Questions Taxation Law CLWM4100

Workshop 3 Ordinary income concepts

Before workshop questions

Question 1
Is ordinary income defined in either ITAA? Why, or why not?

Question 2

Discuss the following comment:

“All individuals and companies need to pay tax on every receipt of money received
throughout the income year. If you receive any amount of money you need to pay tax”

Question 3

Which of the following are assessable as ordinary income under s6-5 ITAA97, and why?

1. Wages and tips received from part-time employment

2. Employer’s present of two tickets to Monsterworld worth $300

3. Employer’s present of two non-transferable tickets to Monsterworld worth $300

4. Gift of $400 conditional on mowing neighbour’s lawn for three months

5. An unfranked dividend

6. Weekly compensation payments to a self-employed person out of a personal disability

insurance fund.

Question 4

What is the essence of the decision in the Myer Emporium Case?

Workshop questions
Question 1

Cleavon likes to collect coins. Over the past 15 years he has collected a large and varied
collection. Cleavon decides it is time to have his collection valued for insurance purposes
and is stunned to find it is valued at $1.5m primarily due to one coin worth $850 000 he
picked up for $5 at an auction 15 months ago according to his immaculate records.

He decides to sell this coin through an online auction to the highest bidder. Are the
proceeds of this activity ordinary income under s6-5?
Questions Taxation Law CLWM4100
Workshop 3 Ordinary income concepts

Assume Cleavon saw the coin and knew it was rare and valuable and bought it with the
intention of selling it within 6 months to a collector. Is the amount received assessable income
under s6-5?

What do you see as the critical differences between the two scenarios?

Question 2

A company provides extremely demanding combat based fitness classes. It charges for its
minimum course of ten lessons in advance. Due to the extreme nature of the course the
company knows there is high dropout rate. The company has a policy of refunding the
amounts for unused classes whenever a request is lodged in the necessary “Quitter”
envelope.

As at 30 June 2021, the company had received fees totalling $100,000 for the year, of which
fees received for lessons still to be provided amounted to $16,000.

In which year(s) should the fees be included in assessable income?

Question 3

You have a $400,000 mortgage at 10% with BILK Bank. In addition, you have entered into
an arrangement to lower the interest rate if you forgo the interest payments made on your
deposits. The bank, naturally, pays 5% on deposits, however under the arrangement the
interest you would have received is offset against your mortgage.

How much interest, if any, will be assessable to you and why?

After workshop questions

Question 1
At the moment your taxation business only has you as the tax advisor generating revenues.
However, business is expanding and at the end of the 2020/21 financial year you decided
you would need another tax advisor in 2020/21. At the end of 2020/21 your business has
accounts receivable of $25 000.

Discuss whether you will need to include the $25000 in either year with reference to the tax
accounting choices available.

Question 2

Is the source of the funds a key factor in determining whether an amount is ordinary income?
Is it necessary for a person to be a current employee to receive ordinary income from the
employer?

Question 3

Does cash flow align with taxable income?