Advice to MPC, Jack and Fred

Name of Student

Name of Institution

Introduction

There exist a number of tax forms in Australia. In this regard, companies and individuals may be legally obligated to pay taxes to all government levels, that is, local, state, and federal. Income taxes form the bulk of Australia taxation. The federal government collects this through the Australian Taxation Office. Others include capital gains tax and value added tax (Woellner, Barkoczy, Murphy, Evans & Pinto, 2014). The following scenarios explain the various modes of taxations and the underlying principles.

Response to Question (a)

It is a general recognition under Australian Taxation Law that tax exempt organizations have to be taxed on the income they obtain from business or trade activities that have no bearing to those regularly undertaken by the organization. In this case, the Rugby World Cup is an exempt organization. However, the promotion of private companies could attract taxes. Where the recognition given to sponsors qualifies as advertising, the payment made thereof could be taxed, in which case the payment will not be deemed public support or public charity.

Businesses have to use money to make more money. Where a business spends money to generate assessable income, the business is, under Australian law, entitled to a tax deduction. Of course, there exist certain kinds of deductions in which businesses are seriously interested. However, there are also certain legitimate, unforgettable deductions on which businesses can capitalize. As a caveat, businesses should show that the expense was incurred to run the business. Sponsorship expenses incurred to publicize the brand are a deduction. One can claim the expenses in that regard. The only caution is that the expenses should not be deemed “entertainment” as defined in the Act in which case they will be non-deductible.

Overall, payments accepted without the likelihood of the sponsor accruing benefits are deemed “taxable advertising.” On the contrary, the use of the sponsor’s name, product lines or logo in connection with the ongoing activities do not bring substantial return benefits hence cannot make the sponsorship payment a taxable advertising income.

In the present scenario, MPC sponsored the Rugby World Cup event to the tune of $1 million to get the entitlement of displaying its name at the football grounds during the Cup and to associate with the Cup and the Sponsorship in its advertising. These objectives do not bring any substantial return benefits to MPC and, therefore, cannot make the payment a taxable advertising income. MPC did not intend the sponsorship to fall under the realm of taxable advertising; hence, the payment made is deductible.

Response to Question (b)

There has been a wide range of cases revolving around service station proprietors who sign agreements with oil companies in which agreements the service proprietors agree to deal exclusively in the oil company products (trade ties). Each of these agreements is distinct from the rest and deserves separate treatment based on the merits. As a general rule, however, where a service station provider ceases to be a multi-brand trader and becomes an exclusive product retailer, with this conversion involving significant changes in the nature of business or profit-making structure, any lump sum received by the station service proprietor from the oil company in the nature of consideration for a trade tie lasting for a considerably long duration is deemed capital. The same rule is applicable in the event that the sums are used to improve the station facility or to provide capital assets to the station service provider.

Where there is no significant alteration of the nature of the business or its structure and that the tie is not for a considerably long duration to give it a capital character, the payments made to the proprietor of the service station are treated as revenue. Courts have decided on relevant factors to consider in determining whether a lump sum payment to station service providers is capital or revenue.

In the present scenario, the payments would be treated as capital because the tie agreement would last for 20 years, which is considerably long. Furthermore, the fact that Jack Smith was the only service station provider in the region meant that he had to change his business structure to suit MPC specifications, hence qualifying the payment for capital. This is not deductible.

Response to Question (c)

As already mentioned in (b) above, where a service station provider ceases to be a multi-brand trader and becomes an exclusive product retailer, with this conversion involving significant changes in the nature of business or profit-making structure, any lump sum received by the station service proprietor from the oil company in the nature of consideration for a trade tie lasting for a considerably long duration is deemed capital. The same rule is applicable in the event that the sums are used to improve the station facility or to provide capital assets to the station service provider. If the contrary is the case, the lump sum payment is treated as revenue, which is deductible.

Fred Brown’s scenario does not meet the capital threshold because of a number of reasons. Firstly, the tie agreement would be for a shorter period (3 years), which is not sufficient to make the lump sum payment capital. There is no standard duration stated to be long enough to make a payment become capital, but contrasting this scenario with the one in (b) above, it comes out clear that 3 years is quite short a duration. It also emerges that Fred Brown used the money in objecting jointly with other proprietors to applications made by other interested investors in the station service provision business within the Chatswood Shire Council. This use is contrary to the requirement that the payments should be applied to business structure improvement so as to be deemed capital. The payment is treated as revenue, which is deductible under the Income Tax Assessment Act. The legal expense is deductible as well. This is the expenses incurred in objecting to the applications.

References

Woellner RH, Barkoczy S, Murphy S, Evans C and Pinto D, 2014 Australian Taxation Law

(Sydney: CCH Australia Ltd, 24th edition, 2014).

BP Australia Ltd v FCT (1965) 14 ATD

Income Tax Assessment Act 1997, s32-45

Income Tax Assessment Act 1997, s46

Maney & Sons de Luxe Service Station Ltd v. C of IR (1976) NZLR 41

Snowden & Wilson Pty Ltd (1958) 99CLR 431

Stone v FCT 2003 ATC 4584