Question

Isabella is 19 years old and a full-time student at an Institute studying the Bachelor of Fashion and Business. She is saving for an overseas holiday to Poland and works part-time at a major department store in Melbourne. Two months before her planned trip to Poland she finds that she still needs $5,000. Her father employs her for four weeks as an office assistant in Harrolds Melbourne, a busy fashion department store. He pays Isabella $5,000 for this work. The other office assistant receives $500 a week.

With reference to relevant cases and legislation, advise as to the assessability of the $5,000 in the hands of Isabella and the deductibility of the amount for her father.

Answer 1

Given facts:

Isabella is a full-time student and she is saving for an overseas trip

She fell short of $5,000 which she needs for the trip

Her father employed her in her office as an assistant for 4 weeks and paid the $5,000 she needed.

Other office assistant earns $500 per month.

Provisions of the Income Tax Assessment Act, 1997 applicable in the given case are as follows:

Division 8:

The Division 8 deals with deductions allowable.

Section 8-1 deals with general deductions

Section 8-1 (1) (b):  As per the provisions contained in this subsection, an amount can only be claimed as an expense and deducted only if such amount incurred, only to that extent, to carry on such business and assisted in accruing the assessable income.

Division 26:

The Division 26 deals with the amount an assesses can not deduct in full or partially.

Section 26-35 deals with the deduction for the amounts those paid to the related parties of the assessment during the tax year.

Section 26-35(1): As the provisions contained herein, an assesses can deduct such allowable deduction as per the act, only to the extent the Commissioner considers reasonable to deduct.

Section 26-35(4): As per the provisions contained in the subsection, the sub-section prevents assess to deduct such an unreasonable amount or to claim as an exempted income.

Analysis:

Both parties involved in the case are related parties since they are father and daughter.

The amount paid by Isabella's father to her as compensation for her work as an assistant in his office = $5,000

The actual amount earned by other assistants working in her father's office = $500 a week

=> For 4 weeks = 4* $500 = $2,000

The reasonable compensation, in this case, = $2,000

But, Isabella's father paid her $5,000 for the same work which exceeded the reasonable compensation by $3,000.

By applying the provisions of section 8-1 (1) (b), Section 26-35(1) and (4), Isabella's father can only deduct $2,000 of the $5,000 paid to her and balance $3,000 is not deductible for him as compensation to his employees or as any other business expenses.

For Isabella, only $2,000 of the compensation she had received is considered as part of her assessable income. The balance of $3,000 is part of his father's business assessable income.