Accounting Lectures Income and Taxation Services †Free Samples

Question: Discuss about the Accounting and Taxation Services. Answer: Accounting and Taxation services Issue/ Facts: It is seen that Jones has received a few sums of money in respect of a small practice run by him and providing accounting and taxation services to local businesses. In the course of the year 2009/10, he had billed a sum of $35,000 in respect of his fees and of this a sum of $30,000 has been received. Another amount of $3,000 was received and which represented the outstanding accounts from 2008/09 year. Further, Travelco, a local motel client provided Jones and his wife with free return air tickets to Bali and having an equivalent fares of cost $2,000. Law: All these sums are in the nature of fees received in lieu of professional services rendered by Jones. As per Sec 6-5 of the Income Tax Assessment Act 1997, assessable income includes ordinary income derived from all sources in the given income year. In other words, ordinary income is taxed at the time that it is derived. Now, the term ordinary income is not expressly defined in the act but gets its meaning from various propositions which have been developed over time on the basis of several decisions given by the courts. An item of receipt is determined to be ordinary income or not on the basis of the character of the receipt in the hands of the recipient. The amount received in lieu of personal services rendered is in the nature of ordinary income. As per Sec 21and Sec 21A of ITAA 1936, all non-cash business benefits are considered to be income as if the amount can be converted into cash. (CCH, 2011) Relevant case law is Commr of Taxation v Cooke Sherden (1980) 10 ATR 696; 80 ATC 4140. Another relevant case is the Commr of Taxation v Firstenberg (1976) 6 ATR 297; 76 ATC 4141, where in it was decided that sole practitioners should return on a cash basis. Analysis Conclusion: Thus, $30,000 amount of fees and $3,000 is in the nature of ordinary income because it is received for accounting and taxation services rendered. As per Commr of Taxation v Cooke Sherden (1980) 10 ATR 696; 80 ATC 4140, it was held that if a benefit can be converted into cash, it is income according to ordinary concepts. Thus, the free return air tickets would be treated as income. Also, it was a benefit granted directly in relation to the services rendered. The term derived is not expressly defined in the act but the term gets its meaning from generally accepted principles established over the years on the basis of the various decisions given by the courts in the various case laws. The authority in this case is the Cardens case or Commr of Taxation (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; 1 AITR 416, where it was held that where a payment is made in reward for professional work or personal services, the return should be taxed on cash basis. Thu s, on application of Sec 6-5 of the Income Tax Assessment Act 1997, Sec 21and Sec 21A of ITAA 1936 and the Cardens case and other relevant case laws, John should return on cash basis. Lectures income Issue/ Facts: Jones is employed at Central University as a lecturer in accounting in a part time capacity. His annual salary is $42,000 p.a. and which he receives in his savings bank account with the State Bank Ltd. In another agreement with the bank, he has arranged that a sum of $5,000 be maintained as a balance in his savings account and the rest must be transferred to his mortgage account with the bank. Also, the interest in the savings account gets offset against the mortgage interest. It is needed to determine the assessability of these amounts. Law: According to Sec 6-5 of the Income Tax Assessment Act 1997, assessable income includes ordinary income derived directly or indirectly from all sources during the particular income year. Further, all amounts received as salary and wages in connection with employment in any capacity is typically treated as ordinary income. The case law relevant is Scott v FCT (1966) 10 AITR 367, where in it was considered that whether a particular receipt is income or not is determined on the basis of the quality of the receipt in the hands of the recipient. (CCH, 2012). Analysis Conclusion: On this basis, it is seen that the amount of $42,000 received by Jones is in the nature of salary received by him for his employment in part time capacity as lecturer in accounting at Central University. And this salary is part of his ordinary income includible in the assessable income. In order to determine the derivation issue and the basis of taxation of this income, we apply the Cardens case and find that cash basis is appropriate in case where income represents receipts for services rendered. Software development Issue/ Facts: John and his wife Joan, who is an IT expert, have been working on developing accounting software for use by small businesses. The system which is called J-Accounts has gotten licensed and is also used by around 175 local businesses for an amount of $100 per year. It is seen that Cashbooks who is a national software developer has agreed to purchase the exclusive rights to use the program for five years. In return, they have agreed to pay a sum of $25,000 to the Joneses and also that after the said five years, a new agreement may be signed. It is needed to determine the character of this receipt. Law: Out of the various propositions developed for ordinary income, it has been established that the receipt arising from a profit making structure will be capital in nature. A compensation for an income-producing activity or the ability to earn income is said to be a capital receipt. But according to Sec 15-20 of the ITAA 97, assessable income includes an amount that you receive as royalty within the ordinary meaning of royalty if the amount is not assessable as ordinary income under sec 6-5. (CCH, 2012). Analysis Conclusion: Applying this principle to the case of the Joneses receiving a sum in return for the exclusive rights to use the program, it is seen that it is in the nature of a capital receipt from the sale of a capital asset. Thus, it is not assessable as ordinary income. On applying Sec 6-5 along with Sec15-20 of the act, it is seen that the amount of $25,000 received for the right to use the program is in the nature of royalty includible as statutory income in the assessable income of Jones. Share Certificate proposal Jones has received a share certificate proposal from a local decorator and picture framer, Herman regarding old share certificates purchased by him from an acquaintance for $500. Jones is interested in commercial history and thus, purchased 500 share certificates relating to old companies that had been liquidated during the great depression of the 1930s. He liked them for the fact that they were very ornate and elaborate and thus capable of being sold for use as a decorative item. When he mentioned this to Herman, he agreed and suggested that if these were properly framed and an inscription was added; it would cost around $100 per certificate and they could sell for $1000 per piece. Further, he also agreed to sell the certificates on a commission of 10%. It is needed to determine the tax consequences of this proposal and for this, it is needed to determine the effect of the sale price of the items, their cost and the commission of Herman on the assessable income of Jones and his tax liability. Law: According to a proposition of what ordinary income is, it is said that all proceeds received from business activities are income by ordinary concepts but it is needed to determine if all such activities amount to business. In London Australian Investment Co Ltd v FCT (1977) 138 CLR 106, the honourable judge laid down a three-step analysis to determine what business is by finding out if there is a business, what is the business exactly and if a transaction is precisely defined within that business.(CCH, 2011). The term business is not comprehensively defined in the act, but Sec 995-1 of the act says that business includes any profession, trade employment, vocation or calling but does not include occupation as an employee. From this it follows that any vocation or interest can form part of business. Analysis Conclusion: Hence, the proposed sale of share certificates by Jones relates to his interest in commercial history and is like a hobby or pastime and which cannot be likened to a vocation for him. Thus, on this basis, the amount which may be realised from this proposed sale cannot be likened to amounts from a business activity and hence, not includible in income. Quiz show Issue/ Facts: Jones took part in a TV station quiz show called Who wants to be rich? and became a winner on the show. The show followed the procedure of randomly selecting the contestants from the local telephone directory. Jones was selected this way and also got the chance to appear for five times on the show. He answered all the questions and became the Grand Champion on the show. For this, he won $200,000 and also a car of value $30,000. It is needed to determine the nature and character of this receipt. Law: One of the propositions relating to income from ordinary concepts causes to exclude windfall games from such income. This is because such gains lack the commercial element which is present in other income producing activities. These are the result of luck and good fortune and not an outcome of employment, rendition of services or business. They are very rarely periodic and regular and cannot be expected to be relied upon. Thus, the character they possess in the hands of the winner is very different from an amount of income. Winnings from lotteries, gambling and raffle prizes are forms of windfall and do not form part of ordinary income. Relevant case law is Kelly v FCT (1985) 16 ATR 478. (CCH, 2012). Analysis Conclusion: On this basis, it can be said that appearance on quiz show does not result in derivation of income as it is not an income producing activity. Also, prizes which are a result of an income producing activity such as a professional service are an exception to this. Re Kelly v FCT (1985) 16 ATR 478. Also, the selection of Jones as a contestant was done on a random basis and not by reason of his professional service. Thus, the amount of $200,000 and car valued at $30,000 received by him is not in the nature of ordinary income includible in assessable income. Conclusion: The above discussion explained the assessability and chargeability to income tax of the various items presented by John Jones. The amount received by him in respect of the practice providing accounting and taxation services is chargeable as ordinary income on cash basis. Further, the outstanding amounts received by him and also the free return air tickets are includible in assessable income as ordinary income. This is in accordance with Commr of Taxation v Cooke Sherden. Similarly, the salary from part time employment as lecturer at Central University received on 15th of every month is an ordinary income to be returned on cash basis. The amount received in respect of software development and sale of the exclusive rights to the use of the program is a royalty payment in accordance with sec 15-20 of ITAA 97 and includible as statutory income. The share certificate proposal deals with an activity which is likely to arise from an interest, hobby or pastime for Jones and not in the natur e of a commercial activity. Hence, it cannot form part of ordinary income. Finally, the earnings from the quiz show are in the nature of windfall gains not to be included as income. References https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/CCH Australia Staff (2012).Australian Master Tax Guide. Australia: CCH Australia Limited. p378-399. CCH Australia Limited (2011). Australian Tax Casebook. Australia: CCH Australia Limited. p174-599. Commr of Taxation (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; 1 AITR 416 Commissioner of Taxation v Cooke Sherden (1980) 10 ATR 696; 80 ATC 4140 London Australian Investment Co Ltd v FCT (1977) 138 CLR 106 Scott v FCT (1966) 10 AITR 367