Jenny Jones Tax Return: Analysis, Calculation And Tax Advice
- December 21, 2023/ Uncategorized
Objective
|
Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 1: Salary and Allowance |
Under the “sec 6 (1) ITAA 1936” the income that is received by an individual taxpayer out of their individual effort are known as personal exertion income. The judgement that was made in “Dean & Anor v FCT (1997)” stated that the remuneration paid to employee for being employed in the company was a taxable ordinary income. Jenny receives gross salary of $69,000 and it will be taxable as personal service income under “sec 6-5 ITAA 1997”. |
(+) $69,000 |
|
Executive Allowance |
Jenny has also been given an allowance from her employment. Under “sec 6-5 ITAA 1997” it included in her assessment as ordinary income. |
(+) $10,000 |
|
Hairdressing and make-up costs |
The expense that are occurred in ordinary dress or apparel are not permitted for general deduction under “sec 8-1 (2) ITAA 1997” because they are not incurred for producing taxable income. Mentioning the judgement in “Mansfield v FCT (1996)” no general deduction is permitted for ordinary articles of apparel even though a taxpayer is needed to maintain a suitable appearance in a job. Expenses occurred by Jenny on hairdressing and make-up will be non-deductible private expense under “sec 8-1 (2) ITAA 1997” . |
$0 (Non-Deductible) |
|
Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 2: Gifts (Voucher and China Vase) |
Gifts relating to personal qualities do not have the character of income. The law court in “Hayes v FCT (1956)” shares given to accountant by his previous boss was not having the characteristics of income. The Myer gift voucher and China Vase will be regarded as mere gift that lacks the character of income. Therefore it is not an ordinary income under “sec 6-5 ITAA 1997”. |
$0 (Non-assessable) |
|
Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 3: Investment Earnings (Interest) |
The interest represents the character of income under “sec 6-5 ITAA 1997” when received by an individual taxpayer. Accordingly in “Riches v Westminster Bank Ltd (1947)” interest represents the profit and it is taxable ordinary income for the recipient. Jenny received a bank interest of $1,000 and it is a taxable ordinary income within “sec 6-5 ITAA 1997”. |
(+) $1,000 |
|
Partially Franked Dividend |
Under the statutory definition of sec 44 (1) ITAA 1936 the dividends are included in the taxable income of taxpayer. Whereas the franking credits are initially included for assessment purpose within “sec 202-60 ITAA 1997” but can be claimed as tax offset by a taxpayer. The dividends received by Jenny is included in her assessable income based on the statutory definition of sec 44 (1) ITAA 1936. Furthermore the franking credits attached are also included in Jenny’s assessable income within “sec 202-60 ITAA 1997” but she can be claimed as tax offset from her total tax payable. |
(+) $7,280 (+) $4,833 (-) $4,833 |
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Issues |
Reasons/Discussion |
Amount ($) |
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Issue 4: Casino Winnings and TAB account |
According to the ATO where a taxpayer makes money from gambling then they are not held as ordinary income within the “sec 6-5 ITAA 1997”. The winnings from gambling’s are often viewed as chance winnings. The taxpayer will be only held assessable when they are doing gambling business. The federal court in “Evans v FCT (1989” ruled that winnings from gambling of the taxpayer was non-taxable income because he was not carrying the business of gambling. The taxpayer are also not allowed to deduct any losses from gambling. Jenny won $50,000 from gambling and further $25000 from trifecta. These money are treated as chance winning and will not form the part of her taxable income. |
Non-Assessable $0 |
|
Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 5: Sale of Residence (Capital Gains) |
Generally main residence exemption is allowed to the taxpayer however if the house is used for generating taxable income then the capital gains is apportioned and a partial main residence is given. The capital gains received from selling the main residence is apportioned based on the total number of days the taxpayer was the owner of property less the total number of days the property was let out for rent. The main residence of Jenny was let out for nine years for generating rental income. She will be denied full main residence exemption because the property was used for generating income. Therefore, Jenny can get partial main residence exemption from her capital gains. Furthermore, reference to “Sara Lee Household v FCT (2000)” can be made to state that the timing CGT event will be 2018/19 because the contract for sale was entered into by Jenny on 30th June 2019. Jenny can avail 50% discount from her capital gains to reduce the tax liability. |
(+) $102210 |
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Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 6: Company Car |
When a car is given to employee by an employer then a car fringe benefit happens under “sec 7 FBTAA 1986”. Jenny gets promoted to Marketing Director position and is given a car by her employer. As a result this has contributed to car fringe benefit for Jenny under “sec 7 FBT 1986” while the employer will be liable for FBT. |
$0 |
|
Work related travel expenses |
The ATO has allowed the taxpayer to avail deduction for car expenses that are incurred while discharging employment related duties. As estimated by Jenny, the car has travelled $1000 kilometre for business purpose. Therefore, Jenny can claim deduction for 1000 kilometre at 0.68 cents per kilometre for business travel made by car. |
(-) $680 |
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Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 7: Rental Property |
Under “sec 6-5 ITAA 1997” rental income are included for assessment purpose. Jenny has received a rental income from her rental property which will be taxable as ordinary earnings with in “sec 6-5 ITAA 1997”. |
(+) $$1500 x 10 months = $15,000. |
|
Repairs on Rental Property |
Deduction relating to repair is permitted within “sec 25-10 ITAA 1997” that are occurred to remedy the defect on the income generating property. The decision made in “Jones & Co v FCT (1951)” allowed the taxpayer with deduction for repairs made on premises by replacing the chimney since the repair were viewed as replacement of subsidiary portion of entirety. A specific deduction within “sec 25-10 ITAA 1997” will be permitted to Jenny for expenses occurred on replacing the roof because it was repair of subsidiary portion of entirety. |
(-) $22,000 |
|
Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 8: Company Loan (Interest on loan) |
Expenses incurred for taking loan such as interest on loan to purchase a rental property are permissible general deduction within “sec 8-1 ITAA 1997”. If any part of rent is used for private purpose then the expenses needs to be apportioned till business use only. A general deduction for loan interest will be permitted under “sec 8-1 ITAA 1997” for loan interest on $400,000 amount while the rest of the amount is used for private purpose. |
(-)$8000 |
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Issues |
Reasons/Discussion |
Amount ($) |
|
Issue 9: Various Expenses Donation |
“Division 30 ITAA 1997” permits a taxpayer to get deduction for donation. Similarly Jenny can deduct the donation made to La Trobe under “Division 30 ITAA 1997” |
(-) $1,000 |
|
Telephone Expense |
Jenny is only permitted to obtain 10% deduction for telephone expenses because it was devoted to business purpose. |
(-)Telephone expense = 10% x 1000 = $100 |
|
Brief case |
Expense occurred by Jenny on brief is allowable general deduction “sec 8-1 ITAA 1997” since the briefcase is completed devoted to business purpose. |
(-)$290 |
|
Tax agent fees |
Jenny cannot claim deduction for $300 paid to retired tax officer for filing tax return fee because he was not the registered tax agent. |
$0 |
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Computation of Tax Liability |
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In the books of Jenny |
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For the year ended 30th June 2018 |
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Particulars |
Amount ($) |
Amount ($) |
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Assessable Income |
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Gross Salary |
69000 |
|
|
Executive Allowance |
10000 |
|
|
Australian sourced interest income |
1000 |
|
|
Australian sourced dividend income |
||
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Partially franked dividends |
7250 |
|
|
Gross up franking credits (7250 x 40/60) |
4833.33 |
12083.33 |
|
Capital Gains from Sale of residence |
||
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Australian sourced rental income |
15000 |
|
|
Sales proceeds |
700000 |
|
|
Less: Commission on Sales |
15000 |
|
|
Net Sales Proceeds |
685000 |
|
|
Cost base: Purchase price |
200000 |
|
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Add: Stamp Duty |
25000 |
|
|
Total Cost base |
225000 |
|
|
Total Capital gains |
460000 |
|
|
Taxable Capital gains (Note 1) |
204421.12 |
|
|
50% CGT Discount |
102210.56 |
102210.56 |
|
Total Assessable Income |
209293.89 |
Notes: Rental Property Capital Gains
Private and Confidential
Knight Tax Advisors
846 Herald Queen Street NSW 999
To
Dear Jenny
We are responding to your recent mail and a detailed telephonic discussion that we made so that we can provide you advice associated to the matters concerning the tax deductibility of the legal expenditure incurred by and the lump sum payment which amounts to $350,000 received by you.
Scope of the letter:
The primary scope concerning this letter is to provide you with necessary advice on how you can claim a tax deduction for the legal expense and tax treatment of lump sum payment which you have received. The letter will be simply addressing the matters that are sought by you and will be omitting the other consequences related to the tax which may follow if there is an increase or decrease in the assets.
Facts:
The letter of advice is based on the necessary facts combined with the needed assumption on the basis of which advice is provided to you. If you deem any of the matters or the advice given is not suitable or you fail to understand then we would request you to kindly reach us as soon as possible because till be affecting you tax position. The advice is highly based on applicable laws, rulings as well as cases since we thing it has applicability in your tax position based on the facts established by you.
Summary of Advice:
We are summarizing our opinion with respect to the matters given above. We found that you reported an expense of $25,000 as legal fees that brining a lawsuit against your former employer who constantly paid you less by 25% than your male colleague for the equivalent work and position. As the general rule, you should understand that under “sec 8-1 ITAA 1997” you are permitted to deduct the expenses that you have incurred in producing your taxable income. We put forward the decision in “FCT v Day (2008)” where the legal expense incurred by the public employer was permitted for deduction the expense were incurred in relation to his income generation activities and the expenses were not private, domestic or capital in nature.
We shift our attention towards the legal expense of $25,000 reported by you during the year. The legal expenses is connected to your employment directly and has satisfactory nexus with your income generating activities. We are following the decision of “FCT v Day (2008)” to state that you are permitted to claim deduction for the legal expenses incurred by you. The legal expense does not hold any enduring benefit and it will be treated in the revenue account. The expenses were incurred by in claiming damage. Therefore, under the general deduction rule of “sec 8-1 ITAA 1997” you are permitted to deduct the legal expenses,
You further reported that in your lawsuit you claimed for damages and in return you have been compensated with a sum of $350,000 in arrears. According to “sec 6-5 ITAA 1997” there is a possibility to characterize the voluntary or unanticipated payments as ordinary income on the basis of nature of payment that is received as a replacement for nexus. We are following the decision of “FCT v Dixon (1952)” case reference in your case to state that periodic payment which is given to a taxpayer as the settlement of differences for the previous pay and his army was held as taxable ordinary income within the meaning of “sec 6-5 ITAA 1997”.
In following the decision of aforementioned case the lump sum payment of $350,000 which you have been compensated is for covering your lost income and for settlement of difference that was paid to your colleague. The compensation amount will be included your assessable income because it involved direct nexus with your occupation. For that reason, the compensation amount of $350,000 will be included into your taxable income on the basis of ordinary concept of “sec 6-5 ITAA 1997”.
We expect that the advice which we have provided to you is a valuable in terms of your tax deductibility and taxability of income. In any circumstances, if you want to discuss with us in a more detailed manner, we would request you to kindly visit our office during the business hours.
Thank You
Yours Faithfully,
Knight Tax Advisors
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