Schubert, Mahler and Tull are resident Australian seamen employed on the fishing trawler MV St Cecilia. Whilst on a routine fishing operation the captain of St Cecilia heard a radio message that SS...

The Business School
BULAW 3731 INCOME TAXATION – Law
& Practice
Assignment
Semester 1 - 2013
Assignment
Part 1
In the give Case, Schubert, Mahler and Tull are resident Australian seamen employed as the
fishing trawler in MV St Cecilia. Whilst on a routine fishing operation the captain of St
Cecilia heard a radio message that SS Titan, an abandoned oil tanker about 20 nautical miles
to the south was drifting towards the Australian coast. The vessel was badly holed, leaking oil
and with present cu
ents and tidal situations it was drifting towards a coral reef a short
distance from a stretch of environmentally sensitive coastline. If the tanker wrecked on the
eef the environmental and economic consequences would be enormous.
The captain sailed to the reported position of the stricken tanker. In the rough sea, the crew
were unsuccessful in their attempt to attach a tow line. The captain then called for volunteers
prepared to risk their lives in boarding the vessel and securing a tow line manually. Schubert
and Mahler had previously worked on a salvage vessel and had some experience in
operations of this type and they volunteered immediately. They displayed considerable
avery in swimming through rough seas, boarded the tanker and fixed a line. The heroic feat
was recorded on video by Tull.
Once the line was secure, St Cecilia towed the tanker away from the coastline and it was
subsequently salvaged by the tug, Resu
ection.
Both Schubert and Mahler were awarded an Order of Australia medal by the Australian
Government and $100,000 each from Lloyds of London, the insurer of Titan, who had been
saved a billion dollar payout.
In addition, Mahler entered into a contract to write an article for a magazine. He was paid
$20,000 and an additional $10,000 for signing an agreement not to give interviews on
television or to journalists.
Schubert was offered $10,000 for his OA medal. He was in poor health at the time and
equired medical treatment so accepted the payment.
Tull sold the video to Channel 9 for $8,000 and it was shown exclusively on that station
throughout Australia. Later that year he was paid $50,000 to travel to the USA to provide
technical advice on a proposed telemovie of the event tentatively entitled ‘Aqualung’. He
plans to stay in the US indefinitely and pursue other filmmaking opportunities.
(a) Explain what is meant by ‘income by ordinary concepts’.
This concept of ‘Income by Ordinary concept’ developed because the key term ‘income’ is
not defined under Income Tax Act of Australia, 1997.
Answer:
Income is ordinarily conceived as arising from three pursuits:
(i) as remuneration received from personal services;
(ii) as the rewards received from ca
ying on a business ;
(iii) as the income derived from property, and ;
(iv) as a return on investments.
Various propositions advanced for better understanding of the concept are as under.
1. Any amount convertible in terms of money is an income [Payne v FCT (1996) 32 ATR
516
2. Any amount beneficially derived is an income.
3. Income is to be judged from the character it has in the hands of the recipient [Federal
Coke Co Pty Ltd v FCT (1977) 7 ATR 519]
4. An Income generally exhibits the characteristics like recu
ence, regularity and
periodicity. Any amount received regularly and periodically is an income.
5. Amounts received as substitutes for or compensation for lost income are themselves
income
6. It does not include receipts that are of a capital nature, voluntary income, gifts,
proceeds of gambling and windfall gain and mutual receipts.
However, it may be noted that above mentioned propositions are considered it should be kept
in mind that no amount must possess all the following characteristics and, in any given set of
factual circumstances, no single element need be decisive
Source: http:
www.lexisnexis.com.au/aus/academic/text_update
gilders/pdf/ch03.pdf
(b) Advise what tax consequences arise in respect of the payments to Mahler, Schubert
and Tull.
Answer:
Consequence 1:
Order of Australia medal by the Australian Government to Both Schubert and Mahler were
awarded is not taxable income by ordinary concepts of Income as it’s is a prize awarded
which is not to be considered as taxable income.
http:
www.lexisnexis.com.au/aus/academic/text_update
gilders/pdf/ch03.pdf
Based on the decision in the matter of Kelly (1985) 85 A.T.C. 4283, in which it was decided
that the prize awarded will not be assessable under section 6-5 or section 6-10 of the ITAA,
1997 mainly because of the following reasons:
a) Prize awarded is not an income in the ordinary sense, and
) The income is not generated through the operations of the provisionsof the tax law, i.e.
it is not a statutory income.
Prize awarded is generally regarded as a windfall gain and not an ordinary income, unless
otherwise, the same is received in relation to any income producing activity of the
taxpayer.
The prize awarded was not considered as an ordinary income because of the following
easons:
a) The prize is not the common incident of the taxpayer’s occupation
( Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR
367; (1966) 14 ATD 286 ( Scott's Case )
) The money was awarded...