Principles of International Taxation Law

Question: Discuss about the Principles of International Taxation Law. Answer: Introduction: Income, which is subjected to tax, is known as assessable income. A hobby is understood as the pastime or leisure activity conducted by an individual during their spare time based on recreational purpose or for pleasure. It is noteworthy to denote that the differences between a hobby and a business should be understood for tax (Long, Campbell and Kelshaw 2016). There are some key elements to be taken into the consideration such as; Has the activity being undertaken for commercial purpose, Is the original intention or objective is to make profit, Has the activity been regularly and on repeated basis undertaken, Has the activity been planned and organised in such a way that it constitute business From the above stated case study it is evident that Michael is a practicing surgeon which he considers to be stressful occupation. In order to keep himself stress free Michael undertook an interest in gardening upon his 1-hectare land. He underwent numerous courses in designing flower arranging and regularly sold flowers to his friends for flower arrangements for wedding, funerals and special occasions (Woellner et al. 2016). He generates $8000 from such hobby and alongside practices his profession of surgeon. The activities of Michael do not constitute a full time business since he engages himself in gardening activities in order to release his stress. Amount received from sale of flower does not constitute assessable income and can be classified as hobby. Michael determines his activity as a hobby and he is not subjected to any additional tax or any sort of reporting obligations (King 2016). Since Michael engages himself in such activities, which constitutes as hobby his clients, may request him to provide an ABN while making payment for the supply of flowers or any services made to business. It is noteworthy to denote that Michael does not have an ABN and his activity of selling flower is purely considered as hobby. Michael should use the Statement by a supplier form, as this will help him in avoiding the business, which he is supplying to withhold the amount from their payment to Michael. The practice adopted by Michael does not bear any resemblance to his profession of being surgeon. It is worth mentioning that Michael hobby does not constitute business and therefore he is not entitled to an ABN. Hence, Michael should provide the evidence that his activity constitute hobby or else the payer may withhold 49% of his payment (Edmonds, Holle and Hartanti 2015). Generally, during the computation of assessable income of any business, one is required to include an amount, which an individual receives, or earn during the ordinary course of running ones business (Jones and Rhoades 2013). This may consist of selling trading stock or rendering services. In usual circumstances, an individual is required to include any of the following amounts such as; Any amounts received from isolated transactions outside the ordinary course of business, if one is intended to make profit Amounts over the written down value at the time of selling any kind of depreciation items Compensation received such as workers compensation or any kind of payments received for trading stock losses, business interruptions or cancellation of agreement. Amount received as incentive payments such as cash payment for leasing of business premises Interest earned on any kind of business investments and interest towards overpayment or early payment of tax (Christie 2015). There are also incomes, which are not assessable and are excluded from assessable income. These includes; Amounts which is earned from hobby Gifts or amount which is bequeathed to an individual Prize received which does not forms the part of business Wins from betting or gabling, unless an individual is operating a betting or gambling business Any borrowed sum of money To conclude with, Michael earnings from his hobby of selling flowers does not constitute an assessable income and hence it should be excluded while computing taxable returns (Kenny 2013). Defamation can be defined as the slander consisting of use of words and statements, which creates a negative impact on the reputation of another person. In the current case study, it is found that Peter who is a well-known financial advisor sued Global news for defamation for issuing a statement against him being indulged in fraudulent investment scheme. The statement made against Peter was fallacious and resulted in personal injury to his reputation for which he was awarded $100,000 damages. Hence, the amount received on compensation damages from Global News is not assessable. Awards or settlement received from cases involving defamation is not taxable (Miller and Oats 2016). Thus, this represents that an individual is not required to disclose his compensation or damages received arising out of personal injury. Global News act of defamation constituted personal injury to Peter since this involve attack on his personal reputation. In general practice a person may be able to recover d amages arising out of defamation and slender. Thus, to collect such damages by the plaintiff, it should be proven in the court of law that the statement of slender is false which in this case Peter has rightly done. As stated under the FCT v Sydney Refractory Surgery Centre Pty Ltd [2008] FCAFC 190 the federal court of Australia turned down the appeal for treatment of tax for defamation damages awarded to a corporate taxpayer (Woellner et al. 2016). The company received a compensatory damages of $812,000 on account of defamatory damages. It was found that the commissioner wanted treat the amount in the form of income because the damages had been computed on lost profits and were to mend the hole in the profits of the corporation. It was held by the court that the treatment of tax concerning the payment should be determined concerning the cause of action in respect to compensation received. An organisations trade status was parallel to goodwill and was in the form of capital asset (Edmonds, Holle and Hartanti 2015). It was learnt that injury diminished the reputation of company along with the ability to attract customers to business. Irrespective of the nature, they were measured, any claims aris ing out of business defamation damages or injury hampering the reputation of business is considered as capital claim. Hence, according to the ordinary concepts such claims are not taxable in the form of income. The study also lays down that if an individual uses their settlement amount or damages award to earn profits after receiving it, then under such circumstances one is required to declare such income in their tax return. Thus, any sort of income made from claim amount is considered for taxation purpose (Kenny 2013). For instance, an individual on receiving the compensation payment after the conclusion of their personal injury claims uses that settlement amount to start up his own business than any such income earned would be taxable. Thus, the individual is required to declare such income in his taxation return. According to the common law, defamation and slender are considered to be the part of personal injury law as they causes damage to someones character. A person being the victim of defamation or slender may bring an action in the court of law against the guilty party (King 2016). Thus, under the current study of Peter it was found that the plaintiff suffered an injury and proved in the court of law that there was damage on his reputation or his character. The amount received for compensation damages by Peter will not constitute assessable income as no compensation and damages settlement payment or award is not considered for taxation purpose. Regardless of how such income is measured, a claim arising out of defamation damages based on injury to an individuals reputation is not assessable as income for Peter (Gullifer and Payne 2015). Post employment restraint clauses or restrictive covenants are largely used by the Australian employers so that they can protect their business interest. Such kind of trends is usually followed in employment, which are contractual in nature for professional, senior, or administrative employees. A distinctive restraint clause creates boundaries on the employee restricting the employee in any capacity as a competitor for a particular phase after leaving the employers business (Austlii.edu.au 2016). This is done so to solicit their ex-employer customers, staff and clients to not use their employers confidential trade secrets. Under the current case study it is found that Mable entered into the agreement with Excelsior for $70,000 to restrict her from setting up the business which otherwise creates competition against employer. Such kind of clauses operates in the form of Common law of doctrine consisting of restraint of trade. This represents that a restraint clause should be directed a t protecting specific interest of the employer in the form of trade secrets or business goodwill (Austlii.edu.au 2016). Thus, the court would not uphold the restraint clause restricting the competition, which unduly creates an interference with an employee,s right to sell his or her own labour. It is worth mentioning that if a restrictive covenant is related both with the existing stage of service and phase following the end of the service, the extent of the consideration received relates to the time of service is assessable under subsection 25 (1) (Ato.gov.au. 2016). As stated under the subsection 160 M (7) such section would fall either under old subsection or the new sub section 160 (m). This depends on whether the restrictive covenant was entered into before 26 June 1992 or after the period. Hence, it is assumed that the amount received by Mabel represents that there is an active asset during the phase of the entering into the covenant (Austlii.edu.au 2016). The agreement significantly lays down that the business secrets, trade relations or value of goodwill would not be shared by not setting up the business of or otherwise of similar in nature. Sub section 160 ZA (4) would be applicable in order to trim down any kind of capital gain to such an amount that the sum was c omputable in the form of ordinary income. The segment of such consideration for Mable is associated with the stage following the end of the employment will be considered for assessment under the new sub section of 160 M (6). Thus, it should be noted that neither old sub section 160 M (6) nor the old sub section 160 M (7) is applicable to that portion of the consideration entered into by Mable (Ato.gov.au. 2016). Payment received by Mabel in consideration of the restrictive covenant is considered as restrictions on her future income-earning ability and it is received in large amount, generally constituting of capital in nature and not income (Levi, Segal and Segal 2015). An amount received in the form of reimbursement for the cessation of termination or surrender of rights under the agreement or service or surrendering any pensionable rights is usually considered as capital and not ordinary income. Furthermore, it is noteworthy to denote that if an amount is paid on termination of service in consequences of the taxpayers employment it will be considered as taxable under the special rules which applicable to employment termination payments (Ato.gov.au. 2016). Mabel entered into a restrictive covenant with his employer Excelsior in the form of agreement that he will not do any kind of things, which in any way or otherwise interferes with the business of the employer for a certain period after leaving the old place of work. Such agreements entered by Mable are usually connected with the business for not taking away clients, customer or staff from Excelsior. Payments received by Mable on agreeing to enter into the restrictive covenants are considered as earnings and hence they are liable to be taxable (Ato.gov.au. 2016). This is because the extent of such consideration is associated with the stage following the end of the employment and hence it is assessable under the new subsection 160 M (6). Reference List: Ato.gov.au. (2016).Income you must declare. [online] Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/ [Accessed 31 Dec. 2016]. Austlii.edu.au. (2016).Sadiq, Kerrie --- "Judicial and Legislative Considerations in the Taxation of Compensation Receipts: An International Comparison" [2001] JlATax 4; (2001) 4(1) Journal of Australian Taxation 98. [online] Available at: https://www.austlii.edu.au/au/journals/JlATax/2001/4.html [Accessed 31 Dec. 2016]. Christie, M., 2015. Principles of Taxation Law 2015. Edmonds, M., Holle, C. and Hartanti, W., 2015. 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