Deck 3: Assessable Incomeincome Tax

Question 1

Which of the following may be considered ordinary income?
1 - Salaries
2 - A Government Pension
3 - Lottery winnings
4 - Rent from an investment property

A) 1 and only
B) 1, 2 and 3 only
C) 1, 2 and only
D) 1,2 3, and 4.

Answer 1

1, 2 and only

Question 2

The term "income according to ordinary concepts" is best defined as:

A) All cash income received from providing a personal service.
B) All non-cash rewards received from providing a personal service
C) All remuneration or rewards received for personal services
D) All benefits and rewards received from an employer for personal services

Answer 2

All remuneration or rewards received for personal services

Question 3

Which of the following transactions will the recipients be least likely have to include the receipts in their income?

A) A business taxpayer receives a cash payment for services rendered
B) A business taxpayer receives a free holiday in Western Australia valued at $1,500 in the course of carrying out their normal business activities
C) A total of $100 worth of non cash business benefits received by a person carrying on a business where the benefits were derived in the normal course of business.
D) A cash prize won by the local coffee shop for having the best window display in a competition conducted by the supplier of his coffee beans

Answer 3

A business taxpayer receives a free holiday in Western Australia valued at $1,500 in the course of carrying out their normal business activities

Question 4

Which is the most likely to be carrying on a business under ITAA97 s995-1?

A) A self- employed builder
B) A barrister
C) A receptionist
D) A serious small scale rabbit breeder

Question 5

Which of the following constitute the assessable income of the taxpayer?

A) Ordinary income and exempt income
B) Income according to accounting concepts and statutory income
C) Ordinary income and income according to accounting concepts
D) Ordinary income and statutory income

Question 6

Which is a suitable definition of ordinary income?

A) Income according to accounting concepts
B) Income according to ordinary concepts, reflecting common usage and common, everyday meaning
C) Income according to specific legislative provisions contained in either of the Income Tax Assessment Acts
D) Capital receipts

Question 7

Which of the following is likely to be considered ordinary income?

A) Mutual receipts
B) Un-dissected lump sum payments for capital
C) Compensation for the loss or damage to an asset
D) Compensation for the loss of wages

Question 8

Which of the following is most likely to be a form of statutory income?

A) Wages and salaries
B) Rent received
C) Net capital gains
D) Age pension payments

Question 9

Which of the following statements is not true in regard to the distinction between income and capital receipts?

A) The distinction is no longer relevant as capital gains are now taxed just the same as income receipts
B) Capital receipts are not included in ordinary income and so the distinction is still relevant
C) Capital receipts are subject to different taxing rules than income receipts and so the distinction is still relevant
D) The tree and the fruit analogy is still useful in distinguishing between income and capital receipts

Question 10

Which of the following is not relevant to the application of the results test in section 87-18?

A) Whether the payment is for the completion of a task or to achieve a result
B) Whether the customer is happy with the end product of the work
C) Whether the person who completes the work has supplied their own tools and equipment
D) Whether the person who completes the work is liable/responsible for fixing any defects in the work

Question 11

Would profit made by a company on the sale of land, that was formed for the purpose of buying and selling land, be assessable?

A) Yes as the sale of the land on these facts would not be a mere realisation
B) Yes as all profits and gains are assessable to business
C) No as the sale involves a capital asset and so the profit could not be ordinary income
D) No as land sales are only assessable under the capital gains tax rules

Question 12

How is a lump sum payment for the loss of opportunity to earn income likely to be considered?

A) Income as the payment is likely to be based on the wages lost
B) Income as all receipts connected with employment are likely to be of an income nature
C) Capital as lump sum payments are always capital in nature
D) Capital and so not assessable as it would be seen as the price for being prevented from continuing in employment

Question 13

Brodie is a plumber and he works only for MC Plumbers. Brodie works at an hourly rate and does not have his own equipment or tools and instead uses those supplied by MC Plumbers. Brodie is also not personally liable should there be any problems with the work he has completed. Brodie does not himself employ anyone and he uses one room in his home for his tax records. Is Brodie likely to satisfy the personal services income rules?

A) No as he fails all four personal services income tests
B) No, since he derives all his income from just one payer and that means he cannot consider any of the other tests
C) Yes as this is common practice in some industries
D) Yes as his payer does not pay any superannuation contributions for Brodie

Question 14

The taxpayer was the wife of a famous, now deceased, celebrity. She entered into an agreement with a TV station to sell her story. She was paid a lump sum after being interviewed and handing over a copy of the manuscript of her story. Is this lump sum payment likely to be an income or capital receipt?

A) A capital receipt as it was paid by way of a lump sum
B) A capital receipt as the payment was a one-off payment and it is not something the wife has ever done before
C) An income receipt as it was paid in cash
D) An income receipt as the payment can be regarded as payment for her services in the form of agreeing to be interviewed and to disclose the story of her life with her famous, now deceased, celebrity husband

Question 15

Which of the following is not a type of statutory income?

A) Return to work payments
B) Royalties of a capital nature
C) Profits from profit making schemes
D) Receipts from illegal or immoral activities carried out in the form of a business

Question 16

Bobbi is an employee for a successful accounting firm and as part of her duties she is regularly required to travel interstate. Whilst her employer pays for this travel, Bobbi is able to use her own personal frequent flyer card and have the points accrued for each work trip added to her card. When Bobbi eventually converts these points into free flights (which cannot be exchanged for cash) would the value of these flights be treated as assessable income to Bobbi?

A) No, since Bobbi only accrued the free flights due to her work duties
B) No, since the flight benefits cannot be converted into cash as she is an employee they value of the flights is not assessable
C) Yes, the value of the free flights can be determined and as such that value needs to be included in Bobbi's personal tax return as employment benefits
D) Yes, as that is what happened in the Payne v FCT66 FCR 299 case

Question 17

Fergus leased seven goats and entered into an agreement with a management company to agist, breed from, and otherwise care for and manage the goats. The taxpayer intended, on his retirement, to buy a farm and raise goats for meat and milk purposes, so the seven goats were leased with the aim of building his herd. The taxpayer took a keen interest in the development of the herd, received monthly reports from the management company as to their progress and maintained a card index system for his leased goats and their offspring. Is Fergus carrying on a business?

A) Yes, although the size and scale of his activities is small, the activities are being conducted on a commercial basis
B) Yes, but only when he actually starts selling the goats or their milk
C) No, as the size and scale of these activities is so small that is in the nature of a hobby and not a business
D) No, since there has not been any income derived as yet

Question 18

David Emporium operates a chain of successful retail stores. In order to obtain some finance for its operations, the company entered into a loan agreement with a subsidiary company in which it loaned the subsidiary a substantial sum in return for a right to large interest payments. Three days later (as was always the plan) it assigned the right to these interest payments to a finance company in return for a lump sum payment. Is the profit made from the assignment of these interest payments likely to be ordinary income?

A) No, as the assignment of the interest is not part of the ordinary or usual course of business
B) No, as the assignment of the interest was paid by way of a lump sum
C) Yes, as the company had a profit making intention in this arrangement and even though the transaction is extraordinary it can be viewed as ordinary income
D) Yes, because all business receipts are likely to be assessable as ordinary income

Question 19

Raymond is a hotelier who also races his own horses and horses under lease and who devotes a substantial amount of his time to the activity of horse racing. He bets frequently and systematically using valuable racing information which he acquires from trainers and others and he also uses agents to place bets for him. Is Raymond likely to be assessable on any proceeds from his betting on horse races?

A) Yes, as any cash winnings from gambling are always assessable
B) Yes, as his betting activities are systematic, organised and business like
C) No, as proceeds from gambling are not assessable due to the risk involved
D) No, if Raymond keeps no records of his winnings

Question 20

What is the taxpayer's ordinary income based on the following:
Salary received of $75,000; rent received of $15,000; net capital gain of $5,000; return to work payments of $3,000 and compensation (for loss of wages) received of $9,000.

Question 21

Bohdan has had an interest in coins all his life and he is very passionate about it. Recently he has started buying and selling coins on a regular basis on the internet. He is keeping records but he estimates that to date he has made a small profit of $2,500 from selling 8 different coins over the last 6 months. His total purchases were $15,000 and his sales were $17,500. At the of the tax year he has stock with a cost value of $10,000 still on hand. He wants your advice as to whether he is carrying on business as a coin dealer/trader?

Question 22

Roger is an electrician who provides his services to two different clients- Ace Electrical (70%) and Sparkies are us (30%). For both payers he is paid an hourly rate but he does supply his own tools and equipment and he has his own liability insurance. Is Roger likely to pass the personal services income rules?

Question 23

Dennis was recently injured at work and he has been unable work since. His employer has agreed to pay Dennis weekly compensation to cover his lost wages and also a separate lump sum for the permanent disability he has suffered. Roger will be able to work again in a few months after he recovers. Would any amount of the compensation paid to Roger be assessable to him as ordinary income?

Question 24

Eastfield Ltd operates various supermarkets in NSW. A few years ago Eastfield purchased some land hoping to use that land for one of its new supermarket stores. However, plans recently changed and the land in question was instead sold at a profit of $300,000. Is this $300,000 profit from selling land by Eastfield Ltd likely to be assessable as ordinary income?