Q2

Q2

Sally’s income:

(1). Firstly, Here\’s an overview of Sally\’s income for the 2022 income year:

1. Salary from TopCo: $300,000
2. Performance bonus: $100,000
3. Payment for joining TopCo (employment termination payment): $250,000

Total Income: $650,000

Using the Income Tax Assessment Act (ITAA) 1997 to explain the above total income tax payable:

1. Salary and Performance Bonus:

According to ITAA 1997, section 6-5, ordinary income derived directly or indirectly from all sources during the income year is assessable. In Sally\’s case, her salary of $300,000 and performance bonus of $100,000 are considered ordinary income and are assessable under s6-5.

1. Employment Termination Payment:

ITAA 1997, section 82-10, states that employment termination payments (ETP) are assessable income. The payment of $250,000 for joining TopCo can be considered an ETP since it was provided to entice Sally away from her previous employment in the Australian Public Service. Therefore, this amount is also assessable under s82-10.

(2). Secondly, Sally\’s investment portfolio comprises two assets: Batemans Bay property and Wesfarmers shares. Let\’s analyze each asset and their impact on Sally\’s taxable income for the 2022 income year:

1. Batemans Bay property:

Sally built an apartment block on the property and sold all the units for $50 million in January 2022. To calculate the capital gain or loss on the property, we need to consider the cost base and capital proceeds.

Cost base (ITAA 1997, s110-25) includes:

• Acquisition cost: $600,000
• Value of land at the time construction commenced: $1.1 million
• Construction cost: $14.5 million

Total cost base: $16.2 million

Capital proceeds (ITAA 1997, s116-20) from the sale of the apartments: $50 million

Capital gain (ITAA 1997, s102-5): $50 million – $16.2 million = $33.8 million

As the property was held for more than 12 months, Sally may be eligible for the 50% capital gains tax (CGT) discount (ITAA 1997, s115-25). Therefore, the net capital gain included in Sally\’s assessable income would be $33.8 million * 0.5 = $16.9 million.

1. Shares in Wesfarmers:

Sally received fully franked dividends of $4,000 in the 2022 income year. Dividends are considered assessable income (ITAA 1997, s44). Additionally, since the dividends are fully franked, Sally would also have to include the franking credit in her assessable income (ITAA 1997, s207-20). Assuming the franking credit rate is 30%, the franking credit would be $4,000 * (30% / 70%) = $1,714.29.

Total assessable income from the Wesfarmers shares: $4,000 + $1,714.29 = $5,714.29

Considering the new information, Sally\’s revised taxable income for the 2022 income year is:

• Previous total assessable income: $650,000
• Capital gain from Batemans Bay property: $16,900,000
• Assessable income from Wesfarmers shares: $5,714.29

Revised Taxable Income: $650,000 + $16,900,000 + $5,714.29 = $17,555,714.29

(3). Thirdly, Based on the information provided, Sally\’s income from her catering activity has grown, and she has earned $80,000 in the 2021 income year and $125,000 in the 2022 income year. The income generated from the catering business should be included in Sally\’s assessable income for the respective income years.

According to ITAA 1997, section 6-5, ordinary income derived directly or indirectly from all sources during the income year is assessable. Therefore, the $125,000 earned from Sally\’s catering activity in the 2022 income year should be included in her assessable income for that year.

Considering this new information, Sally\’s revised taxable income for the 2022 income year is:

• Previous total assessable income: $17,555,714.29
• Income from the catering activity: $125,000

Revised Taxable Income: $17,555,714.29 + $125,000 = $17,680,714.29

(4). Finally, based on the information provided, we will calculate Sally\’s taxable income for the 2022 income year by considering her various sources of income. We\’ll use the Income Tax Assessment Act (ITAA) 1997 to explain the calculation.

1. Salary and Performance Bonus: According to ITAA 1997, section 6-5, ordinary income derived directly or indirectly from all sources during the income year is assessable. In Sally\’s case, her salary of $300,000 and performance bonus of $100,000 are considered ordinary income and are assessable under s6-5.
2. Employment Termination Payment: ITAA 1997, section 82-10, states that employment termination payments (ETP) are assessable income. The payment of $250,000 for joining TopCo can be considered an ETP since it was provided to entice Sally away from her previous employment in the Australian Public Service. Therefore, this amount is also assessable under s82-10.
3. Capital Gain from Batemans Bay property: Capital gain (ITAA 1997, s102-5) of $33.8 million was calculated earlier. Since the property was held for more than 12 months, Sally may be eligible for the 50% capital gains tax (CGT) discount (ITAA 1997, s115-25). Therefore, the net capital gain included in Sally\’s assessable income would be $33.8 million * 0.5 = $16.9 million.
4. Income from Wesfarmers shares: Dividends are considered assessable income (ITAA 1997, s44). Additionally, since the dividends are fully franked, Sally would also have to include the franking credit in her assessable income (ITAA 1997, s207-20). The total assessable income from the Wesfarmers shares was calculated earlier as $5,714.29.
5. Income from the catering activity: According to ITAA 1997, section 6-5, the income from Sally\’s catering activity in the 2022 income year ($125,000) should be included in her assessable income.

Total Assessable Income: $300,000 (salary) + $100,000 (bonus) + $250,000 (ETP) + $16,900,000 (capital gain) + $5,714.29 (Wesfarmers shares) + $125,000 (catering activity) = $17,680,714.29

Sally\’s taxable income for the 2022 income year is $17,680,714.29. To calculate the income tax payable, we will use the individual income tax rates for the 2022 income year in Australia:

1. Up to $18,200: Tax-free threshold
2. $18,201 – $45,000: 19% = ($45,000 – $18,200) * 0.19 = $5,092
3. $45,001 – $120,000: 32.5% = ($120,000 – $45,000) * 0.325 = $24,275
4. $120,001 – $180,000: 37% = ($180,000 – $120,000) * 0.37 = $22,200
5. Over $180,000: 45% = ($17,680,714.29 – $180,000) * 0.45 = $7,875,321.93

Total Income Tax Payable: $5,092 + $24,275 + $22,200 + $7,875,321.93 = $ 7926,888.93

Minus the deductible:

$ 7926,888.93-$ 3000-$254.3-$9,569.05-$2,187.65-$20,000-$2,000-$3,000= $ 7886,877.84

Sally’s expense

Sally’s expense

1. Purchase of raw materials for catering activities:

The amount of $3,000 paid for fresh vegetables by Sally catering company is considered an allowable deduction for income tax purposes under Section 8-1 of the Income Tax Assessment Act (ITAA) 1997. This provision allows for the deduction of losses and expenses to the extent that they are incurred in producing or gaining assessable income, unless they are of a private, domestic, or capital nature, or are explicitly disallowed. Since the payment for fresh vegetables was incurred in the course of producing assessable income for Sally catering company\’s events, it satisfies the conditions for a deduction under s 8-1 of the ITAA 1997.

1. Speeding fine:

Sally\’s $500 speeding fine cannot be claimed as an income tax deduction under Australian tax law. According to s26-5 of the ITAA 1997, this means that if a taxpayer incurs a fine or penalty, they cannot claim it as an expense on their income tax return, even if it is incurred in the course of earning assessable income.fines and penalties imposed by government agencies are specifically disallowed as tax deductions. Therefore, Sally cannot claim the $500 speeding fine as a deduction on the income tax return.

1. Purchase of a laptop computer: According to s8-1 of the ITAA 1997, the cost of a laptop used for commercial purposes can be used as a tax deduction, provided that the laptop is used to produce assessable income. It should be noted that the deduction must be claimed during the useful life of the asset, not in the year of purchase. It has been determined that the effective life of the laptop is 3 years. Therefore, the depreciation method can be used to claim tax deductions for the cost of the laptop over a period of 3 years. It is known that 85% of the time the laptop is used for work and 15% of the time the laptop is used for personal purposes, so 85% of the cost can be claimed as a tax deduction during the useful life of the laptop asset. Since Sally purchased the laptop on April 1, 2022, she can only claim a partial deduction for the 2022 income year. To calculate the deduction for the 2022 income year, the following formula is used:

Deduction for 2022 = (cost of asset x business use percentage x days used for business purposes in 2022) / (effective life x 365) Assuming that the laptop was used for business purposes from April 1, 2022 to June 30, 2022,（91 days） the calculation would be:

Deduction for 2022 = ($3,600 x 85% x 91) / (3 x 365) = $254.3

1. Round-trip transportation cost:

Under the predecessor to s 8-1 as they were not sufficiently connected to the Sally‘s production of assessable income, the cost of commuting between home and work is generally not deductible as it is considered a private expense. This principle was established in FCT v. Maddalena (71 ATC 4161; (1971) 2 ATR 541), and has been consistently upheld by the courts.

Therefore, the cost of the bus fare for commuting between home and work, which is $1,200 in this case, is not deductible for income tax purposes. This is because it is not incurred in gaining or producing assessable income, and it is a personal expense rather than a business expense.

There are, however, some exceptions to this general rule. For example, if the taxpayer is required to carry bulky tools or equipment to work, or if their employment requires them to travel directly from one work site to another during the day, some of the costs of transportation may be deductible.

But in Sally\’s case, there is no indication that any of these exceptions apply, so the cost of the bus fare cannot be claimed as a deduction under the ITAA 1997.

1. Mortgage interest on a house & The cleaning costs for house：

Sally utilized 15% of her house for catering business operations and a bedroom which occupies 10% of the house as her office. s8-1 of the ITAA 1997 allows deductions for losses and outgoings incurred in producing assessable income, except for those of a capital, private, or domestic nature, or those specifically disallowed. This means that 25% of the mortgage interest may be eligible for deduction as a business expense.

However,   As such, the portion of the mortgage interest payment related to the 25 hours of personal use cannot be claimed as a deduction for income tax purposes.

To calculate the allowable deduction amount, the total annual mortgage interest payment needs to be multiplied by the percentage of the house used for business purposes (10%+15%), and then reduced by the percentage of time the kitchen is used for personal purposes (based on 25 hours per week out of a total of   hours per week).

The total annual mortgage interest payment is known to be $42,000 ($3,500 per month).

Therefore, the allowable deduction before personal use in the kitchen is $6,300 ($42,000 x 0.15=$6,300 ). After deducting the percentage of personal use, the allowable deduction is $5,369.05 ($6,300 x (1 – (25 hours per week / 168 total hours per week))=$5,369.05).

Additionally, the bedroom used for business purposes allows for an allowable deduction of $4,200 ($42,000 x 0.10=$4,200).

Thus, the total deductions about the interest on her home loan allowed for this year are $9,569.05 ($5,369.05 + $4,200=$9,569.05).

The same can be said for the cleaning costs for her home ：

The total annual cost of house heating and cleaning  is known to be $9,600 ($800 per month).

Therefore, the allowable deduction before personal use in the kitchen is $1,440 ($9,600 x 0.15 = $1,440 ). After deducting the percentage of personal use, the allowable deduction is $1,227.65（$1,440 x (1 – (25 hours per week / 168 total hours per week))= $1,227.65.）

Additionally, the bedroom used for business purposes allows for an allowable deduction of  $960($9,600 x 0.10 = $960).

Thus, the total deductions about the house heating and cleaning allowed for this year are $2,187.65($1,227.65 + $960 = $2,187.65).

1. Apprentice wages：

Under section 8-1 of ITAA (1997), wages paid to employees are generally considered to be a deductible expense for businesses, provided they are incurred in gaining or producing assessable income (a). The $20,000 in wages paid to two apprentice chefs in this case would be considered to be deductible expense as it is directly related to the catering activity – Sally’s income generating business. However, as wages are considered as a cost of doing business, therefore are GST-exempt. They are subject to other types of taxes e.g., PAYG withholding for income tax and payroll tax.

1. Purchase of cooking attire：

According to section 8-1 of ITAA (1997), the cost of purchasing chef\’s jackets and pants for staff members from a cookery equipment retailer is an allowable deduction for income tax purposes. This provision allows businesses to deduct losses and expenses incurred in producing or gaining assessable income, provided they are not of a private, domestic, or capital nature, or explicitly disallowed. Since the purchase of cookery equipment was made in the course of producing assessable income for Sally\’s catering company\’s events, it meets the conditions for a deduction under section 8-1 of the ITAA 1997. Therefore, the amount of $2,000 spent on chef\’s jackets and pants for staff members can be claimed as a deduction for income tax purposes.

1. Cost of accounting report:

The ATO\’s TR 97/23 ruling provides guidance on various types of expenses under section 8-1, including pre-business expenses. Expenses incurred in investigating the feasibility of a proposed business venture, such as the cost of an accounting report, are generally considered to be of a capital nature and are not deductible. This is because the expense is incurred before the business is commenced and is considered to be a cost of investigating the feasibility of the business rather than a cost of actually carrying on the business. In addition, Sally has already decided not to start a business.

Therefore, the accounting report cost of $3,000 cannot be claimed as a deduction for income tax purposes, as it did not occur in the process of generating assessable income or in carrying on a business to produce assessable income.

1. Interest on overdue loans:

In the case of Sally\’s catering business, she secured a loan of $50,000 to fund her operations. Later on, she used this loan to fund the catering activity of her business.

Under section 8-1 of ITAA 1997, any expenses incurred in gaining or producing assessable income are generally deductible. The interest paid on the loan that Sally secured for her new business is an example of an expense that is directly related to the income-generating activity of her catering business and is therefore deductible.

Taxation Ruling TR 93/30 supports this deduction of interest paid on a loan for income-generating purposes. According to this ruling, interest incurred on a loan used for income-producing purposes is generally deductible to the extent that it is incurred in gaining or producing assessable income.Therefore, interest of $3,000 on the loan can be claimed as a deduction for income tax purposes.

From the facts: She spends 25 hours per week on the cooking activity in the kitchen which is also used for family purposes. This statement might be not correct. Sally spends 25 hours in the kitchen for both catering business and family purposes. We might need other legal comments.

”She spends 25 hours per week on the cooking activity in the kitchen which is also used for family purposes.“ This passage comes from the items\’ information,

And the item mentions that Sally uses the kitchen for food and the office for work. The “food” here is for her catering activities. My understanding is that the kitchen excludes 25 hours of private use, and the rest of the time is for business use.

This number is 24 hours * 7= 168 hours might be too much/unreasonable because that time already included sleeping time and other private time.

So how do you think it should be calculated? She has decided to use the kitchen and bedroom for catering activities. We can know from other information of the item that she sells cakes and cooked meals. You know that thing should be baking takes a long time in the oven. Is it possible (this is just a hypothesis) that the cakes and cooked meals are also cooked in the oven when she is sleeping? Now that they\’ve given us the information that her personal use is 25 hours, we should think it simply. I disagree that you need to worry about sleep time here…