As per the Income Tax Assessment Act 1997 an assessee, Australian resident is liable to pay taxes on the assessable income computed in accordance with division 6. Tax on income is determined on the basis of nature of income as well as the time of income. In the given situation, taxability of Megan is to be determined who is a mining engineer and spends eight months of each year out of the country Australia for the purpose of work.
In order to compute the assessability of Megan’s taxable income, it is essential to determine the residential status of Megan. Further, Megan’s annual income consists of the payment for superannuation payment made by the employer as well as her own contribution. During the financial year, Megan’s gross income amounted to $180,000 out of which she contributed $20,000 to the superannuation fund. In addition to this, Megan also accepted one-off payment amounted to $75,000, which is paid against the agreement for not rendering employment to any other company.
Apart from that, Megan also performed freelance service for several mining organizations amount totaled to $121,000 that includes GST. Megan also received Christmas gifts amounted to $1,800 along with a cash gift amounted $5,000. The case also represents the receipt from designing of equipment as an intellectual property amounted to $440,000. Other than the income from employment and profession in mining, Megan also receives payment from painting activities amounted to $22,000 and received an award valued $33,000.
Issues raised in the present case about inclusion of incomes and allowable deductions for the purpose of assessable income. Megan, the taxpayer wanted to exclude her income from equipment designing as an intellectual property right. She also wanted to exclude the income received from painting activities as a hobby that includes receipt of cash prize. However, commissioner of taxation system has contended that any income received by the individual during the current tax year is required to be included for the purpose of assessable income. Further, income received from the activities that are vocational or according to individual’s hobby is required to be disclosed in the tax return.
According to the Taxation Rulings (TR) 98/17, ITAA 97, an individual is regarded as Australian resident for the purpose of tax if such individual leaves the country on a temporary basis and does not set up or own a permanent home in another region (Somers & Eynaud, 2015). In case the individual is a resident of Australia for the purpose of tax, then the individual is required to declare and disclose all the income earned within and outside Australia. The taxable income is measured by deducting the allowable expenses under taxation system from the assessable incomes of the assessee. As per the Taxation Ruling 2010/1 ITAA 97, it has been stated that the contribution in superannuation account made by employer and voluntary contribution shall be taxable at a rate of 15% in the books of the taxpayer (Savage et al., 2015). However, contribution from superannuation is exempted from assessable income if is received after the age of 75 years. Further, Receipt of payment as one-off for an agreement required to be included in the assessment of income tax as per Australian Taxation System. Considering the provision of ITAA 97 TR 2005/13, gifts received by the individuals are not taxable if it is received as a small amount against small occasions or as a prize or awards (Budig, Misra & Boeckmann, 2016).
Considering the taxation rulings and provisions of ITAA 97, Megan is required to assess her income received from various mining companies and other sources. Firstly, in case of receipt of gross income $180,000 would be taxable including the amount contributed to superannuation fund. According the rulings on superannuation fund, amount of superannuation fund is taxable at 15% in case the receiver is under the age of 75. Since, the age is not mentioned in the case study, it has been assumed that Megan is under the age of 75 and accordingly, $180,000 shall be taxable under the normal tax scheme. On the other hand, superannuation contribution $20,000 would be taxable @15%. Further, receipt of one-off payment $75,000 would constitute as assessable income. Based on the decided case law of Dixon v. High Court in Federal Commissioner of Tax it has been considered that the amounts received by the employers are subjected to the tax if the payment is made during the period of service.
Moreover, deductions related to the expense on generation of income are allowable as per the provisions under division 6 ITAA 97. Therefore, Megan is eligible to claim deductions for expenses incurred during the current tax year. Based on the decided case law Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105, the issue on assessment of prepaid expenses as deduction to evaluate the taxable income was brought to the notice. The issue was regarding the attributable claim for deduction on prepaid expenses by the taxpayer as well as the timing of allowable deduction. Since the payment is prepaid, the commissioner contented that the expense would be allowed as deduction for the period it relates to. However, the taxpayer contended the prepayment to be deducted in the current taxation year because there was cash out flow. Considering the TR of ITAA 97, the court decided that the prepayment would be allowed as deduction only for the period it relates to i.e. the deductible expense should be on accrual basis.
Apart from the receipt of income from employer, Megan also received the income from freelancing services from several other mining organizations amounted to $121,000 that includes GST. According to the ITAA 97, any income received by the individual as a vocational service shall be taxable in the Australian Taxation System. Similarly, in the decided case law of Hayes v. Federal Commissioner of Taxation it has been observed that the court provided the judgment for inclusion of income received from the professional activities as assessable income. Moreover, the amount from freelancing work received by Megan includes Goods and Service Tax (GST). According to Australian Taxation System, if a taxpayer is eligible to claim credit on GST, then the total amount received from freelancing work shall be deducted by the amount of GST included. Therefore, amount of $121,000 would be taxable deducted by the amount of GST, as income from business and profession.
Assessable income of the individual also considers the amount of gifts received from relatives or business associates. However, as per the provisions of ITAA 97 for the purpose of assessable income, gifts received as cash or as a property assets that includes shares and securities considered as exempted income. In the present case, Megan received vintage champagne, as a gift that is valued at $1,800 shall be included as an assessable income because it is neither a cash gift nor a property. On the other hand, cash gift amounted to $5,000 received by Megan would be an exempted income and not liable to be included in assessable income. Based on the decided case law of Harris v. Federal Commissioner of Taxation, high court provided the judgment that receipt of gifts cannot be considered as income of the taxpayer. However, the intention behind the gift donor shall not be of any monetary advantage and the gift should be in terms of cash or property. Similarly, awards winnings, prizes, winnings from lotteries and such other rewards are not considered as the income of taxpayer. Accordingly, award won by Megan from an art industry valued at $33,000 would not be included in the assessable income.
On the contrary, income received from the designing of mining equipment amounted to $440,000 included the intellectual property. Considering the provisions of Australian Taxation System, any income received from the business activity or professional activity, it should be included in the assessable income of the taxpayer. In the present situation, amount received from designing activity constitutes a professional activity therefore; the amount received from designing activity shall be included in the taxable income of Megan. Similarly, Megan also performs activities on landscape paintings through which she earned $22,000 from the exhibition of paintings. On the basis of the judgment of Federal Court by Commissioner of Taxation any income received from the performance of vocation courses or hobby activities would be constituted as taxable income.
One of the important factors for determining the assessable income is residential status of the taxpayer. In the given case, Megan works for an Australian mining organization and stays out of the country for around 8 months for the work purpose. As per the taxation ruling (TR) 98/17 under Income Tax Assessment Act (ITAA) 1997, Megan does not have a permanent set up outside Australia therefore; she is considered an Australian resident. Megan is liable to pay taxes on her income generated from employment, professional services and other vocational activities. Accordingly, Megan is liable to include all the incomes received during the year except the cash gifts and awards received from the painting exhibition. Further, Megan is also eligible to claim credit on Goods and Service Tax because the payment received from freelancing work was included the amount of GST. All other income received by Megan would be included in the assessable income during the current year of tax.
Considering the elements of taxation rulings of ITAA97, an Australian resident for tax purpose is required to pay tax on assessable income that includes several incomes and deductible expenses. It has been observed that Megan is an Australian resident for taxation purpose even if she stays out of the country for 8 months. Since, she does not have a permanent set up out of Australia and travels abroad for the work purpose, Megan is a resident of Australia and required to pay taxes on the incomes received from different sources. Assessable income is measured by considering the incomes received deducted by the expenses incurred to generate the incomes as well as other exempted income. Megan’s taxable income includes income received from the employment in mining company as well as the voluntary superannuation fund would be taxable at a separate rate.
Receipt of one- off payment of $75,000 would also be included in the assessable income of Megan, because it is a receipt against an agreement on restriction of rendering mining services for other company. However, Megan’s income from freelancing services would be included in the assessable income amounted to $121,000 against which she is eligible to claim for GST because the payment includes the amount of GST. Apart from that, Megan is required to include the amount received from designing in the tax return because it is an income received from professional service. Contention of Megan on non-disclosure of receipts from painting activities in the tax return is not tenable because any income generated from activities related to hobby or interest is taxable under other sources. On the contrary, cash award amounted to $33,000 received from the art industry is an exempted income as per the Australian Taxation System. Therefore, Megan is required to disclose the receipt of $22,000 in the tax return as assessable income while cash prize amounted to $33,000 would be disclosed under the head exempted income. However, other gifts received by Megan including vintage champagne amounted to $1,800 would not be exempted. Since, the gift is not a cash gift nor it is a property asset $1,800 would be included in the assessable income during the current tax year. On the other hand, cash gift amounted to $5,000 would be considered as an exempted income as per the taxation rulings of ITAA 97. Therefore, Megan is liable to pay tax on assessable income at the current prevailing rate that specifies exemption for taxable income amounted to $18,200. Income beyond $18,200 is taxable at the prevailing tax slab plus a Medicare levy at the rate 2% on the total taxable income. Additionally, Megan is liable to pay tax on superannuation contribution at the rate 15% apart from the tax on business and salary income.
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