Question 1 (12 marks in total) John Andrews, an Australian resident for tax purposes, is a success- ful professional rugby league player. For the last five seasons he has captained the Hunter Knights National Rugby League (NRL) team and represented his state and country. He has recently had a fallout with the club's management, which saw Andrews take legal action to terminate his contract. The legal action was unsuccessful. However, a new club entering the NRL (the Swansea Swans) have secured his release from the Hunter Knights by paying the club a lump sum of $100,000 to terminate Andrew's contract. Andrews has subsequently signed a new two-year contract for his services with the Swansea Swans. Details of payments to be re- ceived by Andrews under the new contract are as follows: $4,000 per game. - $50,000 if the team reaches the fi- Match Payments Bonus Payment nal. Lump Sum Payment - $50,000 (payable now) for agree- ing to limit injury risk by not playing repre- sentative football. Andrews incurred $35,000 in legal fees in relation to the unsuccess- ful legal action to terminate his contract with his old club and $12,000 in legal fees in relation to legal advice regarding the new contract with Swansea. Under the new contract Andrews retains the right to negotiate spon- sorship deals for product promotion for his personal benefit. He is currently negotiating a number of sponsorship deals with interna- tional and local businesses. Andrews expects to receive in excess of $100,000 from endorsing a number of company's products and through media appearances. Required a) Advise Andrews on how each of the three payments to be received under the new contract with Swansea Swans will be assessed for income tax purposes. Refer to rel- evant case law and sections of the Income Tax Assess- ment Acts. (3 marks) b) Advise the Hunter Knights, a private resident company, on whether the amount received from Swansea Swans for the release of Andrews will be assessable for income tax purposes. Refer to relevant case law and sections of the Income Tax Assessment Acts. (3 marks) c) Advise Andrews as to whether the two payments for legal fees will be tax deductible. Refer to relevant case law and sections of the Income Tax Assessment Acts. (2 marks) ...2/ Question 1 (Cont) d) Andrews has suggested he establish a partnership with his spouse to receive both the contract payments from the Swansea Swans and any amounts received from sponsors and media organizations. Andrews spouse will assist him in liaising with marketing agents regarding promotional ac- tivities. This is expected to take up to ten hours of her time per week. Advise Andrews of the likelihood of the Federal Commissioner of Taxation approving of his proposal. (4 marks) Question 1 (12 marks in total) John Andrews, an Australian resident for tax purposes, is a success- ful professional rugby league player. For the last five seasons he has captained the Hunter Knights National Rugby League (NRL) team and represented his state and country. He has recently had a fallout with the club's management, which saw Andrews take legal action to terminate his contract. The legal action was unsuccessful. However, a new club entering the NRL (the Swansea Swans) have secured his release from the Hunter Knights by paying the club a lump sum of $100,000 to terminate Andrew's contract. Andrews has subsequently signed a new two-year contract for his services with the Swansea Swans. Details of payments to be re- ceived by Andrews under the new contract are as follows: $4,000 per game. - $50,000 if the team reaches the fi- Match Payments Bonus Payment nal. Lump Sum Payment - $50,000 (payable now) for agree- ing to limit injury risk by not playing repre- sentative football. Andrews incurred $35,000 in legal fees in relation to the unsuccess- ful legal action to terminate his contract with his old club and $12,000 in legal fees in relation to legal advice regarding the new contract with Swansea. Under the new contract Andrews retains the right to negotiate spon- sorship deals for product promotion for his personal benefit. He is currently negotiating a number of sponsorship deals with interna- tional and local businesses. Andrews expects to receive in excess of $100,000 from endorsing a number of company's products and through media appearances. Required a) Advise Andrews on how each of the three payments to be received under the new contract with Swansea Swans will be assessed for income tax purposes. Refer to rel- evant case law and sections of the Income Tax Assess- ment Acts. (3 marks) b) Advise the Hunter Knights, a private resident company, on whether the amount received from Swansea Swans for the release of Andrews will be assessable for income tax purposes. Refer to relevant case law and sections of the Income Tax Assessment Acts. (3 marks) c) Advise Andrews as to whether the two payments for legal fees will be tax deductible. Refer to relevant case law and sections of the Income Tax Assessment Acts. (2 marks) ...2/ Question 1 (Cont) d) Andrews has suggested he establish a partnership with his spouse to receive both the contract payments from the Swansea Swans and any amounts received from sponsors and media organizations. Andrews spouse will assist him in liaising with marketing agents regarding promotional ac- tivities. This is expected to take up to ten hours of her time per week. Advise Andrews of the likelihood of the Federal Commissioner of Taxation approving of his proposal. (4 marks)
