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Australian Taxation Law : Tax Casebook

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Question:

Discuss about the Australian Taxation Law for Tax Casebook.

 

Answer:

1. Hilary, a well- known mountain climber has received an offer from a daily terror newspaper to write a story about her mountain climber journey. For this, the newspaper has offered a value of $10,000 along with all the respective copyrights. Hilary accepted the offer without any further conditions. After some time, when the written work of the story was completed, Hilary provided the book with the copyrights to the newspaper and received $10,000.  She had provided the manuscript of the story and expedition photographs to the Mitchell Library in $5,000 and $2,000 respectively. The issue is to determine the nature of the income received, whether the received income would be coming from personal exertion.

The law states that to determine the tax implications on received income, the best possible way is to examine the nature of the received receipts. If the received income is capital in nature, then these receipts would not be taxed under tax law. However, in capital receipts case, a different method is followed to determine the tax treatment i.e. Capital Gains Tax (CGT) as per the Section 10-5 (Barkoczy, 2015). If the nature of the received receipts is revenue receipts, then the tax treatment is applied according to the ordinary income as per the Section of 6-5. Any income coming from personal exertion would be considered as revenue receipts, because it is coming from either business activity or employment (Gilders et. al, 2015). The central question that arises in this case, is to determine whether the copyrights would be considered as capital asset or receipts from personal exertion.

For clarity on this issue, the Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418 case is taken into consideration. In this particular case, Mrs Briggs who was a wife of a famous robber had made an agreement with some of the journalist to narrate them, the story about the relationship with her husband. Four–five days were consumed in the procedure of story narration to the journalist. The newspaper did not make the full payment offered to Mrs Briggs. However, this resulted in a dispute with the tax authorities with regards to the nature of income and hence the case came before the court (Gupta, 2009).

The central objective of the case became to find the nature of the received income. The court provided the judgement, that the nature of the received income would be treated as capital income, because the concerned taxpayer had revealed the facts to the various journalists about her relation with her husband, who was basically involved in a famous robbery. To make this story authorised, she had also mentioned her signature on every page of the story written by the journalist. The real asset possessed by Mrs. Briggs was the secret information which acted as made a legal consideration between Mrs Briggs and journalist. Further, the secret information was termed as the capital asset and hence held not liable for taxation. However, the same would be levied capital gains (CCH, 2012).

Now taking the reference of the above case, it can be assumed that the primary asset for the newspaper was the information about her personal life, which would be considered as a capital asset. In this case, Hilary had shared these facts and experiences in the written format with the journalist and also she had authorized the terror newspaper to take the copyrights for the same, also the amount received by providing the manuscript and photographs would also be termed as capital asset. These are all incidental to the information provided and the neither photography nor writing is the main profession of Hilary. Thus, the compensation has actually been made for the information only and hence amounts to only realisation of the capital asset. Thus, all the income i.e. $ 17,000 would be termed as capital receipts and would only be subject to the aegis of Capital Gains Tax.

In the given case, even if Hilary would have written the story driven by solely personal satisfaction, then also there would be no difference in the stance as the intent to profit is not pivotal in this case. This is because there is essentially a transfer of capital asset which is already present and need not be earned through indulging in any activity (Woellner, 2013).

2. In this particular case, the taxpayer had provided a lump sum amount of $40,000 to her son in order to resolve the financial crisis. Her son had made a promise that he would pay this amount within five years. In this case, no agreement was enacted between the mother and the son and mother had no intent of receiving any interest on the principal extended. The lump sum amount of $ 40,000 was returned by his son in two years, along with the interest amount of two years i.e. $4,000. Therefore, the aim is to ascertain the tax implications of the incremental $ 4,000 received by the mother over and above $ 40,000. 

Ideally, interest received on securities, bank accounts and money lending business falls within the purview of ordinary income as defined in Section 6(5). It is not an imperative condition that interest payment should be regular and interest could be paid with the principal amount in a single transaction at the end. This would not result in escaping of tax liability (Barkoczy, 2013). It is apparent that the concerned taxpayer did not run any business activity of money trading and the amount of $40,000 was given to her son without the enactment of the routine legal documentation and collateral demands that are characteristic of lending transactions. Further, the lack of intention on mother’s part to earn interest indicates that this was not a commercial transaction but arose out of benefaction.

The payment of incremental $ 4,000 to the mother was a gift from the son in accordance with the tax ruling TR 2005/13 (ATO, 2013). This is because there was ownership transfer of money from the son to the mother, which was essentially voluntary and driven by benefaction and not for deriving any significant or insignificant future favours.  Hence, out of total sum of $ 44,000 received, $ 40,000 would be exempt from tax on account of being capital receipts while the remaining $ 4,000 would not attract any tax burden as it is a gift.

 

3.
With regards to computation of capital gains that are taxable, two options are available for an individual taxpayer (Woellner, 2013).
 
Discount method which offers a 50% discount on the long term capital gains
 
Indexation method which makes asset cost base adjustments in line with inflation figures to decrease the CGT (Capital Gains Tax) liability.

Part a)

As per the information provided,

Sale proceeds from property (Land + House) = $ 800,000

But the land component was acquired before September 20, 1985 and thus would not attract any CGT liability. The tax burden would be limited only to the house component which can be derived as shown below (Gilders et. al., 2015).

Total cost of property at the time of construction = 90000(Land) + 60000(House)

Hence, percentage contribution of house to the property = (60000/150000)*100 = 40%

Thus, only 40% of the total sales proceeds of the property would attract CGT

Selling price of property (CGT applicable) = (40/100)* 800000 = $ 320,000

Realisable capital gains = Selling price – Cost base = 320000 – 60000 = $ 240,000

Taxable capital gains after 50% discount in accordance with the discount method of computation = 0.5*240,000 = $ 120,000

The computation as per the indexation method is shown below (Woellner, 2013).

The CPI (Consumer Price Index) has increased from 43.2 in 1986 to 68.72 in 1999.

As a result, indexation factor can be computed as 68.72/43.2 = 1.59

Construction cost adjusted for indexation = 60000*1.59 = $ 95,400

Net capital gains subject to CGT = 320000 – 95400 = $ 224,600

The above computation of net taxable capital gains using both stated method clearly suggest that Scott as a rational taxpayer would choose the discount method since it would lead to lesser burden of tax in the form of CGT.

Part b)

The given situation considers that Scott has sold the property to her daughter at a price of $ 200,000. Due to underlying relationship of benefaction between buyer and seller, for computation of capital gains, Section 116-30(2), ITAA 1997 needs to be applied. In accordance with this section, the capital gains must be computed taking into consideration the higher of the given two values i.e. the actual selling price and the existing market value of asset (Austlii, 2016). In the given case, this amounts to taking the higher of $ 200,000 and $ 800,000. As a result, the capital gains in this case also would tend to remain the same as in previous case.

Part c)

In this case, the property owner instead of being an individual taxpayer now is a company. The discount method for taxable capital gains computation is not available for companies and hence now, the indexation method needs to be adopted (Woellner, 2013). In accordance with the indexation method, the net capital gains subject to CGT is $ 224,000 as computed in part (a).

 

References

ATO 2013, Taxation Ruling:TR 2005/13, Australian Taxation Office, Available online from https://www.ato.gov.au/law/view/document?DocID=TXR/TR200513/NAT/ATO/00001 (Accessed on August 22, 2016)

Austlii 2016, 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 August 22, 2016)

Barkoczy, S. 2015. Australian tax casebook. CCH Publications, Sydney

CCH 2012, Australian Master Tax Guide 2012, 50th eds., Wolters Kluwer , Sydney

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015, Understanding taxation law 2015, 8th eds.,  LexisNexis/Butterworths.

Gupta, R. 2009. Receipts from Personal Exertion: Mere Gifts or Gross Income?, Auckland University o Technology, Available online from https://aut.researchgateway.ac.nz/bitstream/handle/10292/735/GuptaR.pdf?sequence=5 (Accessed on August 22, 2016)

Woellner, R 2013, Australian taxation law 2012, 6th eds., CCH Australia, North Ryde

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