Schubert, Mahler and Tull are resident Australian seamen employed on the fishing trawler MV St Cecilia. Whilst on a routine fishing operation the captain of St Ceciliaheard a radio message thatSS Titan, an abandoned oil tankerabout 20 nautical miles to the south was drifting towards the Australian coast. The vessel was badly holed, leaking oil and with present currents and tidal situations it was drifting towards a coral reef a short distance from a stretch of environmentally sensitive coastline. If the tanker wrecked on the reef the environmental and economic consequences would be enormous.

The captain sailed to the reported position of the stricken tanker. In the rough sea, the crew were unsuccessful in their attempt to attach a tow line. The captain then called for volunteers prepared to risk their lives in boarding the vessel and securing a tow line manually. Schubert and Mahler had previously worked on a salvage vessel and had some experience in operations of this type and they volunteered immediately. They displayed considerable bravery in swimming through rough seas, boarded the tanker and fixed a line. The heroic feat was recorded on video by Tull.

Once the line was secure, St Ceciliatowed the tankeraway from the coastline and it was subsequently salvaged by the tug, Resurrection.

Both Schubert and Mahler were awarded an Order of Australia medal by the Australian Government and $100,000 each from Lloyds of London, the insurer of Titan,who had been saved a billion dollar payout.

In addition, Mahler entered into a contract to write an article for a magazine. He was paid $20,000 and an additional $10,000 for signing an agreement not to give interviews on television or to journalists.

Schubert was offered $10,000 for his OA medal. He was in poor health at the time and required medical treatment so accepted the payment.

Tull sold the video to Channel 9 for $8,000 and it was shown exclusively on that station throughout Australia. Later that year he was paid $50,000 to travel to the USA to provide technical advice on a proposed telemovie of the event tentatively entitled 'Aqualung'. He plans to stay in the US indefinitely and pursue other filmmaking opportunities.

Required

(a) Illustrate what is meant by 'income by ordinary concepts'.

(b) Advise what tax consequences arise in respect of the payments to Mahler, Tull and Schubert.

Part 2

Ruby Engineering Pty Ltd [Ruby] was incorporated in 1990 and produced engine components used in the Australian car industry. In 2008 the business and company assets were sold to Diamond Ltd. Under the terms of the agreement, Ruby remained liable for any claims arising before 2008. The company used the funds to invest in real estate and shares.

During the year ended 30 June 2013 Ruby incurred the subsequent expenses:

(a) Ruby has owned and rented a residential property since 2008. Rental income for the current year is $15,000. During the year the company replaced the old kitchen fittings, including cupboards that had deteriorated through water damage and wear and tear. The new cupboards were of the same type as the old ones and the kitchen layout was not altered substantially. The cost was $6,500.

(b) In another of the rental properties a visitor to the tenants slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against Ruby alleging her injuries were caused by the poor condition of the building. Ruby incurred legal expenses of $4,000 and the action has not been settled at 30 June.

(c) In 2006 Ruby sold a batch of parts that were subsequently found to be defective. The purchaser, an Australian car manufacturer lodged a claim for damages in the Federal Court. The claim was settled in November 2012 and Ruby paid $750,000 to the manufacturer.

(d) The directors of Ruby were concerned about the claim in (c) and the effect it had on the year's reported profit. They resolved to set aside a small amount of funds annually to meet any future claims. Accordingly, an amount of $100,000 was set aside in a provision in the accounts for the year ended 30 June.

(e) In August 2012 Ruby decided to investigate the possibility of re-entering the car parts manufacturing industry using a new type of alloy. An amount of $120,000 was paid to consultants investigating the proposal but the directors decided not to proceed at this time.

Required:

Advise the directors of Ruby Pty Ltd of the tax deductibility of the above amounts.

Report contains the following points

• Income by ordinary concepts
  
• Tax derivatives from the income receipts of Mahler, Schubert and Tull.
• Capital Gain in Australia