QUESTION 1 32 MARKS
This question consists of four separate parts. It is based on the facts relevant to two taxpayers: Payne Boyd and Winning Dreams Casino Ltd
These are the facts relevant to Question 1a and Question 1b:
Payne Boyd is a 24 year old Brisbane born professional rugby league player. He is single and an Australia resident individual for income tax purposes. For the past three years, he has been the star fullback of a premiership club based in Victoria. Towards the end of the 2018–2019 income year, Payne’s agent commences negotiations with another premiership club, the Brisbane Broncos, to secure Payne a new player contract with this club. Payne wants to move back to Queensland to be closer to his family, and because it would be more convenient from a sponsorship perspective as the headquarters of his main personal sponsor, Winning Dreams Casino Ltd, is situated in Queensland. It takes three months to negotiate the contract. But it is worth the time and effort, as his agent secures him a five-year contract on terms that are comparable in all respects to that of other Brisbane Broncos players who play representative rugby for Australia and Fiji.
Payne and the Brisbane Broncos sign the five-year contract on 1 July 2019. On that day, Payne receives a signing fee totalling $200,000 from the Brisbane Broncos. As stipulated in the contract, he commences his employment with the club on 1 August 2019, which is also the day when he pays his agent an amount totalling $50,000 for negotiating the contract on his behalf.
Payne thoroughly enjoys pre-season training at the club. But since February 2020, Payne and his team mates have gone through a tough time. Due to the restrictions placed on large gatherings at sports stadiums in response to the Covid-19 pandemic, the Brisbane Broncos club is unable to fill their home stadium with spectators. All scheduled public events where players meet their fans are suspended. No rugby league games are played over a four week period. The club suffers significant financial losses and are forced to negotiate with players to reduce their employment entitlements for the 2019–2020 income year. In Payne’s case, this means that he is no longer entitled to any bonuses from the club. In addition, starting on 1 March 2020, the club no longer pays his private health cover on his behalf. Payne decides not pay for private health cover himself. He suspends his membership of his private health fund from 1 March 2020.
Payne’s Brisbane Broncos PAYG payment summary for the period 1 August 2019 to 30 June 2020 reveal the following entries:
- Gross salary $300,000
- Reportable employer superannuation contributions $50,000
- Reportable fringe benefits $2,400
- PAYG withheld $200,000
Question 1 continued next page
These are the other facts relevant to Payne’s 2019–2020 income year:
- He wins three ‘man of the match’ prizes for his outstanding play in league games for the Brisbane Broncos. These consist of cash payments from the National Rugby League totalling $5,000 and a mobile phone provided by a rugby league sponsor valued at $1,250.
- Payne has fallen behind in lodging his annual income tax returns. In March 2020, he pays a large accounting firm $3,900 to complete and lodge his 2017–2018 income tax return on his behalf.
- On 1 June 2020, the ATO levies a general interest charge of $200 on his late payment of his 2017–2018 income taxes. Payne pays this general interest charge the next day.
- On 1 December 2019, he appoints a personal assistant to manage his diary and his public appearances. He pays this personal assistant $45,000 before terminating her contract on 31 May 2020 when it comes to light that she stole $5,800 in cash from Payne. The money she stole formed part of his income from various endorsements he has with a variety of business. His income from these endorsements total $105,800.
- On 1 October 2019, Payne decides to rent out the Melbourne unit he owns and lived in when he was based in Victoria, as the unit stood empty since he moved back to Brisbane. He purchased this top floor penthouse unit ‘off plan’ from a property developer for $1,080,000 on 1 January 2018.
- In order to find a suitable tenant, Payne advertises the property during October 2019 at a cost totalling $1,790.
- He travels to Melbourne by air, to interview prospective tenants. The cost of his return airfare totals $780.
- He finds a suitable tenant, who moves into the unit on 1 November 2019. The tenant pays him rent totalling $20,500 during the 2019–2020 income year.
- Before the tenant moves in, Payne has the unit professionally cleaned at a cost totalling $670, and he has the front door lock repaired at a cost totalling $890.
- He appoints a property management agent to manage the property on his behalf. During the income year, he pays the property management agent a fee totalling $1,000.
- Payne pays $6,600 for airline tickets to travel to the Winning Dreams Casino in Cairns on several occasions during May 2020, to attend events as part of the sponsorship deal that he has with Winning Dreams Casino Ltd. He pays $3,890 for the cost of hotel accommodation and meals while he is in Cairns. He receives $25,000 from the company in appearance fees for attending the events.
Question 1 continued next page
These are the facts relevant to Question 1c and Question 1d:
One of the Winning Dreams Casino Ltd events that Payne attends, takes place during so-called ‘stage 3 lockdowns’, during which the Queensland Government issues a public health directive that prohibits public gatherings of more than 50 people during the Covid-19 pandemic. A journalist who attends the event, writes a news report that alleges that there were more than 50 people gathered at the event and that social distancing rules were not observed. The report is published in several newspapers.
Winning Dreams Casino Ltd immediately commences legal proceedings against the journalist to defend the company’s reputation and the reputation of the board of directors as a whole, on the following basis:
- Winning Dreams Casino Ltd has extensive approved Covid-safe plans in place, going above and beyond what is required, to protect patrons’ health and safety during the pandemic, and to meet occupational health and safety regulations in its casino operations.
- The board of directors view patron health and safety as a key operational risk area. The board monitors that there are commensurate risk management processes in place to appropriately deal with this risk on an ongoing basis.
Winning Dreams Casino Ltd expects to incur legal fees of around $780,000 in taking the legal action. If successful, the company hopes to be awarded damages by the court totalling $3 million for loss of revenue as fewer patrons visited the casino for six weeks after the reports were published, and $1 million in compensation for harm to the company’s reputation and to the reputation of the board of directors. If unsuccessful, it is likely that the Queensland Government would use the evidence presented in the court proceedings to impose significant penalties on the company for breaching public health directives in its operations.
You are required to answer the following questions:
- Calculate Payne’s taxable income for the 2019–2020 income year. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts, relevant case law and relevant rulings from the
Australian Taxation Office. (15 marks)
- Calculate Payne’s tax payable or refundable at the end of the 2019–2020 income year. Show all your calculations, present all formulas and bases for your calculations in words, and provide reasons for your answer. (8 marks)
- Discuss the income tax treatment of the money that Winning Dreams Casino Ltd expects to receive as compensation if it is successful in its legal action. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts, relevant case law and relevant rulings from the Australian Taxation Office. (4 marks)
- Discuss the income tax treatment of the legal fees that Winning Dreams Casino Ltd expects to incur. Your answer should reference relevant sections and divisions of the Income Tax
Assessment Acts, relevant case law and relevant rulings from the Australian Taxation
Office. (5 marks)
Question 2 next page
QUESTION 2 18 MARKS
This is a discussion question, based on the following facts:
Herman Holmes was born in South Africa in 1968. He qualified as a commercial pilot in 1990. He holds a valid internationally recognised licence to operate long haul passenger aircraft and a licence to operate low flying aircraft capable of crop and pest spraying. Herman relocated to Brisbane in 2007, after being granted a skilled permanent resident migration visa to Australia. He settled in Brisbane, where he immediately secured employment with Qantas, flying on international routes to Europe and North America. His work took him outside of Australia for at least two weeks each month.
In March 2020, Herman and all the other Qantas pilots flying on international routes, are stood down. The Covid-19 pandemic has grounded the entire Qantas international fleet until June 2022. For the first three months after being stood down, Herman receives JobKeeper payments as income support. But he knows that these government funded payments will not continue indefinitely. As a result, Herman looks for contract employment that would provide him with income until Qantas resumes international flights. Labour laws in Australia permit him to find other contract or part-time employment while he is stood down, and it protects and reserves his job with Qantas until the airline resumes international flights.
In June 2020, Herman receives an email from the World Health Organisation (WHO). In it, the WHO offers Herman a 24-month contract to live and work in Papua New Guinea to conduct extensive aerial spraying to eradicate mosquitoes that cause malaria and dengue fever. These diseases are endemic to Papua New Guinea, leaving thousands ill and many hundreds of lives lost each year.
The contents of the email Herman receives from the WHO is presented on the next page.
Question 2 continued next page
|<Email to: Herman Holmes> World Health Organisation (WHO)
<Date: 15/06/2020> Australasia Division
Human Resources Department
The Australasia Division of the WHO is delighted to offer you a 24-month contract of employment to work in Papua New Guinea, on the following terms:
• A monthly gross salary of US $15,000, payable for the first 18 months
• A monthly gross salary of US $20,000, payable for the last 6 months of the contract period
• A contract completion bonus of US $50,000 if you remain in Papua New Guinea for the full contract period. The bonus will be paid in recognition of the challenging climatic and work conditions that you will experience in Papua New Guinea
• Free accommodation in a fully furnished one-bedroom apartment in the capital, Port Moresby, for the duration of the contract. The apartment is situated in a unit block on the grounds of the WHO headquarters. Around 200 WHO staff members live in the unit complex
• The free use of a WHO four wheel drive vehicle for the duration of the contract
• Three free meals per day for the duration of the contract, in the WHO employee dining facilities situated at the WHO headquarters
• Leave entitlements are restricted to one week at the end of every six month period of your employment. You will not be permitted to remain in Papua New Guinea during these leave periods, but must return to Australia for the duration of each leave period. To do so, you will travel to Sydney on free return flights on privately chartered WHO aircraft, and you will be provided with free hotel accommodation in Sydney. The WHO has been successful in obtaining an exemption certificate from the Australian Government for all our employees who live and work in Papua New Guinea and who are Australian citizens or, as in your case, Australian permanent residents. Therefore, you will not be required to enter mandatory Covid-19 hotel quarantine in Sydney, but you must remain in Sydney while on leave.
The income tax rate payable on employment entitlements earned in Papua New Guinea is a flat rate of 10%, which makes it an attractive country to work in and to live.
There is a large Australian ex-pat community in Port Moresby. They regularly organise social events using a Facebook group. They welcome new members. Therefore, you will find it easy to make new friends and have an active social live.
I look forward to hearing from you before 25 June 2020. If the terms are acceptable to you, the WHO will prepare the necessary employment contract for you to sign. If you accept the offer, your employment will commence on 1 July 2020.
Regional Manager – HR (WHO Australasia)
Question 2 continued next page
Herman also shares the following information with you:
- He has been divorced for the past five years. His new partner lives in Melbourne, where she is employed as a senior management consultant. They are in a committed long-distance relationship. As the Queensland Government has closed the interstate borders with Victoria indefinitely in response to the Covid-19 pandemic, he has not seen his partner since January 2020. It is unlikely that this situation will change in the foreseeable future. There is speculation in the media, that the interstate borders between Queensland and Victoria could remain closed for as long as two years.
- Herman owns and lives in a townhouse situated in Greenslopes, an inner Brisbane-city suburb. His only child recently moved back to Brisbane, after working as a solicitor at a firm in Sydney for three years. Herman intends selling his townhouse with all its household contents to his child if he takes up the offer of employment in Papua New Guinea. Herman will take his remaining personal belongings with him to Papua New Guinea, as these should fit into a few suitcases.
- Except for his superannuation investment – that is the result of his employer’s contributions under Australia’s superannuation guarantee scheme – Herman owns no other assets.
- There is no double taxation agreement between Australia and Papua New Guinea.
Herman comes to you for advice. He is seriously considering accepting the WHO’s offer of employment. But only if he can take advantage of the favourable income tax rate that Papua New Guinea applies to employment income. Herman does not want to pay income tax on these employment entitlements in Australia. He has done some research on the ATO’s website. He knows there are four tests that the ATO uses to determine if an individual is liable for income tax in Australia, but he doesn’t know how these would apply to his circumstances, which is why he comes to you for advice.
You are required to:
Provide Herman with the relevant advice to explain how the ATO’s tests would apply to his circumstances if he accepts the WHO’s offer of employment. Discuss whether, in your opinion, Herman will be successful in taking advantage of the favourable income tax rate that Papua New Guinea applies to employment income if he accepts the 24-month employment contract. Your answer must reference relevant sections of the Income Tax Assessment Acts, relevant case law, and/or rulings from the Australian Taxation Office.
Question 3 next page
QUESTION 3 20 MARKS
Michelle Mental is a registered psychologist. Over the past decade, she has established herself as the leading sports psychologist for top professional sportspeople in Melbourne.
However, her career is at a cross-roads, as her income has fallen by 80 per cent in the 2019–2020 income year. Nearly all of her clients have recently relocated to Queensland. Queensland is the only State in Australia that remains relatively unaffected by the Covid-19 pandemic. As a result, all of the premierships sporting teams in all of the major sporting codes are now based in Queensland, which is where all their games are played.
Michelle comes to you for advice regarding the income tax implications of two different options that she is considering. She has always operated her business as a sole trader, and will continue to do so regardless of the option she chooses to implement. Based on her business turnover, she operates a small business entity as defined, and will continue to meet this definition regardless of the option she chooses to implement, to take advantage of the tax concessions available under Div 328 ITAA97.
Option 1: (10 marks)
Michelle and her family relocate to Queensland in February 2020, and she opens a sports psychology practice in Red Hill, close to all of the major sporting grounds in Brisbane.
The advantage of this option, is that she can resume face-to-face therapy sessions with her existing clients and that she can expand her business by signing up new clients in Queensland. She will also be eligible to receive a business expansion grant from the Queensland Government totalling $10,000.
The disadvantage is that she would have to cancel the lease agreement on the property she uses in Melbourne to operate her business, and her husband would have to resign from his fulltime employment in Melbourne as a leading marketing consultant. However, based on her husband’s experience, she plans to employ him in her business to take responsibility for marketing and advertising as part of a plan to sign up new clients to expand her business.
Michelle’s lease agreement on the Melbourne property expires on 30 June 2020. Her rent, as stipulated in the lease agreement, totals $5,000 per month. If she cancels the lease agreement effective from 1 February 2020, she will still be liable for the full rent until her landlord finds a new tenant or until 30 June 2020, whichever comes first. Due to severe Covid-19 restrictions that are in place across Melbourne, her landlord stands little chance of finding a new tenant before 30 June 2020. On that basis, Michelle’s landlord agrees to a reduction in her rent, so that she only has to pay rent of $2,000 per month from 1 February 2020 to 30 June 2020, but on condition that she prepays the full amount due of $10,000 on 1 February 2020. If she chooses this option, Michelle will agree to these terms and make the prepayment on 1 February 2020. This means she will vacate the premises on 1 February 2020, giving her landlord vacant possession of the property on that date. Therefore, Michelle will no longer operate her business from these premises, starting on 1 February 2020.
Question 3 (option 1) continued next page
In order to sign up new clients, Michelle would have to undertake a well-planned marketing and advertising campaign, incurring the following expenses for the remainder of the 2019–2020 income year:
- Pay her husband a gross salary that totals $230,000 which is commensurate with the salary he earned in Melbourne, but $80,000 more than the gross salary paid to leading marketing consultants in Brisbane
- Pay for two months of outdoor advertising on electronic billboards at major sporting grounds in Brisbane at a cost totaling $60,000. The billboards are owned and operated by a nationwide company that has several clients at any one time that advertise on the billboards
- Purchase new uniforms for her office staff, comprising of designer denim jeans and white button shirts, at a cost totaling $3,500
- Order and pay for water bottles and gymnasium towels that she would give away free of charge to her existing clients. Her name and business website address will be printed on these, at a cost totaling $1,900
- Hosting a cocktail party for the coaches of all the professional sports teams based in Brisbane, to introduce them to her new Brisbane practice. Michelle plans on hosting this function at a restaurant venue that overlooks the Brisbane River, at a cost totaling $25,000.
Option 2: (10 marks)
She remains in Melbourne, but expands her business to host online group coaching and mentoring sessions. To do so, she will incur the following expenses in the 2019–2020 income year:
- The purchase cost of a 3-D digital video camera, purchased on 1 March 2020, at a cost totalling $98,000
- The purchase cost of a high definition video editing computer system on 1 April 2020, at a cost totalling $185,000
- A one-off, upfront licence fee totalling $5,000 to use the software that comes with the high definition video editing computer system and which is essential and required to operate this computer system
- She will schedule two-weekly appointments with a hairdresser to have her hair professionally managed so that she looks her best when she appears in the online sessions. These costs will total $1,000
- She will pay a makeup artist $1,200 to teach her how to apply her own makeup so that she looks her best when she appears in the online sessions.
Michelle’s income tax records reveal that the opening balance of her small business asset pool as at 1 July 2019 totals $186,000.
You are required to:
Discuss all of the relevant income tax implications for the 2019–2020 income year, for each of the two options that Michelle is considering, separately. Show all your calculations and provide reasons for your answers. Your answers should reference relevant sections and divisions of the Income Tax Assessment Acts, relevant case law and relevant rulings from the Australian Taxation Office.