Essay: Analysis Of Receipts & Tax Implications Of Personal Exertion.

Discuss About The Australian Tax Handbook Pymont Thomson Reuters.

Payment from Autobiography

The key issue is to outline if the payments that Hilary (a famous mountaineer) can be termed as receipts derived from personal exertion or not considering s.6(5) ITAA 1997 along with relevant case law

The given facts clearly highlight that the newspaper approaches Hilary and offers $ 10,000 to write her autobiography despite knowing that she has not written anything in the past. Considering the hefty amount, it is imperative to note that the interest of the newspaper does not lie in gaining access to writing of Hilary but rather to gain access to her story and private information which then can be copyrighted by the newspaper and sold. It is apparent that this has commercial value since Hilary is a famous mountaineer and hence people would like to read about her (CCH, 2013). Further a key concept to be noted here is that the act of writing does not produce anything which can be sold for money, instead it is acting as the medium of transfer for the asset which already exists before Hilary starts writing. This understanding has also been forwarded in the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case which has a similar background (Barkoczy, 2015).  Considering that payments are not derived from the physical activity of writing, hence these receipts cannot be considered as income from personal exertion.

The underlying rationale which has been forwarded above can be made applicable in this case also. The intrinsic value of the manuscript is not on account of how good Hilary has written but rather it contains information about a famous mountaineer. Further, this information which is the source of value has not been created through writing and therefore receipts cannot be considered as income from personal exertion (Gilders et. a., 2016).

The intrinsic value of the photographs is derived not because Hilary is a prolific photographer but because the pictures pertain to the famous expeditions done by Hilary. Hence, the pictures have commercial value because of the subject matter they represent and not because Hilary has clicked them or she has some exceptional photography skills. Since the value of the photos is based on the subject matter, hence receipts cannot be considered as income from personal exertion (Sadiq et. al., 2016).

Intention change is a useful parameter only when the underlying act tends to produce commercial value and hence leads to assessable income production. In the given case, however, it is evident based on the discussion carried out above that the act of writing does not have commercial worth since it is not responsible for any proceeds which are derived. It is only acting as a means. Thus, the underlying intention would not change the conclusion that receipts are considered as income from personal exertion (Deustch et. al., 2016).

Payment from Manuscript

The objective is to ascertain the taxable value related to the car fringe benefit in accordance with the s.9 of Fringe Benefit Tax Assessment Act, 1986. As per this section, the relevant formula is illustrated below (Woellner, 2014).

The key inputs for the formula stated above are highlighted as follows (Sadiq et. al., 2016).

• A – The cost of the car would be used to represent the base value considering that the purchase has been enacted by the employer last year only. Hence, as per s.9, car base value would be $50,000.
• B – This does not change with the distance travelled and hence is pegged at 20%.
• C – The question states this as 183 and hence the same is assumed
• D – Considering the respective year under assessment, the number of days would be 365.
• E – Any expenses which during the assessment year if borne by the employee are reimbursed and hence deducted as highlighted in s.9.However, for the employee to claim the same, s. 10A puts the condition of relevant documentation being available. This is fulfilled and hence $ 1,000 would be deducted.

Considering the above input which have been highlighted, the same can be substituted in the formula in the applicable formula and therefore the taxable value of the benefit is computed as highlighted below.

The given situation highlights a financial assistance being extended to a son from a parent. The extent of this assistance was $ 40,000 and there was a promise on the part of the son that the principal would be repaid after a period of five years.  However, he was able to arrange for the money earlier and hence paid back all the money with interest by giving a $ 44,000 cheque to the parent. The parent now needs to be advised on the potential tax implications arising from this transfer.

It is essential to segment the given money received by the parent in the following two segments to facilitate more prudent analysis.

• Principal Repayment – There would not be any tax levied on this payment of $ 40,000 since this was initially lent and hence this is not income but capital proceeds. Thus, no tax implication would arise for this amount (Barkoczy, 2015).
• Interest payment – This is the $ 4,000 amount which is transferred over and above the principal borrowed by the son. The said amount does not fall within the purview of s. 6(5) ITAA 97 owing to non-involvement of the parent into lending related business. This becomes evident from the conduct displayed when money is extended to the son. There are no safeguards and it is extended purely on trust with no mechanism to recoup money in case of default (Gilders et. al., 2016). Further, the profit under isolated transaction permissible under s.15(15) ITAA 97 does not work here as the basis necessity of being driven by the profit motive is lacking. This is apparent from the statement made by the parent where it is made clear that no interest is desired. (Woellner, 2014).

But the given amount of $ 4,000 would be considered as gift owing to satisfaction of the necessary conditions that were outlined in relevant tax ruling i.e. TR2005/13 (ATO, 2005).

• Through the medium of cheque, the transfer does take place in reality.
• The interest amount is voluntary payment considering parent’s stance made clear at the time of lending the money.
• By giving this nominal amount, the son would not have future expectations considering that he does not need to give this money for fulfilment of those.
• Personal gratitude is the reason behind the transfer.

Considering that both capital receipts and gifts are non-taxable, hence on account of the receipt of $ 44,000 cheque, there would not be any tax implications for the parent.

Considering the different dates of land purchase and house construction, the situation is arising here where the land is exempt from application of CGT since purchased before September 20, 1985 and also the house would have CGT applicable since it has come into existence after the cut-off date. Thus, the given asset (property) would be considered as the sum total of the two assets mentioned below (Barkoczy, 2015).

• Land –  CGT not applicable
• House = CGT applicable

For the house, the cost base under s. 110-25 would serve as the construction cost which is given as $ 60,000. The current market value of the complete property is given and based on this along with the input value, the current price of the house is estimated in the manner given below.

Post the determination of the market value of house, one of the following two methods would be chosen by the taxpayer for computation of taxable capital gains (Gilders et. al., 2016).

Discount Method (Division 115)

Gross capital gains on house = Selling price – Construction cost = 320000 – 60000 = $ 260,000

Considering long term capital gains, net taxable gains = (1/2)*260000 = $ 130,000

Indexation Method

In this case, the construction cost of the house would be inflation adjusted and then this would serve as the cost base.

Inflation adjusted cost = (68.72/43.2) * 60000 = $95,400

Taxable capital gains = 320000 – 95400 = $ 224,600

The discount method would be chosen and hence taxable capital gains = $ 130,000.

Scott liquidates the property to his daughter as a significant discount to the market price. However, the taxable capital gains do not alter and remain at $ 130,000. Section 116-30, ITAA 97 is the reason since for capital gains computation, it prescribes that between the market value and sale value, the maximum value should be chosen (Sadiq et. al., 2016). In the given case, this value is market value or $ 800,000 which leads to the same computations as in part (a).

The ownership of the property is now with company and hence Division 115 does not apply (CCH, 2013). For a company business structure, capital gains computation is only carried through the use of indexation method which as per computations done in part (a) lead to the taxable capital gains as $224,

References

ATO (2005), Tax Ruling TR 2005/13, [online] available at https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001  

Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

CCH (2013), Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax handbook.  8th ed. Pymont: Thomson Reuters.

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9^th ed.  Sydney: LexisNexis/Butterworths.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8^th ed., Pymont: Thomson Reuters

Woellner, R (2014), Australian taxation law 2014 7^th ed. North Ryde: CCH Australia