The current report is based on determining the assessability of income derived by Jacinta Wells for the income year of 2016/17 and 2017/18. “Section 6 of the ITAA 1936” provides that income derived from the personal exertion or income generated personal exertion represents income that comprises of earnings, salaries, wages, commissions bonus, fees or proceeds derived from the business that are carried on by the taxpayer (Pinto 2013). “Section 6-5 of the ITAA 1997” states that most of income that comes home to the taxpayer is held as ordinary income.
The court of law in “Commissioner of Taxation v Scott (1935)” have explained income that are as per the ordinary concepts (Woellner et al. 2016). As evident in the current situation of Jacinta Wells she lived in Melbourne and worked as the management consultant. She was employed in an American firm and derived a salary of $8000. The salary derived by Jacinta is regarded as the income from the personal exertion and the same will be considered for assessment under “section 6-5 of the ITAA 1936” as income from ordinary concepts.
Conversely, in the later instances it is noticed that Jacinta was required to move Singapore to arrange the installation of the new computer system. Initially her salary was paid in Melbourne bank account but from 1st May the salary of Jacinta was paid in her Singapore bank account. According “section 6-5(2), 6-10 (4) (a) ITAA 1997” residents are usually assessed based on the ordinary income and the statutory income derived from all the sources (Barkoczy 2016). When an individual residing in overseas they remain to be an Australian tax resident and are taxes are levied on all the worldwide income but credits are available for offset relating to the foreign tax paid.
An individual remains to be an Australian tax resident under the law but also become the tax resident of the overseas nation. The primary considerations of the Australian taxation office at the time of assessment is whether the person held as the Australian resident for assessment purpose (Tan, Braithwaite and Reinhart 2016). Given the person is an Australian resident their employment income is assessable in Australia. Their income would be held foreign employment income and any form of taxes that are paid in the jurisdiction would form the part of tax return and would be eligible for income tax offset. The court of law in “French v Federal Commissioner of Taxation (1957)” to consider an income assessable place where services are performed are taken into the considerations.
Similarly, in the situation of Jacinta she would be held as Australian resident and the salary paid to the Australian bank account will be considered for assessment. Jacinta salary paid into her Melbourne bank account will be held for taxation under “section 6-5(2), 6-10 (4) (a) ITAA 1997” (Cao et al. 2015). However, from 1st May 2016 her salary was paid to Singapore bank account which constitute that her salary would be assessable as the employment income from the overseas employment. Jacinta would remain to be an Australian resident for taxation purpose but her income from foreign employment income would be liable for tax offset.
As Jacinta is an Australian resident her employment income will be taxable in Australia. Jacinta income would be classified as the foreign employment income and any form of taxes paid in the jurisdiction where Jacinta is working would include in her tax return as the overseas income tax offset for the year 2016-17.
In the later instances it has been noticed that Jacinta received a free airline ticket and holiday package in London that for a value of $8,000. For a receipt to qualify as the ordinary income to a taxpayer under the section 6-5 of the ITAA 1997 a principles were stated by the court that it should be “come in” for the taxpayer and it is received as the money or in the form that are convertible into money (Robin and Barkoczy 2018). The statutory intervention of “section 15-2 of the ITAA 1997 and FBT” includes allowances and other things that are in respect of the employment or services. The principle of court was experimented in “Cooke & Sherden v FC of T (1980)” where the taxpayer was provided with free holiday by their supplier.
The argument of the commissioner stated that value of the free holiday was considered as the money worth and must be considered as ordinary income or alternatively must be considered for assessment under “section 26 e of the ITAA 1936” that was associated to benefits received for the services rendered. However, it must be noted that section 26 e has been replaced with the “section 15-21 of the ITAA 1997” (Robin et al. 2017). As per the ordinary concepts in “Tennant v Smith (1892)” for an income to be receipts the same should be in the form of money or convertible to money.
The judgement of the court held that the value of the overseas holiday that is received was not considered as the ordinary income since the holiday does not constitute money or worth’s money due to the benefit in kind and cannot be transformed to money. Additionally, it was held that the section 26 e cannot be implemented since the taxpayer did not provided any service to the supplier under the employer or employee relation (Blakelock and King 2017). Eventually, this represents that 26 e cannot be implemented on the business taxpayers.
Following the replacement of “section 26 e with section 15-2 of the ITAA 1997” allowance or any form of allowances and other benefits that are provided related to the employment or services does not constitutes an ordinary income but would be held for assessment as taxable income (McDaniel 2017). As evident in the current situation of Jacinta the value of airline ticket and voucher of free holiday for a worth of $8,000 cannot be classified as ordinary income but would be included in the assessable income for tax purpose under “section 15-2 of the ITAA 1997”. This is because the benefits that is provided by Jacinta is in respect of the employment and attracts tax liabilities.
A taxable fringe benefits originates where the benefit is provided to the employee during the year by the employer or by the third party agreement or in relation to the employment of the employee. “Section 136 (1) of the FBTAA 1986” provides that a taxable fringe benefit originates as the consequences of employment association (Bankman et al. 2017).
Evidences suggest that Jacinta received consulting job contract for a three-year term with an employment salary of $100,000 and a car. The salary received by Jacinta for the year 2016/17 will be considered for assessment under income from employment however for the year 2017/18 her salary would be not form the part of assessable income as she is not held as the Australian resident.
As defined under the “section 7 of the FBTAA 1986” car fringe benefit origins where the vehicle is provided to the employee or it is made available to the employee for their private use represents taxable fringe benefit (Schmalbeck, Zelenak and Lawsky 2015). Additionally, the car provided to Jacinta during the year constitute a taxable fringe benefit under the positive limbs of “section 136 (1) of the FBTAA 1986” that is provided in respect of the employment by the employer. The benefit of car provided to Jacinta represents a benefit as the consequence of employment relationship in respect of employment.
The income from personal exertion also includes voluntary payments can be considered as the income that has sufficient association with the taxpayer income earning activities. The court of law in “Federal Court of Taxation v Dixon” stated that supplementary payments will be considered as the assessable income (Saad 2014). The court of law stated that the payments were considered in accordance with the ordinary concepts. In an another example of “Calver v Wainwright (1947)” the federal commissioner held that the tips received by the taxi driver were held as the income.
Similarly, in the situation of Jacinta the receipt of incentive to join EZI and receiving a compensation payment to leave the Staedler Ltd constitutes income under the ordinary concepts. This is because the income holds sufficient connection with her employment or the income earning activities of Jacinta. Therefore, a portion of $40,000 or in other words the sum of $20,000 would be held assessable for the income year of 2016/17.
Moving to the second tax year of 2017/18 assessability of amounts derived by Jacinta is taken into the consideration. As evident she decided to permanently move to Singapore for the year 2017/18 therefore she no longer would be held as the Australian resident. Additionally, the she has also opened a bank account in Singapore. The salary income would not be considered for assessment as she is a foreign resident. Additionally, a part of her compensation payment for leaving Steadler which was due to be in next year does not constitute income from the Australian sources and would not be considered assessable for the tax year of 2017/18.
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.
McDaniel, P., 2017. Federal Income Taxation. Foundation Press.
Pinto, D., 2011. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.
ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET AL.), 2018. AUSTRALIAN TAXATION LAW 2018. OXFORD University Press.
ROBIN, H., 2017. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.
Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
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