James Lucas is 24 years old and lives in Nundah in Brisbane. James plays football professionally and has been under contract to play for the Brisbane Roar since 2016. James was born in Brisbane and his parents and younger sister live in Coorparoo. James is single and lives in a townhouse in Nundah and he is studying Bachelor of Physiotherapy on a part time basis at the University of Queensland.
James coaches an elite under 8’s development team for a 9-week program on two occasions during the off season. James provides his own Australian Business Number (ABN) to the Olympic Football Club so that they can pay him for this work.
James is offered a contract with a Spanish football team from July 2023. As an incentive to sign the contract the team pays him a lumpsum payment of $30,000 (AUD).
Nike sponsors James by providing cash and clothing and in return James must promote Nike through radio broadcasting advertising.
James advises you with further detailed information below (some items already mentioned above).
Money/items received (Receipts) $3000 winnings from playing Blackjack at the Treasury casino.
$160,000 wages from Brisbane Roar
$1,800 payment from Olympic Football Club for the 9 week elite program for under 8 children
$20,000 received from income insurance provider of Brisbane Roar for 4 weeks when James could not play due to a head injury obtained during a match.
$20 reimbursement from Brisbane Roar for parking fee to attend a dentist appointment
$30,000 contract incentive payment from the Spanish football club
$2000 for winning player of the match in the Brisbane Roar game against Newcastle Jets
$2800 travel allowance for when James travels to games outside of Brisbane.
$35 interest from the bank where his wages are deposited
$15000 in cash from Nike as his sponsor.
$4000 worth of clothing from Nike
$250 Rebel sport voucher from parents of the under 8 elite team to say thank you.
Required: a. In terms of the items that James has received above, determine whether each item would be considered ordinary income under s6-5 of the Income Tax Assessment Act 1997.
Ensure that you address your answer using ILAC format and follow the structure set out below. There is no need to consider the source of the income or in what year it is derived. (12 marks) Ensure that you justify your application with the relevant law.
b. For gifts received that have a connection to work activities, why is it important that they are included as part of income when considering fairness and equity of the Australian tax system? (3 marks)
IDENTIFYING WHETHER A RECEIPT WILL BE ASSESSABLE UNDER s 6-5 ITAA97:
Step 1: Is there a legislative definition of ‘ordinary income’ under the ITAA?
Step 2: Is there case law that defines ‘ordinary income’? Consider the common law characteristics of ordinary income – have these been met on the balance?
Does the receipt fit into any of the known categories of ordinary income:
Step 2(a): Are any of the receipts ‘income from personal exertion’?
Step 2(b): Are any of the receipts ‘income from property’?
Step 2(c): Are any of the receipts ‘income from business’?
Step 3: Are any of the receipts exempt or non-assessable non-exempt income?
Step 4: Are any of the receipts a kind of statutory income? The statutory provision usually prevails.
Any receipts that do not fit into the any of the above categories will not be a kind of assessable income.
Issue: The issue here is to determine whether each item James has received would be considered ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA97).
Law: Section 6-5 of the ITAA97 defines ordinary income as income according to ordinary concepts. Case law and common law characteristics provide additional guidance for identifying ordinary income.
Application
Step 1: Is there a legislative definition of ‘ordinary income’ under the ITAA97? Yes, section 6-5 of the ITAA97 provides the legislative definition of ordinary income.
Step 2: Is there case law that defines ‘ordinary income’? Yes, common law characteristics have been established through case law. These include income from personal exertion, income from property, and income from business.
Step 2(a): Are any of the receipts ‘income from personal exertion’?
Step 2(b): Are any of the receipts ‘income from property’?
Step 2(c): Are any of the receipts ‘income from business’?
Step 3: Are any of the receipts exempt or non-assessable non-exempt income? None of the provided receipts seem to fall under exemptions or non-assessable non-exempt income.
Step 4: Are any of the receipts a kind of statutory income? None of the receipts are mentioned as statutory income.
Conclusion: Based on the analysis, the following items would be considered ordinary income under s6-5 of the ITAA97:
The treatment of $3000 winnings from playing Blackjack as ordinary income depends on whether gambling can be considered a business activity.
Part B: Importance of Including Work-Related Gifts in Income
Issue: The issue is to discuss why it’s important to include gifts received with a connection to work activities as part of income when considering fairness and equity of the Australian tax system.
Law: Fairness and equity are important principles in tax law. Income should be broadly defined to ensure a fair distribution of tax burdens.
Application: Gifts received that have a connection to work activities can be seen as indirect forms of compensation. Including them as part of income is important for several reasons:
Fair Distribution of Tax Burden: Treating these gifts as income ensures that individuals who receive benefits related to their work are subject to the same tax principles as those who receive direct monetary compensation.
Prevention of Tax Avoidance: Without including work-related gifts in income, there could be a potential loophole for individuals to receive non-monetary benefits to avoid taxation, leading to an unfair advantage for some taxpayers.
Consistency and Transparency: Tax systems strive for consistency and transparency. Treating all forms of compensation, whether monetary or in-kind, as income ensures that the tax system remains transparent and consistent for all taxpayers.
Equity among Taxpayers: Including gifts as income promotes equity among taxpayers. Those who receive various forms of compensation, such as gifts, vouchers, or benefits, should contribute their fair share toward funding public services.
Conclusion
Considering fairness and equity, including gifts received with a connection to work activities as part of income is vital. This approach maintains a balanced tax system where all taxpayers contribute equitably and helps prevent potential abuses of the system.
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