to activities. Thomas v FCT (1972) 3 ATR 165 establishes that a business may exist even if the prospect of profits is short term or minimal, and if the business is on a small scale. The Softwood Pulp and Paper Ltd v FCT (1976) 7 ATR 101 case establishes that the time of commencement of business is based on the intention of the individual. Fergal’s income from salary of $79,500 is considered ordinary income from employment under section 6-5 ITAA 972. The income from salary is not considered income from business3 as business does not include employment, therefore this income does not constitute Fergal as carrying on business. Although Fergal is employed and receives a salary, this does not exclude him from being considered as also carrying on a business, as in Ferguson’s case4, where the courts decided that

1 Income Tax Assessment Act 1997 2n1 3 Income Tax Assessment Act 1997 s995-1(1)

4 Ferguson v FCT (1979) 9 ATR 873 MELANIE CADOGAN | 17220284

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having other sources of income, such as employment income, would not ascertain that the individual is not also carrying on business. The characteristics do not all have to be met in order to determine carrying on business. The first characteristic is the intent of profit-making5, although this makes for a strong case, it is not necessary. As in Stone’s case6, the courts held that there was no intent to make profit but the sponsorship deals led to the decision that the individual was carrying on business. This case explores a professional athlete, however sponsorship is consistent with the present scenario as Eerie Energy were being sponsored by Fergal as he agreed to review the product, and continued to feature and post photos of the product throughout his blog in order to promote the product. Another characteristic is where or not the activities are repetitive and regular7. Fergal initially received 150 EerieVibe Bracelets wherein he sold 149, and kept one for himself. Shortly after he received another batch of 150 bracelets to sell, which were sold quickly after the fun run, along with an additional 100 orders. He was then advised on how to order more stock, and ordered 3 more boxes, and an additional 4 once they were sold. Between February and June Fergal had sold 5 boxes of the product. This shows that Fergal was making repeated sales, on a regular basis, which he plans to continue to do. Thus, this characteristic is satisfied. The third characteristic is whether or not Fergal has taken a business-like approach and the system and organisation of the activity8. The verdict of the JR Walker case9 was highly influenced by the business-like manner in which the operations were handled. Fergal spends most evenings replying to emails and correspondence with followers. His blog is regularly maintained and includes a range of information including product reviews. He also made an agreement with Eerie Energy via email, which eventuated in him being able to make orders to sell the product on their behalf. Fergal also promoted the product across multiple social media platforms. All these factors imply that Fergal was treating the sponsorship deal with Eerie Energy as a planned, organised business operation, by handling the activities in a business-like manner on all levels. Another characteristic is the size and nature of activities. The Thomas case10 tells us that the business activity does not have to be on a large scale to be considered carrying on business. The

5 n4 6 Stone v FCT (2005) 59 ATR 50 7 n4 8 n4 9 FCt v JR Walker (1985) 16 ATR 331 10 Thomas v FCT (1972) 3 ATR 165 MELANIE CADOGAN | 17220284

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case discusses that the activities were on a bigger scale than is necessary for personal, or recreational purposes, and therefore was concluded as carrying on business. Fergal sold multiple boxes of Eerie Energy’s product, promoted it across many platforms and reordered the product for continuous sales in which he would make profit. This establishes that the activity of promoting and selling EerieVibe Bracelets was on a greater scale than a hobby, and therefore could still constitute carrying on business. As Fergal has satisfied the characteristics that constitute carrying on business as laid out in Ferguson’s case11, we can conclude that he was carrying on business with his promotion and sales of Eerie Energy’s product. However in order to determine at which point in time, and what income is considered income from business, we must look at what constitutes the commencement of business. The Softwood Pulp case12 establishes that business has not commenced, and is not carried on until there is a commitment to commence operations. Both Softwood Pulp13 and Osbourne14 cases involve expenses that help the courts distinguish when business had commenced. Due to the nature of the activities in Fergal’s situation, the only expense he incurred was the cost of stock when he agreed to purchase boxes from Eerie Energy to onsell their product. So we can establish that at the point in which Fergal ordered and paid for an additional three boxes of the product, business commenced. Although, it is important to identify whether there was any other intention to produce business income prior to this point. In Fergal’s case, there is no indication that he was aware he would receive $400 from Eerie Energy for his initial review and promotion of the product, he also sold the first box to immediate friends and family for less than retail price, which suggests this was a one-off activity. However in the Ferguson case15 it was established that every business must commence with a single transaction. Immediately after receiving the initial cheque from Eerie Energy and the second box of bracelets, he made a post promoting the product. He then sold the second box to strangers at retail price, and took an additional 100 orders. This implies that when Fergal received his first cheque and second box from the company, he intended to make a habit of

11 n4 12 Softwood Pulp and Paper Ltd v FCT (1976) 7 ATR 101 13 n12 14 FCT v Osbourne (1990) 21 ATR 888 15 n4 MELANIE CADOGAN | 17220284

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promoting and selling the product on behalf of Eerie Energy. Thus intention and commitment to business activity with Eerie Energy was present and we can conclude that business commenced at this point.

Part B Item or Description Salary

Amount

Law $79,500



Ordinary income, S6-5 ITAA 97



Cash Tennant v Smith [1892] AC 150



Real gain Hochstrasser v Mayes [1960] AC 376 MELANIE CADOGAN | 17220284

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Sales to friends

149*$175 $26,075

Sales to others

250*$195

after fun run

$48,750



Regular FCt v Blake (1984) 15 ATR 1006

 

Flow Eisner v Macomber 252 US 189 Ordinary Income s6-5 ITAA 97



Isolated transaction FCT v Whitfords Beach



Pty Ltd (1982) 12 ATR 692 Ordinary income s6-5 ITAA 97



Normal business proceeds GP International Pipecoaters Pty Ltd v FCT (1990) 21 ATR 1



Additional 100 recorded here as income is

Sales from 3

[(150*3)-100]*$195



assessable when accrued s6-5(4) ITAA 97 Ordinary income s6-5 ITAA 97

boxes

$68,250



Normal business proceeds GP International Pipecoaters Pty Ltd v FCT (1990) 21 ATR 1

Less: (150*3)*$140 $63,000 $5,250 Cheques from Eerie Energy

2*$400

 $800

First $400  Ordinary income s6-5 ITAA 97  Isolated Transaction FCT v Whitfords Beach Pty Ltd (1982) 12 ATR 692



Second $400  Extraordinary Transaction FCT v Myer Emporium Ltd (1987) 163 CLR 199  Ordinary income s6-5 ITAA 97

Total

$160,375

MELANIE CADOGAN | 17220284

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