Question

Question 2 – Income

Derek is a police officer in Auckland. His house is located on a large corner site on a main street, which provides good exposure to passing traffic. He was approached by a heat
pump company who offered him two heat pumps plus installation of the pumps in his house free of charge, in exchange for allowing the house to be used in a marketing campaign. The value of the heat pumps including installation was $4,500. The agreement required a sign to be erected on the outside fence of Derek’s house.

As part of the agreement, the house was also used in a television commercial which featured Derek enjoying a home warmed by heat pump. The heat pump company paid Derek $ 2,000 for the commercial.

During the same year he purchased a pearl necklace for $6,000 intending to give this to his girlfriend for her birthday but a month after the purchase his girlfriend broke up with him and he enrolled in a course about making jewellery. Using the new skills, he has learned, Derek broke up the necklace and set each pearl into a separate ring. He spent $200 on ring mounts and settings and sold all the rings for $11,000.

Required:

Discuss whether (a) the value of the heat pumps and installation, (b) the $2,000 payment for commercial and (c) $11,000 for sale of rings is assessable income to Derek. Support your discussions with references to the Income Tax Act 2007 and appropriate case law.

Answer 1

a. The value of the heat pumps and installation is assessable income because it is the benefit received by Derek for alloeing his house to be used in a marketing campaign.

b. $2000 payment for commercial is assessable income for Derek as it is paid to him for services rendered by him.

c. Only $11000-$6000-$200 = $4800 is assessable income for Derek in case of sale of rings because expenditure is tob e deducted from the gross proceeds received to arrive at the assessable income.
Though initially the pearl necklace was bought for personal use, later it was used for business purpose. So, $6000 spent on pearl necklace should be considered as expenditure.