1. Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?
Answers:
Issue
The objective is to ascertain if the various payments received by Hilary would fall within the ambit of income generated from personal exertion under s. 6(5), ITAA 1997 in light of the following facts.
Hilary by profession is a mountain climber who has accumulated fame through her expeditions. She has been offered $ 10,000 for writing her story by a local newspaper which is gladly accepted by her and story is delivered along with the associated copyrights. Further, sale of manuscript along with the expedition generate a cash flow of $ 5,000 and $ 2,000 respectively.
Rule
When the taxpayer gets involved in an activity that generates anything having commercial value, then the proceeds derived from the sale of the result of the exertion would amount to income from personal exertion. However, at times, it may so happen that even though personal exertion is involved yet nothing of commercial value may be created. A relevant case which merits mention in this regard is Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. In this particular case, the wife of a robber who garnered fame through involvement in a much fame robbery The newspaper wanted information about the private life of the robber which could be obtained only through the wife and hence paid a hefty amount to the wife. Through a series of information, all the relevant information was divulged by the wife. Based on this information, a book was written by the newspaper agency and the wife had to sign all the respective pages for authorization of the content. The court in this case ruled the proceeds as capital since the act of interviewing did not create anything new but proved to be medium for the transfer of the information which was the real asset that the newspaper agency wanted.
Application
The decision in the case discussed above can be extended to the Hilary case. It is apparent considering Hilary has no experience in writing and is not known for the same, extending $ 10,000 offer would be ridiculous and would not make sense. But the newspaper is extending this huge sum so as to gain rights on the personal information which would be expressed as part of her story. This is further validated by the payment of $ 10,000 by the newspaper agency to Hilary. Hence, this payment is essentially for the copyrights of the information about personal details of Hilary which had commercial worth owing to the fame garnered by her through her mountaineering profession. The act of writing did no produce anything of significance but provided a medium for transfer of information which the buyer desired. Thus, the payment would be capital in nature. This argument may also cover the sale of photographs and manuscript whose commercial worth is derived on account of their innate content and not in the manner of the expression. Hence, these are not art pieces but are associated with Hilary and her fame provides them value. Thus, the sale of these would also result in capital receipts. Thus, the above payments are not income on account of personal exertion.
Motive Alteration
If Hilary is driven by satisfaction as the sole motive to write the book and does not intend to profit from the same, then also, there would not be any difference in the classification of the proceeds. Again, the contents of the book or story would have no intrinsic worth except for the fact that it has personal details about a famous mountain climber Hilary. Thus, whenever the story or book would be sold, the proceeds would be capital and thus not income from exertion.
Issue
A home loan assistance worth $ 40,000 is extended by the parent to her son who promises to make the repayment within a period of five years along with applicable interest at 5% pa. The parent expresses her desire of not wanting any interest income but only wanting timely repayment of principal. However, the son returned the complete debt within two years and gave a cheque of $ 44,000 in favour of the parent. The concern is to ascertain the impact of this payment on the assessable income of the parent.
Rule
The loan repayment would have repayment of principal coupled with interest payment. The principal repayment would not attract any taxation liability on account of it being a receipt of capital nature. However, the taxation treatment of the incremental amount would require exploration of the following possibilities.
This payment may be assessable income for which it has to be covered under two relevant sections namely s. 6-5, ITAA 1997 and s. 15-15 ITAA 1997. Section 6-5 accounts for income generation from regular activities and thus would be covered only if the taxpayer has a business related to lending of money where such transactions are common. For considering the income under s. 15-15, transaction may be one off or isolated but has to be indulged with clear intention to profit.
If both the above sections fail to apply, then the increment amount would be termed as gift especially if the following conditions are met (TR 2005/13)
- Voluntary transfer
- No expectation in return
- Actual ownership change
- Benefaction intent
Application
The above discussion clearly reflects that $ 40,000 out of the total sum of $ 44,000 would be exempt from any tax owing to receipt of capital nature. With regards to incremental amount of $ 4,000, s.6-5 does not seem to be applicable as loan extension has not been done in a business like manner as relevant paper work, collateral and other formalities are lacking. Further, this amount would not fall within s. 15-15 as parent made it clear that she does not desire any profit, hence lending not driven by profit intention. The $ 4,000 would be gift as it is voluntary, ownership changed in parent’s favour, lack of expectation and driven by gratitude and
For the repayment amount done by the son, the parent would not have to pay any tax as the complete $ 44,000 is exempt from tax.
Scott’s property requires division into two separate assets for the computation of CGT liability. One of these assets would be the land which he purchased in the pre-CGT era and hence is exempt from CGT related liabilities. However, the same cannot be said about the house which was constructed when CGT was applicable and therefore it would apply on the house. Considering that the combined market value of the property is given as $ 800,000, the first objective is to find out the market value of the house presently which is indicated below.
Thus, sales proceeds from house = $ 320,000
Cost base of the house = $ 60,000
Indexation Method
Adjusted cost base taking into cognizance the change in inflation from 1986 to September 1999 = 60000*(68.72/43.2) = $ 95,400
Taxable gains on the house = 360,000 – 95,400 = $224,600
Discount method
Capital gains (Gross) = 320,000 – 60,000 = $ 260,000
As per Div 115, since the ownership period is greater than one year, 50% rebate can be availed by Scott.
Capital gains (Net) = 260,000 - (50/100)*260,000 = $130,000
Scott would need to pay CGT on $ 130,000 due to the sale of the property.
Scott liquidates the property to his daughter at a fraction of market price i.e. $ 200,000. However, the CGT liability would not alter as s. 116-30 tends to deploy the higher of the selling price and the market value in the capital gains computation. Even though Scott has reduced the selling price but the market value of $ 800,000 for the property remains intact.
Now the owner is not a individual but a company. For CGT liability computation, companies have to use indexation method only and thereby CGT would be payable on $ 224,600 which are the net capital gains on the house sale in accordance with indexation method.