Describe about the Australian Taxation for Appropriate Tax Treatment.
Hilary, a famous mountain climber is approached by “The Daily Terror”, a local newspaper with the proposal of writing her story for which the newspaper would pay a consideration of $ 10,000 to her which she gladly accepted. She completed the story without any external help and derived the promised consideration by transferring all rights and interests. Further, she goes on to derive additional payments of $ 5,000 and $ 2,000 from the sale of the manuscript and the expedition photos respectively.
In order to determine, the appropriate tax treatment of the above payments, consideration needs to be given to the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. The relevant fact in this case was that there was a contract where the appellant was to derive payments by sharing details about her marital life which was valuable as her husband was involve in a high profile robbery. In this case, there was an issue with regards to the payment being derived from transfer of information or earned through the process of interviewing (Barkoczy, 2013). The court opined the receipts would be capital as the payment derived by the appellant was for the divulged information and its copyright while the activity of narration was a mere mechanism to bring about the transfer from seller to the buyer (Coleman, 2011).
The given case needs to be viewed in the light of the above arguments. It is apparent that Hilary has professional skills pertaining to only mountain climbing and not writing or photography. Hence, the offer of $ 10,000 by a newspaper to Hilary with no writing experience make sense only when viewed in the light that the intention was to obtain private information about Hilary’s life and to copyright the same. Thus, indulgence in writing of story was a mere means to communicate the details about the personal life. Thus, the $ 10,000 derived from the newspaper is actually on account of copyrighted information about her personal life and hence the proceeds would be capital and not accessed. Similarly, with regards of manuscript and photographs clicked during expedition, their commercial value is not on account of Hilary’s skills with regards to performance of writing or clicking photographs but rather due to the subject which deals with a famous personality Hilary. Thus, these are assets (just like collectibles associated with Hillary and her life), and thus on sale, capital receipts would be obtained which would be non-assessable (CCH, 2013).
Intent – self-satisfaction and not profit
If Hilary writes the story owing to derive only personal satisfaction and no commercial gains, then also there would not be any change in the tax treatment from the above case. This can be concluded as the essential asset which eventually would be sold is the information about her personal life which is a capital asset. Also, since there is no profit intention involved, hence writing would merely be a hobby which she would be indulging for her pleasure. Hence, the proceeds cannot be termed as ordinary income under either section 6-5 (as Hilary is not a professional writer) or section 15-15 (as writing has no profit intent) (Woellner, 2013). As a result, money received from sale later would be termed as capital receipts and would not be assessable.
As per the relevant facts mentioned in the given situation, son obtained a loan facility of $ 40,000 and repaid back the same after two years with a cheque payment of $ 44,000. The $ 4,000 extra were given to the mother as interest computed at 5% pa even though the mother made it is abundantly clear that she has no income intentions while extension of this housing loan and aims to help the son.
In this case, the aspect that requires further discussion is the payment of $ 4,000 that has been forwarded to the mother at the time of the repayment of the loan amount. It is evident that the principal repayment of $ 40,000 would not attract any tax liability on account of it being a capital receipt (Sadiq et. al., 2014). With regards to the appropriate tax treatment of the interest amount, the following three options arise.
Ordinary income as defined in Section 6(5) – For the interest payment to be recognised under Section 6(5), it is imperative that it must be derived from usual business activity but the situation lacks any information to suggest that the mother operates a money lending business (Deutsch et. al., 2015).
Ordinary income as defined in Section 15(15) – In case of any casual lending or isolated lending transaction is enacted with the main motive of earning interest income and the transaction is implemented in a commercial manner, then the interest would be categorised under this section (CCH, 2013). However, the mother lends a significant amount of money to the son without indulging in any legal documentation and more importantly has no intent to earn interest income which implies that this transaction is outside the ambit of Section 15(15).
Gift – For a payment to be labelled as gift, there are certain conditions as per TR 2005/13 that are to be satisfied which are tested in the wake of the given facts (ATO, 2005).
During the transfer of gift, ownership transfer has to accompany – Satisfied as the cheque has been handed over to mother.
The transfer of gift must be voluntary and not driven by obligations – Satisfied as the mother never wanted to earn income from interest.
The transferor must not have any expectations of any reciprocal gains from transferee – Satisfied as the son in lieu of $ 4,000 has no expectations.
The gift transfer needs to be driven by benevolence – Satisfied as the son makes the payment due to appreciation and gratitude towards the mother.
Based on the discussion above, it is apparent that $ 4,000 is gift and thus exempt from ay tax burden. Hence, the mother has no impact of the transaction on her assessable income.
3. Part a)
As per the provided information, it becomes clear that the land has been purchased in 1980 but the house construction took place in 1986 only. Capital gains on any asset that is acquired on or before September 20, 1985 is exempt from any taxation and hence the no CGT would be applicable on the proceeds from the land but CGT may be applicable on the capital gains obtained from the house (Barkoczy, 2013). Thus, we need to compute the capital gains on the house,
However, the first task is to estimate the current market value of the land and also the house. This can be done by considering the initial contribution of the house to the property’s value.
Percentage contribution of house in the property’s value in 1986 = (60000/(60000 + 90000))*100 = 40%
Hence, the value of the house in the present = 40% of 800000 = $ 320,000
For calculation of long term capital gains, there are two options available in the form of indexation method and discount method (Sadiq et. al, 2014).
The cost base of house which comprises of only the construction cost adjusted for inflation = 60000*(68.72/43.2) = $ 95,400
Where 60,000 is the actual construction cost
68.72 and 43.2 are the respective values of CPI in 1999 and 1986
Capital gains that are taxable under CGT regime = 360000 – 95400 = $224,600
Long term capital gains on sale of house = 320000 – 60000 = $ 260,000
In accordance with the discount method, a 50% rebate is available, hence capital gains from house that are taxable under CGT regime = 0.5*260,000 = $ 130,000
To minimise the tax arising from CGT, Scott would prefer the discount method and thus the CGT applicable gains from the property are limited to $ 130,000 (Deutsch et. al., 2015).
In this case, the property is sold by Scott to his daughter at a throw away price of $ 200,000.However, the taxable gains would not still change from part (a) since Section 116-30 dictates that the capital gains computation must be conducted using either selling price or existing market value which one is greater (CCH, 2013). In case of Scott, the higher figure would be the price derived at the auction and hence the taxable capital gains derived from property would be still $ 130,000.
Due to change in ownership structure from individual to company, the discount method would not be applicable and the taxable capital gains computed as per the indexation method as shown in part (a) come out at $ 224,600 (Barkoczy, 2013).
ATO 2005, TR 2005/13 Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001 (Accessed on September 5, 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
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont
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