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Australian Taxation : Mountain Climbing Profession

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Question:

Describe about the Australian Taxation for Mountain Climbing Profession.

 

Answer:

1. Issue

The central concern in the given situation is to opine on the nature of payments that Hilary is deriving from the sale of the manuscript, story and photographs associated with her climbing expeditions. The key facts that have been presented in the given case are summarised below.

The main skill of Hilary lies in the mountain climbing profession.

Hilary has never written any story previously to the offer by “The Daily Terror” . However, still a lucrative amount of $ 10,000 was offered.

Hilary is not known for her skills related to photography.

Even though she has no writing experience, but despite that she writes the story on herself only.

Rule

The underlying treatment of any payment that is derived by the taxpayer depends on two aspects i.e. taxpayer’s intention with which the activity was performed and the receipts nature (i.e. revenue and capital). Revenue receipts tend to contribute to assessable income while capital receipts are held as non-assessable (Barkoczy, 2014).  Assessable income may be derived on the basis of the sections listed below.

Section 6(5) – For all the payments that the taxpayer obtains by indulging in routine business or employment activity, it would be ordinary income and would also include income in way of rent, dividends and interest (Woellner, 2014).

Section 15(15) – In case of any isolated transaction that is enacted with the motive of earning profit, then the gains from such transaction would make contributions to assessable income in accordance with this section (CCH, 2014).

Capital asset liquidation gives way to capital receipts which are free from tax but any capital gains derived in the process will be taxed as per Section 10(5) (Gilders et. al., 2016).

A relevant case which needs further analysis to lent clarity on the issue at hand is Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. The case relates to the issue of the appropriate assessibility of the payments which the appellant receives from the contract enacted with a newspaper company. As per the relevant details of the contract, the appellant derives payment from the payment for making disclosures about her marital life through the interview medium. The interest of the newspaper in this information can be understood from the fact that her husband was convicted in a robbery which has become highly popular during those days (Sadiq et. al., 2014). The wife revealed the information to the company’s representatives who then condensed this in a book format and at the end the appellant was asked to sign on each page for authentication purposes (Coleman, 2011).

When the matter came to the court, it ruled that the receipts were of capital nature and no tax liability arose for the appellant. The central reason as explained by the court for the same was that essentially that the payment was made by the company to gain access to previously undisclosed private information having material worth. The fact that the appellant gave interviews does not amount to any productive activity being done and the interview was done as it acted as a medium to enable the transfer of information from the appellant to the company. Since, the underlying contract was for gaining access to the intangible capital asset that is already present at the time of contract, hence the receipts were of capital nature (Nethercott, Richardson & Devos, 2016).

Application

In wale of the discussion regarding the above case, Hilary’s case needs to be analysed.

The profession for which Hilary is known for is mountain climbing and he has never engaged in any writing activity. Despite being aware of this fact, the newspaper gives an offer only because she wanted to gain access to the valuable information about personal life of Hilary. By writing the story, Hilary was merely transferring the information to the newspaper which could have been enabled through interview of any other medium. Also, through the payment of $ 10,000, the newspaper is able to get the rights with regards to this information. Thus, the proceeds would be capital as it involves transfer of one capital asset from Hilary to the newspaper.

The argument stated above can also be used to account for the cash inflows arising from the sale of manuscript and photos to Mitchell Library. The commercial value of manuscript does not lie in the fact that it is written by Hilary since her writing skills are not appreciated but rather from the fact that it contains information that deals with the personal life of Hilary. In case of photographs, the commercial value is derived that the photo depicts Hilary on her climbing missions and is not related to the fact that the photos are clicked by Hilary or someone else. Hence, all proceeds are capital in nature and thus not assessable for tax.

Absence of profit motive

Unlike previous case where Hilary started writing the story with the intention of earning money, here she is driven only by satisfaction and hence indulges in writing. Since, Hilary is indulging in an activity where she does not have any proficiency and the same is being enacted without any profit motive, hence any proceeds that may be derived would be outside the ambit of assessable income under Section 6(5) (since writing is not her profession) and Section 15(15) (since profit motive absent). Thus, the proceeds would not be taxable since Hilary would be deemed to engage in writing hobby (Sadiq et. al. 2014).

Conclusion

It is fair to conclude on the basis of the arguments extended above that neither of the proceeds derived by Hilary would be classified as income from personal exertion and further all proceeds would be non-assessable in nature.

2. Issue

As per the relevant case facts, the son has approached for housing loan to mother who gladly obliges by extending a sum of $ 40,000. In accordance with the verbal agreement between the two parties, this money is to repaid back after five years. The son offers to pay interest at 5% pa which is denied by the mother as has no intention to earn any income through interest on the loan facility. The son is able to repay the complete debt in two year only when he passes on a cheque of $ 44,000 to the mother where the incremental amount represents the 5% interest for a period of two years. In wake of these facts, the impact of the above cheque on mother’s assessable income needs to be analysed.

Rule

In case of repayment of borrowed capital, there is no ambiguity with regards to the underlying tax treatment accorded to the principal repayment as the same amounts to capital receipts and hence is non-assessable (CCH, 2014). However, with regards to any additional payment received the following options arise.

Ordinary income (Section 6-5) – For incremental payment to be assessable in accordance with this section, it should either be derived from some investment made by the taxpayer or should have been obtained from a money lending business which is operated by the taxpayer on a routine basis (Hodgson, Mortimer & Butler, 2016).

Ordinary income (Section 15-15) – For incremental payment to be assessable in accordance with this section, the transaction should be of isolated nature and entered into with the explicit intention of making profits. For instance, if an individual not engaged in money lending, lends money with the intention of earning interest income, then the interest payments would be recognised under Section 15-15 (Gilders et. al., 2016).

Tax exempt Income (TR 2005/13) – For the additional received payment to be regarded a gift, the following conditions need to be complied with (ATO, 2005).

Change of ownership as part of the transfer.

The transfer should be on voluntary basis without any threat or obligation from the recipient.

The transfer should be initiated without mutual or reciprocal expectations to be extracted from transferee.

Transfer initiated by feelings of personal nature along with benefaction.

 

Application

With regard to the above, it is apparent that the main issue is to determine the precise status of $ 4,000 given as interest by the son in accordance with the discussion above.

Ordinary Income (Section 6-5) – Based on the limited information given, there is no evidence that mother is operating a money lending business and also the payment is not attributed to any security which pays interest. Thus, the current section does not account for this payment.

Ordinary Income (Section 15-15) – Based on the information give, it is evident that mother had no intention to obtain interest income and hence in the absence of profit motive, the current section fails to account for this payment.

Tax exempt income (TR 2005/13)

Mother obtains the payment by way of cheque written in her name.

Despite the mother not wanting any interest, son has given to the mother this $ 4,000 payment.

For this token payment, the son does not expect any reciprocal benefits from mother.

The intention for making this payment is personal with a sense of gratitude for the help extended.

Since, all the terms fulfilled, hence $ 4,000 is gift.

Conclusion

The mother does not draw any assessable income from the given transaction.

3. Part a)

It is known that capital gains derived on only capital assets are subject to CGT that have been acquired on or after the cut-off date i.e. September 20, 1985. Scott’s purchase of the vacant land would fall under the purview of a CGT exempt asset since it was bought in 1980. However, same cannot be said about the house which was constructed in 1986 (Barkoczy, 2014).

Thus, on the property sales proceeds of $ 800,000, a part would be exempt from CGT while another part would attract CGT. Hence, it is imperative to ascertain the valuation of house from the property valuation (CCH, 2014).

Contribution of the house to the overall property price at the time of construction i.e. 1986 = (Price of house/Price of property)*100 = (60000/(60000+90000))*100 = 40%

Hence, sales proceeds deemed to have been obtained from the house = 40% of 800000 = $ 320,000. Now, we need to estimate the taxable capital gains based on the house using the methods available below (Coleman, 2011).

Indexation Method (Section 114-1)

Taxable capital gain from sale of house = Proceeds from house – Construction Cost (inflation adjusted) = 320,000 – [60000*(68.72/43.2)] = $224,600

Discount method (Section 115-25)

= (50/100)*Capital gains) = 0..5*( Proceeds from house – Construction Cost) = 0.5*(320000 – 60000) = $ 130,000

Hence, the net taxable capital gains for the current year amount to $ 130,000.

Part b)

As per, Section 116-30, ITAA 1997, the capital gains computation is conducted by deployed the greater value from the following two values (Austlii, nd).

  • Asset’s actual selling price
  • Asset’s market value

As per the information provided,

  • Asset’s actual selling price is $ 200,000
  • Asset’s market value is $ 800,000

Thus, even in this case, $ 800,000 would be used and hence for the current year the taxable capital gains would amount to $ 130,000 only.

Part c)

The question states that now the property is not under individual taxpayer ownership but under company. Hence, discount method is not applicable and hence gains are computed using indexation method (Gilders et. al., 2016). The capital gains computation as per this has already been carried out in part (a) and the taxable capital gains would be $ $ 224,600.

 

References

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 15, 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 15, 2016)

Barkoczy, S 2014, Foundation of Taxation Law 2014,6th eds., CCH Publications, North Ryde

CCH 2014, Australian Master Tax Guide 2014, 52nd 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 2014, Australian taxation law 2014, 7th eds., CCH Australia, North Ryde

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