Australian Taxation Office

Questions: Part A 1. Allan and Betty were living and working in Melbourne. They decided on a tree change, sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine makers dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360. 2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mothers recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They dont keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600. 3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a barter system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home. No money changes hands. Suzie would receive a credit to her account of 15 to 20 barts that she can exchange for goods or services of equal value from other registered participants in the scheme (fruit, vegetables, child minding, lawn mowing etc.). Part B Nicole Grownman is an Australian actress who has had a number of roles in films and guest appearances in serials. During the year the following events occurred: Nicole was offered a role in a telemovie set in the 1950s. She was required to put on 10 kilograms to play the part offered and would be awarded the role only if she put on weight. Nicole increased her food intake dramatically, dining-out several times a week and eating fast food. She estimated she spent $1,000 on food that she would not normally have eaten. She was paid $50,000 for her role. As a result of her weight gain Nicole had to buy new clothes at a cost of $2000. At the end of filming she wanted to loose weight and get back into shape so hired a dietician at a cost of $1,000 and a personal trainer ($2,500) and spent a week at a health clinic ($1,500). Nicole was paid $2,000 by Womans World for an interview in which she spoke about the new telemovie as well as her personal life. She donated the money to the Royal Childrens Hospital. The telemovie received critical acclaim and Nicole was offered a small role in a Hollywood movie. Under the contract she was to receive $AU20,000. She flew first class to the United States at a cost of $5,000; economy class would have been $2,000. After filming she spent a week visiting agents in Hollywood in the hope of securing more roles. Nicole regarded the week as a working holiday and she treated herself to five star accommodation at a cost of $6,000. A well know gossip magazine Eye Spy published a story about Nicole that contained a number of untruths. Ordinarily she would not have bothered about such thing but with her career blossoming she was concerned that her reputation might be tarnished and future roles lost. She spent $10,000 in legal fees, sued the magazine for libel and was successful in securing damages of $50,000. A short break in acting followed and at her managers suggestion Nicole paid $1,000 to a voice coach to improve her voice projection. In the expectation that her career was to take off at last, Nicole shifted to a rented town house. She specifically selected a two bedroom unit so that one room could be set aside for exclusive use as a study/office. There she could read scripts, deal with correspondence and meditate. Her manager suggested she would be entitled to a tax deduction for an apportionment of the rent. Answers: Part A 1. Facts regarding the current case Allen and Betty are two individual tax payers. Both are the residents of Melbourne. Due to certain reasons they both came to a conclusion to sell their house in the Melbourne and shift to Central Victoria. Currently both are under some profession. Further both are married couple. The husband is a locum doctor. A locum doctor is the one who provides medical treatment in absence of the original doctor. The wife is works as a part time accountant at some place. The husband who is a local doctor has fame in the minds of senior citizens at the place where they both live. Allan charges fees for providing service. He is being provided additional consideration in kind also Questions raised in the case The case asks for the implications of tax for the additional consideration received. Judgement and Analysis In very simple form, barter is a system of dealing wherein goods and services are exchanged for goods and services. Money has no role to play under this system. In some cases there prevails a partial barter system wherein the consideration is paid in money as well as kind. The kind portion is under barter system. In the current case Allan provided medical service to a dog that was injured by a snake bite. The owner of the dog gave some fees in kind for the treatment. The owner of the dog was pleased with the service Allan provided and he additionally gifted a dozen of wine bottles. The retail value of the same was $360. This transaction totally falls under barter system. This case has characteristics similar to FC of T v. Cooke Sherden(1980) 42 FLR 403; (1980) 10 ATR 696; (1980) 29 ALR 202; 80 ATC 4140, under this case the court decided that the provider of service has to pay tax on the retail value of the kind. Conclusion When we apply the facts, circumstances and decision of the above mentioned case to our case we conclude that Allan has to pay tax on the retail value of wine. 2. Facts regarding the current case Stated in the question Questions raised in the case The case asks for the implications of tax and further asks to provide details regarding registration of the business Judgement and Analysis The provisions relating to this case are given under (Taxation Ruling TR 97/11). The intentions of both are not to make profits. The monthly receipts are $500 to $600. When we total it for a year we see that the total gross receipts for a particular year is $6000 to $7200. There are specific requirements for getting the business registered with the income tax authority. These are as follows For companies it is compulsory irrespective of the turnover The GST turnover is more than $75000 There is no provision for registering a non GST turnover business In our case the vegetables are used to make marmalade and relish. This is provided to neighbours. Then slowly the couple made a stall and started selling to public. So they are doing business. But they are not required to pay tax or get their business registered as the turnover is less than $75000 for the year. This case also raises a question of hobby vs. Business. The basic difference between both of them is intention to earn profit. When the intention is to earn profit then it is termed as business but when the intention is just fun and recreation than it is nottermed as business. The facts stated in this case have characteristics similar to Blockey v. FC of T(1923) 31 CLR 503 Isaacs J. In this case the court decided that non profit transaction does not attract the provisions of ITAA 1997 Conclusion After looking to the facts, circumstances and the decision of the above mentioned case we conclude that they do not require to make the registration for business as the turnover does not exceed $75000, they dont even require to have a tax filing number as the income is below $18000 for the year. The activities that both of them carry on are non business activities. 3. Facts regarding the current case Stated in the question Questions raised in the case What are the tax implications of barter system? Judgement and Analysis In very simple form, barter is a system of dealing wherein goods and services are exchanged for goods and services. Money has no role to play under this system. In some cases there prevails a partial barter system wherein the consideration is paid in money as well as kind. The kind portion is under barter system. There are some forms of barter system which is a bit sophisticated. Such system are owned and controlled by member organization. The medium of exchange is not goods or services but certain units of credit. The members pay some subscription upfront for joining the membership. For providing goods and services to other members provider gets some points and he or she utilises such points to purchase goods and services from other members. But for this they need to have a Goods and Service Tax number. And under barter system the organization can claim input tax credit (Section 290.240). Case referred, FC of T v. Cooke Sherden(1980) 42 FLR 403; (1980) 10 ATR 696; (1980) 29 ALR 202; 80 ATC 4140, Conclusion There are so many conclusions regarding this case Allan and Betty need to get their organization registered for under ATO as well as for GST They need to obtain Tax Filling Number and have to file income tax return every year They need to maintain records of transactions of their members Part B 1. Facts of the case During 1950s, Nichole was given an offer to act in a telemovie set. In order to fit in to this movie she was required to put on additional 10kgs. In order to gain 10kgs she started eating more and more food. So this additional intake cost her $1000. After putting up the weight she got the role and this role earned her $50000. And this she claimed as expense. Issue Can she claim the deduction of such expense? Analysis The facts of this case were similar to the case of. It must have the essentialcharacterof an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T;Hayley v. FC of T(1958) 100 CLR 478; [1958] ALR 225; 11 ATD 404 (Lunney'scase)). In this case the artist incurred certain expenditure which was of personal nature in order to boost his income. He claimed the deduction of expenditure from the income that he received. This expenditure was not incurred in the ordinary course of business so this was not allowed by the judge as expenditure. Conclusion Applying the provisions of the above mentioned case we conclude that the expenditure incurred by Nichole was not allowed as a deduction from the receipt from acting in the telemovie as this was personal in nature and not incurred in the ordinary course of business 2. Facts regarding the current case As stated in the question Questions raised in the case Can Nichole claim the deduction of such expenditure? Judgement and Analysis Under section 290.150, when the taxpayer is an artist then he or she will be allowed deduction of certain expenditure which are necessary to maintain the profession he or she is in. (Section 8-1). Charles Moore Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344 at 349-350; (1956) 11 ATD 147 at 148; (1956) 6 AITR 379 at 384; FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624 Conclusion After applying the facts, circumstances and decision of the above mentioned case we conclude that Nichole can claim deduction of expenditure incurred. 3. Facts regarding the current case We got to know from the above case that Nichole got role in a movie. In order to promote the movie she gave an interview in Womans World magazine. She received $2000 and she donated the same to Royal Childrens Hospital Questions raised in the case Can she be allowed a deduction of the donation made to Royal Childrens Hospital? Judgement and Analysis The receipt that she received is a capital receipt and not an ordinary income. Donations made are allowed as deduction but there is a condition attached to it. The organization who receives donation should have the status of Deductible Gift Recipient (DGR). It should be voluntary transfer of money. This case has similar characteristics with AAT Case 6919(1991) 91 ATC 257; (1991) 22 ATR 3166. In order to be a tax deductible donation, the owner must have rights over the thing donated. In our case Nichole has received $2000 Woman World. This means that she has a right over the property that she is donating. She can claim such expenditure. Conclusion In case if the hospital has the status of Deductible Gift Recipient (DGR) then Nichole can claim deduction of such donation. In other case she cannot. The question does not state the status of the donee. 4. Facts regarding the current case Nichole got an opportunity to act in a Hollywood movie. She got a small role. She received $20000. She incurred certain expenditure, many of which were in excess of normal expense. Questions raised in the case Can she claim expense more than reasonable? Judgement and Analysis The income that she received i.e. $20000 will be included in her ordinary income. She can claim expense for earning such income. A professional artist such as an actor, musician, sport athlete, etc can claim deduction or the expense incurred for retaining or maintaining specific skills relating to the profession he or she is in Travelling expense incurred is a personal expense. Further accommodation expense is also a personal expense. So the taxpayer will not be allowed deduction of such expense Conclusion Applying the normal provisions of ITAA 1997, we conclude that the travelling expense and the accommodation expense incurred by Nichole is personal nature and such expense cannot be allowed as a deduction. $20000 will be included in the ordinary income under section 6-5 and will be taxed accordingly. 5. Facts regarding the current case A magazine known by the name Eye Spy has published a story in their magazine. This story is regarding the life of Nichole. But the story is a false story. When Nichole came to know about this publication she filled a suit against the magazine as this story created a negative impression of her in the minds of her fans. She incurred $10000 as legal fees. She won the case and was awarded $50000 as compensation Questions raised in the case What is the tax implications of damages received and the legal fees paid Judgement and Analysis Any compensation or damages receipt by the individual taxpayer is not an ordinary income under section 6-5 but it is treated as capital receipt. Nichole will be allowed deduction of expenditure on legal fees. This expenditure will be treated as expenditure for maintaining her image in the market. Any such story can easily affect her reputation and it may happen that she wont get any other role in any movie. So this expense was to save her image and was directly related to her profession. The net income i.e. $40000 will be treated as capital receipt and will be taxed accordingly. Charles Moore Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344 at 349-350; (1956) 11 ATD 147 at 148; (1956) 6 AITR 379 at 384; FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624. Under this case the expense incurred which were necessary to remain into profession were allowed as expenditure. This case does not have similar characteristics of our case but it conveys that the expenditure incurred to maintain the legal profession is allowed as expenditure. Conclusion Nichole can claim deduction of legal expense and the net income i.e. $40000 will be considered as capital receipt and will be taxed accordingly. 6. Facts regarding the current case A short break in acting followed and at her managers suggestion Nicole paid $1,000 to a voice coach to improve her voice projection. Questions raised in the case Does the expenditure incurred by Nichole is allowed as deduction from the expenditure? Judgement and Analysis A professional artist such as an actor, musician, sport athlete, etc can claim deduction or the expense incurred for retaining or maintaining specific skills relating to the profession he or she is in Conclusion Applying the normal provision of ITAA 1997, Nichole can claim deduction of expenditure incurred on voice recognition and improvement as it was directly related to the profession she is in 7. Facts regarding the current case Now Nichole expects her career to take off. So in order to fulfil her dreams she decided to shift to another town. She rented a town house. The house has two bed rooms. One bed room was used for study or office purpose and the other was used for residential dwelling. Questions raised in the case Can she claim the deduction for the rent paid for the house Judgement and Analysis A professional artist such as an actor, musician, sport athlete, etc can claim deduction or the expense incurred for retaining or maintaining specific skills relating to the profession he or she is in. A professional is not expected to have a study place or an office place. Such places are meant only for those who are doing business or providing services as goods and services can e provided from a specific place only. But for an artist he does not require such place. So any expenditure incurred by such artist in the form of rent is not allowed as deduction from his or her income. One of the cases in the history of income tax has the characteristics of our case Conclusion When we apply the facts, circumstances and decision of the above mentioned provisions we conclude that Nichole will not be allowed to claim the deduction of rent expense incurred by her as this is not relating to the profession that she is in.