Status consumption Essay Example
S6-5 and S15-30ITAA971 defines compensation for lost of income as ordinary income while compensation for loss of right to earn income as capital in nature. Regarding our case, the issue is whether Tom is being compensated for loss of ordinary income or compensation for loss of right to earn income. Other information that Tom needs to provide in order to accurately determine the treatment of the compensation treatment includes whether the compensation is as a result of;
-payment of goods supplied according to the contract, or
-payment as a result of breach of the contract, or
-Compensation of any other nature
If the compensation is as a result of loss of right to earn income, the compensation will be treated as capital as was the case in Van Den Bergh’s case where the compensation related to the company’s loss of capital making apparatus. This was also observed in FCT V Woite2 where the tax payer- a footballer received$10000 for entering a contract that restricted him from playing football with other Victorian clubs apart from North Melbourne.3 However, there was no requirement for him to play for North Melbourne club unless he decided to play in the Victorian league. It was held that the compensation was not an ordinary income but a capital payment to give up the right to play for other clubs. However, had the player signed a contract with the club to play for them, this would have been treated as ordinary income and hence taxable. Similarly, Tom would be assessed on the compensation if only it related directly to his normal business income. If Tom’s right to earn income is not affected by the compensation- and hence the compensation is ordinary income, it will be assessed as ordinary income as in Heavy minerals case 4where it was held that the company could still continue in business although the contract had been terminated.
Under ITAA36 (S995-1(1) ITAA975, ordinary and statutory income will be treated to have an Australian source if and only if they are derived from a source in Australia. The decision on whether or not Charlotte will be regarded as an Australian resident will be based on s6 (1) ITAA366 which details the conditions for one to be considered an Australian resident as explained below;
If Charlotte goes to work in Vanuatu temporarily and she does not set up a permanent residence, she will be considered to be an Australian resident for taxation purposes. Moreover, if her personal effects remain in Australia, she will be considered as resident but if they are in Vanuatu, she will be considered as nonresident as was the case in LEMAY V. COMMISSIONER7, a tax payer worked for an oil rig in territorial waters of Tunisia. In After working 28 days, Lemay returned to the US to be with his family for 28days. In Tunisia, he was provided with housing and had little contact with local citizens and the culture. The tax court’s application decided that: Lemay had strong economic, familial and personal ties to his residence in the US, and therefore his ‘abode’ remained in the US in 1982. Similarly, if charlotte has a lot of contact with his former country of Australia the tax Authorities will treat her as a resident and hence her income will be assessed.
If she leaves for Vanuatu permanently with no intentions of returning, she will be considered as Australian nonresident from the date of departure for purposes of tax computation as was the case in FCT v French8 an Australian engineer employed by an Australian company in New Zealand. It was held that he derived income from work he did while in New Zealand in New Zealand rather than from Australia.
If Charlotte returns to Australia, the frequency and duration of her trips as well as their purpose will also determine her assumed residence for tax purposes (James, K 2008).9 If she returns frequently or for business purposes, she will considered as Australian resident, otherwise, she will be considered as nonresident.
The extent to which charlotte’s family and business ties are spread in the two countries will also determine her residence as provided in s6-5(2)10. If most of her family is in Australia as well as her business ties, she will be considered as an Australian resident but if most of her family and business ties are in Vanuatu, she will considered as Vanuatu resident for purpose of tax computation.
Charlotte’s maintenance of assets and bank accounts in Australia will also determine her fate regarding residence. If she maintains them in Australia, she will be considered as Australian residence but if they are maintained in Vanuatu, she will be considered as an Australian nonresident.
Therefore she needs to clarify in which category her situation is so that she can be advised accordingly.
A similar conclusion can be deduced from the case of Cook V Tait where the Supreme Court in America upheld the constitutionality of the taxation of Americans on their foreign earned income provided they are deemed to be American citizens for taxation purposes.11
New residential and commercial properties are subject GST. For purposes of taxation, new buildings refer to those that are less than five years old. Any agent’s fee for new or old property is subject to GST. Homes sold by builders are taxable. A builder refers to a person who builds, substantially renovates or buys a house for business or adventure or concern in the nature of business /trade. No GST applies to the sale of a house if its build for ones personal use. If the house is used partly for personal use and partly for commercial use, GST applies to the portion or percentage used for commercial purpose (Aaron, 2004).12 If it is used entirely for commercial purposes, its market value is subject to GST.
Arnie is therefore a builder. If the house is more than five years old, he is not liable to pay any GST. If however it’s less than five years old, he is liable to pay for GST. If Arnie had used the building for residential use only, no GST is payable. However, since his business is resale for such property for a profit, he is expected to pay GST based on the fair market value of the house as was the case in Marana Holdings Pty Ltd V Commissioner of Taxation (2004). In this case, the full Federal court considered whether the sale of a strata title resident unit that had been developed from a motel was subject to GST.13 The seller claimed that the sale of the property was not taxable because it was a sale of Residential premises to be used predominantly for residential accommodation’ the court held it was taxable. If Arnie sells the house to a GST registrant. The purchaser is expected to remit the tax. The seller will not be required to collect the tax as the purchaser has to be self assessed.
S6-1(1-4)14 defines both assessable and non assessable income. In addition, common law defines assessable income to include prizes and awards if connected with employment or services rendered as well as exploitation of one’s skills in a commercial way as in Kelly V FCT where the taxpayer played football at the highest level in the Western Australia completion. He won an award for the best and fairest player in 1987. The media broadcast that it would pay $20000 to the winners prior to the announcement of the winner.15 The commissioner assessed Kelly on the price because it is directly related to his skill and performance as a professional footballer. Similarly, since the contest relates to Tim’s talent, the award will be included in his taxable income and reported in their tax return. However, Tim will be exempted from taxation if it meets the following four criteria:
If Tim was selected without any action in his power to take part in the contest. Secondly, if Tim does not perform any services which in this case he did (Irena and James, 2008).16 Thirdly, Tim has to prove that his talent is in recognition of religious, sciencetific, artistic, charitable or civic achievement. Lastly, if Tim decides to award the prize to a government unit or taxes exempt charitable organization prior to the receipt of the award.
As regards the non cash award (Cruise); s11-1 ITAA97 17clearly states that income must be money or convertible into money. Furthermore, s21 ITAA3618 states that if payment is made other than in cash, the monetary value of the payment will be deemed to have been paid or given and therefore assessable. Similarly in Wills V Commissioner’s case which involved a bane ball star Maury wills who was awarded an auto mobile upon being elected the most popular dodger and a valuable trophy Belton becoming outstanding athlete of the year by national sportswriters.19 The items were clearly given to him as award which fell under sec.74 of the internal revenue code and hence taxable as income except statutory exception applied. Similarly, since the cruise is convertible to money, he will be assessed on it. However, if Tim chooses not to accept the prize, he should not include it in his taxable income on his tax return.
S6-5 and S15-30ITAA97 which clearly defines compensation as either being ordinary income or capital.
FCT v Woite where it was held that compensation for loss of ability to make income is to be treated as capital.
Heavy minerals V commissioner where the compensation was treated as assessable as it did not result in loss of income.
ITAA36 (S995-1(1) ITAA97which details the treatment of income with an Australian source
s6 (1) ITAA36
Lemay V. Commissioner
FCT v French
9James, K2008, Studies in the history of tax law, William books, Wellington.
S6-5(2) which provides for the conditions applicable for one to be considered a resident for taxation purposes.
11 Cook V.R Tait.
Aaron, O2004, International taxation law, Quinnipiac probate law journal, Vol. 4, no.4, no.1pp25-39.
13 Marana Holdings pty ltd V.R commissioner of taxation.
14 S6-1(1-4) which defines assessable and non assessable income.
Kelly V.R FCT S (1985) 16 ATR 478.
16 Irena, V &James, R, 2008,tax law issues, Akron Tax Journal vol. 25, no. 1 pp 34-44.
19 Wills V.R. C commissioner.
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