Situation 1: Tax Liability in case of sale of Melbourne House

Questions:

Part A

1.  Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their Melbourne home and purchased a large country-‘ho-use on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker‘s dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.

2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mother’s recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They don’t keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600.

3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter’ system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home. No money changes hands. Suzie would receive a credit to her account of 15 to 20 ‘barts’  that she can exchange for goods or services of equal value from other registered participants in the scheme (fruit, vegetables, child minding, lawn mowing etc.).

Required 1
 
(a) Advise Allan and Betty of any income tax implications arising in paras 1, 2 and 3 above.

(b) Advise the participants in the barter scheme of any income tax implications.

Part B

Nicole Grownman is an Australian actress who has had a number of roles in films and guest appearances in serials. During the year the following events occurred:

i) Nicole was offered a role in a telemovie set in the 1950s. She was required to put on 10 kilograms to play the part offered and would be awarded the role only if she put on weight. Nicole increased her food intake dramatically, dining-out several times a week and eating ‘fast food’. She estimated she spent $1,000 on food that she would not normally have eaten. She was paid $50,000 for her role.

ii) As a result of her weight gain Nicole had to buy new clothes at a cost of $2000. At the end of filming she wanted to loose weight and get back into shape so hired a dietician at a cost of $1,000 and a personal trainer ($2,500) and spent a week at a health clinic ($1,500).

iii) Nicole was paid $2,000 by Woman’s World for an interview in which she  spoke about the new telemovie as well as her personal life. She donated the money to the Royal Children’s Hospital.

iv) The  telemovie received critical acclaim and Nicole was offered a small role in a Hollywood movie. Under the contract she was to receive $AU20,000. She flew first class to the United States at a cost of $5,000; economy class would have been $2,000. After filming she spent a week visiting agents in Hollywood in the hope of securing more. roles. Nicole regarded the week as a ‘working holiday’ and she treated herself to ‘five star’ accommodation at a cost of $6,000.

v) A well know gossip magazine Eye Spy published a story about Nicole that contained a number of untruths. Ordinarily she would not have bothered about such thing but with her career blossoming she was concerned that her reputation might be tarnished and future roles lost. She spent $10,000 in legal fees, sued the magazine for libel and was successful in securing damages of $50,000.

A short- break in = acting -followed and-at– her- manager’s suggestion Nicole paid $1,000 to a voice coach to improve her voice projection.

vii) In the expectation that her career was to take off at last, Nicole shifted to a rented town house. She specifically selected a two bedroom unit so that one room could be set aside for exclusive use as a study/office. There she could read scripts, deal with correspondence and meditate. Her manager suggested she would be entitled to a tax deduction for an apportionment of the rent.

Required:

Advise Nicole of the taxation implications of the receipts and payments.

Situation 2: Income of Betty by working as a Part time Accountant

Part A

Income Tax implication arises to Allan and Betty in the Para 1, 2 and 3 is as follows:

Taxable Situation arises in the given Para is as follows:

Situation1 : Tax Liability in case of sale of Melbourne House

In the given situation Allan and Betty lives together in their home at Melbourne. They decided on tree change sold their Melbourne Home and purchased a large country house in Central Victoria on a 10 hectare block.

Income Tax Act of Australia generally provides that any gain arising from sale of home is taxable as capital gain Tax. However, Australian government also provide certain type of exemption in which taxpayer is not required to pay capital gain tax on home in which he used to live. The exemption is called Main Residence Exemption. Since, gain arising from sale of home is not taxable therefore the taxpayer is also not allowed to claim tax deduction of expenses relating to buying and selling of home.  The exemption is allowed if

a)    The house is used by the taxpayer as family home where he used to live with his family,

b)    The house is not more than in 2 hectare.

c)    No portion of the house is rented nor used in running the business. (Government 2012)

Assuming all the condition mentioned to claim Main residence exemption is fulfilled therefore, sale of house is not taxable as per Income Tax Act.

Situation2:  Income of Betty by working as a Part time Accountant

Section 6-5 provide that any Income earned by the person as salary whether full time or part time will b taxable as ordinary Income. Therefore, Income earned by Betty as Part time Accountant will be taxable as ordinary Income.     
    
Situation3:  Income Tax Implication of Allan:

a)    Fees received by doctor Allan as a doctor will be considered as fees received in business and the same will be taxable as business income after providing deduction of the expenses which will be incurred in the business for earning such fees.

b)    Section 21A of Income Tax Assessment Act 1936 provide for taxability of non cash benefit received in the business. As per the said Act any non cash benefit will be first converted to monetary value by using the arm’s length price which will be sold in the market and from those value, the entertainment expenses which is not allowed to the taxpayer is deducted and the remaining will be taxable. So, in the given situation it is not possible to calculate the value of home made cakes and scones and also the same will also not be possible to sold in the market. Therefore, the same is not taxable. However, on occasion of receipt of wine for treating dog of wine maker, the same wine will be taxable because it is possible to convert it in money and the same will be easily sold as well. (Government n.d.)

Part  A (A.2)

Situation 1: Surplus of Produce from gardening.

In the given Para it is established that Allan and Betty love gardening and the wanted to establish a few hectare of grapes wine and begin growing vegetable. For this they also under gone a education course on organic farming and in the second year they have surplus of produce. Since, there is intension of the taxpayer to earn income therefore, income earned by Allan and Betty from sale of Surplus produce will be taxable as Business Income.

Situation 3: Income Tax Implication of Allan

Situation 2: Income Earned from Opening Stall at New town Market Grower’s

Income is only taxable if there is intension to earn income as per Income Tax Act. In the given situation Mrs. Betty make marmalade and relish by using her mom recipes which he used to distribute to the neighbors. The recipes become popular and just as a hobby he started selling the same at New Town Market Growers only on second Sunday of every month and not regularly. Since this is just an hobby and not the complete business setup therefore the same is not taxable.

Situation 3: Regularly Supply of recipes to three suppliers with sweet Potatoes and Pumkin
 
Since, Now they have started supplying recipes regularly to suppliers with sweet potatoes and pumpkins which is said to be business activity therefore the income derived after deducting eligible deduction will be taxable under Business Income. And now from onwards, they need to maintain records because initially the intension was not to earn profit but since now they are continuously supplying therefore records need to be maintained.

Part A (A.3)

Situation 1: Receipt of upfront Fees of $50

No differentiation has been made for Income Tax purpose for transaction incurred in Barter System and Normal Cash Transaction. Therefore Upfront Fees of $50 received from the member for keeping the administrative records will be taxable.

Situation 2: Receipt of Service Fees

 If Allan and Betty Charge any Service fees from the member to enter transaction in barter system the same will also be chargeable for income tax purpose after allowing deduction for expenses required for keeping the necessary records or providing services to the members.

Answer to Question B

Income Tax Implication of Participant in Barter System is as follows:

a)    Barter is a system in which goods and services are exchanged without the transaction being carried in money.

b)    The Transaction entered in the barter system are deductible and also assessable for the income Tax purpose as no difference is being made by the government for transaction entered in barter system or normal cash or credit transaction.

c)    The entity entraining in to the transaction is assessable to tax including GST if he is the member of trading organization.

d)    The Transaction in the barter system is valued at Arm’s length price which is nothing but the market price.

e)    Tax invoice is also required for all transaction entered into the barter system. The Tax Invoice must comply all the government rules.

f)    All records of the transaction entered into the barter system need to b kept by the Trading organization.

g)    ABN Number i.e. Australian business Number is required for the transaction that are entered in the barter system. (Office 2014)

Part-B

Tax Implication of Nicole of the receipt and Payment is as follows:

(1)    Section 8-1 of the taxation Act of Australia provide that any expenses which has been incurred and is necessary to be incurred to earn income is always allowed as deduction. In the given situation Nicole has incurred expenses on her food intake dramatically, by eating fast food and taking it multiple times in a week to gain 10kgs weight which is necessary to barge a role in telemovie set in the 1950s for which she was paid $50,000. Since gaining of weight was essential for the role and to gain weight it is necessary to increase the diet. Therefore, Expense of $1,000 which was incurred on food is necessary to earn Income. Therefore deduction will be allowed.  She needs to pay tax on $49,000. (Governmnt 2014)

(2)    Since Nicole is an actress and it is necessary for her to look charming therefore expenses incurred by her on purchase of new clothes and also cost incurred on hiring dietician took fit to get another role and expenses incurred on personal trainer and health clinic totaling to $7,000 will be allowed as deduction as all the expenses incurred is necessary to get another role for the actress.

(3)    Amount received by Nicole from interview by Women’s word will be considered as ordinary income and will be taxable in the hands of Nicole amounting to $2,000 by virtue of section section 6-5 of taxation Act.
Further, donation made to Royal Children Hospital is only allowed if the said hospital is an registered donee by the taxation department to claim exemption. Because Australian government provide deduction of donation above $2 dollar only to approved institution.

(4)    Amount received by Nicole of $ AUS 20,000 is taxable as ordinary Income. Further, expenses incurred by him in air ticket and accommodation totaling to $11,000 will be allowed as statutory deduction because all the expenses are incurred to earn income or in the expectation of earning income and as per the taxation department deduction of expenses incurred for earning income is allowed. Therefore, the said expenses is also allowed.
 
(5)    Damages received by Nicole amounting to $50,000 will be considered as capital receipt because as per Australian taxation rule any amount receipt for damages of moral is considered as capital receipt. Further, any expenses which has been incurred for securing income which is not taxable will not be allowed as deduction.
But in the given case the expenses incurred by Nicole in filling legal suit amounting to $1,000 is considered to be necessary in order to earn more role and income because his carrier is in blossoming  stage and with rumors it might be possible that he will not be able to get any role. Therefore, expenditure is considered necessary to earn income and deduction will be allowed under section 8-1.

(6)    Amount paid by Nicole to her voice coach will be allowed as deduction. Since she is an actresses and it is necessary for her to keep her voice sweet to earn more role and income. Therefore, deduction of $1000 paid to voice coach to improve voice projection will be allowed and the expenses are not treated as personal expenses.

(7)    Suggestion of manager is correct. Nicole is eligible for tax deduction for an apportionment of the rent.  Australian Taxation as the clause in which rent paid by the individual will be apportioned in two parts one for personal and another for business.  The apportioned may b done on the basis of the floor area. Since, Nicole is an actresses, therefore she needs one room for study and busnss purpose and deduction of such room will be allowed. Further, expenses on telephone, gas and another facility in such room related with business activity will also be allowed as deduction. 

Reference:

Government, A 2012, ato.gov.au, <https://www.ato.gov.au/General/Property/Your-home/Buying-and-selling-your-home/>.

Government, A, austlii.edu.au, <https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s21a.html>.

Governmnt, A 2014, law.ato.gov.au, <https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR977/NAT/ATO/00001>.

Office, AT 2014, www.ato.gov.au, <https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/Barter-transactions/Bartering-and-barter-exchanges/>.