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Australian Tax Law : Taxation Act 2016

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Question:

Describe about the Australian Tax Law for Taxation Act 2016.

 

Answer:

1. Issue

Hilary as per the information provided in the case has derived the following three payments:

$ 10,000 – Sale of copyright of her autobiography

$ 5,000- Sale of Manuscript

$ 2,000 – Sale of expedition related photographs

Other relevant information include that Hilary had no prior writing experience but still accepted the offer and could complete the book without taking help from outside. Hence, in wake of this the principal task is to ascertain if the above payments constitute as income derived from personal exertion.

Rule

The ordinary income as derived under the scope of Section 6(5) and Section 15(15) needs to be distinguished from the capital income that is tax exempt but may give rise to gains on capital being taxed under the aegis of Section 10(5).  Further, the constituents of ordinary income are essentially revenue receipts unlike capital receipts which are derived from transactions involving liquidation of capital asset (CCH, 2013).

The source of the payment needs to be given key consideration as is apparent from the decision in the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case,  The case involves the appellant signing a contract with a newspaper agency for divulging information about her husband’s behaviour towards her and marital life in general. The newspaper wanted this information as the husband was convicted in a very famous robbery case. In order to obtain the relevant information, her wife engaged in interviews for few days and at the end signed all the pages of the book written by the journalists so as serve as a authentication. There was dispute regarding the nature of payments and the court termed these as capital (Coleman, 2011).

The core reasoning of the court was based on the premise that through the transaction, the actual object of interest for the newspaper was the secret information about their relationship which the newspaper wanted. The interview served as mere mode and was instrumental in facilitating transfer of information but otherwise did not add any value or provide any service. Further, the wife was involved in the signing of the book but it was only to authenticate the book and did not have any commercial value otherwise. Thus, the payments were derived by the wife and not earned. This derivation was on account of transfer of copyright of the personal information from the wife to the newspaper company for which the wife got payments (Barkoczy, 2013).

Application

The learning from the decision of the Brent v. FCT case would now be applied to the situation presented by the Hilary case. There are some comparisons which can be drawn in given case with the Brent v. FCT case which are highlighted below.

  • Motive of the offer

In Brent v. FCT case, the actual asset that the newspaper intended to buy was exclusive access to the information about the martial life. Similarly, in the given case, the actual asset which the local newspaper has offered money for is not the book written by Hilary but rather exclusive access to the contents of the book which narrate Hilary’s personal life. The information in both cases is the asset due to the underlying fame associated with the concerned person whose information is sought.

  • Irrelevant nature of incidental activities

In Brent v. FCT case, interview was the medium through which information as extracted from the wife through the use of journalists. Further, the act of putting signatures on each page of the book lacked any commercial value 

In the given case, information is extracted from Hilary through the indulgence of writing in the book which would not have much commercial value as Hilary’s profession is not book writing and infact she has no prior writing experience. Further, similar argument may be extended for photography where Hilary has no expertise and the commercial value lies in the fact that it captures a moment from Hilary’s expedition.

In wake of the above, it is apparent that the income is derived from the sale of assets and not earned by engaging in personal exertion or any activity. Even though Hilary engaged in writing, but it did not result in any valuable being created and is only a medium for information transfer to the newspaper. Similar arguments may be made for manuscript and photographs and thus the transactions involving these results in capital receipts which are non-assessable but the gains so derived may pose CGT liability (Section 10-5).

Now if the underlying motive behind writing of book by Hillary is only satisfaction of self and not to earn profit, then the writing activity would be considered as a mere hobby. This is because this is being carried out in a non-commercial manner i.e. without appointment of editors and other external staff. Also, there is no intent to earn money from this and Hilary has never written a book before. Any proceeds that may be derived from hobby indulged without any commercial intent would amount to non-taxable receipts (Hodgson, Mortimer & Butler, 2016).

Conclusion

Based on the discussion above, it would be fair to conclude that if Hilary indulged in writing after getting the offer, then the receipts are capital in nature and non-assessable. However, if the intention is only to derive satisfaction, then writing becomes a hobby and thus the proceeds would not be assessable.

2. Issue

The facts of the given situation are summarised below.

Son obtains a debt of $ 40,000 from his mother for buying house and makes a promise to return a sum of $ 50,000 after five years.

The mother clarifies that she wants prompt repayment of principal at the committed time and does not desire any interest income for the help extended.

In actuality, the son does not take five years to clear the loan and repays the money only in two years. The total repayment is made in the form of one cheque totalling an amount of $44,000.

In wake of the above description of facts, the central concern is to opine if mother’s engagement in the above lending arrangement would have any effect on the assessable income or not.

 

Rule

In cases where the lender repays back the money, no tax is applicable on the principal repayment which would be categorised as capital receipts.  However, the issue is with regards to the determination of the tax assessibility of any incremental amount received by the lender. This amount may be assessable income if it falls within the purview of either Section 6-5 or Section 15-15 (Woellner, 2013). The amount would fall within Section 6-5 if the underlying taxpayer operates a money lending business or has made an investment where interest income is expected and paid whether periodically or as a lump sum amount. The amount would fall within Section 15-15 if the lender enters into an isolated lending transaction but the same has been enacted professionally with income intention. In order to judge the commercial element in the transaction, its comparison with business transactions would be made (Gilders et. al., 2016).

For the payment to be classified as a gift there are certain conditions that ought to be fulfilled. Firstly, there has to be an actual ownership transfer of the underlying gift to the transferee. Secondly, this transfer is to be prompted on voluntary basis without any pressure from transferee or any other party. Thirdly, post the transfer of gift, there must not be any expectations from the transferor to derive benefits from the transferee in any nature at any point of time. Lastly, this transfer must be initiated on the back of personal feelings and not as professional relationship (ATO, nd).

Application

The first aim is to analyse if the incremental income to the tune of $ 4,000 can be assessable under Section 6(5) or Section 15(15).

There is no information to suggest that the mother has a money lending business and also the given money has been lent without intention of earning interest. Hence, the interest income cannot be covered under Section 6(5). Further, from the manner in which the loan is extended, this cannot be termed as a commercial transaction. This is because the agreement for the money is not written, lacks any legal documentation and mother has made no demand for any collateral. Besides, the fact that she has no intention to earn interest income removes the payment from the ambit of Section 15(15) as presence of profit intention is pivotal in this case.

Thus, the payment of $ 4,000 would be termed as gift and would not attract any tax liability for the mother. The relevant explanation is outlined below.

Through the cheque, the ownership transfer of the amount has successfully been achieved.

The son made the payment even though the mother insisted on not making any payment.

The son has no expectations for any present of future gains for the $ 4,000 extended to mother.

One of the core aspects that drives this payment is the affection of son towards the mother.

As all the four conditions are satisfied, thus the $ 4,000 payment would be gift from the son to mother and would be exempt from tax. Further, the amount of $ 40,000 is non-assessable as they are capital proceeds.

Conclusion

On account of the lending transaction discussed, the mother would not have to bear any additional tax liability.

3. Part a)

The given case briefs about Scott’s property whose market value is $ 800,000. The property essentially comprises of two major assets.

Constructed House

Land

There is difference in date of acquisitions of the two assets. While the land was acquired in 1980 when CGT legislation was absent but construction of house took place when CGT legislation was applicable. Thus, it is prudent to treat the two assets separately as land is CGT exempt unlike house which would be CGT applicable (Nethercott, Richardson & Devos, 2016).

Total value of property in 1986 = Value of Land + Value of House = 90000 + 60000 = $ 150,000

Hence, 40% of the property’s value is derived from the house.

Thus, value of house at current market prices = 40% of the property’s market value = (40/100)*800000 = $ 320,000

Hence, the remaining component would be CGT exempt as that is value of land.

Capital gains on house = Selling price of house – Cost base = 320000 – 60000 = $ 260,000

Taxable gains as per discount method = (1/2)* 260,000 = $ 130,000

Construction cost after adjusting for inflation = (68.72/43.2)* 60000 = $ 95,400

Taxable gains as per indexation method = 320,000 – 95,400 = $ 224,600

The above calculations clearly indicate that CGT applicable gains on the property sale amount to $ 130,000 since Scott as an individual taxpayer has the option to choose either method (Barkoczy, 2013).

Part b)

In this case, the relevant statute would be Section 116-30(2) which clarify that the taxable capital gains in case of discrepancy between the actual sale price and existing market price, the larger value of the two would be given prominence (Austlii,nd).

Actual selling price to daughter = $ 200,000

Current market price = $ 800,000

Hence, the capital gains would be applicable using $ 800,000 and hence answer would again be $ 130,000.

Part c)

The property now belongs to a company which cannot use the discount method and hence is limited to only indexation method (CCH, 2013).The taxable capital gains in accordance with this would amount to $ 224,600 as has been shown in the a) part.

 

References

ATO nd, Gifts and Donations, Australian Taxation Office, Available online from https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Gifts-and-donations/ (Accessed on September 2, 2016)

Austlii nd, INCOME TAX ASSESSMENT ACT 1997 - SECT 116.30, Austlii Website, Available online from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s116.30.html (Accessed on September 2, 2016)

Barkoczy, S 2013, Foundation of Taxation Law 2013,5th eds., CCH Publications, North Ryde

CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney

Coleman, C 2011, Australian Tax Analysis, 4th eds., Thomson Reuters, Sydney

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 9th eds.,  LexisNexis/Butterworths.

Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5th ed., Thomson Reuters, Sydney,

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney,

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2014 , Principles of Taxation Law 2014, 7th eds., Thomson Reuters, Pymont

Woellner, R 2013, Australian taxation law 2013, 7th eds., CCH Australia, North Ryde

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