THE UNIVERSITY OF ADELAIDE INCOME TAXATION ESSAY ASSIGNMENT – 2021 SEM 2 This Assignment forms 20% of the total assessment for this course and is compulsory

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THE UNIVERSITY OF ADELAIDE INCOME TAXATION ESSAY ASSIGNMENT – 2021 SEM 2 This Assignment forms 20% of the total assessment for this course and is compulsory. The mark for the Assignment is not be redeemable by other forms of assessment in the course. Students have the choice to submit the Assignment answer individually or in a group of up to five members. If an Assignment is submitted by a group, the mark given to the Assignment answer will be the mark received by each member of a group. Only one Assignment answer needs to be lodged per group. The Assignment covers and assesses the topics up to and including the topic of “Assessable Income - Statutory Income - Net Capital Gains”. It does not cover and assess any part of the course covered after that topic. Assignment due date & submission The written Assignment answer must be submitted electronically only through MyUni via “Turnitin” by no later than 4.00 pm on Monday, 27 September. Further instructions will be provided for this closer to the due date. Late submission of Assignments is dealt with in the Course Outline. Assignment format The Assignment answer must be no more than 2,000 words in content (excluding footnotes) and must have a word count noted on it. If it does not have a word count noted on it may not be marked. A penalty, of a reduction in mark, may be imposed if the word limit is exceeded. It must be type written, double spaced on A4 and in a font size of not less than 12. For this course, the use of footnotes is preferred over the use of endnotes. However, footnotes should not include content that is essential to the reasoning on an issue. Marks will only be given to the content of the body of the essay and generally will not be given to footnote content. Students should ensure that the content of an Assignment answer is their own work and that no part of the answer is copied from another student or group, or from any online source. Assessment criteria 1 The extent to which the Assignment answer identifies relevant income tax issues and sets out sound reasoning in support of the discussion, including applying the tax law to relevant facts and not just stating conclusions. 2 The extent to which the Assignment answer demonstrates research into relevant topics of the income tax law covered in the course, including having references to applicable statutory provisions of the enacted tax law and any applicable unenacted case law. 3 Whether the Assignment answer is easy to read and understand. Ease of reading can be achieved, for example, by the use of relevant headings and sub-headings. Assignment IT M - 2021 Sem 2 - AMENDED Author: Domenic Carbone 2 Assignment question Based on the following facts, you are required to: (a) Advise Michelle Jordan as to whether or not she remained an Australia resident for the 2021 income year (10 marks); and (b) Assuming Michelle was an Australian resident, work out her total assessable income for the 2021 income year, giving reasons why amounts are or are not assessable income (30 marks). Ignore the effect of the “double tax” agreement with the United States of America. Michelle Jordan is a professional basketball player who, on 1 July 2021, returned to Adelaide from the United States after playing basketball in the “Pro League” competition in that country. Before leaving Adelaide for the United States on 15 July 2020, Michelle’s domicile was in Australia. She left after having received several approaches from “Pro League” teams in the United States. One of the clubs that approached her was the “L.A. Belles” that made an offer to her that included match payments of $4,000 per game played by her, a “sign on” fee to be negotiated, and a reimbursement of her travel costs to the United States. As an additional incentive for players to perform at their best, they were also eligible for “best on court” awards of $8,000. One award was given to a team member for each game won. Just before leaving Australia, Michelle sold all her household furniture to raise funds for her stay in the United States. Also just before leaving she entered into a contract to sell her apartment in Adelaide in which she had lived, and the sale contract was settled and completed on 30 September 2020. The only asset Michelle retained in Australia was some money in a bank account with the Commonwealth Bank of Australia Ltd. Shortly after her arrival in the United States, Michelle negotiated her contract terms and entered into a one year contract to play with the “L.A. Belles”. The contract was entered on 1 August 2020 and contained an option for an extension for a further one year that could be exercised by the club. The playing season stipulated in the contract ran from 1 September 2020 until the following 31 May. Michelle was accompanied to the United States by her fiancé, Fella MacPherson, a leading Australian male model. She and Fella moved into a rented furnished apartment in Downtown Los Angeles that they leased for a term of one year, with an option to renew for a further one year. However, despite renting this apartment it was only used by her more as a “base” when she was in Los Angeles as she spent very little time there because of the amount of travel required of her during the playing season. Indeed, as events turned out, Michelle found that the “Pro League” competition was much more demanding than she anticipated and she also had trouble coping with the amount of travel required of her. As a result, she was only moderately successful in her performances. Meanwhile, Fella’s fortunes took an upturn early in the new year while they were both in New York for one of Michelle’s games. Fella was introduced to top model, Cindy Clawford, who took more than a professional interest in him. He promptly broke off the engagement to Michelle and stayed in New York with Cindy. Assignment IT M - 2021 Sem 2 - AMENDED 3 Michelle became extremely lonely and homesick and so she negotiated an early end to her contract with the “L.A. Bells” and to her lease of the Los Angeles apartment so she could return home to Australia. She then left the United States soon after and arrived back in Adelaide on 1 July 2021. During the income year ended 30 June 2021, Michelle received and derived the following: 1 Match payments from the “L.A. Belles” club totalling $100,000 for the 25 games played by her. 2 A “sign on” fee from the “L.A. Belles” of $30,000 on entering into the contract with the club under which Michelle agreed to play exclusively for that team and no other team. 3 A “best on court” award of $8,000 for being the best player in one of her games. This amount was paid to her by the team’s leading sponsor and not the club. 4 A reimbursement of air fare expenses totalling $2,000 that were incurred by Michelle in travelling to the United States. This fringe benefit was reimbursed by the “L.A. Belles” club. 5 Sale proceeds of $300,000 from the sale of Michelle’s apartment in Adelaide that she had bought to live in. She had bought it on 2 January 2015 at a total cost of $200,000, and sold it under a contract of sale entered into on 14 July 2020. Throughout the period of her ownership, the apartment was used by Michelle as her home. 6 Sale proceeds of $5,000 from the sale on 10 July 2020 of Michelle’s apartment household furniture that she had all acquired for personal use in January 2015 at a total cost of $20,000. She had never previously bought and sold any furniture. 7 Interest totalling $1,000 on money Michelle had deposited in a bank account held with the Commonwealth Bank of Australia Ltd (Commonwealth Bank), an Australian resident company. 8 Franked dividends totalling $1,400 from shares Michelle owned in the Commonwealth Bank. A Dividend Statement received by her shows a franking credit of $600 on the dividends. 9 Sale proceeds of $25,000 from the sale on 10 July 2020 of her shares in the Commonwealth Bank. These shares were sold by Michelle after they went ex-dividend. She acquired the shares on 1 September 2019 at a total cost of $15,000 as a “long-term investment”, but sold them when she did because of her move to the United States. She had never previously bought and sold any shares. 10 An amount of $20,000 that was unexpectedly received from her grandparents on the eve of Michelle’s departure. The amount was given to help her “set herself up” in the United States after her arrival there. Cash amounts have been converted into Australian dollar amounts where relevant. Assignment IT M - 2021 Sem 2 - AMENDED Income Taxation M Assignment g Assignment Notes • Point 1 – Total marks 40 with the marks spread being: – Part (a) 10 marks ( ) 30 marks – Part (b) • Use the marks spread as a general guide to the amount of words for each part: – Part (a) about 500 words – Part (b) about 1,500 words • Point 2 – Topics p covered only y up p to and including g “Assessable Income - Statutory Income - Net Capital Gains”. • Use the recommended “Problem solving methodology” to help identify relevant topics or tax issues. 2 Assignment discussion - 2021 Sem 2 Author: D. Carbone Assignment Notes 1. Tax entity 1) Identify type p 7 below)) 2)) Tax treatment ((see step 2. Jurisdiction to tax 1) Residence 2) Source 3. Assessable income 1)) Statutoryy income 2) Ordinary income 3 Assignment Notes • Point 4 – An Introduction and overall Conclusion at the end is not necessary. • However, a conclusion should be stated on: a) Residence b) Total assessable income • Use relevant headings and sub-headings. 4 Assignment discussion - 2021 Sem 2 Author: D. Carbone Tax residence of individuals • Four alternative tests or limbs: 1. Resides in Australia. 2. Domicile in Australia unless permanent place of abode is outside Australia. 3. More than half an income year in Australia unless usual place of abode is outside Australia and no intention to take up Australian residence. 4. Commonwealth superannuation scheme member, their spouse or child under 16 16. • Only need to satisfy one of the four tests or limbs. • An individual can be resident in Australia and in another country – dual resident. 5 Alex Smart – Tutorial 3 Question 2 Alex Smart is a senior employee of the Australian Taxation Office who has been employed here for over 10 years and is held in very high regard. He has been offered and accepts a secondment to work in the OECD in Paris i for f a fixed fi d 5 year period. i d He leaves l Australia A li on 28 December b accompanied by his wife and children. In Paris they move into an apartment leased by Alex. They retain ownership of their former home in Australia and lease it to a tenant. Does Alex remain an Australian resident during his stay in Paris? As a Commonwealth public servant, servant during Alex Alex’ss stay in Paris he remains a member of the Commonwealth Superannuation Scheme established under the Superannuation Act 1990. Do these additional facts affect whether or not Alex remains an Australian resident, and if so how? 6 Assignment discussion - 2021 Sem 2 Author: D. Carbone Assignment Notes • Point 4 – Format and layout of essay Assignment answer: Michelle’s Assessable Income Item: (state the item or amount and then discuss it under these headings or sub-headings, as relevant) – Statutory income • CGT • Other – Ordinary O di income i • Use this approach separately for each item and amount. 7 Problem solving methodology – Assessable income provisions • Problem solving in most cases: 1. Consider statutory income (SI) provisions first as these will generally prevail over ordinary income (OI) s6-5 and apply in priority: i it s6-25(2). 6 25(2) 1) CGT – do not overlook CGT events A1, D1 and H2. 2) Other SI provisions. 2. If the SI provision expresses a contrary intention so that s6-5 prevails, then make sure consider OI s6-5. 3. If no contrary intention in the SI provision and certain that it applies then no need to consider OI s6 applies, s6-5. 5 • Some SI provisions are certain – s15-70, s40-285(1) & s44(1). • But some SI provisions are uncertain: – s15-2 & s15-10 which depend on the required connection. – s15-15 & s25A 1st first limb which depend on purpose. 8 Assignment discussion - 2021 Sem 2 Author: D. Carbone Kelly v FCT 85 ATC 4283 The t/p played league football as an employee of a club in WA and received a set amount for each game played. He won the Sandover Medal as the best and fairest player in the league and, as a result, he received i d a cashh awardd prize i off $20,000 $20 000 from f a television l i i station. i The h motive of the television station in making the award was to cement its relationship with the league, and to attract more viewers to its televised coverage of the medal presentation. HELD: The t/p was an employee of the club. The receipt of the $20,000 prize was assessable income as: • Statutory income under now s15-2; and • Ordinary income under now s6-5. Note that as the prize “benefit” was also ordinary income, s6-5 applies instead of s15-2: s15-2(3)(d). 9 Recommended problem solving – CGT provisions • Generally follow the 4 main steps 1 to 4 in that order. • However, if an exemption provision (other than s118-20) clearly applies, then first apply the exemption instead, as any capital gain or capital loss is disregarded. • No need to consider the CGT provisions if an amount is clearly OI under s6-5 because it is received: – directly from employment or services rendered – in the ordinaryy course of business – periodically from the use of property as s6-5 prevails and applies instead because of the antioverlap provision in s118-20. 10 Assignment discussion - 2021 Sem 2 Author: D. Carbone Recommended problem solving – Ordinary income • If a receipt is: – directly from employment or services rendered egg Wages, g salaries, fees and commissions Possibly also bonuses depending on the contract terms. – in the ordinary course of business, eg Revenue from the sale of trading stock. – periodically from the use of property eg Interest, rent, dividends & royalties (but dividends are included in AI as SI under s44(1)). s44(1)) then a “sufficient connection” will exist to an income producing activity. • So there is no need for an answer to address any other relevant factors to support the conclusion that the receipt is OI under s6-5. 11 Apply and incorporate sections and cases “Anti-overlap” provisions in CGT Example of reducing a capital gain that is otherwise assessable income (based on the example in s118-20) Liz bought some land in 1990, as part of a profit-making scheme. In December 1998, she sold it for a profit of $40,000. • CGT event A1 happened because Liz disposed of a CGT asset. The land is a CGT asset because it is a kind of property: s108-5, and the sale is a disposal of it because the sale gave rise to a change of ownership from Liz to another entity: s104 s104-10(1) 10(1) & (2). (2) Suppose Liz made a capital gain of only $30,000. • This is because of the effect of indexation of the land’s cost base, which reduces the amount of the capital gain. 12 Assignment discussion - 2021 Sem 2 Author: D. Carbone Apply and incorporate sections and cases “Anti-overlap” provisions in CGT Example of reducing a capital gain that is otherwise assessable income (based on the example in s118-20) Liz’s profit from the sale is $40,000 and is included in her assessable income under section 6-5 (about ordinary income). • The profit of $40,000 is ordinary income because it arises from a realisation of property acquired with a purpose of profit-making by sale. • Liz’s decision to sell the land implements an “intention or purpose, existing at the time of acquisition, acquisition of profit-making profit making by sale … in the context of … carrying out a … commercial transaction”: Myer Emporium. The capital gain is reduced to zero because it does not exceed the amount included in assessable income under section 6-5. 13 Assignment discussion - 2021 Sem 2 Author: D. Carbone THE UNIVERSITY OF ADELAIDE INCOME TAXATION ASSIGNMENT NOTES - 2021 SEM 2 In addition to the instructions and notes set out in the front page of the Assignment, students should note the following in writing an essay answer to the Assignment question. 1 Total marks The essay answer to the Assignment question will be marked out of a total of 40. However, it will still form only 20% of the total assessment in the course. The spread of the 40 marks is 10 for part (a) and 30 for part (b). This spread can also be used as a general guide to the number of words used for the answer to each of the two parts. 2 Topics covered Only topics up to and including “Assessable Income - Statutory Income - Net Capital Gains” are intended to be considered and covered. Of course, students need to identify which topics are relevant to the Assignment question. To assist in identifying the relevant topics or tax issues, students should have in mind the approach recommended in the “Problem solving methodology”. 3 Nature of the Assignment answer The Assignment answer must be in essay form. Therefore, a bullet point form answer will not be accepted. 4 Format and layout of the essay An Introduction to the essay is not necessary. If an Introduction is included, it should not restate the facts of the Assignment question. Also, any Introduction should be kept brief. For example, for part (a): “Whether or not Michelle remained an Australia resident for the 2021 income year depends on …”. And for part (b): “Assuming Michelle remained an Australian resident, her total assessable income depends on which of the amounts or items in 1 to 10 are included in assessable income, either as statutory income or ordinary income.” Further, an overall Conclusion at the end of the essay is not necessary. However, a conclusion should be reached on Michelle’s residence for part (a) and a conclusion should be reached on her total assessable income for part (b). Also, remember that one of the Assessment Criteria is whether the Assignment answer is easy to read and understand, and that ease of reading can be achieved by the use of relevant headings and sub-headings. Therefore, in discussing the issue of Assessable Income the following is recommended for each item or amount mentioned: Assessable Income Item: (state the item or amount and then discuss it under these headings or sub-headings) ? Statutory income ? CGT ? Other ? Ordinary income Assignment Notes IT M - 2021 Sem 2 This approach should be taken separately for each item or amount. 5 Referring to sections of the legislation The appropriate provisions of the income tax legislation dealt with in the course must be referred to in an Assignment answer wherever they are relevant. The sections of the legislation should be restricted to those mentioned in the PowerPoint slides. Sections can be referred to by using the practice adopted in the Income Tax Assessment Act 1997 (Cth), and in the PowerPoint slides, of normal text for section numbers in that Act (remembering that these sections also incorporate a dash “-” in their numbering) and bold text for section numbers in the Income Tax Assessment Act 1936 (Cth). The whole wording of sections should not be written out in full in an answer. Instead what is stated in the sections should be used to support the discussion in the answer. Put in another way, relevant words of a section should be applied and incorporated into an answer as appropriate. See PowerPoint slide 31 in “Assessable Income - Statutory Income - Net Capital Gains” for an example of how this can be done. Further examples of this are in the solutions that have been provided to Tutorial questions. Finally, a discussion of “why amounts...