Tonys Taxable Income - Assignment Example

Taxable income Section 17 of the Income Tax Act1 require income tax to be levied on the taxable income which is taken from the year of a person’s income tax. Companies are expected to pay taxes for a year of income. Tony’s Taxable Income Tony is employed as a pharmacist under a contract for five years from July 2012. This means that the contract lasts up to July 2017. His annual salary is $150, 000 per annum. According to the Australian Taxation Office (ATO)2 the tax and super obligations depend on whether a person is an employee or a contractor. Basically, an employee is considered as a person who works in a business and is a part of the business. On the other hand, a contractor runs his own business and provides services to your business. In this right, Tony is an employee. On 2 March 2013, Tony received an APPLI computer worth $ 5,000 from COSTCA P/L for completing an MBA course as a way of encouraging senior professional staff to gain business qualifications. He sold the computer because he has impaired sight and needs money. In the sale, he incurred the costs of $100 in selling off the APPLI computer. According to FCT v Dixon,3 in consideration of gifts, the important thing is to consider whether the gift was awarded as a product of the taxpayer’s services or because of his personal qualities. Although the gift is given because of employment relationship between Tony and COSTCA P/L, it is given because of his completing the course and not because of some services he had rendered. This is evident in Hayes v FCT4 where a taxpayer received shares from a person who had been his employer. The court decided that the gift of the shares was not part of the remuneration and it was merely a gift. Under section 15-25, cash and non-cash benefits which are obtained by an employee by reason of employment are assessable as statutory income. However, the provisions of Fringe Benefits Taxation6 are supersede the provisions of section 15-2. In this case, Tony’s computer can be converted to cash. The computer was given because he has successfully gained professional qualifications. Tony sold the computer worth $5,000 at the same amount because he has impaired sight and he needed the money. He incurred additional costs of $100 selling the computer on eBay. The $100 costs that Tony incurred does not qualify for a deduction because, as earlier discussed, in the sale of the computer Tony was not conducting business. In addition, according to section 8-1,7 the loss was not incurred in gaining or producing assessable income, neither was it necessarily incurred in carrying on the business of producing assessable income. The Act8 defines what a business is but does not define the income from business. The first indicator of a business is the profit motive. In Tony’s case, he sells the computer for its exact value and in fact incurs additional costs of $100. In addition, he sells the computer because he has impaired sight. Therefore, there was not motive of profit in selling off the computer. Therefore, the $5000 is not assessable income. Tony had worn the Denkin University prize of $2000 which is given to employed part-time students. This reward is given to part-time students who had been working 30hours per week in the course of their studies. The award was awarded on the basis of employee assessment reports which were provided to the university by the employees of part-time students. The assessability of the $2000 award here is determined by two factors; the connection between the prize and Tony’s employment and whether it can be shown that the reward was expected or foreseen to result from Tony’s performance. It is clear that the award was consequent of Tony’s employment. In Kelly v FCT,9 the ‘Best and Fairest’ award worth $20,000 was given to a professional footballer by a television station. However, the court decided that he was an employee of his club and award was incidental of his employment. The eligibility to receive that payment was by the virtue of his employment. In Tony’s case, the ruling on Kelly v FCT applies because eligibility was being a part-time employee while doing the studies. Secondly, Tony won the award on the basis of employee assessment reports which were provided to the university by his employer. Conclusion Individuals with income over $18,000 are expected to pay tax in Australia. For the year 2013, Tony’s taxable income is $157,000 ($150,000 salary + $ 2,000 award from Denkin University). COSTCA P/L Taxable Income Prior to the release of new anti-depressant drug ‘RELIEVE’ in the United Kingdom, COSTCA P/L anticipated that there would be significant profits from retailing it in Australia. The management of COSTCA P/L placed an order in early March 2013 to purchase $ 5,000,000 worth of ‘RELIEVE’ which it planned to sell in Australia. They expected to retail it at $14,000,000. At the time of placing the order, COSTCA P/L anticipated that the Australian Drug Authority would provide approval in Australia for the sale of the drug. The wholesale price of the drug is $5,000,000, this means that the drug costed COSTCA P/L $2,000 per pack and they bought 2,500 packs. They expected to sell the drug at $14,000,000 which means they had a mark-up of 180%. However, they later sold the drug at 100% because the drugs costing $2,000 per pack were included in the travel package and charged to the client at $4,000 which is a discount on the original expected mark-up of 180%. 1,000 travel packages were acquired for $10,000 which do not include the cost of the drug. Travel packages including the acquisition of the drug were sold at $20,000 each. The drug pack is included in the $20,000 price. As the drug retailed at $4,000, it was intended to release a profit on the sale of the travel package alone of $6,000 each ($20, 000-$4,000-10,000) and a profit on the sale of the drug of $2,000 ($4,000-$2,000). COSTCA did not sell any of the travel packages to customers and all the 1,000 travel packages and drugs were sold for $10M. The price of the drug are included in the sale of $10,000 per package. Originally, COSTCA bought 2,500 drug packs. This means that 1,500 remain as the property of COSTCA. COSTCA does not operate as a travel agency and it has never been undertaken a venture as this one and it does not propose to enter another arrangement as this one. Section 6-5(1) provides that normal proceeds of activities that constitute a business are assessable income. In order to identify the scope of the activities that make up business that COSTCA entered the broad formulation, which is the Australian approach, will be used. In the ruling of The Myer Emporium case,10 the court relied on two kinds of reasoning to rule that the amount received by The Myer Emporium were income. First, the money on the issue was a profit which resulted from a transaction which was entered into with the purpose of making profit. This is besides the fact that the business was outside the ordinary course of taxpayers business. Secondly, the taxpayer sold the right of to gain interest for a lump sum. The taxpayer took the lump sum in place of the future interest it would have received. This according to the court is converting future income into present income. In the COASTCA case, they sold the drug at lump sum rather than waiting for the drug to be approved in Australia and selling it then. Like in the Myer case11 COSTCA sold the travel packages for a lump sum, however, they did not make profits from the lump sum. Although COSTCA undertook both the activities of buying the ‘RELIEVE’ drug and the travel packages with the intention of making a profit, they did not make profit from carrying of the business operation. The Myer Emporium doctrine does not apply in this case because profit was not made and the initial intentions of 180% mark up. Basically, costed COSTCA $5,000,000 for the cost of the drugs and $10,000,000 for the travel packages (1,000 travel packages × $10,000 per package), in total COSTCA spent $15M for the ventures. The packages were sold to a rival company at $10M which includes sale of 1,000 drugs packs. 1,500 drug packs remain in possession of COSTCA which is worth $3,000,000. One of the issues in the COSTCA venture is to determine whether there was income. Income is viewed as something flowing from capital. The courts have used agricultural metaphors to liken capital which gives rise to production. Income is seen as the product itself. This is birthed in the case Eisner v Macober12 and the approach is known as Fruit and Tree test. Income comes from the use of capital. COSTCA cannot be said to have made any income because it did not gain anything from the use of capital ($5,000,000). In the whole venture COSTCA lost $2,000,000. These facts leads to the question of the tax deductions that COSTCA was eligible for. Section 8-1 (1)13 gives the provisions for the two positive limb. The first one being deductions for any loss or to the extent that it was incurred in gaining or producing the assessable income. The second positive limb gives provision for deduction for loss incurred in carrying a business for the purpose of producing assessable income. In Charles Moore & Co v FCT14the company which operated a department store were allowed a deduction on their money which was the previous day’s takings that was robbed on their way to the bank. The company was allowed a deduction because its loss was suffered in the course of their business. This is in relation to the second limb (it was necessary to take the money to the back at the end of that day). The ruling in this case applies to COSTCA because the losses they suffered were incurred in the course of their business – it was necessarily incurred in carrying out their business of producing assessable income. Although accessible income was not produced, Section 8-115 gives the provision of a deduction on expenses incurred in a current and on-going earning activity which will hopefully lead to a future assessable income. The deduction for COSTCA include $2M which was lost in selling the 1,000 packs of the drug together with the travel packages. In COSTCA’s case, there is still $3M worth of the “RELIEVE’ drug which can produce future assessable income upon approval of the drug by the Australian Drug Authority. Conclusion In determining taxable income, it is important to ascertain whether income was gained or not. In Tony’s case, determining what his taxable income was involved determining whether the $5,000 gained from the sale of the computer was assessable or not. In addition, it involved determining whether the $2,000 award was assessable income. On COSTCA’s case, determining whether income was made in the venture was important. It is also important to determine whether the company was eligible for tax deductions on the costs incurred. Read More