Taxation Law (australia) with Calculation of Indexation

PART - 1

QUESTION – A

Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

In a simple sense Taxable income is: Assessable income

(-) deductions

Assessable income includes 2 segments ordinary income & statutory income, excluding exempted income.

Statement of Issues

1. Whether Andrew’s income of $ 50 from assessing family & friends tax returns is assessable as taxable income under the income tax act?

2. Whether Andrew’s income of $ 1,000,000 derived from illegal channels (stealing from W.E.T’s overseas clients) is considered as income and assessable under the income tax act?

3. Whether Andrew is liable to pay tax on the general bonus amounting to $ 5000 received in July 2006, also on the personal bonus of $ 3000 received in December 2006, which other employees were not entitled to.

4. The next issue is whether the raise in Andrew’s annual income amounting to $ 7500 (pay rise effective from 1st January 2007) resulting from a promotion is considered as assessable income under the taxable income’s act?

5. Whether the remuneration or fee of $ 50,000 offered by S.E.A. to Andrew for signing a 5 year contract is considered as taxable income and is assessable under the taxation act?

6. The final issue is whether the winning proceeds of the annual marathon amounting to $ 10,000 is assessable as income under the taxation act?

Issue 1

Law& Application: Taking into consideration that Andrew was charging a fee for filing tax returns for his friends and family is an illegal act as it was against W.E.T’s policy which stated that no employee was to engage in doing family’s returns. None the less it is a taxable income for Andrew as it will be considered as ordinary income and therefore cannot be eligible for any deductions.

Taking into consideration the T vs. La Rosa case it has been derived that no matter if transaction is illegal in nature it does not deny its taxability. Therefore the amount of $50 illegally earned by Andrew using the company’s resources is assessable as income and is taxable. The simple fact is that any receipt with immoral or illegal motive does not prevent it from being considered as ordinary income

Issue 2

Law& Application: taking into consideration that Andrew was illegally taking money from W.E. T’s overseas clients is a clear case of stealing or embezzlement Section 6-5 ITAA 1997 (formerly s 25(1) ITAA 1936) clearly states that any income earned during the taxable period or financial year is included as gross income derived from any source and is assessable as income even thou it is derived illegally. Taking into consideration the above, the earnings Andrew made amounting to $1,000,000 is liable for assessment without any deductions and is taxable.

Issue 3

Law& Application: s 6(1) ITAA 1936 “income for personal exertion”In the above situation there are 2 aspects one is with the bonus amount of $5000 & $3000 with is considered as normal income or not.

The first part of the $5000 bonus is provided for services rendered, also that the bonus is given to other employees as well and not only earned by Andrew. The key is to differentiate as to whether it is a gift or not.

Gifts are considered as ordinary income if the amount is a product of employment or services rendered. In this case it is clear that the bonus of $5000 was rendered due to the services rendered or Andrew’s perceived diligence. Under no grounds is it a payment made for personal reasons therefore is considered as ordinary income and is assessable as income and is taxable.

On the other hand the bonus amounting to $ 3000 is also considered as normal income as well as it is clearly being given on basis of performance, reason being staying extra hours at work, it is clear in another sense too because the bonus of $3000 is only being earned by Andrew and not other co-workers. It is clearly not a gift given on personal terms, therefore considered as ordinary income which is assessable income.

Issue 4

Law & Application: in this case too the $7500 pay rise is not considered as a gift because a Gift will be ordinary income if it is a product or incident of employment or