taxation law is a hard unit, but i think it is fun...

there were two parts of the assignment, but we did not the answers to these two
question...the following anwsers were made by me.
QUESTION:
PART A
Michael Rage was a train driver. However, his real passion was photography. Michael owned
an SLR digital camera and lenses worth $12,000. He spent a lot of his spare time looking for
and taking exciting and unusual photographs. He particularly enjoyed taking photographs of
people, and the night skies. He also owned a $5,000 telescope for the purpose of
photographing the night sky.
Michael had set up a web page on which he placed some of his most spectacular photos.
Michael was approached by NASA after having seen his web site. NASA asked Michael to join
a team of other amateur photographers to photograph designated portions of the night sky.
NASA agreed to contribute $3,000 per annum to the maintenance of his photographic
equipment.
A regular science programme on TV did a special feature of Michael as a result of his
invitation to be amongst a select few to help NASA. Also, Michael had established a strong
following as a result of his web site. Because of these two factors request were often made
of Michael by other photographers to teach them better photographic techniques generally
and of astronomical bodies in particular. Michael was also often approached by people who
wanted to take up photographer to teach them the basics of photography.
As a result of these requests Michael began running small classes for basic and advanced
photography. Michael would run these classes once every month for beginners over 2 days,
and once every month over 2 evenings, for 4 hours each evening, for those wishing to learn
the technique of night sky photography. In fact Michael simply incorporated these classes
into his usual photographic routine. Thus, on most Friday and Saturday evenings Michael
would take photos of the evening sky. Now, every fourth Friday and Saturday he would also
teach the art of photography. To help in his lessons Michael bought two new telescopes each
worth $3,000, an overhead projector worth $3,500 and a computer worth $1,800 to help in
the lessons he gave.
Michael charged the people who attended his classes $175. Each class was restricted to six
people. He held ten classes a year for beginners and six classes a year for those wishing to
learn how to photograph the night sky. In total Michael received $16,800 in fees.
The salary from train driving is clearly income. However, are the other amounts Michael
received assessable income?
PART B
Bill & Ben Reticulation Pty Ltd had a entered into a contract worth $15,000 with the Port
Cricket Club to replace the drainage system on the playing surface of the clubs sporting
ground. Shortly after entering into the contract, and before Bill and Ben had done any work
under the contract, Port Cricket Club decided it would sell its current sports ground and buy

better grounds and facilities. It therefore negotiated with Bill & Ben Reticulation Pty Ltd to
be released from the contract. Bill & Ben Reticulation Pty Ltd. agreed to this if they were
paid the sum of $6,000. Port Cricket Club agreed to this and duly paid the sum.
Will the $15,000 received by Bill and Ben Reticulation Pty Ltd be taxed and if so why?
ANSWERS
Part A

In the scenario, there are two receipts related to Michaels income besides the salary from
train driving. The first one is $3,000 which is given by NASA to maintain his photographic
equipment. The other one is $16,800 which he receives from his class. These two amounts
have different natures, so they should be considered separately.
-$3,000 from NASA
To decide whether this part of received amount should be treated as assessable income, one
important thing to do is whether should consider this receipt is ordinary income or not.
There is a large amount of case laws dealing with the issue of whether a receipt is ordinary
income. From this case law it is possible to identify a number of factors that will determine if
a receipt is income according to ordinary concepts. The most basic list that can be identified
from these cases is
Whether the amount has the characteristics of periodicity, recurrence or regularity;
whether it is convertible into money, or moneys worth
Whether it is associated with business activities or services rendered, as distinct from the
mere sale of property
In the question, obviously, the $3,000 is cash, and NASA pays him every year. But the
receipt is not from business or person services. The reasons are listed below.
1. The amounts are not from business.
The ITAA 1997 defines a business includes any profession, trade, employment, vocation
or calling, but does not include occupation as an employee. In Tax Ruling 1997/11, it lists
several indicators to define the activity whether it is carrying on a business or not:
- Whether the activity has a significant commercial purpose or character; this indicator
comprises many aspects of the other indicators.
- The size, scale and permanency of the activity
- Whether the activity is planned, organized and carried on in a businesslike manner such
that it is directed at making a profit.

In the question, Michael is keen on photography, but neither indication shows that he is
doing photography to make profit. The receipt is from NASA after he set up a website.
Thats to say, before he started the photography or set up the website, he didnt know he
could earn money from this. If he wants to make money form the photography, he should
approach to NASA and sold his photos. But in fact, NASA approached him, and wanted him
to join a team, after that, gave him some money to the maintenance of his photographic
equipment. What is more, the photos are just shown on the website, rather than sold to the
NASA or someone else. It should be noticed that the money is given to maintain the
photographic equipment, which doesnt come from selling photos.
From the analysis above, the money is not from business. Michaels behavior is just a kind
of hobby.
2. The receipt is not from personal service.
Although not every payment received by an employee will be income, the courts have
established the following factors in determining whether gains from person services or gift
are ordinary. (Kenny, 2008)
Degree of connection to employment or services rendered. The $3000 is nothing to do
with his job or service rendered. In the question, NASA asked Michael to join a team of
other amateur photographers to photograph designated portions of the night sky. But the
payment is to maintenance of his photographic equipment. The degree of connection to
employment or services rendered is almost zero.
Reasonable expectation payment would be made. As mentioned above, he didnt know
NASA would give him money after he set up the website.
Dependence upon payment to meet usual living expenses. $3000 in Australia is not a big
amount, his life cant rely on this.
Payment replaces income. Comparing his salary from train driver, these receipts cant
replace his income.
Motive of the payer or donor, i.e. commercial considerations or personal reasons for
making payment. NASA as a non-profit organisation, it gave Michael money cant be for
commercial considerations.
So the receipt is not from personal service.
In conclusion, the money is not from the business or personal service, and the activity is
better described as a hobby, and that should be non-assessable income.
-$16800- received from taking the classes
To decide this amount is assessable or not assessable, first thing to do is determine whether
this receipt is ordinary income. If it is ordinary income, it is clearly that it should be taxed.
Income tax laws failed to define income, so it leaves that task to the courts. And the courts

have developed other principles for ordinary income resulting in the following categorization
of income by principles:
Must be derived;
Must be convertible into money;
Periodical and regular gains usually have the character of income
Gains from the carrying on of a business have the character of income (Kenny,2008)
Next, the essay will consider these principles one by one:
Must be derived
Subsections 6-5(2) and (3) require that you include your ordinary income derived directly or
indirectly during the income year. According to the fact of the question, it satisfies this
principle clearly.
Must be convertible into money obviously
A cash payment of income will have a readily ascertainable income value. Also in this
question, the people who attend Michaels class directly pay him money, but not other type
of payment.
Periodical and regular gains usually have the character of income
In the question, Michael received the money regularly, because he took the classes
periodically. In the case- FCT v Dixon (1952) 86 CLR 540, a clerk enlisted for military
service during World War II. His wartime pay was less than his pay from his form his former
job and so his former employer paid him the amount of the difference. The periodic
payments received by him during the income year totaled $104. The Commissioner
assessed the payments as ordinary income. The full high court held that payments were
income. The total amount received was income as it was periodical, expected and a
substitute for wages. In the question, Michael received the money, which is very similar to
that Dixon received it from his former employer, it is periodical, expected.
Gains from the carrying on of a business have the character of income
Carrying on a business is not defined, so the courts have developed a number of relevant
characteristics for a business activity. In the case- Ferguson v FCT (1979) 9 ATR 873 the
taxpayer was a member of the Australian Navy who wished to establish a primary
production business after he retired. Before retirement, he leased five cows for a period of
four years. He intended to breed these cattle by artificial insemination and established a
herd of about 200 cows. In the years ended 30 June 1973 and 30 June 1974 expenses
totaling $2370 and $1258 respectively were incurred by Ferguson, who sought to deduct
these amounts against his salary. The natural increase over these years was two bulls and
three heifers in 1974, for bulls in 1975 and two heifers in the eight month to 28 February
1977. Two bulls were sold in the year ended 30 June 1976 and four in the eight month to 28

February 1977. An overall loss was made on these transactions. The Full Federal Court held
that taxpayer was carrying on a business through a manager and that expenditures were
deductible. The Court said that a purpose of profit-making may be important, repetition and
regularity were relevant and organisation along business lines was important. Other relevant
factors were the volume if operation and the amount of capital were employed by the
taxpayer. In the question, Michaels behavior is similar to Fergusons. The reason is as
follows:
1. Profit motive: In this question, the profit motive or profit-making intention is very clear.
He charged the people who attended his classes $175. In objective, if he doesnt have the
profit-making intention, he should not charge the money.
2. Volume of operations-size or scale activity. He held ten classes a year for beginners and
six classes a year for those wishing to learn how to photograph the night sky. Its a heavy
work for just one person to carry on that numbers of classes.
3. Organization of activities in business- like manner- keeping of records, use of a systemhe held the class once every month for beginners over 2 days, and one every month over 2
evening, for 4 hours each evening, for those wishing to learn the technique of night sky
photography. He already makes himself like a tutor, and makes his classes running regularly.
4. Time engaged in activities- once he starts his classes, first, he should spend some time to
prepare the class, i.e. how to teach the students. Second, it takes him 4 hours for each
class. That means during this 4 hours, he cant do anything but just teach the students.
Third, after class, he also needs to answer the questions from the student. In a word, it
will cost him a lot of his spare time to hold a class.
5. Amount of capital used. To help in his lessons, Michael bought two new telescopes each
worth $3000, and some other equipments, totally costs him $10300. Thats to say, besides
the time he put into the class, he invest a lot of money on the class.
6. Profit is made from activities. Obviously, to charge the people who attend the class, this
activity makes Michael can get profit. Although he must buy some equipment to start his
class, but the money which he gets from the class is more than the money which he spent
on the equipment. In total Michael received $16,800 in fees, but his expense is $11,300.
And his investment is fixed, however as he continues his class, his profit will grow up.
To sum up, the 16800 is the receipts from carrying on the business, which belongs to the
ordinary income. According to the ITAA 1997 6-5, the assessable income includes income
according to ordinary concepts. Hence, the amount should be treated as assessable income.
In conclusion, the $3000 is from Michaels hobby, and should not be ordinary income. But
the $16800 is the receipt from the business, and it should be assessable income.
Part B
In the question, obviously, $6,000 received by Bill and Ben Reticulation Pty Ltd is one kind
of payments for cancellation of business contracts. This is one kind of compensation or
damages received by taxpayers during the ordinary course of a business. This category

includes compensation or damages received by a business for some type of loss or injury to
that business. The loss may be in the form of a reduction in profits, temporary cessation or
reduction in business or damage to the asset structure of the business. (Coleman, 2008)
But whether the $6,000 should be taxed, it depends on which kind of compensation it is.
Generally, the various types of payments can be classified into three types. First one is
Ordinary Trading Contracts. Second type is Contracts relating to the structure of a
business. The last one is Contracts relating to business agencies. (Kenny, 2008)
In this question, there is nothing to do with the agency, so the third type of compensation
can be ignored firstly. So just consider the first two kinds, which is enough to answer this
question.
The difference between Ordinary trading contracts and Contracts relating to the structure
of a business is whether the compensation affects the structure of business. Next, it will
discuss whether the receipt affects the structure of the company.
A mounts received for the cancellation of ordinary trading contracts are generally income.
On the other hand, cancellation substantially affects the structure of a business and is not a
normal incident of the business, it is generally a capital. In another word, compensation for
a structure contract is generally a capital concept. If trading contract is cancelled, the
compensation payment is treated as assessable income. So, determining whether the act
relates to the structure of company is the key point to judge the nature of the
compensation.
Go back to the question. In the scenario, there is no evidence to indicate the act of
cancelling the contract affect the structure of the business. Firstly, the contract is only worth
$15,000. For a company, $15,000 is not a big amount. The assets and capital of a
reticulation company is far more than $15,000. Even if, there is no compensation, the
company can also afford the loss of cancellation. Secondly, before Bill and Ben had done any
work under the contract, Port Cricket Club decides to cancel the contract. In a word, so far,
Bill and Ben has spend $0 on the contract. So, it is impossible that the cancellation of the
contract affect the structure of company. Thirdly, even if Ben and Bill bought some new
equipments and assets for the new contract, but its a reticulation company. Its capital
assets are just like the tools or equipment to replace the drainage. After the contracts are
cancelled it is still had there. Its free to find the next customer. For example, the club will
sell the sporting ground, but the sporting ground is still there, the drainage system still
needs to be fixed. Ben and Bill have the tools and equipments to deal with it. They can
make a new contract with the next owner. They were not put out of business by the
cancellation of the club. Fourthly, in the question, it doesnt show the main source of income
for the Bill and Ben Company is dealing the business with the Club. So the California Oil
Products Ltd v FCT case cant be used in this situation. In that case, the cancellation of the
agreements resulted in the taxpayer abandoning its only business. The payments were
installments of a capital sum. But the situation of the Bill and Ben is totally different, they
still have the power and opportunity to do business with other companies. And even the
contract which made between the Bill & Ben and Club is not cancelled, the company cant
rely on this single contract. As it was said, the contract was only worth $15,000. In a word,
the income from the contract was not the only source of the company. Fifthly, the question
is very similar to Heavy Minerals Pty Ltd v FCT. In that case, the taxpayer was a rutile miner

who entered into forward sales contracts with USA and German customers. However, the
price of rutile collapsed. Accordingly, the contracts were cancelled and the taxpayer received
$220,000. In the question, the Bill and Ben have the same situation as the Heavy Minerals
Pty Ltd. The other party cancels the contract before they do and work under the contract.
Then they received the compensation. In Heavy Minerals Pty Ltd case the High Court held
that the amount which received by the taxpayer is income, not capital. It was not the
cancellation of contracts that put the taxpayer out of business, but the collapse of rutile
prices. The taxpayer still retained its capital assets, plant and the mine. Similarly, Bill and
Ben can continue the business, and still hold its capital assets, plant and the equipment. Its
capability to do the business is not changed evidently. Consequently, according to this case,
the compensation received by Bill and Ben also should be treated as income.
To sum up, based on the situation of Bill and Ben and case- Heavy mineral Pty Ltd, the
$6,000 received by Bill and Ben Reticulation Pty Ltd has nothing to do with the structure of
company, and its just a compensation for cancellation of an ordinary trading contract. So it
should be classified into income. As a general principle, a compensation receipt or damages
award takes on the character of the item it replaces: FCT v Dixon (1952) 86 CLR 540.
(Coleman, 2008) Consequently, where the indicia of ordinary income are present for the
amount being replaced, and compensation received in lieu of that amount will itself be
considered ordinary income and assessable under s 6-5 of ITAA- (1) your assessable income
includes income according to ordinary concepts which is called ordinary income. (Coleman,
2008)
In conclusion, Bill and Ben need to pay the tax for $6,000 which was received from the Club
because it is assessable income.

Reference
Coleman C, Hart G, Jogarajan S, Krever R, Mclaren J, Sadiq K, Principles of Taxation Law,
2008, Thomson Legal & Regulatory Limited
Deutsch L, Fundamental Tax Legislation, 2008, Professor R L Deutsch BEc, LLB (Hons) LLM
(Cantab), Thomson Legal & Regulatory Limited
Kenny P, Concise Tax Legislation 2008, 2008, Butterworths
Kenny P, Australian Tax 2008, 2008, Butterworths
California Oil Products Ltd v FCT (1934) 52 CLR 28
FCT v Dixon (1952) 86 CLR 540
Heavy Minerals Pty Ltd v FCT (1966) 115 CLR 512
Tax Ruling 97/11