Taxation Law Assignment 2012
In this assignment, it is assumed that Emma and Ryma are both tax residents of Australia.
Part A
Based on Emma’s negotiated remuneration package and her activities with ‘Ryma Rhymes’, we look into identifying which of her income is assessable income (AI).
Remuneration Package
ANNUAL SALARY
Emma’s annual salary of $150,000 per annum is assessed based on s6-5(1) ITAA97, which states her AI includes income according to ordinary income (OI) concept. In Scott v Commissioner of Taxation (1935), the court’s definition of income is reflective of what majority of public would consider income, such as salaries. Emma’s annual salary does constitute for OI and is thereby AI.
However, since Emma has arranged for 10% of her salary to be directed to her sister, we consider whether there is an implication on the full amount of her salary being AI. According to the constructive receipt rule, s6-5(4) ITAA97, even though Emma is not the recipient of that 10% of her salary, she is deemed to have also derived it as soon as it is dealt with in accordance to her directions. Thus, the 10% is still part of her AI.
To conclude, Emma’s full salary of $150,000 is AI under OI.
ALLOWANCE VS REIMBURSEMENT
The issue of whether Emma’s provided clothing and make-up allowance limit is an allowance or reimbursement is looked into. Using TR 92/15 as guidance, ‘allowance’ is understood to be a specific predetermined amount paid to recipient to cover an expense regardless of whether the expected expense is incurred. In contrast, ‘reimburse’ describes how a “recipient is to be compensated exactly for an expense already incurred”. Based on the definitions provided, since Emma is required to provide her employer with receipts of all her expenses before she is paid the full amount as per her receipts, her situation is likely to be a reimbursement.
In assessing the tax consequences of the reimbursement, we look into whether it qualifies as a fringe benefit. According to s136(1) FBTAA,
Part A
Based on Emma’s negotiated remuneration package and her activities with ‘Ryma Rhymes’, we look into identifying which of her income is assessable income (AI).
Remuneration Package
ANNUAL SALARY
Emma’s annual salary of $150,000 per annum is assessed based on s6-5(1) ITAA97, which states her AI includes income according to ordinary income (OI) concept. In Scott v Commissioner of Taxation (1935), the court’s definition of income is reflective of what majority of public would consider income, such as salaries. Emma’s annual salary does constitute for OI and is thereby AI.
However, since Emma has arranged for 10% of her salary to be directed to her sister, we consider whether there is an implication on the full amount of her salary being AI. According to the constructive receipt rule, s6-5(4) ITAA97, even though Emma is not the recipient of that 10% of her salary, she is deemed to have also derived it as soon as it is dealt with in accordance to her directions. Thus, the 10% is still part of her AI.
To conclude, Emma’s full salary of $150,000 is AI under OI.
ALLOWANCE VS REIMBURSEMENT
The issue of whether Emma’s provided clothing and make-up allowance limit is an allowance or reimbursement is looked into. Using TR 92/15 as guidance, ‘allowance’ is understood to be a specific predetermined amount paid to recipient to cover an expense regardless of whether the expected expense is incurred. In contrast, ‘reimburse’ describes how a “recipient is to be compensated exactly for an expense already incurred”. Based on the definitions provided, since Emma is required to provide her employer with receipts of all her expenses before she is paid the full amount as per her receipts, her situation is likely to be a reimbursement.
In assessing the tax consequences of the reimbursement, we look into whether it qualifies as a fringe benefit. According to s136(1) FBTAA,