Question

1. Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their
Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty
works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients
in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he
treated a local wine maker’s dog for snake bite when the vet was unavailable and was given a dozen
bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.

2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin
growing vegetables. They attend a continuing education course on organic farming and find in their
second year they have a surplus of produce. Betty started making marmalade and relish using her
mother’s recipes. Initially she gave them to neighbours but they became so popular that she opened a
stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the
excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and
pumpkin. They don’t keep records as they never intended to make a profit but estimate that in a good
month gross receipts could be $500 to $600.
3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges
and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter’ system in
the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a
charge for the keeping of administrative records. Thereafter people register their goods or services to be
bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home.
No money changes hands. Suzie would receive a credit to her account of 15 to 20 ‘barts’ that she can
exchange for goods or services of equal value from other registered participants in the scheme (fruit,
vegetables, child minding, lawn mowing etc.).
Required 1:
(a) Advise Allan of any income tax consequences of para 1, above.
(b) Citing relevant case law, explain how a hobby is to be distinguished from a business.
(c) Advise Allan and Betty of any income tax implications in paras 2 and 3 above.
(d) Advise the participants in the barter scheme of any income tax implications.

Answer 1

Reference is taken from google.

"

1) First of all we will summarize the points mentioned in the given case:

a) Allan and Betty were living together in Melbourne.

b) They decided to sell their home at Melbourne and purchased a large country home

c) Allan is a locum doctor and Betty is a part time accountant.

d) People generally used to given Allan their home made cakes along with fees for his treatment

e) On one occasion while treating a local wine vendor dog who was bitten by a snake, he got a bottle of wine amounting to 360$.

As per Income Tax Act of Australia, the Income of the Individual taxpayer is considered mainly to be derived from three sources:

1. Personal Earning (Salary & Wages)
2. Business Income, and
3. Capital Gain.

Personal Earning also include the ordinary Income.

The tax liability arises as per the situation as given in question is as follows:

1. As per Income tax act of Australia any gain arising from sale of house property is taxable under the head capital gain. Further, Australian Income tax Act also provide exemption in respect of any gain arising from the sale of house property which has been used by the as main residence by the seller or his family member and the house was not use for income earning purpose. Therefore, gain arising from sale of Melbourne house is not taxable.

2. The Salary earned by the Betty from working as Part time accountant is considered as Ordinary Income as per Section 6-5 of the income tax act of Australia.

3. The Fess received by Mr. Allan who is a locum doctor will be assessable as Business Income.

4. As per Sec 21 of Income Tax Act of Australia any non cash business benefit derived in the business which will be convertible to cash shall be treated as if they were converted to cash and will be chargeable to Income tax. In the given situation Allan get home made cakes and scones which are not be possible to convert to cash therefore, they were exempt. Further, the amount of cakes and scones is not likely to exceed $ 300.

But in case of Wine given by the Wine makers for his dog treatment is easily convertible to cash and its value also exceed $300, therefore this is taxable as assessable Income."

"

As Per Income Tax Act of Australia any profit earned from selling of product is only taxable id there is an intension to earn profit. Because the business require a huge Investment in some form and also requires the enough consumer to consume the product sold.

However, mere sale of Product as a hobby will not be taxable as Business Income. Hobby is pastime activity which is perused for recession and fun. In the given case Mr. Allan and Mrs. Betty enjoy gardening and also used to attend continuing education course on organic farming.

Suddenly Mrs. Betty started making marmalade and relish using her mom recipes which turn out to be popular and she started to sell it at stall at Newtown Growers market every second Sunday of the month and not regularly which is considered to be hobby and hence the Income will not be Assessable.

But now when they started selling the product regularly to three retailers will now considered as business activity and not just a hobby. Therefore, estimated gross receipt of $500- $6oo in a moth now considered to be receipt for selling of the product and will be taxable under Business Income. But where overall profit motive of the assesses seems to be absent and the activity does not look like that it will earn profit than it is unlikely to treat the activity as Business Income.

Since in the given case also there is no profit motive of Allan and Betty and further receipt of $500 - $ 600 is also considered to be very low. Therefore, the same may not be considered as Business Income as decided in case of Ferguson v. FC of T (1979) 37 FLR 310 at 325"