Reference no: EM133062445

Question 1. Using the general principles discussed in this chapter, discuss whether the following are likely to be "ordinary" income:

(a) Salary received by an employee.
(b) Compensation received by an injured worker for loss of salary because he was unable to work for four weeks.
(c) A Christmas present received by a daughter from her mother.
(d) Proceeds from selling the copyright to a book. The recipient was an employee accountant who wrote a novel in her spare time over a number of years.
(e) Proceeds from selling the copyright to a book, where the recipient is in the business of writing books and selling his copyright.
(f) Profit realised on the sale of shares that have been held for a number of years, primarily for their capital growth.
(g) Unemployment benefits from the Government to an unemployed person.

Question 2. Look up some English dictionary definitions of "income". In what respects are these definitions of
income similar to what tax law regards as "ordinary income"? Why is there a similarity?

Question 3. Consider the following situations and discuss, giving reasons, whether any of the receipts are ordinary income.

The taxpayer has operated a business of purchasing vacant land that can be subdivided into housing lots and then sell either the vacant lots or the lots with a house build on it. A site office is normally built on one of the subdivided blocks and this is staffed by a sales person.

Sometimes the vacant blocks are sold directly after subdivision, but in other cases, the business arranges for the construction of a house on the subdivided block and sells the property with the completed house. On less frequent occasions, the sales are what are known as a house and land package. In these cases, the purchaser agrees on a design for the house and the business enters a contract to build the house on the block and the total sale price includes the block of land plus the construction cost of the house.

In the current year, the business made the following sales:
• vacant blocks of land for a total of $1,600,000;
• house and land packages for a total of $2,800,000;
• $250,000 for the land that the site office was located on. The site office was moved to a new subdivision;
• $1,300,000 worth of farm land which the taxpayer inherited from his parents. The taxpayer had leased this land to a farmer for the past 10 years. This land was not suitable for subdivision, so he sold it to the farmer who had been leasing it.

Question 4. During the current tax year Erin received the following amounts:
• Salary and wages income of $98,000.
• $4,200 interest from a bank term deposit of $50,000.
• $500 per week for 50 weeks of the year from a rental property she owns.
• Winnings of $10,000 on the poker machines.

• $500 from selling eggs that her chickens laid to friends.
• A holiday bonus of $1,000 from her employer.
• A watch worth $200 from a happy client.
What is Erin's ordinary income for the current tax year?

Question 5. Jane and Sally are employed school teachers who have a very wide general knowledge. Both decide to enter a television quiz program called "Lease of the Decade". Under the rules, contestants receive $100 for each appearance, but if questions are answered correctly, they receive substantial cash prizes and other prizes, such as household items and holiday packages. The holiday packages cannot be transferred or redeemed, but the organisers of the program allow them to be converted into alternative venues and accommodation.

Jane and Sally go on the show but Jane is eliminated in the first contest and receives her $100. Sally, however, makes 10 appearances. She wins cash prizes of $50,000, household appliances worth $20,000 and a trip to Europe with her family valued at $30,000. Discuss the assessability of these prizes.

Question 6. Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.

Discuss whether or not the three payments are income from personal services. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?

Question 7. George is manager of Newcastle Steel Ltd. His contract is for 10 years. In the third year George enters into a restrictive covenant which provides that during the remainder of his contract he must not reveal to another party the confidential information of his employer. It further provides that he must not work for a competitor during the remainder of the employment agreement. Consideration for entering into the agreement is $40,000. Is this capital or income in George's hands?