Question

With reference to relevant legislation and case law, determine if the following scenarios give rise to income for tax purposes:

a)John is a pensioner and swapping his surplus free range eggs valued at $150 (for the year) with his neighbour Alex for surplus vegetables grown in his home garden

b) David is a builder and helping John at weekends to build his home, doing so on the basis that David can have John’s caravan towed trailer (which cost him $10,500 on 1 January 1997) when John move into his current home. Assume the value of the David’s work was $11,000 and the caravan had a market price of $12,000 when John handed it over on 1 January in the current income year.

Answer 1

Answer a

John is simply swapping his free range eggs for surplus vegetables with Alex valued $150. Since the value of eggs and vegetables for each is same, we cannot say any income is generated from tax point of view.

Answer b

John is sacrificing a caravan having a market price of $12,000 and the same had cost him $10,500. Hence for John the capitals gain of $1,500 ($12,000 - $10,500) should be reported for income tax purposes.

For David, however, he accepted a caravan instead of a fair value of his services to the tune of $11,000. Hence David should report service income of $11,000, the fair value of his services, from income tax point of view.