Stone v Commissioner of Taxation - Case Study Example

Name Tax in Sport- BLS 340 Open Universities Australia Instructor’s name Subject Table of contents 1. Introduction..................................................................................................................3 2. Facts about the case.......................................................................................................4 3. The issues raised in the case and rationale behind the judgement ...............................5 4. The 2005 appeal and the issues raised .........................................................................7 5. The need to tax athletes................................................................................................9 6. Ways of minimizing tax payable .................................................................................10 7. Conclusion ...................................................................................................................13 8. References ..................................................................................................................15 1. Introduction This paper seeks to analyze Stone v commissioner of taxation case [2003] FCAFC 145 and subsequent appeals in the Commissioner of taxation v stones case [2005] HCA 21. It will begin by listing the facts presented in the case Stone v Commissioner of taxation 2003. In addition the report will discuss the issues raised in 2003 case and the rationale behind the judgement. Furthermore an analysis of the appeals in 2005 commissioner of taxation v Stone case will be presented as well as the issues raised. Moreover my opinion on the need to subject the athlete to taxation on income from his/her talent will also be discussed. Finally the paper will enumerate several strategies that can be employed to minimize the amount of tax payable by the athletes. 2. The facts of the case The information presented in court during this case revealed that Miss Joan Stone was a fulltime employee as a police woman of the Queensland police service and in addition to serving as a police woman Stone participated in the women’s javelin throwing as a part time activity. Judge hill also found out that Miss Stone stated showing her interest women javelin in 1994 and in the following year Stone won her first prize in Grand prix. According to the Judge Stone was a full time police officer but she managed to spare part of her time to participate in javelin and the money given to athletes was to enable them meet their expenses and later in the decade Stone won sponsorship with sports goods producers. In 1998 she started receiving grants from the Queensland Academy of Sports [QAS] and the following year stone received prizes from Athletic Australia. These receipts were rewards for excellent prowess in athletics specifically in javelin. The same year she received sponsorships which took another for and not money. [The high court’s decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005 p 221-225] According to the commissioner of taxation Stone received more income in 1998 from her championship awards and her sponsors therefore these contributes towards her success through financial assistance from other stakeholders such as Queensland academy of sports [QAS] and the Australian Olympic committee [AOC] thus impacting positively on her grand income. In this year the case revealed that she earned more and above the recommended amount that could attract taxation. The Judge points out that by the year 1999 Stone’s income ranged from grants, appearance fees, and awards among other and the commissioner of taxations felt that Miss Stone should pay tax (Davies, C. 2005) VOL part 1. (B., Cases and Comments VOL 28:373. 2006)[The high courts decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005.p 221-235] However later in that year her income started declining due to the injuries she had sustained. On the other hand the case revealed that in the view of the commissioner of taxation Stone was conducting a business by exploiting her talent. Therefore the commissioner recommended that stone should pay tax. However the task to decide whether Stone was engaging in a business through her profession was placed before the courts where the federal court gave a ruling that she did not participate in a business undertaking however the appearance fees and sponsorship money should be taxed (B., Cases and Comments VOL 28:373. 2006). 3. Issues raised in the case and the rationale behind the judgement In the case Stone v Commissioner of taxation several issues have been raised. The issues revolve around Miss Stone and her participation in international javelin throwing thus forming the background to the judgement that follows. An issue raised in this case is to determine whether Stone is engaging in professional sport or she is an amateur (Healey 2005) p.279-295. (Cassidy 2007) P.169-. this is a serious issue because it formed the grounds upon which the court was to determine whether her returns from sports should constitute her taxable income. Another issue raised is what should constitute an income this is major issue because it raises many questions in the country related to tax and sports. Determining what should constitute an income has always raised concern within the state therefore the court finds it difficult to give a ruling over the same issue. This could be attributed to the fact that the state does not have a well established taxation laws that clearly define an income. The Australian Federal court has to deals with this situation by applying necessary laws and relating the case to past legislations in order to establish an appropriate solution to this issue. Another issue raised in this revolves around examining whether Stone participated in athletics as a hobby or a business as a professional athlete. In order to come up with a proper ruling over this case the court had to proof that Stone’s participation in athletics. This is with reference to the fact that repeated participation in sporting activities where there money was given as compensation for services offered amounted to a business venture and that income from such undertakings is subject to taxation. The courts also reveal that, such incomes will always be open to controversy if the there are no legislations enacted over the same. Due to the difficulties experienced during the ruling the courts had to seek for relevant and reliable cases from precedents and the Australian Tax Office in order to give the ruling. Therefore the court had to come to a conclusion by evaluating Stone’s sporting activities. In determining the final decision in the case Judge Hill reveals that it is difficult to come to a conclusion that Stone’s participation in sports is a business activity or not. However the Judge argues that Stone had had turned her talent into a money making venture therefore part of her income should be classified as taxable income. For instance the judge acknowledges that Stone’s income and receipts in the form sponsorships from different donors can receive varied treatment when it comes to the tax department depending on the motive and the relationship that exist between the recipient and the donor however it becomes difficult to identify her intentions. On the other hand the Full Federal court does not find it right to classify Stone’s activities as a business because a talent and a hobby may be similar however it is evident the sought for sponsorship [The high courts decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005.p 221-235] According to the Judge there are incidences when the an athlete participates in sporting activities by exploiting his/her talent in exchange for money this is classified as a business because the athlete gets something in return for the services. In this case Stone participated in javelin as a hobby and derived satisfaction from the activity. However when Stone sought for and got sponsorships and appearance fee from individual firm by promoting their sporting products her undertaking turned into a business activity. According to the ATO this type of income comes as a result of the great efforts from the competitor therefore it fall in the category of benefits or rewards. Therefore Hill rules that rewards form part of accessible income which should be taxed. In the initial stages of this case it seamed that all categories of her financial benefits did not qualify as profit making adventures. However the court observed that Stone’s receipts in form of prizes and related income should not form part of her taxable income but whatever she receives in return for her service such as appearance fees and sponsorship payments was part of taxable income [The high courts decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005.p 221-235]. At the same time the commissioner presents evidence that point towards effective taxation on the basis income levels. From his argument it is evident that the defendant does enjoy exemption from tax as long as income form this sector does not exceed the minimum requirement. According to Judge Hill the ruling in this case he evaluated both the facts and issues raised and found out that there is a possibility that part of Stone’s income could be termed as assessable income and should be subjected to taxation. However there is also a possibility that even though Miss Stone engaged in athletics is was a hobby and that she did not intend to gain monetary returns from this activity. Therefore did not engage in a business activity thus no part of her income should be taxed. The Judge observed that some athlete turn their talent into money making avenues by engaging in professional athletics therefore money from these activities is subject to taxation. Thus the judge concluded that there was enough proof that Stone engaged in a business activity and that part sponsorship fees and appearance are assessable income which should be taxed. The 2005 appeal and issues raised in the appeals The appeals of Stone v Commissioner of taxation 2003 to the Federal courts also raised some issues over the case. The Jury in this case which included three judges observed during the ruling in the court Judge Hill made reference to the 1936 tax act. In addition the court observed that this resource was relevant and hence reliable however the court was quick to admit that the income tax assessment act of 1997 was better placed in drawing a conclusion to this case in providing a clear alternative definition to income. Similarly the court acknowledge that Just like the other courts tackling case concerning Stone v Commissioner of taxation there are issues raised in the high court. The high court also faced similar challenges during the whole process however the final decision saw the case turn around. The High Court also finds it difficult to come up with information differentiating between an amateur and a professional athlete engaging in business. This court observed there are several factors that should be taken into account in order to clearly define an income before coming to a conclusion that part of Stone’s income should not constitute her taxable income. The court therefore assesses different acts unlike Judge Hill whose attention was limited to the 1936 act. Another issue raised in the appeal revolves around determining a business activity. This is major issue because it formed the grounds for upon which the court decides whether Stone is engaging in a business activity. It can also provide the basis to determine the part of receipts that are assessable income. According to the jury handling the appeal one factor could not be used in deciding that Miss Stones participation in sporting activities qualify as a business venture therefore the Judges in this panel Judge Heeley, Emmet, and Heerey observe that Stone did not engage in a business activity The high courts decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005.p 541-545. In addition the jury observed that Stone was a full time employee as a police officer of the Queensland police service. Similarly the court recognizes her ambitions drawing her to further her studies in order to secure a promotion. Moreover the court also acknowledges the fact that even though Stone is participating in athletics and that she receives money in return there is a possibility that Stone participated in these competitions for enjoyment. It then concludes that Stone’s income from this venture is not assessable income [The high courts decision in commissioner of taxation v Stone and its impacts on sport Australia, 2005.p541-545.] The court observed that the commissioner of taxations presented evidence to proof the fact that Stone’s activities could amount to a business activity. The commissioner argued that Stone solicited support from sponsors and that the athlete did commercials with companies producing sporting products. Basing on these findings the court decided that the money Stone receives as prizes and grants is not assessable income. However the commissioner of taxations manages to convince the court that stone receives income as a result of doing some commercials in the form sponsorships and appearance fees. Basing on these findings the jury observed that Stone received money for some service she offers to these firms therefore her sporting activities become business activities even though it was meant to gain experience in the sport (B., Cases and Comments VOL 28:373. 2006). This decision by the Judges in the High court after taking into consideration related case and reports such as the Tax Assessment Act of 1997 which Judge Hill did not find it necessary in this case is contrary to his findings. 4. The need to tax athletes In my opinion payment of tax is inevitable every person accessing some income should pay tax. The ruling by the court in Stone v Commissioner of taxation case that Stone should pay tax on such income in my opinion is valid. There are several reasons for drawing this conclusion first it is allows the country to step up to the international standards. In the international arena for instance athletes who engage in sporting activities with the aim of making money must pay tax it is clear that she used her abilities in Queensland sports academy to earn more income. Therefore Stone pay tax the same since the court ruled the she is eligible. In addition from such earning as sponsorship payment and appearance fees are part of taxable income because it adds value to the tax payer’s scheme and that the law demands should be paid. Stone exploits her talent in sports by participating in javelin throwing this generates extra income. The rule holds that an extra income to the tax payer will move her to the next taxation bracket. Therefore this income will mean that Stone should pay a larger amount of money as tax. Since income earners pay tax according to their income the same case should apply to Stone. Another reason why Stone should pay tax can be derived from the fact that over a period of time she has managed to develop her career to the international level. This development makes her sporting activities an asset which should generate income to the owner. It is also clear that tax payers enjoy the comfort of the facilities such education, health, water, and security that the state offers to all. However we should know that this can only continue in the event that we pay tax. Therefore assessable income should form part of taxable income to enable the state deliver better services. Taxation system change with time therefore payment of taxes allows the tax payer to file for claims whenever need arises. 5. How could stone minimize tax payable There are several ways that Miss Stone could employ in order to reduce the amount paid as tax to the state this means that they are legal and that these methods allow individuals to reduce the amount tax payable to the central government during the financial year. These methods revolve around minimizing income, engaging in retirement schemes, and mortgage facilities, taking advantage of tax credits and distributing your earnings to prevent concentration to a particular period. Some of the programs ensure that a different entity assists in shouldering this responsibility and the finance owner enjoys more benefits as he/she continues with the normal routines. To start with Stone should purpose to purchase a retirement scheme. (Jong 2002).p205-227 (Hatcher 2008).p78-80 this is a program that an individual engages in voluntarily and he/she pays in to the system via subscription. In addition the government has well established methods of ensuring that persons saving for retirement benefit from paying tax to certain levels (Jong 2002).p205-227 (Jong 2002) (Hatcher 2008).p78-80. This strategy will allow her to continue earning more and spending a percentage of her income in the scheme. This scheme will also permits Stone to save for the future without compromising without reducing her income. Stone could also plan to channel part of his income to activities such as the mortgage industry. This method will reduce the amount of income subject to taxation. By increasing her monthly deductions there will be subsequent decline in the amount moving out from her income as tax. In addition it facilitates her saving for the future thus securing it before hand. Moreover such a plan minimizes assessable income by keeping this amount at the minimum; this ensures that her money income does not attract a lot of tax in the long ran. Stone could purpose to benefit from tax credits by taking the option allowing parents to offer support to students at college levels. This method could ensure that she benefits from education credits (Mazonas 2005).p84. The advantage is to ensure that tax payable on incomes such as assessable income is not much to the extent that is impacts negatively in the taxpayer. On the other hand it focuses on motivating the tax payer and at the same time play along the law without attracting legal measures. Since Stone is attending college part time lessons to further her studies and increase the chances of securing a promotion in the forces. She could capitalize on this to lower her financial eligibility thus reduce the amount paid as tax. Since she also takes classes and paying for her studies Stone could take the chance to seek financial assistance and use her commit her income towards the repayment of the loan. Such an event will allow her to benefit by reducing the tax payable. Finally stone can choose to shift her income to children attending college or another individual such as relative with little income this will impact positively on the student and reduce her tax deduction. Shifting income to students is preferable when the tax payer has children in college it is a way of helping them out to pay for their education without attracting tax. The law stipulates that a student earning below certain levels should not pay tax therefore this strategy best works for students with minimum earnings. However the method is useful because it minimizes taxable income and consequent tax reductions. Therefore Stone could have used the strategies above in order to minimize the amount on money she pays out as tax without violating the law or moving to seek the opinion of the court. 6. Conclusion The case Stone v Commissioner of taxation revolves around Joan Stone an athlete and a police woman in the Queensland police service [QAS]. Besides earning the regular salary as a police woman Miss Stone decided to exploit he talent and she ended in the Olympic team where she participated in the women javelin and won several prizes in return. There are several facts raised in this case which the report discusses in detail. The report also looks at the rationale behind the judgement and finds that her participation in sports drew the attention on the Commissioner of taxation into drawing a conclusion that the extra income should be taxed. With Stone moving into a court of law to seek justice that this part of her income should not form her taxable income because she did not engage in a business Judge Hill handles the case. Due to the absence of a single legal document to assist the court in offering a clear ruling the court borrows part of the 1936 act definition in order. With reference to this act the Judge Hill gave his ruling over the same and decided that Stones earning from athletics could be classified into two categories and that grants and prizes are not assessable income. This ruling did not satisfy her or the Commissioner of taxation. However subsequent appeal followed led to the federal court and the High court. The courts handling the appeals observed that in his ruling Judge Hill made reference to one act and that there were other act such as Tax Assessment Act of 1997 that could have offered more information on the case. This court admits that the previous act in not inadequate however the newer version offers a better definition therefore is the most prevalent in this case. The ruling in the appeal acknowledge that Miss Stone is a fulltime police officer in the Queensland police service and that she engaged in javelin with the aim of advancing her experience in this sport. However more information from the Commissioner of taxation revealed that through this activity Stone became a professional athlete making her call a business undertaking. This led to the final decision that her earnings in form of grants and prizes were not assessable income and that sponsorship money and appearance fees should be assessable income. However due to the last part of her income becoming assessable income all her income was declared taxable income. Miss Stone should also purpose to pay tax because it is her obligation to do so however she could have opted to make use tax credit and retirement schemes as a better way of minimizing her income tax. Work cited 2010, Fishman S. Tax Deductions for professionals. 5th Ed. California: Nolo, 2010. Australian Master Tax Guide 44th Edition. Sydney: CCH Australia Limited., 2009. B., McDermott. "Cases and Comments VOL 28:373." Sydney Law Review. , Sydney, 2006. B., McDermott. Commissioner of Taxation v Stone (2005) 215 ALR 61: It's Implications for the Role of Intention in Assessing Business Receipts, and the Treatment of Gains Made by Athletes. Sydney: Sydney Law Review., 2006. Cassidy, J. Concise Income Tax.pp, 95. Federation Press, 2007. Clark, B. "The meaning of income: the implications of Stone v FCT." Revenue Law Journal. Vol 14: Iss 1, Article 9, 2004. Coyle, DC. Why pay taxes. National home library. National home library foundation, 1937. Davies, C. "The high court decision in Commissioner of taxation v Stone and its impact on sport in Australia. vo. part 1." 2005. Editors, CCH. Australian master tax guide: tax year end edition 30 June 2009. CCH Australia, 2009. Hatcher, TA. Collegiate Solutions. Troy A. Hatcher, Ccps, 2008. Healey, D. Sport and the law. pp.295-. UNSW Press, 2005. Institute, J. K. Lasser. J K LASSER'S YOUR INCOME TAX. John Wiley & Sons, 2007. Jong, DSD. Jakabcin, AG. J. K. Lasser's Year-Round Tax Strategies 2003. John Wiley & Sons Inc, 2002. L., Clark B & Miller. Taxation in Sports. Sydney:. The Federation Press. , 2000. Mazonas, P. Double your retirement income: three strategies for a successful retirement. Wailey, 2005. McCahery, J.Renneboog, L. Venture capital contracting and the valuation of high-technology firms. Oxford University Press, 2003. Read More