John seeks your advice about satisfying his income taxation obligations in respect of his printing and designing activities. In particular, advise John of the income tax consequences and implications of:
In providing your answers, you should ignore GST, you should provide full details and reasons as to why and when amounts are taxable, and you should refer to any relevant case law, legislation and taxation rulings to justify and support your conclusions.
Various facts and circumstances of the case have to be taken into consideration in the instant case in order to ascertain the tax liabilities and the accessibility of various receipts of money by John over the relevant accounting year. In order to render proper legal advice to John, all these factors have to be taken into consideration and accordingly, a brief discussion of relevant facts as ascertainable from the facts of the case has been undertaken hereunder so that correct advice can be given to John regarding his liability pertaining to receipt from painting and designing T shirts and regarding the liability from purchase and sale of patents.
As the accounting year in the Commonwealth of Australia is from July 1 to June 30th of the next year, for the purpose of tax accessibility, figures and receipts during the relevant time in 2009-2010 have to be taken into consideration. A perusal of the facts of the case discloses that John, who was an architect by profession, worked in a small firm in Melbourne in a part time job. The facts further reveal that John was introduced to the hobby of designing and printing T shirts in the month of August, 2009 by a friend and he started to design T shirts, print them and keep them for personal use or to gift them to someone.
As per the facts of the case, till the month of December, John had continued the entire process as mere hobby. Since January, as per the facts of the case, John started receiving personal orders, though there is no mention of any effort made by John in order to solicit orders till now. During January and February of 2010 John sold around 20 T shirts but the facts still do not disclose any profit motive on part of John. The receipts from sale of T shirts over the month of January and February is an amount of $ 500/. In the month of March, John decided to analyse and check if he could pursue designing and selling T shirts to increase his earnings in addition to the wages that he earned from his architectural employment. As his investigations were reflecting positive results, he invested $ 2,000 to purchase certain items such as large drying rack, paints, T shirts and a printing screen even though the immediate need was of drying rack and printing screen and John presumably purchased paints and T shirts because maybe he got a better deal. In the month of March, John sold 30 T shirts making his receipts for the month to be $ 750. On 31st March he decided to develop a website and invested $ 500 in this regard and this resulted in increased sale as he sold 80 T shirts in the month of April, 2010 thus his receipts being $ 2000. In the month of May John received order of designing 200 uniforms for the cafes owned by Ron and the aprons designed by John became so popular that he decided to patent the aprons with special belt. Moreover, John started filing all his designs, logos and slogans that he developed.
It is submitted here that wages that John earned, being an architect, would form a part of his ordinary income and would also come under the purview of statutory income as well. The important question which arises in the instant case is whether the receipts made by John with respect to printing and designing T shirts would become a part of his assessable income or not.
As long as John was printing and designing T shirts as a part of his hobby, the income accrued out of his pursuit of his hobby would not become a part of his assessable income. In the landmark ruling in case of Stone1 wherein it has been clearly held that moneys or benefits accrued or received in pursuit of pastime or hobby do not become a part of the assessable income2 of the assessee. In this regard, accordingly, it is submitted that the money received to the tune of $ 500 by sale of 20 T shirts by John during the month of January and February 2010 would not be treated as a part of his assessable income as he had received the money in the pursuit of his hobby of printing and designing T shirts.
It is further submitted that for an exercise to be discernible as business as opposed to be a hobby, there should be an expectation and realisation of recurrent and regular income,3 there should be systematic planning and there should be investment pertaining to the exercise so as to raise profit4 from the exercise.5 Accordingly, as John undertook research and invested money to procure machinery in the month of March and then later on he invested money to develop a website, it clearly shows that he intended to use his talents of designing and printing T shirts for raising income and thereafter the money earned by him by sale of T shirts and uniforms from the month of March 2010 would form a part of the assessable income of John. Another relevant factor to be considered is that in the once he decided to take printing and designing T shirts professionally with profit motive, he used to work around 35 hours a week and it amounts to fulltime work making the receipts thereof to be taxable. It is further submitted that the money invested with a purpose of gaining assessable income is allowed as deduction6 by virtue of section 8 of the Income Tax Assessment Act, 1997. In this regard, it is submitted that with respect to machinery, i.e. drying rack and printing screen, John would be eligible to get depreciation and not deduction.
Accordingly, John is advised that the receipts made by him from sale of T shirts and uniforms from the month of January would form a part of his assessable income by virtue of sections 6.5 and 8 of the Income Tax Assessment Act, 1997.
Regarding the profits made by John by virtue of purchase of patent pertaining to automatic folding machine on July 15th of 2010 and subsequent sale on October 18th 2010 for a profit of $ 6,000 would be treated in the tax calculation for the year 2010-2011 as the transaction does not fall under the purview of last accounting year. The transaction was undertaken by John with a motive to make quick profit and it was a part of speculation to make profit in short term and actually the transaction was completed in three month only thereby not making assessable as capital gains by virtue of section 108-5(1)(b) of Income Tax Assessment Act, 19977. However, the profits made by John from sale of the patent would become a part of his assessable income by virtue of section 6.5 of Income Tax Assessment Act, 19978 and John is being advised accordingly. Regarding the purchase of patent, it is submitted that purchase of intellectual property is purchase of asset and had been held for a period of more than one year, it would be considered under the head of capital gains upon its sale. However, as GST provisions have not to be applied in the instant case, the profits made by sale of the patents on automatic folding machine would be subject of trading profits which would become a part of assessable income of John for the next accounting year.
Regarding the expense incurred in getting the intellectual property protected in the form of patent on apron and his designs, logos and slogans, John would be able to claim depreciation under the provisions of division 40 of the Income Tax Assessment Act, 1997.