Taxation Law and Practice - John Jones Assessable Income - Case Study Example

Taxation Law and Practice Institution Tutor Date Exclusive Summary The paper seeks to analyze the amount to be included in John Jones’ assessable income. Taxable income is the assessment subject. John Jones operates a small business and thus the most basic aspect of income derived in his business activities is receipt and thus Jones should use cash basis. The assessable income for Jones include received $30,000 and $3,000 are ordinary income, his salary of $42,000, interest earned from his saving account as offset of $300, as well as , half of Jones’ share that is worth $17 500 for the license is assessable as well as the utilization of exclusive right of $25 000 for subsequent five years. The gift Jones received as a free ticket for him and his wife worth $2,000 is not assessable as well as the $200,000 and a car valued at $30,000 that Jones won are not assessable. The $500 price of share certificate is also not assessable. Taxation Law and Practice Issue The amount to be included in John Jones’ assessable income Relevant Law/Cases As per ITAA36, Section 161, each individual is supposed to submit an income tax return for the year income where the year income under ITAA36, Section 6-1 is the financial year from which tax is taxed. Submitting the tax income instigates the assessment process that finally results to tax payment/appeal against assessment process. Taxable income is the assessment subject. Normally, taxpayers have liberty of adopting any recognized accounting method that is consistent with the Acts, but actually the courts circumscribe the choice. The difference between cash and accrual basis is that in cash basis there is no derivation in case the taxpayer purely comes to have a right to get money which means there should an actual receipt of money. On the other hand, in accrual basis, the right to get money might be a derivation (Adriana, 2008). Examples of cases that indicate whether to use cash basis or accrual basis include Abbott v. Philbin [1961] A.C. 352 and Donaldson (1974) 74 A.T.C. 4192. For tax purposes, contractual right to an issue of options does not entail a derivation while the actual issue of options involves a derivation. For instance, the taxpayer might be entitled under his/her contract, following some time duration of service, to a free ticker to travel on the airline conduct by his/her employer. In such a case, derivation of income only occurs when the travel benefit has in reality been provided by the employer. The cases Abbott v. Philbin [1961] A.C. 352 and Donaldson (1974) 74 A.T.C. 4192 clearly indicate the importance of the derivation moment as an element of income by ordinary usage. Basically, if a taxpayer is on cash basis in regard to the taxable item and gets money there is a derivation and there can no further derivation if the taxpayer converts the money into property, for instance purchasing property using the money. In both case, the conclusion that income is derived as income from services during time of sale of the options was rejected by the judges. This means that the exercise of options is merely “exploiting valuable rights”. In Abbott v. Philbin [1961] A.C. 352, it was held that even though exercise results to a derivation, the derivation within circumstances does not give the exercise an income element as a reward for services. Donaldson (1974) 74 A.T.C. 4192, derivation by the taxpayer did not take place until the taxpayer got a payment from the superannuation fund. During that time, circumstances provided it the aspect of a simple payment from a fund to satisfy his rights within the fund. Nonetheless, it does not mean that the exercise of options might not be included when acquiring and selling shares which will give profit that is income, the element of income. In such a case, it is important to make sure that the profit does not consist of any part of the value of the options during their application time when acquiring the shares. The case Executor Trustee & Agency Co. of S.A. Ltd (Bristowe's case) (1962) 36 A.L.J.R. 271, is important in calculating the amount of the profit which involves subtracting the options’ value during the exercise. The case is the test applied in determining if basis used gives a correct reflection of the real income. For sole proprietors, the most fundamental aspect of income derived is receipt. According to Section 17 of the Income Tax Assessment Act, income tax is taxed on the taxable income gained during the income year by any individual. Section 25 (1) describes income tax as the total amount of its realizable value, when it has been obtained by the taxpayer and the income is a gain obtained in conditions that give the income in other respects aspects of an income. As per Section 6.5 Of Income Tax Assessment Act (1997), the assessable income consists of income in accordance with the ordinary concepts as well as the income tax is billed for every year by every person. As per Section 108.10 Of Income Tax Assessment Act 1997, personal collections having combined value of $500 or less are not taxable. In the case Everett (1978) 78 A.T.C. 4595 ((1980) 143 C.L.R. 440, High Court), it was held that tax is only applied to the income derived from property. In regard to the relevance of residence within Australia as well as of source within Australia, any taxpayer residing within Australia is legally responsible for paying income tax on his income from each and every source, subject to the exemption that the taxpayer is not liable of Australian tax on income whose source is not in Australia and is not exempted from income tax within the source country. Additionally, a taxpayer who is not residing within Australia has a legal responsibility of to income tax on income having an Australian source. However, according to (s. 23(r)) such a taxpayer is exempted from income tax if the source is not from Australia (Parsons, 2001). Regarding gifts, in Australia gifts are not province of income tax although property subjects of gifts is taxable. Casual winnings and lottery have some aspect of unexpectedness and this is the key reason they are exempted from income tax base. The Australian income tax almost certainly exempts lotteries and casual winnings from the income tax base in all situations. Particularly, when the lottery or winning does not involve any business activity, such a win is exclusively exempted from the income tax base. In cases Squatting Investment Co. Ltd (1954) 88 C.L.R. 413; Hayes (1956) 96 C.L.R. 47; Scott (1966) 117 C.L.R.514; Dixon (1952) 86 C.L.R. 540; and Harris (1980) 80 A.T.C. 4238, it was held that an employer can give his worker a gift and this is not termed as the worker’s income. In both cases, a gift from employer to employees was ruled not to be income and a business relationship between two individuals does not imply that a gift given to the other party must be that party’s income (Parsons, 2001). Application From the case, case Executor Trustee & Agency Co. of S.A. Ltd (Bristowe's case) (1962) 36 A.L.J.R. 271, receipt is the most fundamental aspect of income derived in sole proprietors. Accordingly, Jones operates a small business and thus the most fundamental aspect of income derived in his business activities is receipt because he receives reward through receipts as payment for his services. Therefore, Jones should use cash basis. Additionally, in the cases Abbott v. Philbin [1961] A.C. 352 and Donaldson (1974) 74 A.T.C. 4192 clearly indicate the importance of the derivation moment as an element of income by ordinary usage. Therefore, since Jones uses cash basis in his business as indicated by$30,000 cashed received and $3,000 cash received from outstanding accounts from the 2008/09 year, and also according to Sect 6.5 Of Income Tax Assessment Act (1997), the assessable income consists of income in accordance with the ordinary concepts as well as the income tax is billed for every year by every person; the $30,000 and $3,000 received cash are assessable since both payments have the aspect of income by ordinary usage. In Australia, casual winnings are exempted from income tax base especially if the winning does not involve any business activity. Unexpectedness of winnings is an aspect that exempts them from being taxed. Therefore, the $200,000 and a car valued at $30,000 that Jones won are not assessable because they were unexpected and were casual winnings which are exempted from the tax base and hence this amount is not assessable. According to the case Hayes (1956) 96 C.L.R. 47, gifts were held not to be income regardless of the business relationship and also gifts are not province of income tax and thus the gift of free return air tickets Jones and his wife received from Travelco worth $2 000 is not assessable. Any taxpayer residing within Australia is legally responsible for paying income tax on his income from each and every source and as per Sect 6.5 Of Income Tax Assessment Act (1997), the assessable income consists of income in accordance with the ordinary concepts as well as the income tax is billed for every year by every person and thus Jones’ salary of $42 000 is assessable since it is ordinary income he gets from teaching at Central University. Additionally, the interest Jones gets from his savings is assessable since interest is an ordinary income. Since according to Section 108.10 Of Income Tax Assessment Act 1997, personal collections having combined value of $500 or less are not taxable, the personal collections Jones bought within 2005 are $500 and thus are not assessable. As per the case Everett (1978) 78 A.T.C. 4595 ((1980) 143 C.L.R. 440, High Court) and according to Section 6.5 Of Income Tax Assessment Act (1997), the assessable income consists of income in accordance with the ordinary concepts as well as the income tax is billed for every year by every person, the 175 user pays $100 each are assessable because it is paid yearly as ordinary income. Likewise, the $25 000 is assessable because it is ordinary income. Conclusion The most appropriate assessment method for Jones is cash basis. The received $30,000 and $3,000 are ordinary income and thus are assessable. However, the free ticket Jones and his wife worth $2,000 received from Travelco are not assessable. As well, the $200,000 and a car valued at $30,000 that Jones won are not assessable. The $500 price of share certificate is not assessable because it is $500. Jones’ salary of $42 000 is assessable as well as interest earned from his saving account as offset of $300. Lastly, since Jones is in partnership with the wife, half of Jones’ share that is worth $17 500 for the license is assessable as well as the utilization of exclusive right of $25 000 for subsequent five years. This is because both are ordinary income and thus assessable. References Cases Abbott v. Philbin [1961] A.C. 352 Donaldson (1974) 74 A.T.C. 4192 Everett (1978) 78 A.T.C. 4595 ((1980) 143 C.L.R. 440, High Court) Executor Trustee & Agency Co. of S.A. Ltd (Bristowe's case) (1962) 36 A.L.J.R. 271 Hayes (1956) 96 C.L.R. 47 Squatting Investment Co. Ltd (1954) 88 C.L.R. 413 Legislations Section 108.10 Of Income Tax Assessment Act 1997 Section 6.5 Of Income Tax Assessment Act (1997), ITAA36, Section 161 ITAA36, Section 6-1 Books/Journals Adriana, T. (2008). Cash versus Accrual Accounting in Public Sector. IFAC Public Sector Committee (2006) - IPSAS 1 – Presentation of Financial Statements IFAC. Parsons, R. (2001). Income Taxation in Australia Principles of Income, Deductibility and Tax Accounting. Sydney: University of Sydney. Read More