Karl (aged 26 in 2007) is a licensed plumber. He is employed by Logistics Solutions Ltd (Logistics) on a salary of $120,000. Logistics is a major listed company that provides plumbing installation and electrical installation services to building companies that work mainly on large construction projects involving commercial and industrial buildings. Logistics has some 600 employees, and some 200 "contractors". Karl mainly used his own tools in his job. He stored a lot of his tools in the two secure steel cabinets (lockers) affixed to the back of his utility truck (motor vehicle). Karl's vehicle is a 2010 Toyota Hilux Cab-Chassis Petrol Manual with 2694cc engine capacity. It cost Karl $26,000, and it was purchased on 30 September 2010. Logistics required its tradespeople to travel directly to a client's jobsite to start work for the day. It was only around five-times per year where Logistics would require its tradespeople to report first to the company's head office, before traveling to a client's jobsite (e.g. meeting regarding a new project). There was usually a portable (movable building) at each jobsite and this was available to all tradepeople for storing tools overnight and at weekends. However, in light of the number of thefts of tools at Logistics' sites over the years, Karl (and many other employees) decided to bring his tools with him everyday. (The building industry is notorious for the stealing and theft of tools and equipment). Other larger tools that were not required on a regular basis were stored by Karl at his garage at home, and were only brought to a jobsite when needed. The garage was on the property owned by Karl and his partner, Denise. The mortgage outstanding on the home was $300,000. The footprint of the garage was 6% of the property. Karl also stored sporting equipment and recreational items in the garage. During the 2011-12 income year, the following transactions were entered into by Karl and/or Logistics: 1. Karl sometimes worked at a jobsite that required him to be away from home for a whole week. For example, on one job in Newcastle (NSW), Karl was required to be at the jobsite on Monday by 10.00 am and to complete the job on Friday afternoon. To cover expenses of accommodation, food, etc, Logistics paid Karl an allowance of $295 (comprising $150 for accommodation, $120 for food and drink and $25 for incidental expenses) per day for five days. Karl actually stayed at his sister's house in Newcastle (Gwen). Karl contributed $60 per day to Gwen's "costs" as a "thank you". Karl obtained a receipt for this payment from Gwen. Karl also incurred $300 in total on food and drink while in Newcastle (e.g. lunch). Karl kept receipts of this expendituire. Logistics did not show Karl's allowance on his 2011-12 payment summary. 2. On top of his normal salary, Karl was paid a tool allowance of $4,000 per year. Karl received this allowance because he was an employee that predominantly used his own tools. Karl could keep this amount even if he did not spend all of it, or any of it, on tools in a particular year. In addition, Karl was paid a vehicle allowance of $60 per week because he was required to have a vehicle to transport his tools to and from work. The $60 was a rough estimate of costs, and the amount is reviewed every two years. Karl kept very good records of kilometres traveled by the Toyota during 2011-12. The vehicle traveled 26,000 kms for the year. Of this, 8,000 kms was on travel from home to a jobsite, and back home from a jobsite. There was also 2,000 kms that involved travel in the middle of the day from one jobsite to another jobsite. This did not occur often. There was also 4,000 kms of travel while away from home (and to and from home) (e.g. Newcastle job). Vehicle expenses on fuel for the year were $4,200. ------------ After eight-years service with Logistics, in June 2012, Karl resigned from employment because "he wanted to go out on his own". As is standard practice, Logistics asked Karl to enter into a restrictive covenant with Logistics that prevented Karl from soliciting work from clients of Logistics for two-years from the date Karl's employment ceased. Karl agreed to this, and Karl was paid $60,000 for this restriction. This $60,000 was deposited into Karl's bank account on 5 July 2012. Some 12-days later, in the course of discussions with his accountant (Narda), Narda advised Karl that he should pay the $60,000 into his superannuation fund account immediately. Karl did this on 17 July by way of direct transfer to the trustee. On ceasing employment with Logistics, Karl also received an unused annual leave payment of $9,000 (after tax was withheld by Logistics). Narda also said that this should be paid into Karl's superannuation fund account. Karl did this on 17 July as well. Karl operated as a sole trader and all of his work was obtained from three competitors (companies) of Logistics (around, 20% of time for one, and 40% for each of the others). Karl had approached these competitors stating that he was available for work. Karl did not pursue any other avenues for obtaining work (e.g. advertising). Karl was essentially doing similar work to that he was doing while working for Logistics. There was no pattern to how Karl allocated his time between the three companies. It really depended on who had work that needed to be completed. The following provides a break up of time for October-November 2012: 1/10/12 to 18/10/12 19/10/12 to 8/11/12 9/11/12 to 30/11/12 Company One Company Two Company Three Karl was paid by these companies according to timesheets submitted weekly by Karl. The rate was set by the companies and it was the same rate for all "contractors" who fit within a particular category (e.g. plumbers). The written contract was in similar terms for the three companies. The contract stated that this contract does not create the relationship of employment between the company and Karl. Karl was entitled to an hourly rate for confirmed hours of work. Karl was not entitled to any other benefits or payments from the companies (e.g. annual leave, sick leave). The companies would not withhold tax from payments to Karl, unless Karl failed to provide the company with an ABN. Karl did obtain an ABN. Karl was not permitted to work for another company while engaged by a company. Karl was to report to a supervisor on signing on. Karl was to report to the jobsite at 8.00 am and to finish at 5.00pm. Karl was not permitted to work on his allocate tasks after hours. On signing on, the supervisor would allocate tasks to Karl. Karl worked on the task until it was completed. If an "approval inspector" considered the task was not satisfactorily completed, the supervisor would be required to ask Karl to redo it. This rarely occurred. After completing a task, Karl would be allocated another task. Karl was to provide his own tools. The company would provide larger tools. Karl would be allocated an assistant to complete tasks. Karl could not choose his own assistant. Aside from hardhats and boots, Karl was free to wear any suitable clothing or overalls when on site. The hardhats had to be company hardhats, which had the company logo on them. Karl's contract stated that he was the only party that could carry out the terms of this contract. There was a clause in the contract that Karl was responsible and liable to fix any defective work. In practice though, a person who performed substantially defective work was not re-engaged by any of the companies, and the company did not pursue compensation, etc. The contract stated that the company does not guarantee that Karl will be provided with ongoing work. However, the company would seek to offer work on another site or project outside Sydney if there was a shortage of projects in Sydney and the contractor wanted work. For the whole of the 2014-15 income year, Karl worked solely for one of the companies (Company One) because the other two companies had suffered a downturn in projects in Sydney. When Narda learnt that Karl was only obtaining income from one company (on 23 May 2015), she advised him to get some income from another source before 30 June. Accordingly, Karl asked some of his relatives and Denise's relatives if they needed plumbing work done. Karl also offered a good rate. Denise's uncle, Milton, said he needed some urgent work on his Randwick home. Accordingly, Karl did the work on 14 June and charged Milton $200 for the work. The market rate would have been around $500 for the work. From the start of going out on his own, Karl set aside a room (bedroom) in his (and his wife, Denise), home for the purpose of the business. The home is owned in joint tenancy. The room was 15% of the floor area of the house. Karl purchased a desk and a filing cabinet for the business. The room was exclusively used for the business, even though there was very little to do. Some of Karl's small work tools were also stored in the room, and there was no private items stored there. Logistics provided the following benefit to one of its managers, Rick. Logistics reimbursed Rick 80% of the council rates for the 2013-14 year on his jointly owned (with wife) residential dwelling at Kiama. The Kiama property was rented out for 35% of the year, and it was available for rent for 40% of the year (but it was not rented). The rest of the time, Rick used it for holidays and weekend breaks from Sydney, and he let friends use it at no rent. Council rates for the year were $1,200 and Logistics reimbursed 80% of this. Logistics has the following policy on reimbursing expenses: Income Producing Portion of Expense Percentage Reimbursement 0%-40% 20% Above 40%-70% 50% Above 70%-100% 80% Advise all relevant parties on the tax consequences of the above. Fully explain your advice by reference to tax legislation, case law and ATO "authorities". Show calculations where necessary (Note, there is no need to calculate anybody's final tax liability for a period as there is insufficient information for this). Reasonable assumptions of fact(s) are permited but you must justify the need for the assumption(s).