Legl300 Taxation Law For Relevant Assessment Answers

Advise the Commissioner and the taxpayer on whether the above amounts, are either assessable or deductible.

Answer 

Relevant Facts

The relevant facts for the given case are highlighted below.

• Jarrod Jones is a football player by profession.
• He receives an award from Hale Bank in 2017 which was in the form of $ 100,000 Mercedes.
• He has a contract with Sydney University and thus received $ 250,000 as the payment for the same.
• With regards to his profession, he spent a total of $ 100 on a weekly basis from January 2017 for enhancing his diet based on the recommendation of the head coach. A deduction has been claimed to the tune of $ 2,600.
• He tends to bet regularly on horse races and in the given year has been able to win $ 50,000.

Area of Law

The relevant area of law would be ordinary income in accordance to Section 6(5), ITAA 1997. Also, windfall gains is a relevant aspect whose assessibility would need to be established.

Relevant Legal Principles

Ordinary income as per Section 6(5) is any income which is derived through ordinary manner. However, the section does not outline the various types of income that could be included in this regard. Therefore, the understanding of ordinary income is derived from the arguments and commentary offered in tax various tax rulings and case laws. One of the key components of ordinary income is employment income which would include salary, allowances and other benefits (Barkoczy, 2015).

In accordance with ATO ID 2002/644, prizes would normally be considered as windfall gains and would not contribute to the assessable income of the recipient. However, for determination of whether the prize can contribute to ordinary income or not, the following parameters need to be considered (Deutsch et. al., 2015).

• Underlying cause or reason for which the recipient is awarded
• Whether the underlying prize or reward is common in the occupation or profession that the taxpayer indulges in
• Whether prize or reward is voluntary or not
• Whether the gift can be attributed to gratitude expressed in exchange of extension of a particular service to donor of the gift
• Motive with which the reward or gift has been given
• Whether the underlying taxpayer tends to rely on receiving these rewards or gifts for day to day expenses

Further, a relevant case law in this regard is the Kelly v. FC of T (1985) 80 FLR 155 case. Based on the case details, Kelly was a professional footballer and he received a cash award for being declared the most fair player. The question before the honourable court was whether this amount would be ordinary income and thus assessable. The court opined that in the profession that Kelly was engaged in, receiving such awards is a common practice. As a result, the award could be considered as incidental to employment of Kelly and hence it may be inferred that the prize received was on account of the employment. Hence, it was considered as ordinary income under the ambit of Section 6(5) (CCH, 2013).

Meanwhile, TR1999/17 tends to deal with criteria for income recognition in case of sportspersons. For any payment in case of sportsperson to be assessable, it may be either ordinary income (Cash based) or statutory income (i.e. Non-cash incentives). Further, any payment received for employment would be considered as assessable income. Besides, any payment derived on account of extension of certain services that may be extended would also constitute as assessable income (Deutsch et. al., 2015). Besides, any expenses that may be incurred by the sportspersons in order to enhance and maintain their performance in their sport such as special diet, workout would be regarded as deductible expenses (Barkoczy, 2015).

As per TR 2005/15, with regards to ascertaining assessibility of the income derived through indulging in speculative activities such as horse betting, it is imperative to distinguish between gambling and profit making.  In this regard, there are two key issues that have been outlined below (ATO, 2005).

• Purpose of engagement in the speculative activity is recreation or income making. If the given taxpayer, indulges in these activities with the intention of making money and not for recreation, then the derived income would be assessable. However, income derived from any recreational activity would not be tax assessable and hence considered tax exempt.
• The role of skill in derived income from speculative income against the role of chance. If the derivation of income is more chance driven, then it is likely that the underlying money would not be accessed as income. On the other hand, if income derivation is driven by underlying skill, then the money so derived would be treated as assessable income.

In Evans v. F.C. of T. 89 ATC 4540; (1989) 20 ATR 922, it was opined by the Federal Court that engagement in betting and gambling activities is rarely inspired by business interests as there is considerable fluctuations in the final outcome and winning is not a certainty. Thus, it would be fair to assume that any winnings from any such activity would not be assessable and resulting losses would not be deductible for tax purposes (Sadiq et. al., 2016).

Application of Facts

It is apparent based on the above discussion that the Mercedes amount to the tune of $ 100,000 would be considered as assessable income since these awards are a common aspect of the professional life of a football player. Besides, the award has been given by the bank on a voluntary basis that too for him being the most fair and the best player from the lot.

Besides, the contract amount of $ 250,000 would be considered as ordinary income as per Section 6(5) since it is employment income for a professional football player. They tend to earn money by offering their services to various football clubs who tend to hire them by way of contract. Also, the amount of incremental expenditure on special diet recommended for Jarrod for the current tax year amounts to $ 260 and would be considered deductible expense as it is related to generation of income.

Further, in relation to placing bets on horses, it would be apparent that Jarrod would not do so for money as he is a professional footballer with sizable salary. Based on the limited details made available, it would be fair to assume that indulgence in betting on horses is primarily for recreation purpose and not with the intent of making money. Besides, despite Jarrod continuous engagement in betting on horse races, there is no information of usage of any sophisticated tool or technique for predicting the winner. Thus, in accordance with the understanding developed through analysis of TR 2005/15 and also Evans v. F.C. of T. 89 ATC 4540, it would be fair to assume that Jarrod is not engaged in any business of betting and hence nay income so derived would not be considered as assessable income.

Conclusion

Based on the above discussion, it is apparent that the Mercedes worth $ 100,000 received by Jarrod would constitute as assessable income since it is linked to employment. Also, the contract amount would be ordinary income and hence would be assessable for the given tax year. Further, the amount of winnings to the tune of $ 50,000 obtained through betting on horse race would not be considered as assessable income as it is fair to assume based on the information given that betting is being done only for recreational purpose and not to earn any incremental income.

References

ATO 2005, TR 2005/15, Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200515/NAT/ATO/00001 [Assessed March 29, 2017]

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^th ed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2015, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016,  Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters