Taxation Law Essay

1. The assessability or otherwise to Jino and Anna of the annual bonuses give by pricey patois to them. Consideration of the proximity of divine work or engagement congenericship, the importance of the presenters motive and the status of gratuitous recompenses ar relevant in determine whether the bonuses standard are nonexempt income. We kitty conciliate that the bonuses satisfactorily fulfil the requirement that for the bonuses to be nonexempt they must come in. (tenant v smith) Natural incilairts of mesh entrust be income, because they arise from a service relationship and because they are an expected incident of the occupations. Kelly v DCT) Ultimately, it is the eccentric person of the payment in the hands of the recipient that is determinative (Scott) of income. The bonuses authentic by Jino and Anna were non mere submits. The descend in Scott v FCT was a gift it was gratuitous, not made in drift off of an responsibleness and not interpreted by the recipie nt as discharging an obligation and not income by middling concepts. The payments in Scott v FCT and Moore v Griffiths were one-off. The payments were in addition to entitlements infra service harmonys the donors motive was to make a personal protective cover and the payment was unexpected.While income gener all(prenominal)y exhibits recurrence, uninterruptedity and periodicity, it would be wrong to conclude they were essential elements and that a one-off payment in the disposition of a gift furthertnot be income. (demonstrated by Squatting Investment Co) In Moore v Griffiths, the bonus received was a testimonial or personal gift rather than a reward for services rendered by the taxationpayer in the course of his employment. The payment had no foreseeable element of recurrence, and there was no knowledge or arithmetic mean on the taxpayers part that the payment would be made as a reward for rendering his services.A bonus payment is ordinary income for the purposes of subd ivision 6-5(2) of the ITAA 1997, which provides that the nonexempt income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or come out of Australia, during the income year. The initial pre couplingption, prima facie, a payment from taxpayer to recipient is not income (Hayes v FCT) whitethorn be displaced if in substance and reality the payment was a product of services.Ordinary income is typically regarded as including salary and wages and fees connected with employment or purvey of services the critical element macrocosm the connection with an earning activity. Amounts derived from employment or the readying of services are income. In FCT v Dixon, the numerate taxpayer received was nonexempt because the passs were of an income shell, and the amount was an expected periodical payment arising out of circumstances, and similarly because it formed part of the receipts upon which he depended for regular economic consu mption.Similarly, the bonuses Jino and Anna received fulfill 3 critical elements in FCT v Dixon the payment was periodical, incidental to employment and relied upon for regular expenditure. In FCT v Harris, payments were unrelated to the length or fictitious character of service, and were periodic yet unpredictable. Hence, they were unassessable as the critical elements in Dixons typeface were absent in Harris. In FCT v Kelly, the prize bills the football player received was held to be payments as income. Kelly was aware that the prize would be offered,S15-2 sets out that allowances and other things provided in pry of employment or services go off be included in your assessable income. S15-2(1) states that assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided in respect of any employment of or services rendered. Hence, if the bonuses are consequently not considered ordinary income, it pull up stakes still be regarded assessable to a lower place s15-2 as the amount that is assessable as ordinary income under s6-5 is not included in assessable income under s15-2(3).The key show up to consider is the connection with earning activity. It was for work throughout the year. The $100,000 bonuses can therefrom be included in assessable income under s. 15-2 as a reward for personal exertion, even though the bonuses were unexpected and not relied upon by Jino and Anna (Moore). The bonuses were recurring, incidental to employment, of an ordinary kind. (Scott) at that place is direct nexus with employment FCT v Cooke & Sherden is irrelevant because the holidays received did not represent income.There was no entitlement to utility(a) compensation if the holidays were not taken, and it was also not convertible into holding. 2. Whether Jino and Anna are empower to conclusions for cheer paid on the amount they redraw from their lend on the Darling Point prop to partly finance thei r investment in the great power Street property. ITAA97 S8. 1 (1) provides that you can deduct from your assessable income any discharge or extraverted to the limit that it is welcomered in toping or producing your assessable income.Hence, Jino and Anna will be entitled to rebates for hobby paid on the amount they redraw from their loanword to the extent they are using it to finance their investment in the stemma leader Street property. Interest is characterised by the use of the funds the fact that the legitimate loan was for the Darling Point property is irrelevant. Consideration must be given to the redraw facility, that any fund used from the redraw is used to reveal assessable income or for the line of products, and the engross on the portion of the fund will be deductible to that extent.In FCT v Munro, the deduction for rice beers were not permitted under s. 8-1 ITAA97. It was held that the deductibility of pursual depends on the purpose for which the principa l is borrowed, a deduction in lodge in is not permitted when the borrowed notes is used for a purpose whereby no income is cookd, even if the money is borrowed on the warrantor of rub producing property. The commissioner disallowed the taxpayers claim for deductions, on the basis that the borrowed moneys had not been applied exclusively to produce assessable income.The borrowed money had been applied for the benefit of the sons and and so kindle was not incurred in gaining assessable income. Conversely, the purpose for which the principal amount of $400,000 Jino and Anna borrowed was for an investment in property that would produce rent. The fact that the Darling Point property was used as security for the loan as it was withdrawn from the refund redraw facility for residential property is irrelevant. Hence, Jino and Anna should be entitled to deductions for the 6% kindle paid on the $100,000 backdown from the redraw facility.Steele v FCT considers whether there is suffici ent nexus of residence with income production interest incurred before assessable income is derived is deductible if there is. It was established that the meaning of assessable income in the first limb of s51(1) is summarised in Fletcher & Ors v FCT (1991) 173 CLR. Assessable income is to be construed as an abstract phrase which refers not only to assessable income derived in that or in some other tax year entirely also to assessable income which the relevant outgoing would be expected to produce.The 6% interest withdrawn from their loan is incurred before assessable income is derived hence is deductible. 3. Appropriate tax treatment of the lump sum payout to Thomas from some(prenominal) Jino and Annas perspective and from Thomass perspective From Jino and Annas locating TR 2005/6 1. This legal opinion explains the circumstances where it is considered that (a) a lease surrender receipt is assessable income under atom 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and (b) a lease surrender payment is deductible under separate 8-1 of the ITAA 1997. . This Ruling also addresses the application of the provisions of the ITAA 1997 covering outstanding gains and ceiling losings (CGT). The first issue to consider is first considering the general deduction provision s8-1. Although the lump sum payout passes the 1st positive limb, based on temperateness Newspaper Ltd v FCT, we can establish that the payout is not of revenue enhancement still of a groovy nature. There are 3 matters to consider in determining whether the payout is on revenue or capital note. Footnote pg 446 of casebook) double to the features of transactions of the expenditure in Sun Newspaper, 1 (a) the payout was of a large sum intended to remove competition for Tony, (b) the payout was recurrent in the sense that the insecurity of a competitor arising must always be theoretically present, (c) the head teacher object of the Considering the general deduction provision s8-1, if the payout was revenue, it would be deductible. However, the capital nature of the payout fails the negative non-capital requirement under s8-1.As Jino and Anna are not carrying on a business of gaining or producing assessable income (s8-1(b)) in leasing out the shop, it is still a capital gains tax and we must consider further provisions for peculiar(prenominal) deductions for capital expenditure. Jino and Anna were not obliged to lease the shop to receive rent because Thomas was already willing and happy to pay fixed term of a contract of $3, calciferol per month for 5 years. Therefore, the $5000 is not deductible because it is not a loss, but rather a result of voluntary action. If it were a loss incurred, thus the amount would be deductible.Second, for the lump sum payment to be deductible, the disbursement has to be related to producing assessable income. Herald and Weekly Times Ltd v FCT derives the notion incurred, as the expenditure (legal fees) incurred by the taxpayer was wholly and exclusively expended in gaining or producing its assessable income and was therefore deductible under s23(1)(a). Since the $5000 payment was to depose Thomass lease and provide an opportunity for Jino and Anna to obtain $500 more in monthly rent, it can be seen as being incurred to gain assessable income from the new lessee Tony.Consequently, the expense of $5,000 is deducted by straight gentle wind method over five years. Thomass Perspective The amount paid to Thomas can either be capital in nature where the lease formed part of the profit-yielding-structure of the lessees business or it could be income which arises in the course of business activity. If the compensation payment lead to the cancellation of business leaving the profit-making structure permanently impaired, then it constitutes as a capital gain. Considering Heavy Minerals (1966) Californian Oil ProductsIn Van den Bergs Ltd v Clark (1935), the House of Lords held that the sum received by the taxpayer on the conclusion of the arbitration and in consideration of the taxpayers consent to termination was a capital receipt and shouldnt be taken into account in computing the taxpayers liability to tax. 4. Appropriate tax treatment of the expelling of Tonys first months rental from twain Jino and Annas perspective and from Tonys perspective Jino and Annas perspective No money conductd agreement Not meant to pay each other money. Tony didnt pay out any rent and anna didnt receive.No money interchange therefore first month no assessable income as no exchange. For tony didnt pay out any rent therefore no deduction Tonys perspective Orica Reduction in expenditure can not be income according to ordinary concepts assessable under s25(1). There was no profit or gain made as a result of the taxpayer entering into arrangements which was a singular transaction, not part of the regular means whereby the taxpayer obtained returns. Lees & Leech Even if it was assumed the payment received by tax payer constituted a profit or gain, the payment was not received by it in the ordinary course of carrying on its business.TR 93/6 1. This Ruling is concerned with those arrangements which are used to reduce the interest account payable on a customers loan account. These are commonly referred to as interest offset arrangements but are called loan account offset arrangements in this Ruling. These products are generally structured so that no interest is derived by the customer and therefore the customer is not liable to pay income tax in respect of the benefit arising from the account. This Ruling outlines the manner in which satisfactory loan account offset arrangements usually operate and xplains the limits on acceptable arrangements. 5. The appropriate tax treatment of the early repayment punishment from both Jino and Annas perspective and from Tonys perspective TR 93/7 A punishment interest payment is generally deductible under arm 51(1) if (a) the loan moneys were borrowed fo r the purpose of gaining or producing assessable income or for use in a business carried on for that purpose and (b) the payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan, where much(prenominal) interest would itself have been deductible if incurred.Where the repayment of loan moneys borrowed for the purpose of producing assessable income is secured by mortgage, penalisation interest payable on an early repayment which effects a discharge of the mortgage will generally be deductible under section 67A. 5. penalty interest is not expenditure incurred in adoption money so as to be deductible under section 67. 6. Where penalty interest is paid upon repayment of a loan incidental to the government activity of an addition, the payment is not taken into account under Part IIIA of the ITAA in calculating the amount of any capital gain or capital loss arising on the disposal.Subsection 51(1) provides that all losses and outgoings to the e xtent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or are of a capital, mystic or domestic nature, or are incurred in relation to the gaining or production of exempt income. 9. Generally speaking, provided loan moneys were borrowed for the purpose of gaining or producing assessable income or for use in a business carried on for that purpose, penalty interest payable on early repayment of the loan will, unless it is of a capital nature, qualify for deductibility under section 51(1). This will commonly involve borrowings used to acquire an income-producing asset or to provide working capital to operate a business. 10.In the case of such borrowings, the central issue is whether penalty interest payments are losses or outgoings of capital, or of a capi tal nature. If so, then they will not be deductible under subsection 51(1), but may be deductible under sections 67 or 67A. 11. We do not consider that so-called penalty interest is, in fact, in the nature of interest. This is so even if the loan agreement uses the term penalty interest. The description of an item used in any relevant agreement is not conclusive of its character (refer FC of T v. Sth. Aust.Battery Makers Pty. Ltd. (1978) 140 CLR 645 at 655 78 ATC 4412 at 4417 8 ATR 879 at 884 per Gibbs ACJ and Cliffs external Inc. v. FC of T (1979) 142 CLR 140 at 148 79 ATC 4059 at 4064 9 ATR 507 at 512 per Barwick CJ). To call a payment interest does not conclusively determine that it in fact answers that description. Nor does it prevent the payment from being an outgoing of a capital nature. 12. Interest is considered to be compensation to the lender for being unploughed out of the use and enjoyment of the principal sum see FC of T v.The Myer Emporium Ltd. (1987) 163 CLR 199 at 2 18 87 ATC 4363 at 4371 18 ATR 693 at 702). Penalty interest is not paid for the use of the lenders money. It is paid in respect of a period when the borrower has repaid the loan and does not have the use of the money (refer R. W. Parsons, Income Taxation in Australia at para. 6. 330) 13. The critical factor in determining the essential character of an outgoing is the character of the advantage sought by the making of the expenditure ( Sun Newspapers Ltd. v. FC of T (1938) 61 CLR 337 at 363 per Dixon J).Whether an outgoing is capital or revenue in nature depends on what the expenditure is calculated to effect from a practical and business point of situation ( Hallstroms Pty. Ltd. v. FC of T (1946) 72 CLR 634 at 648 per Dixon J). 14. As a penalty interest payment is a cost directly attributable to obtaining early repayment of a loan, the question to be answered is effectively what, from a practical and business point of view, is the advantage sought from an early repayment of the loa n? This is a question of fact to be answered on a case by case basis. 5. Where the advantage sought is the release from the contractual obligation to incur a recurrent liability to pay interest on the loan, and such interest would itself have been deductible, then the penalty interest payment is on revenue account ( FC of T v. Marbray Nominees Pty. Ltd. 85 ATC 4750 (1987) 17 ATR 93, Metals Exploration Ltd. v. FC of T 86 ATC 4505 (1987) 17 ATR 786). Such a payment does display definite capital indicia in terms of the tests enunciated by Dixon J. in the Sun Newspapers case (supra) i. e. t is a once-and-for-all type lump sum which eliminates a endanger disadvantage and thus produces a benefit of a lasting character for the taxpayer. Nevertheless, where the initiating cause for early repayment of the loan is a saving in future interest outlays, the payment is essentially revenue in character. 16. On the other hand, where the penalty interest payment is paid effectively as a price to r id the taxpayer of a burdensome capital asset or is otherwise incidental to the realisation of an asset, then it will generally be on capital account. 17.Where repayment of a loan is secured by mortgage, penalty interest payable on early repayment may be deductible under section 67A. Section 67A provides a deduction for expenditure (excluding principal or interest payments) incurred in connection with the discharge of a mortgage securing repayment of moneys borrowed for the purpose of producing assessable income. Unlike subsection 51(1), deductibility is not affected by whether the expenditure is capital or revenue in nature. As previously discussed, so-called penalty interest is not, in fact, in the nature of interest, and is therefore not excluded on his basis from deductibility under section 67A. 18. Borrowing expenses which are on capital account and for that land not deductible under subsection 51(1) may qualify for deduction under section 67. However, penalty interest is not expenditure incurred in borrowing money for section 67 purposes. These words, in the context of section 67(1), refer to a cost of borrowing i. e. expenditure incurred in relation to the actual establishment of the relevant loan. The liability to pay penalty interest is first incurred after the money is borrowed, and is therefore not incurred in borrowing the money.The payment is not made pursuant to a contractual obligation which was incurred at the time of borrowing as an incident of establishing the loan (refer Ure v. FC of T 81 ATC 4100 (1981) 11 ATR 484). 19. Where penalty interest is paid upon repayment of a loan incidental to the disposal of an asset, the payment is not taken into account for Part IIIA purposes in calculating the amount of any capital gain or capital loss arising on the disposal. The payment would not be included in the cost base of the asset under section 160ZH.In particular, it is not within the categories of incidental costs of acquisition or disposal in su bsections 160ZH(5) or 160ZH(7), and, as it is not in the nature of interest (see paragraphs 11 and 12 above), is not a non-capital cost under subsection 160ZH(6A). 22. Anne obtains a loan from a financial institution to purchase a rental property. Within the term of the loan Anne decides to sell the property. This requires her to repay the loan in order to discharge a mortgage over the property which secures the loan. In paying out the loan early Anne incurs a penalty interest payment. 3. The repayment of the loan, and the associated incurrence of the penalty payment, is a necessary incident of the barter of the property. A payment so connected to the realisation of a capital asset will be on capital account. The payment is therefore not deductible under subsection 51(1). The payment will, however, qualify for deductibility under section 67A as expenditure incurred in discharging a mortgage. 6. The CGT effects for Jino and Anna of the gross sales of the Darling Point apartment and of the King Street Property