Michael Rage - Nasa

QUESTION:

PART A

Michael Rage was a train driver. However, his real passion was photography. Michael owned an SLR digital camera and lenses worth $12,000. He spent a lot of his spare time looking for and taking exciting and unusual photographs. He particularly enjoyed taking photographs of people, and the night skies. He also owned a $5,000 telescope for the purpose of photographing the night sky.

Michael had set up a web page on which he placed some of his most spectacular photos. Michael was approached by NASA after having seen his web site. NASA asked Michael to join a team of other amateur photographers to photograph designated portions of the night sky. NASA agreed to contribute $3,000 per annum to the maintenance of his photographic equipment.

A regular science programme on TV did a special feature of Michael as a result of his invitation to be amongst a select few to help NASA. Also, Michael had established a strong following as a result of his web site. Because of these two factors request were often made of Michael by other photographers to teach them better photographic techniques generally and of astronomical bodies in particular. Michael was also often approached by people who wanted to take up photographer to teach them the basics of photography.

As a result of these requests Michael began running small classes for basic and advanced photography. Michael would run these classes once every month for beginners over 2 days, and once every month over 2 evenings, for 4 hours each evening, for those wishing to learn the technique of night sky photography. In fact Michael simply incorporated these classes into his usual photographic routine. Thus, on most Friday and Saturday evenings Michael would take photos of the evening sky. Now, every fourth Friday and Saturday he would also teach the art of photography. To help in his lessons Michael bought two new telescopes each worth $3,000, an overhead projector worth $3,500 and a computer worth $1,800 to help in the lessons he gave.

Michael charged the people who attended his classes $175. Each class was restricted to six people. He held ten classes a year for beginners and six classes a year for those wishing to learn how to photograph the night sky. In total Michael received $16,800 in fees.

The salary from train driving is clearly income. However, are the other amounts Michael received assessable income?

PART B

Bill & Ben Reticulation Pty Ltd had a entered into a contract worth $15,000 with the Port Cricket Club to replace the drainage system on the playing surface of the club's sporting ground. Shortly after entering into the contract, and before Bill and Ben had done any work under the contract, Port Cricket Club decided it would sell its current sports ground and buy better grounds and facilities. It therefore negotiated with Bill & Ben Reticulation Pty Ltd to be released from the contract. Bill & Ben Reticulation Pty Ltd. agreed to this if they were paid the sum of $6,000. Port Cricket Club agreed to this and duly paid the sum.

Will the $15,000 received by Bill and Ben Reticulation Pty Ltd be taxed and if so why?

ANSWERS

Part A

In the scenario, there are two receipts related to Michael's income besides the salary from train driving. The first one is $3,000 which is given by NASA to maintain his photographic equipment. The other one is $16,800 which he receives from his class. These two amounts have different natures, so they should be considered separately.

-$3,000 from NASA

To decide whether this part of received amount should be treated as assessable income, one important thing to do is whether should consider this receipt is ordinary income or not.

There is a large amount of case laws dealing with the issue of whether a receipt is ordinary income. From this case law it is possible to identify a number of factors that will determine if a receipt is income according to ordinary concepts. The most basic list that can be identified from these cases is

 Whether the amount has the characteristics of periodicity, recurrence or regularity;

 whether it is convertible into money, or money's worth

 Whether it is associated with business activities or services rendered, as distinct from the mere sale of property

In the question, obviously, the $3,000 is cash, and NASA pays him every year. But the receipt is not from business or person services. The reasons are listed below.

1. The amounts are not from business.

The ITAA 1997 defines a "business" includes "any profession, trade, employment, vocation or calling, but does not include occupation as an employee". In Tax Ruling 1997/11, it lists several indicators to define the activity whether it is carrying on a business or not:

- Whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators.

- The size, scale and permanency of the activity

- Whether the activity is planned, organized and carried on in a businesslike manner such that it is directed at making a profit.

In the question, Michael is keen on photography, but neither indication shows that he is doing photography to make profit. The receipt is from NASA after he set up a website. That's to say, before he started the photography or set up the website, he didn't know he could earn money from this. If he wants to make money form the photography, he should approach to NASA and sold his photos. But in fact, NASA approached him, and wanted him to join a team, after that, gave him some money to the maintenance of his photographic equipment. What is more, the photos are just shown on the website, rather than sold to the NASA or someone else. It should be noticed that the money is given to maintain the photographic equipment, which doesn't come from selling photos.

From the analysis above, the money is not from business. Michael's behavior is just a kind of hobby.

2. The receipt is not from personal service.

Although