Reference no: EM131197294

According to the assignment requirement and the lecture slides and tutorial questions, design a multiple choice question on ordinary income and statutory income from the individual point. 400 words. The QCQ must have a case.

Tutorial No. 3 Ordinary Income and Business Receipts

Q 1 Ordinary income
• Different examples of ordinary income, income from personal exertion

(1) A lawyer of many years who had been involved with a family company was given $10,000 from the principal for his personal qualities, after the successful closing of a sale of the business.

(2) A manager received a fixed salary for the year of $104,000 - regardless of the amount of hours worked by the manager.

(3) An employee received a bonus.

(4) A waitress received tips at the restaurant and management is aware of the customer compliments.

(5) A soccer player received a sign on fee of $10,000 to join a club.

(6) Weekly pocket money paid to children.

Required

For each of the scenarios involving an employee or services rendered, consider whether the associated receipts are ordinary income under s 6-5 ITAA 1997, and state your reasons incorporating common law. Refer to the definition of  section 6 ‘income from personal exertion' in ITAA 1936 in your answers and make comment about the relevance of its impact.

Q 2 Business income
•  Different examples of business receipts

(1) A furniture dealer receives receipts from sales of furniture.

(2) A shopping arcade rents out the shops and it receives money from a film company to use the arcade when the shopkeepers are closed - the historicity of the arcade matches a scene in the film.

(3) A coin collector receives receipts from selling his coin collection.

(4) A punter‘s TAB account reveals a large turnover in excess of $500,000 - and the punter is ahead in terms of his gains vs his losses.

(5) A farmer in NSW grows, harvests and dries tobacco on the black market.

(6) A taxi business leases its 10 taxis and sells 2 of them at a profit.

Required
(1) Business income must be derived and be convertible to money to constitute ordinary income. Although, most receipts from carrying on a business will be income, not every business receipt will be income. There must be a sufficient connection to the business activity. Spedley Securities

Outline the various factors relevant to whether there is a sufficient connection between a receipt and business activity.

(2) For each of the following scenarios consider whether the associated receipts are ordinary income pertaining to a business under s 6-5 ITAA 1997, and state your reasons incorporating common law. (Ignore CGT consequences)

Q 3 Income vs Capital
•  Business receipts and Myer Emporium

Janaia Compotes P/L
Janaia Compotes P/L is a manufacturer of home-made style compotes and sauces.

Janaia Compotes P/L had purchased a 5 acre block back in 1984 at the same time the company built its factory. The land was initially acquired because the company's founder, Janaia, had dreamed of expansion, but that never occurred.

Times have became tough for the compote and sauces manufacturer due to increasing local competition and also increasing numbers of imports that were impacting adversely on sales. Accordingly, the company had no choice but to sell the land to combat its liquidity concerns.

Janaia Compotes P/L decided to sell the property it owned adjacent to the factory premises. The land sold for a significant profit of $600,000 in January 2016.

Required
Comment on whether the receipts in the following scenario are assessable income under s 6-5. In particular, consider how the Myer Emporium case might apply.

Tutorial No. 4 Income from Property

Q1 Income from property
•  Different examples of property receipts

Required
For each of the following scenarios involving receipts from property, consider whether the receipts are ordinary income under s 6-5 ITAA 1997, and state your reasons incorporating common law. (Ignore CGT consequences)

(1) Sale of a 5-bedroom residence held by the same family for 20 years. The parents are downsizing and upgrading as the children have left home. The best real estate agents have been hired to sell with the intention to realize the home's greatest value.

(2) A private lender receives interest (at a higher rate) on loans made to clients who do not meet bank eligibility requirements.

(3) A share trader reviews his trading account and smiles as he exclaims "We're in the money!".

Q 2 Ordinary income
•  Receipt from property as an isolated transaction

Scenario 1 - Joy's sale of her grandmother's home
Joy was a career teacher, and was contemplating retirement when she unexpectedly inherited the family home from her grandmother. Joy had assumed her grandmother would leave the property to her parents who were still alive. The grandmother's home was on a large block, and the house needed updating, although it was fit for rent. The market value was only $400,000 - basically land value. As Joy was only living in rental premises, Joy saw this was an amazing opportunity to build her dream home. She thought of knocking down the old house and building a new one, but she needed capital to do that and she only had $50,000 savings. She thought if she retired and drew down a lump sum of $200,000 in cash from her pension fund that would mean she would have sufficient capital to build but leave her with a small pension to live on. Then she realized if she kept the large 4 bedroom old house she could get $20,000 in rent for the year which would supplement her living needs on top of her pension. Accordingly, Joy built a new residence at the back of the grand parents house which cost her $200,000.

Two years later, Joy was living in her dream home, she had no debt, she had her small pension and rental income from the old home. But she found it stressful to deal with the tenants who were rowdy Uni students and found them unreliable in terms of payment. After one very loud party, Joy said to herself ‘Enough is enough - I am going to sell granny's home to someone who will buy it to live in. I will get a neighbour who will care for the property and be respectful'. Joy subdivided the land for $20,000 and erected fencing for $5,000 so that she could sell the old house. However, Joy misunderstood that buyers for her inner city suburb expected a much better product for the price Joy was asking, and were not interested in renovating the old home. After a failed auction and market campaign, Joy spoke to her real estate agent who said she would have no trouble selling her dream house for her. Joy thought about it and then realized she could sell her new home she had been living in for the last 18 months and use those proceeds to knock down the old house and build a new home. This was indeed a windfall, as she always preferred the street front position that was not shaded by the giant tree from the neighbour's property. The real estate agent sold the house for $550,000 and Joy was staggered with the sale proceeds of the new home. Joy celebrated and immediately bought a new car. She now had the money to rent a unit nearby, knocked down the old home and build an even better dream home.

Scenario 2 - Jaimie's sale of her grandmother's home
Jaimie was a career teacher and was contemplating retirement and had just returned from travel overseas when she inherited her grandmother's home in July. Jaimie had already been told a number of years before that her grandmother had intended for Jamie to inherit the house. The grandmother's home was on a large block, and Jaimie had already thought about how she would make the best use of her inheritance, because she certainly had no need to live there. She had thought about knocking down the property and building 3 new properties. The market value was only $400,000 - basically land value. Jamie saw her banker and reminded him of their conversation from the past, and he said, with all of Jamie's equity, there is no problem regarding finance. But the banker said she would have to stall her retirement plans, as she would need some cash flow to pay for the loan interest as it fell due. Jamie had just spent most of her savings on her overseas trip, so she didn't mind deferring her retirement. Jamie contracted a builder (who was a close friend) and the builder organized the subdivision of the land into 3 titles with the Council, and the builder then built a house on each property in accord with the plans Jamie had kept in her cupboard at home. Within the same financial year of her inheritance, Jamie was at the auction, and was delighted the 3 new units sold for $550,000 each, because they had only cost Jamie $200,000 each and $25,000 for the subdivision costs.. She was surprised to hear her banker who attended the auction comment - ‘You've just made the Tax man very happy!'

Required
Each of the following two scenarios involve the sale of property as an isolated transaction.

Advise whether the sale of the property receipts would be ordinary income and give your reasons - common and statute law.

Q 3 Ordinary income
•  Miscellaneous compensation receipts

Scenario re Jade
Jade has been an employee for 20 years for her employer and reached a senior level. However, the past 5 years have not been an easy road for Jade who has bitten her lip about many matters, particularly the way she has been treated by her senior managers.

Eventually the stress became too much for Jade when she found out from a 24 hour blood pressure monitor that she had a blood pressure level on a normal day peaking a number of times at 210 /120 - and her doctor advised if she continued like this she risked a heart attack or a stroke. Something had to change.

Jade then wrote to her employer and claimed that over the 3 years 2011-2013 she was victimized, bullied, harassed and suffered unreasonable administration, which she submitted was a breach of contract by her employer.

She had the same claims in 2014 and 2015 but they also included maladministration and misfeasance - again a breach of contract by her employer.

Jade's claims were referred to the employer's legal department and lawyers for both parties were brought in and negotiations took place.

The final result saw an exit strategy package for Jade involving the following elements:

(1) Back Pay for 3 pay rises - $15,000
Jade proved that she was unjustly denied pay rises for the last 3 years. She would be compensated via back pay in her next pay.

(2) Miscellaneous Leave - $80,000
Her employer stipulated her duty was to stay at home but she needed to make herself available if required.

(3) Annual leave and Long Service Leave
Annual leave ($10,000) and long service leave ($15,000) entitlements are to be paid out with the redundancy..

(4) Compensation for harassment - $50,000
Jade's claim of breach of contract via bullying, victimizing, harassment, unreasonable administration, maladministration and misfeasance was conceded by her employer to be harassment, and settled upon $50,000 compensation for pain and suffering.

Required
Advise whether the miscellaneous compensation receipts in the scenario are ordinary income.

Attached are cases in power point presentation.
First is: Ordinary Income

Second is: Statutory Income

Attachment:- Topic-3---Ordinary-Income-.rar

Attachment:- Topic-4---Statutory-Income-.rar