Topic 2 Flashcards
QUIZ 1
Jasmine works part-time as a waitress while studying at University.
A café customer, who also owns a clothing store, gives her a new leather jacket as a token of gratitude for her polite and cheerful service. The retail value is $250. She also received $100 as her share of employee tips.
What is her assessable income?
Nil
$100
$350
+ Jasmine’s assessable income will be $350.
+ The $100 cash tip would be ordinary income under s.6-5, Calvert (Inspector of Taxes) v Wainwright.
+ The jacket is a non cash benefit and it is unlikely that Jasmine could have asked the customer for cash instead. Consequently, the amount is not ordinary income, FC of T v Cooke and Sherden.
+ However, the services have been rendered and the value of all gratuities must be included under s.15-2 whether in cash or any other form. The value of the jacket is statutory income.
QUIZ 2
Pete the plumber received discounted bathroom fittings from a supplier for use in his private home. His normal trade price would have been $2,000, however he only had pay $500. He received a discount from the store owner who is a friend.
What is his assessable income?
$2,000
$1,500
$500
+ The discounted goods are a non-cash business benefit. The assessable income under s.21A(2) is the arm’s length value less an consideration paid.
+ The value is $2,000 and Pete has paid $500.
+ Consequently his assessable income will include $1,500 as statutory income.
QUIZ 3
Jeff is a bank employee.
He receives the following amounts from his employer:
$1,000 shift allowance – for working late on the international desk
$2,000 bonus – from unexpected and favourable sales figures
How much is included in his assessable income?
$1,000
$2,000
$3,000
+ Jeff’s assessable income will include the entire $3,000.
+ A shift allowance is an inducement to provide services and would be assessable as ordinary income under s.6-5. If an allowance is not ordinary income for some reason then it will be statutory income unde4r s.15-2 which includes the value of all allowances from services rendered.
+ A bonus will usually be ordinary income if connected with services. If for some reason it is not ordinary income then s.15-2 will include the value of all bonuses from services rendered.
QUIZ 4
A registered charity also operates an opportunity shop selling donated goods in order to fund its operations.
During the financial year, it received charity cash donations of $250,000 and the shop sales receipts amounted to $500,000.
What is the charity’s assessable income?
Nil?
$500,000?
$750,000?
+ The entire $750,000 is exempt income.
+ A registered charity is an exempt entity under item 1.1 of the table to s. 50-5.
+ Consequently it is exempt from income tax no matter what kind of ordinary or statutory income it derives.
QUIZ 5
A registered charity also operates an opportunity shop selling donated goods in order to fund its operations.
The charity is registered for GST and its sales for the income year amount to $550,000 including GST at 10%.
How much is non assessable non exempt income?
$550,000
$500,000
$50,000
+ The $50,000 GST payable by the charity is not ordinary income or statutory income. GST payable is exempt income under s.17-5.
+ The $500,000 balance is exempt income because the charity is an exempt entity under item 1.1 of the table to s. 50-5.
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(i) Lump sum received from a newspaper publisher in full settlement of an action for libel.
To what extent are the following amounts assessable, and under which provision:
(i) Lump sum received from a newspaper publisher in full settlement of an action for libel.
Answer: The lump sum appears not to be connected with any income producing activity, rather it is received as damages for injury to personal reputation. The payment is also exempt from capital gains tax (Topic 5).
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(ii) Honorarium received by the honorary secretary of an athletics club.
(ii) Honorarium received by the honorary secretary of an athletics club.
Answer: Payments as a reward for providing services is ordinary income and assessable under s. 6-5 (Brent v FC of T). An office bearer is rendering personal services, therefore the outcome rests upon the connection with services rendered.
If the payment automatically comes with the position or the amount varies with seniority or the hours worked then it is connected with the services/office. If the payments are regular, expected and depended upon then they may be ordinary income by the nature of the receipts (FC of T v Dixon).
However, if the payments are merely token amounts to offset costs incurred and each amount is not automatically paid but must be put to the club committee for approval then the payments would be unlikely to be ordinary income.
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(iii) A lump sum legacy of $10,000 received from the estate of a deceased friend.
(iii) A lump sum legacy of $10,000 received from the estate of a deceased friend.
Answer: Gifts of natural love and affection are not ordinary income (Scott v FC of T). A lump sum legacy is a testamentary gift and is not ordinary income.
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(iv) A lifetime annuity of $500 per month received from the estate of a deceased relative for which you are a beneficiary.
(iv) A lifetime annuity of $500 per month received from the estate of a deceased relative for which you are a beneficiary.
Answer: The annuity consists of periodical payments which are expected and depended upon, they are ordinary income (FC of T v Dixon) and assessable under s. 6-5. The characteristics of the receipts are in the nature of income regardless of the fact that they arose from private family dealings.
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(v) A tool allowance of $500 paid to an apprentice plumber.
(v) A tool allowance of $500 paid to an apprentice plumber.
Answer: The allowance is a payment incidental to the rendering of personal services which would suggest ordinary income (Brent v FC of T) and assessable under s.6-5. If the payment is not ordinary income then allowances in respect of services rendered are statutory income under s. 15-2.
QUESTION 1
To what extent are the following amounts assessable, and under which provision:
(vi) An employee is reimbursed for his own car use at the rate of 55 cents per km by his employer. He travelled 100km for private purposes and another 100km to attend a work-related conference.
(vi) An employee is reimbursed for his own car use at the rate of 55 cents per km by his employer. He travelled 100km for private purposes and another 100km to attend a work-related conference.
Answer: Amounts received from an employer by way of reimbursement of car expenses using the cents per km method are statutory income under s. 15-70.
QUESTION 2
(i) Minh is a concrete contractor who receives free non-transferable tickets to the football grand final from a grateful customer. The tickets would normally have cost $200 and Minh is a keen football fan. Discuss the tax implications for Minh.
(i) Minh is a concrete contractor who receives free non-transferable tickets to the football grand final from a grateful customer. The tickets would normally have cost $200 and Minh is a keen football fan. Discuss the tax implications for Minh.
Answer: Minh has received a non-convertible non-cash benefit in respect of rendering services which is not ordinary income (FC of T v Cooke and Sherden). However, the value to Minh of the tickets must be included in assessable income under s. 15-2. Whilst the value to the taxpayer may be subjective, Minh is a keen football fan and the valuation is likely to be $200.
QUESTION 2
(ii) Sue is a computer retailer who receives a prize from one of her suppliers for having the highest turnover. The ticket entitles Sue, and nobody else who may hold the ticket, to stay in Sydney for a week. The normal cost for the ticket would have been $1,500. How much would Sue include in her assessable income if she spent the week in Sydney on holiday ?
(ii) Sue is a computer retailer who receives a prize from one of her suppliers for having the highest turnover. The ticket entitles Sue, and nobody else who may hold the ticket, to stay in Sydney for a week. The normal cost for the ticket would have been $1,500. How much would Sue include in her assessable income if she spent the week in Sydney on holiday ?
Answer: Sue has received a benefit in respect of carrying on a business, however it is not ordinary income due to the non-convertible non-cash nature (FC of T v Cooke and Sherden). The arm’s length value of $1500 is statutory income under s. 21A ITAA36.
QUESTION 2
(iii) How much would Sue include in her assessable income if she used the ticket solely for attending a computer conference that happened to be in Sydney that week ?
(iii) How much would Sue include in her assessable income if she used the ticket solely for attending a computer conference that happened to be in Sydney that week ?
Answer: Sue has received a non-cash business benefit that would have been tax deductible to her if she had purchased the tickets in order to attend the computer conference as a business-related trip. Therefore no amount is included as statutory income under the ‘otherwise deductible’ exception s. 21A(3) ITAA36.
QUESTION 2
(iv) A manufacturer invited a retailer, who was a large customer, to spend a day in the manufacturer’s corporate box at the horse races where food, drinks and entertainment was provided to selected clients. The cost to the manufacturer of the entertainment was $500. How much is assessable income of the customer.
iv) A manufacturer invited a retailer, who was a large customer, to spend a day in the manufacturer’s corporate box at the horse races where food, drinks and entertainment was provided to selected clients. The cost to the manufacturer of the entertainment was $500. How much is assessable income of the customer.
Answer: The manufacturer has incurred entertainment expenditure which is not tax deductible to them (Topic 6). Therefore the customer is not required to include $500 as statutory income under s. 21A(4) ITAA36.
