Gerard Stone and Rob Whait FTIA Taxation Law discipline School of Commerce University of South Australia

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1 Gerard Stone and Rob Whait FTIA Taxation Law discipline School of Commerce University of South Australia Rob Whait FTIA graduated from the University of South Australia with a Bachelor of Commerce degree in 2001 and became a Chartered Accountant and Fellow of the Taxation Institute in Rob worked in public practice and in commerce before joining the University of South Australia as Lecturer in Taxation in His research interests include tax avoidance and tax compliance; income taxation and policy, and research methodology. Gerard Stone graduated from the University of South Australia with a Bachelor of Commerce. He is the Program Director of the Bachelor of Commerce degree and a lecturer and tutor in Accounting and Tax at the University of South Australia. Gerards research interests include: Question 1 The Small Business sector and its relationship with the Accounting profession. Determinants of satisfaction of the Small Business clients of Accounting firms. Communication between the Accounting and Small Business sectors. Undertaking readability analysis of written communications provided to the Small Business sector by Accountants. Undertaking analysis of the preferred communications methods of the Small Business sector in its communications with Accountants. Jane is employed as a marketing manager for a large chain of discount warehouses. During her spare time she enjoyed mountain climbing and abseiling. One Saturday whilst abseiling, Jane broke both of her legs and was unable to work for 2 months following the accident. Jane only had 10 days of sick leave available, but she had taken out an income protection insurance policy that ensured that she got paid 90% of her usual fortnightly salary until she was able to return to work. Must Jane include the receipts from the insurance company in her assessable income? Support your answer with reference to relevant taxation law. Suggested solution Dixon v FCT is the authority for the principle that a receipt that substitutes for ordinary income takes on the character of ordinary income. Jane s salary is income from employment and is therefore ordinary income under s.6-5(1). The insurance payments that Jane received take on the character of ordinary income since they substitute for her salary lost due to her accident and are therefore ordinary income under s.6-5(1). The argument above has been applied in Tinkler v FCT to assess receipts from income protection insurance as ordinary income. Section does not apply since that section only operates where the insurance receipt is not ordinary income. Question 2 Harriet Harrison is a self-employed physiotherapist specialising in providing therapy to the elderly. Since she visits all her patients in their own home, she does not need consulting rooms for her patients to visit. Instead she runs her business from her own home where she has converted a unused bedroom into an office. She has furnished this office with appropriate office furniture and equipment including a desk and chairs, bookcase, filing cabinet, telephone and fax machine, and a computer with broadband Internet access. She also has bought some stationery. In addition to the office expenses she also pays interest on a home loan. Taxation Institute of Australia Page 1 of 5

2 Advise Harriet whether she can claim a tax deduction for any of these expenses. Support your answer with reference to relevant taxation law. Suggested solution The facts say that Harriet is a self employed physiotherapist therefore she is carrying on a business. In Swinford v FCT a self-employed scriptwriter conducted his business from home and was allowed to deduct the appropriate proportion of occupancy and running expenses. This is because the area designated for his business constituted a business premises. Likewise Harriet is also carrying on her business from home and has set aside one room to conduct this business. Therefore Harriet may deduct the appropriate proportion of running costs and occupancy costs associated with her business. Office furniture (desk, chairs, bookcase, filing cabinet) and computer equipment, telephone and fax machine deduct the decline in value under s.40-25(1). Any private use must be apportioned in accordance with s.40-25(2). Telephone expenses, fax expenses, internet, stationery - proportion of taxable use of the running costs are deductible - s These expenses may or may not have some private use depending on Harriet s pattern of use which cannot be deducted per s.8-1(2)(b). Interest on home loan a connection between the interest and the earning activity (a business) is established by Swinford v FCT as noted above therefore taxable use portion of the interest is deductible under s.8-1. The house is also a private residence therefore must apportion the interest appropriately. Question 3 Phones For You Pty Ltd is a retailer of mobile phones. On 21 May 2008 the company entered into a contract for the purchase of some mobile phones for $20,000 from an overseas supplier. On 27 June 2008 the company received the invoice for these phones but a dispute had delayed shipment. As at 30 June 2008 the order was still in transit although the company had received bills of lading in respect of one quarter of the shipment. Advise the company of the tax consequences, if any, of the goods in transit for the year ended 30 June Support your answer with reference to relevant taxation law. Suggested Solution The mobile phones are trading stock since they are held for the purpose of resale in the ordinary course of the taxpayer s business (s.70-10). The issue is whether the goods are on hand in accordance with s To be on hand, Phones For You Pty Ltd must have dispositive power of the phones. Dipositive power is the power to direct, control, and dispose it (authority FCT v Sutton Motors (Chullora) Wholesale P/L). Dispositive Power does not necessarily require the stock to be in the physical possession of the taxpayer. Stock can be on hand when it is in transit, where the risk and property in the goods has passed to the taxpayer (cite All States Frozen Foods P/L v FCT). If a taxpayer holds legal title to stock, but they do not have the power to direct, control or dispose of the stock, then it is not on hand (Farnsworth v FCT). Taxation Institute of Australia Page 2 of 5

3 Bills of lading were received for $5,000 of the stock meaning that risk and title for that stock has passed to Phones For You Pty Ltd. Thus, the company has dispositive power, making the phones on hand at 30 June Therefore, $5,000 is included in purchases pursuant to s (2) and deductible under s.8-1. Also, include $5,000 in closing stock calculated in accordance with 70-45(1) for the trading stock adjustment required under s Trust exam question Susan Lawson was a solicitor in sole practice who had returned income on a cash basis. On her death in November 2008, a trust was created under her will conferring the following fixed interests in the net income of the trust estate: William (widowed husband) $ 40,000 Albert 30,000 Belinda 20,000 In addition to the above fixed interests, the trustee of this trust estate has the discretion each year to accumulate the balance of the net income or to distribute it amongst other eligible beneficiaries as the trustee sees fit. The trustee made the following resolution on 29 June 2009: It is resolved that the balance of the net income of the Estate of Susan Lawson for the year ending 30 June 2009, after taking account of the fixed interests in this net income, be distributed as follows: Cate $ 15,000 David 10,000 Any remaining balance to be accumulated. For the year ending 30 June 2009, the trust returned a net income of $160,000 in terms of subsection 95(1) of the 1936 Act. The bulk of this income was derived from extensive rental properties which had been owned by Susan, but also included was an amount of $20,000 received for fees owing to Susan at the time of her death. There were no outstanding debts owing by the estate. Additional information (1) Albert is a son aged 26 and a resident of Mexico for the last 3 years where he is employed as a computer consultant. He does not lodge income tax returns in Australia. (2) Belinda is a daughter aged 19 who is a full-time student with a part-time job. (3) Cate is a daughter aged 16 who is also a full-time student with a part-time job. (4) David is a son aged 14 and fully occupied with school work. Required Explain how the net income of the trust, and the taxable incomes of the beneficiaries where appropriate, will be assessed for income tax for the year ending 30 June Reference should be made to the relevant tax law and rates, but calculations of tax are not required. Taxation Institute of Australia Page 3 of 5

4 A suggested answer Professional fees owing at death: the amount of $20,000 is deemed to be income of the trust to which no beneficiary is presently entitled in accordance with s.101a. See Single s case. Rent income: the balance of the net income of $140,000, comprising rental income, is available to be distributed to presently entitled beneficiaries. This income is legally available to be distributed because all debts have been settled (compared with Whiting where the estate was still under administration). Distribute fixed interests: William Resident, not under a legal disability and presently entitled to income. Therefore, the distribution of $40,000 is included in his assessable income under s.97(1). He bears sole responsibility for tax on that distribution. Taxable income is taxed at resident individual tax rates. Albert The facts indicate that Albert is a non resident because he has a permanent place of abode outside Australia in terms of the tests of resident in s. 6(1) of the 1936 Act: see Applegate. He is also presently entitled to income and not under a legal disability. Therefore, the trustee is assessed on his distribution of $30,000 under s. 98(4) at non resident individual tax rates. (As he does not lodge returns in Australia, there can be no application of s. 98A). Belinda Like William, she is presently entitled to income, resident and not under a legal disability. Therefore, the distribution of $20,000 is included in her assessable income under s.97(1). She bears sole responsibility for tax on that distribution. Part-time income is assessable under s.6-5. Taxable income is taxed at resident individual tax rates. Other discretionary distributions: A valid resolution to distribute other income was made in time by the trustee by 30 June This deems present entitlement to income by the nominated beneficiaries in accordance with s Cate Resident and under a legal disability as a minor. A prescribed person per s.102ac as she is only working part-time as at 30 June, However, this is excepted trust income in accordance with s. 102AG(2)(a), so Div. 6AA penal tax rates do not apply. Therefore, the trustee is assessed on her account under s. 98(1) at ordinary resident individual tax rates. The part-time income that Cate earns is assessable to her under s.6-5. This is excepted assessable income (s.102ae(2)(a). Thus, again Div. 6AA penal tax rates do not apply; rather resident individual tax rates apply. Here, s.100(1) applies because Cate, as a beneficiary under a legal disability, has derived income from another source (part-time work) during the income year. Thus, she is also liable to pay tax on her trust distribution in her own return. Cate then claims a tax credit under s. 100(2) for the tax paid by the trustee under s.98(1). Taxation Institute of Australia Page 4 of 5

5 David Resident and under a legal disability as a minor. Prescribed person (s.102ac) as not working full time on 30 June, 2009, but again this is excepted trust income under s.102ag(2)(a) and so Div. 6AA penal tax rates do not apply. The trustee is assessed under s. 98(1) at ordinary resident individual tax rates. As David does not derive income from any other source during the income year, s. 100 does not apply. Accumulated Income The trustee is assessed on this $45,000 ($20,000 professional fees owing at death and $25,000 accumulated per resolution) under s. 99. The higher s.99a tax rates do not apply because this is a testamentary trust: s.99a(2). Therefore, the trustee is assessed at resident individual tax rates as Susan died less than 3 years before the end of the income year in question. Taxation Institute of Australia Page 5 of 5