John Jones is employed in a part time capacity as lecturer in accounting at Central
University. His annual salary is $42,000 pa. Jones has arranged with his employer for
his salary to be paid on the 15th day of every month into his savings account with the
State Bank Ltd. Jones uses the savings account to meet household expenditure. Jones
also has a home mortgage loan with the State Bank.
Under a separate agreement with the bank Jones has arranged for a balance of $5,000
to be maintained in the savings account and any balance to be transferred to his
mortgage. He has also arranged for any interest on the savings account to be offset
against the mortgage interest. For the year ended 30 June 2017 $300 was offset.
Jones also runs a small practice providing accounting and taxation services to local
businesses. During 2016/17 he billed fees of $35,000 of which $30,000 has been
received. An amount of $3,000 was also received from outstanding accounts from the
2014/15 year. One of his clients is Travelco, a local motel. In March 2017 Travelco
provided Jones and his wife with free return air tickets to Bali. Equivalent fares would
cost $2,000.
Jones’s wife Joan is an IT expert. For several years John and Joan had been
developing software for an accounting package for use by small businesses. The
system, ‘J-Accounts’, has been licensed and is used by 175 local businesses at a cost
of $100 per year [$17,500]. A national software developer ‘Cashbooks’ has agreed to
pay the Joneses $25,000 in return for the exclusive rights to use the program for five
years after which time a new agreement for a further five years may be signed.
Jones has an interest in history, particularly commercial history. In 2005 he purchased
500 old share certificates from an acquaintance who practised in the area of insolvency
and liquidation. The total cost was $500. The certificates related to old companies that
had been liquidated during the 1930s depression. They were very elaborate and ornate
and Jones thought that framed they could be marketable as a decorative feature to
hang in the offices of accountants and solicitors. In February 2017 he happened to
mention the matter to Herman, a local decorator and picture framer. Herman suggested
that if properly framed, numbered, and if an inscription was added, they could sell for
$1000 each. The cost to Jones would be $100 per certificate. Herman agreed to sell the
items on a commission basis of 10%.
A local television station runs a quiz show called ‘Who Wants to be Rich?’ Contestants
are selected randomly from the local telephone directory. Jones was lucky enough to be
selected and he appeared on the show for five nights, answering every question and
becoming ‘Grand Champion’. He won $200,000 and a car valued at $30,000.
Required:
Advise John Jones of the tax consequences of the above receipts. You should discuss
what amounts would be included in his assessable income or, if any item is not
assessable income, why that is so. Your answer should include a discussion of the
following:
(including capital).
was to proceed with the plan?
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