Introduction
Mary Masters, an employee of Happy Housing Pty Ltd, is a resident of Australia for tax purposes. Mary is not registered or required to be registered for GST. During the year of income 2017/2018 Mary was involved in a number of events. The goal of this tax research report is to determine and explain the tax implications for Mary arising from each of the events. The tax report draws authority from Commonwealth legislation including Income Tax Assessment Act 1936, Income Tax Assessment Act 1997, and Fringe Benefits Tax Assessment Act 1986. The report also draws authority from the state and legislation from the State of Victoria, considering that Mary resided in Melbourne, hence subject the state taxes. Finally, the report draws authority from case law, mainly judicial precedents from Australia.
Part A- Non-commercial Losses Requirements
On 1 July 2017 Mary began a business to supplement her employment income. Every weekend she took tourists on a guided tour of the most historic buildings in Melbourne. In the year of income ended 30 June 2018 her outgoings from the business exceeded the fees which she received. The issue arising from this event is whether Mary can offset the loss from the business against her other income in the year of income ended 30 June 2018.
The law requires that only sole trades or individual partners in a partnership who meet the non-commercial losses requirements can offset business losses against other income in the same year. Under the non-commercial business loss requirements, the business must be a primary production business or a professional arts business and the taxpayer makes less than $40,000 in an income year from other sources of income. The income for non-commercial business loss must less than $250,000 and if this requirement is met, there are four tests to run. The first test requires the assessable business income to be at least $20,000. The second test requires that the business made a profit in three out of the past five years. Thirdly, the business should have interest in real property worth at least $500,000 and lastly the assets used by the business should be worth at least $100,000.
The tax payer must considers where the event meets the non-commercial losses requirements as to be allowed to offset the business losses against her employment income and other income in the same year. If not, she will be allowed to defer the losses to the next income year when she will offset the losses of the business against any business profit that will be made in the coming year.
Facts of the case indicate that Mary was a sole proprietor. However, it was not clear whether she met all the other non-commercial losses requirements as explained above. Consequently, Mary is advised to consider the tests explained above to determine whether she will be allowed to offset the business losses against her income in the current year or whether she will need to defer the losses until her business returns a profit. To make the decision, the law allows Mary to write a letter to the Commissioner applying for discretion in offsetting the commercial losses against the current year’s other income. Notably, there is no assurance that Mary would be allowed to offset the business losses against her other income. However, the consideration of case law would help in pointing to whether Mary has a chance to get the Commissioner’s discretion.
Case law helps in the determination of the success rates in applications for the Commissioner’s discretion. The ruling in Esso Australia Resources Ltd v Federal Commissioner of Taxation considered that evidence was the key to getting the deductions allowed by the Commissioner’s discretion. The implications are that when applying for the Commissioner’s discretion, Mary must provide evidence of the revenues earned, expenses incurred in the business, and the resultant losses that Mary would like to offset against the current year’s other income. Besides, Mary must show evidence that the endeavor is likely to result in profits in the future and that it would not be simply special purpose vehicle for getting deductions against her other income. In the end, the success would depend on whether Mary is able to convince the Commissioner of Taxation that there is a course for offsetting the losses against her other income and the amount of evidence availed would be the main determinant for the application’s success. Mary may need to seek the services of a tax consultant so as to get guidance on the preparation of the evidence as well as the possible contribution of a tax lawyer to determine the chances of success in such an application.
Part B
On 1 January 2018 Mary sold a painting she owned for $2,000. She had bought the painting for her personal enjoyment on 1 January 1995 for $600. The issue in this event is whether the realized capital gain would be exempt for tax purposes, under sections 118-5, 118-10, and 118-12 of the Income Tax Assessment Act 1997. The analysis is also considered under the question of whether the capital gain on the painting would comprise assessable income under the provisions of section 35-30 of the Income Assessment Tax Act 1997.
Section 118-10(1) of the Income Assessment Tax Act 1997 states that a capital gain or capital loss made from a collectable is disregarded if the first element of its cost base, or the first element of its cost if it is a depreciating asset, is $500 or less. This rule applies to all the collectibles and personal use assets. Further, the section explains that the rule applies if interest acquired in the collectibles and personal use assets was acquired before 16 December 1995.
Under section 118-10(2) there is a special rule affecting artwork, among other collectibles and personal use assets while under section 118-10(3) the law states that capital gain or loss would be disregarded if the cost base is $10,000 or less.
The implications of the law are that under the transition provisions for the Income Assessment Tax Act of 1997 the capital gain on Mary’s painting would be taxable because the cost base of $600 was higher than $500 under the transitional provision. However, this provision was superseded by the provisions under section 118-10(3) which raised the cost base to $10,000. The implications are that the capital gain will be disregarded.
The other issue in this even related to the camera which she used as part of her hobby as a nature photographer. She had acquired the camera in 2014 and the money she received on the sale meant she made a loss of $1,000 on the sale.
The analysis considers that the camera is a depreciating personal asset. Mary would require to determine allocated life of the camera to determine the amount of loss that would be considered as deductible. Assuming that Mary’s camera was set to depreciate by $100 every year, Mary would be required to determine the gain or loss after depreciation and if it exceeds $500, then Mary would be allowed to offset the loss from the current’s year’s other income. If less than or equal to $500 then the loss would be disregarded under the provisions of the law.
It is important to note herein that since Mary did not provide details of the worth of the Camera when it was first purchases and she also did not provide details of the expected life of the camera, then the standard rule is to disregard the loss. Notably, the painting and the camera are two separate collectibles and personal assets and they would be treated separately for tax purposes. This means that while the capital gains on the painting would be disregarded, the capital loss on the camera may not be disregarded. Considerations such as the fact that she sold the camera to purchase another collectible and person use asset is also important in making the determination of how the collectibles and personal use assets would be treated for tax purposes.
Part (c)
In this event there are various tax issues for consideration. The first issue is whether interest expenses are deductible and whether interest income associated with the facility are included in the assessable income.
The analysis of the facts of the case concludes that based on the Income Tax Assessment Act 1997, interest income and interest expenses are tax assessable unless the taxpayer borrowed to pay for tax liabilities. In this event Mary borrowed $100,000 from the National Australia Bank for a period of 5 years at an interest rate of 8% per annum with the purpose of investing one-half in shares yielding dividends and on-lending the other half to her brother at an interest rate of 3% per annum. The use to which the funds were invested were both income generating activities in that the investment in securities had the potential for capital gains income and other forms of income. Lending to his brother also provided an opportunity for income, even though the net interest on the portion that she lend her brother would be negative. Besides the deductibility of the interest expense, Mary would also be allowed to deduct the account management fees and associated expenses for the investment in securities as the Income Tax Assessment Act 1997 allows Mary to make the deductions.
Under ordinary circumstances, interest income attracts a withholding tax of 10%. This tax would be considered if Mary’s brother withheld the tax on the 3% tax. However under the circumstances of the event it is highly possible that Mary would be able omit the 3% interest income from the assessable income. Furthermore, the interest income is lower than the interest expenses that Mary incurs and this explains why Mary would most likely end up with not tax liability resulting from the interest income.
The other consideration in the analysis is whether the $5,000 in fees to the University of Melbourne where she commenced a degree in mathematics would be considered for eligible tax refund. The verdict is that this amount is not allowable and it is not eligible tax refund simply because the payment was paid to an institution other than primary or secondary education. Secondly, Mary is past the age required for the eligibility of education tax refund.
The education tax refund was replaced by the School Kids Bonus in 2012 and again the school kids bonus was again stopped in 2018. The commonwealth law on income taxes does not communicate to the school kids bonus or the education tax refund. More so the school kids bonus does not include payments made to universities and college. These considerations then mean that Mary cannot deduct the $5000 from her assessable income.
Mary has the option to apply to Higher Education Contribution Scheme (HECS) for arrangements on how to pay the fees for higher education. While the Higher Education Contribution Scheme (HECS) would result in interest accrual on any amount that Mary receives from Higher Education Contribution Scheme (HECS), she would be able to stagger the payments over a period of time. The policies on the tax status of fees payments for higher dedication were made necessary by the economic conditions in Australia pushing the government to consider different approaches to education financing in Australia. Mary may also consider contacting the State of Victoria for further information on the financing of education and the tax office for tax implications of higher education funding. The assumptions in this consideration are that tax savings are the primary reasons for Mary to consider the options by the State of Victoria as well as the options that the Australian Tax Office may offer on the funding of education, hence the need to keenly and closely consider all options.
Part D
There are two issues in this event. The first regards the treatment of the child care expenses and the reimbursement from the employer and the second issue pertains to the tax treatment for the $1000 that Mary won for being the best sales person at the company where she was employed.
The Income Tax Assessment Act 1997 communicates to and sets provisions for child care tax offset under section 61-1. Under section 61-10 the act sets the requirements for those that are entitled to the Child care tax offset. Under section 61-10 (1) (iii) Mary should be caring for a person who is aged 16 years or over and is her child, brother or sister or a brother or sister of the spouse as residents domiciled in Australia. There are other requirements such as caring for a person with disability as well as caring for parents that would make one qualify for the Child care tax offset.
Under section 61-30 the maximum amount of child tax offset allowable under the law is $2,423. Any amount above $2,423 would not be permissible for child tax offset. Further, the analysis considers that other considerations such as shared child care are important for consideration.
Mary’s case also involves the consideration of fringe benefits considering that the employer refunded Mary of the amount spent on Child care. It is important to consider the tax implications of the refund and also how Mary ought to incorporate the child care expenses in the computation of the assessable income and the payable taxes.
Under the Fringe Benefits Tax Assessment Act 1986, child care benefits to an employee would be exempt if the care of children of the employee in a child care facility and the recreational facility or child care facility, as the case may be, is located on the business premises of the employer of if the employer is a company, the employer or of a company is related to the employer. The last condition under which the residential benefit would be tax exempt is where a residual benefit provided in respect of the employment of an employee arose out of priority of access, for a child or children of the employee, to a place that is an eligible child care center for the purposes of any provision of the Child Care Act 1972.
Focusing on the facts of the event, Mary paid $770 to a child care provider for child care for her two children, whose age is not indicated. If the children are aged older than 16 years then child tax offset would be allowed for an amount up to $2,423. As pertains the reimbursement by the employer, Mary would be required to include the residential benefit in terms of child care benefit in the assessable income because she does not meet all the requirements for exemption. The implications are that the assessable income of Mary increases by the amount refunded by the employer for child care. This is important since it increase the tax liability for Mary, hence the need to consider how it impacts the taxpayer.
The last consideration on this event is the prize of $1,000 that Mary won for being the best sales agent at her employer’s business. The prize is tax exempt, as stated in the Income Tax Assessment Act 1997. Under section118-37 that gambling, a game or a competition with prizes are exempt or loss denying transactions meaning that if Mary lost the prize she would not claim a loss and now that she won the prize, the tax authorities do not demand the inclusion of the prize money in the assessable income.
Part E
The issue in this event concerns what are the tax implications of working from home and how the additional $5000 income would be treated for tax purposes. The analysis considers that the additional income of $5000 would be included in the taxpayer’s assessable income for the year and that for the period since started working from home, she would not be allowed to deduct commuter or travel expenses.
Under section 85-10, the Income Tax Assessment Act 1997 provides for deductions for non-employees relating to personal services income. Under the act, the taxpayer cannot deduct an amount to the extent that it relates to gaining or producing part of the ordinary income or statutory income if the income is not payable to you as an employee and if the taxpayer would not be able to deduct the amount under the act if the income were payable to the taxpayer as an employee. The Act goes on to give the example of an architect who works mostly from home but on most days travers from home to her business premises of the firm, considering the architect has a home office. The act rules that the architect cannot deduct the expenses of traveling between her home and the firm’s premises because she could not deduct them if she were an employee.
Applying this rule to the case of Mary’s home office, she would gain if she deducted any amount of travelling and commuter costs from her home to her office yet she is not doing that. Secondly, Mary would gain unfairly if she deducted the $5000 additional income for tax purposes simple because if she were an employee she would not be allowed to deduct the amount for office expenses. These are the key considerations in making a decision on the tax implications of working from home. The verdict therefore is that Mary must include this amount in the assessable income and that she will not be allowed to deduct any commuter expenses to the business premises. Consideration into how this impacts the tax liabilities.
While Mary may not deduct the $5000 and she would not be allowed to deduct the commuter expenses, the law allows her to apply to the Commission for the deduction of home office expenses including the costs of home equipment used for work, costs of repairs to home office, furniture, and equipment. If there are any associated cleaning expenses or any other day to day running expenses, then Mary would be allowed to deduct those costs for tax purposes. The key to deductions is ensuring that they are well document with all source documents for the services well documented. This would allow for Mary to reduce the tax liability.
Part F
In March 2018 Mary received a prize of $1,000 when she appeared on a television quiz show. The issue in this event is on the tax status of the prize. The prize is tax exempt, as stated in the Income Tax Assessment Act 1997. Under section118-37 the act states that gambling, a game or a competition with prizes are exempt or loss-denying transactions meaning that if Mary lost the prize she would not claim a loss and now that she won the prize, the tax authorities do not demand the inclusion of the prize money in the assessable income.
Mary received from Happy Housing a bonus of $500 for excellent services to the company. A bonus or other additional payment for excellent service, is an income to which the taxpayer was not entitled. The implications are that the bonus will be included in the assessable income and taxed as part of the ordinary income or the statutory income of the employee. The implications are that the tax liability of the taxpayer increases due to the amount provided as a bonus. However, the tax increase implications may not be significant.
The last consideration is on the treatment of cost re-imbursement at a rate of 60 cents per kilometre for using own car on Happy Housing business. The reimbursement of costs does not amount to income that is assessable under the Income Tax Assessment Act 1997. Consequently, the amount reimbursed shall not be subject to taxes on Mary’s income since it is not an ordinary or statutory income under the definitions of income under the Income Assessment Act of 1997.
Under the law the re-imbursement for costs such as fuel, wear and tear, and other such costs such as night outs are not taxable. The main requirement is that the reimbursement of these costs is not re-imbursement for costs incurred for moving from the house where the employee resides to the office, on a daily basis but rather re-imbursement of cost incurred because the employee travelled outside the normal area of daily business. Any other allowances would be considered under fringe benefits tax and would be included in the assessable income of the taxpayer and have tax implications.
Conclusion
In conclusion, the objective of this document was to present various events for tax purposes. The review of the events was to determine their tax implication for the taxpayer for the tax year 2017/2018 ended June 30 2018. The tax report drew authority from Commonwealth legislation including Income Tax Assessment Act 1936, Income Tax Assessment Act 1997, and Fringe Benefits Tax Assessment Act 1986. The report also drew authority from the state and legislation from the State of Victoria, considering that Mary resided in Melbourne, hence subject the state laws and legislation in the State of Victoria. Lastly, the report drew authority from case law, citing the ruling in Esso Australia Resources Ltd v Federal Commissioner of Taxation. All the legislation and case law helped in providing tax advice to the client who was also advised to provide adequate evidence for all the issues and events reported in the events. The client should also consider hiring the services of professional tax consultants and tax lawyer in filing the taxes and in making applications to the Commissioner of Taxation. The measures would significantly increase the success rates for the taxpayer in the applications and procedures advised in this report.
References
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Fringe Benefits Tax Assessment Act 1986
Esso Australia Resources Ltd v Federal Commissioner of Taxation

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