QUESTION
Nancy practises as an architect in a sole practice in Adelaide, Australia. She has also built up a portfolio of shares and cryptocurrency for investment purposes over the years. Nancy also owns an investment property at the Gold Coast.
During August 2023 Nancy made her repainted Gold Coast property (see Part B below) available to a photographer for use as a backdrop for photographs. The photographer used it 5 times and paid Nancy $2,500. You are not required to calculate GST in this assignment but note that Nancy’s architecture practice is registered for the Goods and Services Tax (GST).
During the financial year ended 30 June 2023 Nancy was paid $400,000 in fees for her architect services. She has one full-time employee who is her nephew Dom. He is her office assistant and also helps with bookkeeping and other duties as he has the appropriate TAFE certificate. Nancy pays Dom a salary of $95,000 per year. Nancy pays an annual rent on her office premises of $54,000.
Nancy decided she needed a printer/copier for her business. The old one was out of date. The new printer/copier was installed on 29 July 2022, and it cost Nancy $7,700 which she paid on 1 August 2022.
Nancy also has a two and half year’s old child who attends childcare when Nancy is working. The cost of the childcare is $5,500 per annum. On a holiday trip to New Zealand Nancy went bungee jumping and wrenched her shoulder. She was in pain and could not work efficiently drafting plans, so she went to a physiotherapist in February 2023. The cost of treatment was $650 in total, but Nancy said it was worth it because she was back to full work efficiency after only two treatments and was healed after two weeks.
Nancy often works from a room in her rented house. The home office in her house was originally one of three bedrooms in the house. The office contains a desk with a computer, a large drafting table and bright lights, two filing cabinets and a bookshelf. Nancy uses the home office solely for her architecture work. Indeed, there are times when Nancy also works on the dining room table because the home office is so crowded with client drawings. The office covers 20% of the floor area of the house. The rent per week for the whole house is $800 (i.e., $41,600 for the year).
Nancy and her friend have been entering the weekly trivia night at the local pub for around 5 - years. They have become very good at trivia competitions and often win so they enter a Channel 12 TV trivia competition. To Nancy’s surprise, she and her friend won second prize in the show which was broadcast live on 23 March 2023. The prize was $18,000 which they shared.
Advise Nancy of the income tax implications of the above transactions for the year ended 30 June 2023. Your advice must be supported by reference to relevant income tax legislation, tax cases and/or authorities. Assume all currency amounts are in Australian dollars.
SOLUTION
Introduction:
Nancy is an architect. Her architecture practice at Adelaide, Australia is registered for the goods and Services Tax. She has earned income from multiple sources and spent on multiple expenses throughout the year 2022-23.
A photographer paid Nancy for using her Gold Coast property as a backdrop for photographs. She received fees for her architect services and paid salary and rent for office premises. The bought a new printer/copier for her work. She paid for childcare of her kid. She paid medical expenses for her physiotherapist treatment. 20% of the floor area of her house is covered as home office and she lives in a rented house. She also won second prize with her friend in a trivia competition.
Nancy is in need of advice about the income tax implications of the above transactions for the year ended 30th June 2023.
Explanation:
Nancy received $2,500 from the photographer in the month of August 2023. So, this transaction remains out of tax implications for the year ended 30 June 2023.
Fees received for architecture services during the year is her ordinary income and hence taxable. Salary paid to Dom and rent of office premises are expenses incurred in connection with production of assessable income. Dom is a TAFE certified, full time employee who assists Nancy in her office work. Rent of premises is also a necessary expense. Since both the expenses satisfy the positive limbs, they are deductible under s 8-1 of ITAA 1997.
The new printer/copier purchased is a capital expense and not deductible under s 8-1. Acquisition of printer/copier is an expense on asset that will provide Nancy lasting benefit. So, the amount spent on it is not immediately deductible under s 8-1 but it will be deductible under depreciation and capital allowance in future years.
Nancy’s two and half year child attends child care so that Nancy can work smoothly. Childcare expenses do not satisfy the positive limbs and so are not deductible under s 8-1 of ITAA 1997. Childcare expenses are not incurred in the production of assessable income but they merely put the taxpayer in a position to produce assessable income[1]. Childcare expenses being domestic or private in nature violate the second negative limb too.
Losses or outgoings of domestic or private nature[2] are not deductible under s 8-1 due to the second negative limb. The expenses incurred on physiotherapy treatment simply put Nancy in a position to carry out her drafting plans and execute her work. The treatment cost was not incurred to carry on her architect services. Even otherwise, she was in pain and she had to undergo the therapy for herself. The injury suffered was not in connection to her income producing activity. Just because she was back to work efficiently after therapy, does not imply the treatment cost as not private[3]. So, the cost of treatment is not deductible expense.
[1] Lodge v FCT (1972) 3 ATR 254; Martin v FCT (1984) 15 ATR 808
[2] S 8-1(2)(b) of ITAA 1997
[3] FCT v Cooper (1991) 21 ATR 1616
It appears that Nancy’s home office is a genuine home office[4] considering the furnishing done in office room specifically for office purpose[5]. In case of genuine home office, both running and occupancy expenses are deductible on the basis of portion of home used for home office under s 8-1 of ITAA 1997. Since, Nancy’s office covers 20% of the floor area of her house, 20% of the rent of house is apportioned to home office and hence deductible.
Windfall gains that generally depend on luck are not ordinary income, whether received in the form of chance winnings or prizes. The prize won by a casual participant in a game show hosted on television is normally not an ordinary income if the element of chance is greater than requisite skill[6]. However, Nancy and her friend were skilled in trivia competitions as they often played and win for around 5 years at the local pub. They entered into a trivia competition which was broadcasted live. They won the prize on demonstrating their skill rather than by luck or chance. Hence, $18,000 is ordinary income.
Now, as per sub-section 4-10(3) of the ITAA97,
Income Tax Payable = (Taxable Income X Tax Rate) – Tax Offsets;
Where Taxable Income = Assessable Income – Deductions
And Assessable Income = Ordinary Income + Statutory Income
[4] Ruling TR 93/30
[5] Swinford v FCT (1984) 15 ATR 1154
[6] Case 37 (1996) 13 CTBR (NS) 235; Ruling IT 167
Calculation of Nancy’s Taxable Income for the 2022-23 tax year
|
Particulars |
Amount in $ |
Amount in $ |
|
Assessable Income: |
|
|
|
Fees for architect services |
400,000 |
|
|
Prize won in trivia competition[7] |
9,000 |
|
|
Total Assessable Income |
|
409,000 |
|
Less: Deductions |
|
|
|
Salary to Dom |
95,000 |
|
|
Rent of office premises |
54,000 |
|
|
Home-office expenses[8] |
8,320 |
157,320 |
|
Taxable Income |
|
251,680 |
Calculation of Nancy’s tax liability for the year ending 30 June 2023
|
Taxable Income |
Tax on this income |
Amount in $ |
|
0- $18,200 |
Nil |
0 |
|
$18,201 - $45,000 |
19 cents for each $1 over $18,200 |
$5,092 |
|
$45,001- $120,000 |
32.5 cents for each $1 over $45,000 |
$24,375 |
|
$120,001- $180,000 |
37 cents for each $1 over 120,000 |
$22,200 |
|
$180,000 and over |
45 cents for each $1 over 180,000 |
$32,256 |
|
Medicare Levy |
2% of $ 251,680 |
$5,034 |
|
Total Tax payable |
$ 88,957 |
|
[7] Since the prize money was shared by Nancy and her friend, we are considering only 50% share for Nancy in the prize amount. So, 50% of $18,000 = $9,000
[8] House rent paid for the year = $41,600. 20% of house rent apportioned to home office.
So, 20% of $41,600 = $ 8,320.
Conclusion:
Nancy has to consider the above implications of transactions done by her throughout the year and pay the tax liability accordingly.
References
www.ato.gov.au. 2023. PS LA 2001/6. [online] Available at: [Accessed 6 July 2023].
"Legal Database", Www.Ato.Gov.Au (Webpage, 2023)
Sadiq, K., Black, C., Jogarajan, S., Krever, R., Obst, W. and Ting, A., n.d. Principles of taxation law 2020. 13th ed. Sydney: Thomas Reuters (Professional) Australia Limited.
Taxbanter.com.au. 2022. Tax Data 2022. [online] Available at: [Accessed 6 July 2023].
AUSTRALIA, C.P.A. (2022) Australian taxation. S.l.: JOHN WILEY. Available at: https://wileybn.ipublishcentral.net/explore;searchText=australian%20taxation,%202nd%20edition;phraseMatch=0;themeName=Default-Theme.