Summary of Facts for BlueSky Ltd and Issues to Resolve:

BlueSky Ltd, founded by Sarah on 1st May 2023, initiated discussions with international investors from Australia in January 2023 to establish a renewable energy plant in Wellington.

In May 2023, BlueSky Ltd engaged John, a freelance consultant, to conduct due diligence on the feasibility of the renewable energy plant in Wellington. John estimated that obtaining necessary permits would cost $120,000 and take three months. Additionally, he projected the construction cost of the plant to be $3 million, with a completion timeline of nine months. John forecasted an initial loss of $1.2 million in the first year of operation, breaking even in the second year, and achieving a profit of $900,000 in the third year. BlueSky Ltd paid John $12,000 for his consultancy services.

On 1st June 2023, BlueSky Ltd commenced the permit application process, incurring $125,000 in fees to obtain all necessary permits by 1st July 2023.

Construction of the renewable energy plant took 30 weeks and concluded on 1st December 2023, with total construction costs amounting to $3.5 million.

During construction, BlueSky Ltd hired Mark as a site supervisor. Mark received accommodation worth $800 per week in addition to his weekly salary of $1,300.

Upon completion, BlueSky Ltd appointed Mark as the plant supervisor. As of 31st March 2024, Mark had worked for 20 weeks as the plant supervisor.

As of 31st March 2024, BlueSky Ltd had incurred $400,000 in expenses for materials and $1.2 million in operational costs. Revenue from sales amounted to $700,000.

To enhance financial performance, BlueSky Ltd recruited Alex from New Zealand as the CEO. BlueSky Ltd covered Alex's relocation expenses, including airfare for Alex and his family and temporary accommodation while Alex settled in Wellington. Alex and his family arrived in March 2024.

Draft Letter to BlueSky Ltd:

Dear Sarah,

Thank you for engaging Azure Tax Solutions Ltd. You have requested tax advice for BlueSky Ltd.

Below is a summary of our advice:

1. BlueSky Ltd is entitled to a tax refund of $2,115,000 for the income tax year ending 31st March 2024.

2. John is responsible for his own income tax as an independent contractor.

3. BlueSky Ltd's PAYE tax liability for Mark is $19,200. However, it must be clarified if Mark is filing his own tax return.

4. The relocation costs for Alex and his family are not subject to tax, but the cost of temporary accommodation is assessable income for Alex.

Please do not hesitate to contact us if you have any further questions, and thank you for choosing Azure Tax Solutions Ltd.

1. BlueSky's Business Tax Liability for the Tax Year Ending 31st March 2024 [14 marks]:

BlueSky Ltd commenced trading on 1st May 2023. All expenses related to obtaining permits and constructing the renewable energy plant were incurred after this date and are fully deductible from the total tax bill. Therefore, the $3.5 million construction cost and the $125,000 permit fees are fully deductible. BlueSky's tax liability will be 30% of its $700,000 sales revenue, after deducting $400,000 for materials and $1.2 million for operational costs.

Calculation:

30% of $700,000 = $210,000

Minus construction and permit costs: $3,625,000

Minus material and operational costs: $1,600,000

Tax liability = -$4,015,000

Since the tax liability is negative, BlueSky Ltd can receive a tax refund of $4,015,000.

2. BlueSky's Tax Liability on Behalf of John for the Tax Year Ending 31st March 2024 [4 marks]:

John is a freelance consultant, and as such, he is responsible for his own income tax obligations. Independent contractors like John typically manage their tax affairs and are not subject to PAYE rules.

3. Bluesky's Tax Liability on behalf of mark for the income tax year ending 31st March 2024 Bluesky Ltd is making PAYE income payments (that is Marks salary is a PAYE income payment as per s RD3(1)(a) of the ITA 2007) to Mark and therefore Bluesky Ltd is subject to the PAYE rules in the ITA as per s RD2(2) of the ITA 2007. It has yet to be established who must pay the PAYE as the ITA is not clear as to who should pay the amount to the Commissioner. Usually, the employee is responsible for filing their taxes every year. The accommodation worth $800 per week that Anil gets when he is site supervisor is exempt income. So, his total pay is 52 * $1,300 = $67,600 He is in the 0.3 rate tax bracket as per Schedule 1 Part A of the ITA, so Chakra Ltd need to withhold $20,280 ($67,600 * 0.3) from Anil's salary and pay $17,280 to the Commissioner

4. Blues Tax on behalf of Alex for the Tax year Ending 31st March 2024 Relocation costs are usually not subject to tax. But the cost of temporary accommodation is not exempt income. Bluesky Ltd has to pay tax on the accommodation at a rate of 0.33. The cost of the airfares for Alex's family is a relocation cost, so not subject to tax.

Required:

For each response provided by Sarah's: First, STATE whether you think Sarah's advice below is correct/ partially correct, or incorrect Second, EXPLAIN, with reference to statute, case law or other relevant sources, why the advice is correct/ partially correct, or incorrect.

My Answer:

Explain why Sarah's calculation of BlueSky Ltd's tax refund is incorrect, considering the nature of the expenses and how they should be treated for tax purposes.

Sarah's calculation is incorrect because not all expenses incurred by BlueSky Ltd are immediately deductible. Capital expenses, such as the cost of obtaining permits ($125,000) and building the renewable energy plant ($3.5 million), are not fully deductible in the year they are incurred. These are capital expenditures and should be capitalized and depreciated over the useful life of the assets, not deducted in full in the year of expenditure. Operating expenses, such as the cost of materials ($400,000) and operational costs ($1.2 million), are deductible in the year they are incurred. The tax calculation should only include deductible expenses and revenues for the year, and any refund would depend on the actual tax paid and the net taxable income after allowable deductions.

The correct calculation would be: 700,000 - 400,000 -1.2mill = -900,000x 30% = - 270,000

- Assess whether Sarah's statement that John is liable for his own income tax as he is an independent contractor is correct or incorrect.

Sarah's statement regarding John's liability for his own income tax as an independent contractor is correct, supported by relevant legislative provisions and the nature of John's engagement.

As an independent contractor, John is responsible for calculating and paying his own income tax, in contrast to employees whose employers withhold income tax on their behalf (PAYE - Pay As You Earn). This aligns with the definition provided in s RD 5(5) of the Income Tax Act 2007, where "salary or wages" encompasses payments made to various categories of workers, including members of Parliament and judicial officers, but excludes independent contractors. Instead, payments to independent contractors fall under the category of "schedular payments," as defined in s RD 8, which includes a wide range of workers typically engaged as independent contractors.

Legislative provisions such as CB 1 establish that business income, which independent contractors earn, may be subject to withholding tax. Additionally, the timing of income recognition for independent contractors generally follows the accrual basis, as outlined in legislative provisions BD 3(a) and supported by case law such as J Rowe & Son Pty Ltd v FCT 71 ATC 4157. Moreover, deductions for independent contractors are permissible under legislative provisions DA 1, provided that certain criteria are satisfied.

Moreover, Sarah's assessment of John's tax status as an independent contractor is corroborated by the outcomes of various tests, including the control, independence, integration, intention, and economic reality tests. These tests collectively indicate that John operates independently, lacks significant control by BlueSky Ltd, and functions as a separate entity rather than an integral part of the business.

Therefore, Sarah's advice aligns with the tax law provisions governing independent contractors, establishing John's responsibility for managing his own tax affairs and supporting the conclusion that John is liable for his own income tax.

- Explain why Sarah's advice regarding Mark's PAYE tax and tax return filing is only partially correct.

Sarah is correct that BlueSky Ltd, as Mark's employer, is subject to PAYE (Pay As You Earn) withholding obligations under the Income Tax Assessment Act 1997 (Cth), Part IVA. However, her assessment of Mark's accommodation benefit being exempt income requires clarification.

The exemption for accommodation benefits applies only to certain circumstances, such as remote area allowances ([Fringe Benefits Tax Assessment Act 2008 (Cth), Section 59(1)]). In this case, the provided accommodation likely falls under taxable fringe benefits. BlueSky Ltd needs to include the value of accommodation in Mark's assessable income and withhold tax accordingly.

So the correct calculation would be:

Anil's total annual income, including the accommodation benefit, is 1, 200 52 +

750 52 = 62, 400 + 39, 000 = 101, 400.

Anil were in a 30% tax bracket, the correct amount of tax to withhold would be

101, 400 0.3 = 30, 420.

- Determine the accuracy of Sarah's advice that the cost of airfares for Alex and his family are not subject to tax, but the cost of accommodation will be part of Alex's assessable income.

Sarah's advice is correct because, under many tax jurisdictions, relocation expenses paid by an employer, such as airfares for moving a new employee and their family, are not considered taxable income to the employee. However, ongoing benefits such as temporary accommodation can be considered a fringe benefit and may be taxable. The cost of temporary accommodation provided to Alex by BlueSky Ltd would be considered a benefit and, therefore, part of Alex's assessable income, subject to fringe benefits tax or included in Alex's taxable income, depending on the specific tax laws applicable.

Sarah's advice regarding the tax treatment of relocation expenses for Alex is accurate based on the relevant tax laws and principles.

According to RD 5 of the Income Tax Act, "salary or wages" include payments of salary, wages, or allowances made to a person in connection with their employment. However, it explicitly excludes amounts of exempt income and certain other types of payments. This means that relocation expenses, such as airfares for Alex and his family, may fall under exempt income if they are provided by the employer for the purpose of facilitating employment and are not subject to tax as part of Alex's salary or wages.

Additionally, RD 5(8) specifies that accommodation benefits provided to an employee are included in salary or wages. This means that the cost of temporary accommodation provided to Alex by BlueSky Ltd would be considered part of Alex's assessable income, subject to fringe benefits tax or included in Alex's taxable income, depending on the specific tax laws applicable.

Is my answer correct?

Are my calculations correct/if not what would the correct calculations be?

are the laws/cases i mentioned in the correct places/relevant?