Income From Personal Exertion And Assessable Income: Three Cases From Taxation Law

1. Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.

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? 

2. Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay
$50,000 at the end of five years.

Reconsider this question in light of the following facts. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.

Discuss the effect on the assessable income of the parent.

3. Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000. 

a) Based on the information above, determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
b) How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?
c) How would your answer to (a) differ if the owner of the property was a company instead of an individual?

Case 1: Mountain climber and income from personal exertion

Under the above case Hilary is a mountain climber and she is offered $10,000 for her life story if she writes her story. And after receiving the offer she writes her story without the help of ghost writer and assigns the interest and rights in the copyright for $10,000 (Lingopro. 2012). After the publication of the story she gets paid. After that she sells the manuscript for $5,000 and some photographs taken by her for $2,000.

Income from personal exertion is the income that is produced mainly from the personal efforts and skills of an individual.  An income is said to be personal exertion income if more than 50% of the amount of the income received is through the personal skill, expertise or labor (Clark 2004).

The ghost writer is the one who helps the other person in writing the documents or the story of the other person for some amount. He is said as a ghost writer because he remains unknown and as a ghost to the outside world and is not known to the other people (ATO 2014). He is a complete stranger and his identity remains hidden to the outer world. He just offers his personal expertise and knowledge to the other person. The stories or articles or pictures when are published does not bear his name. the person who has hired the ghost writer is given all the credit and all the praise is given to him. The ghost writer remains like a nobody and is like the behind the scenes man (Fortmann 2015).

In the above case all the three payments that are the rights, photographs clicked by her as well as the manuscript are to be considered as the income from the personal exertion as the book was written by her personally and the photos and the rights that she sold were in accordance of the law. Also, if she would have written the story for her own satisfaction and would have decided to sell it later on than the situation would have been the same (Withers 2012).

Conclusion

Here, it can be concluded that the three payments are the income from personal exertion as whatever she earned comes out from the labor and talent of her own and isn’t because of someone else. The answer here would also not differ if she decided to sell her pictures or the written document later on in the future to some firm or other person (Annoynomous 2011).

Hence, all the income which she receives is her personal income and she is not liable to give it to anyone. As she has written the story of her own, she has even written the story herself and has not taken help from any of the persons, (CCH Australia 2011)she is not liable to pay the income which she receives to anyone else (Wikinson 2012). The amount which she receives for her pictures as well is her own personal money as she has clicked all the pictures herself. As she has taken no help from any of the persons on her writing the documents and even while clicking the pictures she is not accountable to anyone around. She does not need to share her money or the income which she receives with anyone as the money which she receives is her own hard earned money and her personal money which she receives from her personal exertion (Scriven 2011).

Case 2: Short-term housing loan and assessable income

Hence, the income which one receives from his own efforts, i.e. in which she has done all the work personally and put in the efforts without the help of other people, he has got the whole right over the income he receives as well over the things which he has produced. All the copyright of the items is with him and he can sell those goods later in life whenever he or she wants and he is not (CCH Australia Limited 2011) answerable to anyone else. The money which is thus gained from the personal exertion is one’s own and he has all the right over it and he has got all the authority to share or not share that amount with anyone else.

2. Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years.

The loan is given to the son on basis of repayment. The son has to repay the amount and also the interest of 5% is being asked form it (Annoynomous 2014). The mother has been asked the son to repay the amount and that there was no former or original deed or agreement which states about such transaction or that the son has to repay the amount together with the amount.

It is also stated in the question that the amount which had to be returned after the period of 4months has been returned with in the period of 2 months together with the amount of interest. The interest amount is given together with the loan amount in one go and that too in one check to the father by his son. Hence, there is no installments and there is only one check (Krishnan 2008).

Explanation- 

Assessable income is the income which a person receives from other sources except his normal or daily course of business or income generating work. It is acquired from other sources which are also known as the passive sources from where the income is generated. These passive sources are those sources which can be investment, loan, etc. which are not part of the daily or regular income of the person. Regular income is the income which a person receives on a monthly or weekly basis for a work in which he is employed at a particular time. The incomes other than these regular income generating sources are called as passive sources and income generated from this is the assessable income (Lasser Institute. 2007)

The question rises is whether the amount received as interest together with the basic amount is the assessable value or no. the interest of 5% was given by the son together with the amount of $50,000 in the same check where he has returned the basic money of $50,000. If the interest is added in the this amount, it is the basic amount in itself and that income becomes a part of the basic income and is not considered the income from passive sources or the assessable value (Snippet 2008).

Case 3: Sale of property and net capital gain

Similarly, if the amount has been given to the parent in a different check i.e. the basic amount to be returned in one check and the interest charged in the other check, (Kess 2008)the income earned by doing such a thing, in this situation the amount received is the passive income and hence here it will be known as the assessable income.

As the son is not aware that he has to give the interest and there is no formal agreement laid between the son and the father for the lending of money, the son when here gives the amount together with the interest amount in the same check after the given period of time, there will be no assessable income in that amount. There will be no changes the assessable income of the father and the amount cannot be treated as the passive income of the father.

Scott has purchased a land in a certain year for the amount of $ 60000. After six years, he stats the construction over that land and builds a building. The whole amount of the construction was amounting to $ 90,000. Till the current year the house was rented by Mr. Scott. Hence, the total number of years calculated from the date of construction for which the tax would be paid and the years would be calculated comes to 30 years. After the period of 30 years, he sells his house for $ 8,00,000. Hence, with the given information, we are asked to calculate the net capital gain or loss which the person suffers rom (Congress Joint Commission on Taxation. 2005).

Capital goods are the goods which a business house for an individual firm buys for a long period of time. It is for the purpose of investment and are fixed in nature. These goods are not used for daily purposes and are used for business for daily course of transactions. These goods are very costly and are huge source of investment. The depreciation is charged on them on regular basis.

When the capital goods are sold a person can either gain profits or suffer from losses. When the selling price of the capital good is more than the purchase price together with the amount of depreciation and taxes levied on it, it is said that the capital gain has been achieved. But when the selling price of the items is less than the total depreciation and taxes, it is said that loss has been suffered from.

a) In this the amount of capital good and loss has to be calculated for the current year. For the current year the profit would be the difference between the selling price and the amount of cost of input materials in it.

Hence, the capital gain for the current year is

$ 800000 - $ 90000 - $ 60000 = $ 650000.

b) In this case the building is being sold to the daughter. The amount of capital gain will decrease in this case at the amount for which the building is sold is less than the previous question.
hence, the amount of capital gain here is

$200000- $60000 - $ 90000 = $ 50,000

c)  The procedure for calculating the amount profit or loss when a business house purchases the capital goods is different from the case when an individual purchases the capital assets. The certain numbers of formalities increase when the company is purchasing the capital assets and there are certain procedures which need to be followed and complied with in this case.

Hence, in this case when the capital assets are bought by a company the amortization papers are signed by the company. The amortization expenses and the taxes paid till date are deducted from the selling price of the capital goods and the amount If arrived at is in positive numbers, it is the capital gain which is achieved and if in negative numbers it is the capital loss which is suffered by someone.
Hence, the capital gain or loss in case of companies buying the assets are calculated as below-

Capital loss/ gain= selling price for the capital goods- amortization expenses- taxes paid- other expenses.

Hence, from this question one gets to understand certain concepts that there is a difference if a company purchases the capital assets or an individual. When an individual is purchasing the assets the rules and regulations are not that strict of complex. But when a company entity is purchasing the capital goods there are certain rules and regulations which need to be complied in order to fulfill the agreement and to arrive at the capital loss or capital gain achieved by the person selling his capitals goods.

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Annoynomous 2014, Congressional Record, V. 149, Pt. 4, February 25, 2003 to March 10, 2003.

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