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Discuss About The Income Concentration And Top Income Tax Rates.

Case Study on Private Exertion Income

For an ordinary income to for the part of the taxpayer’s assessable income during the particular year under “section 6-5 of the ITAA 1997” it should be derived must be derived by the taxpayer in the relevant year (Clarke, 2017). In order to consider the receipts as personal exertion it must be produced from the employment or services rendered there must be a sufficient connection with the activities. The court of Law in “British Columbia v Ostrum (1904)” stated that the receipts that are produced through the employment or through the services rendered is held as income (Stewart, 2017).

The court of law in “Kelly v Federal Commissioner of Taxation” further provides that there is should be existence of sufficient connection between the receipts that is obtained from the direct or the indirect sources (Peiros & Smyth, 2017). For an income to be classified as the ordinary income usually connection to the employment or the services rendered is held as the most important factor that is associated with the revenue generating activities. The private exertion income generally comprises of the fees, wages, salaries or any form of business receipts.

The study here revolves around in understanding that private exertion income that is derived by Hilary in the relevant year. Hilary evidently was the mountain climber. On one occasion Hilary was approached by the Daily Terror that was the newspaper company who expressed the interest in knowing the Hilary’s life story. Hilary was required to provide service by writing the book and title into the book that was written by Hilary would remain vested in the hands of the Daily Newspaper.


Consequently, under the “section 6-5 of the ITA Act 1997” provides an explanation that taxpayers receiving money from the for an exclusive media interview of a life story is considered taxable (Buchanan & Consett, 2016). The agreement that are signed by the taxpayer before such media rights and the sum of money that are paid are taxable in the hands of recipients. All the rights, title and interest including the copyright in the interview are exclusively within the ownership of the media channel. The term derived has been defined under “section 995-1 (1) of the ITAA 1997” which is only within the meaning affected under “section 6-5 (4) of the ITAA 1997” (Jones, 2017). The personal services that are rendered by the taxpayer are considered for assessment. In “Brent v Federal Commissioner of Taxation (1971)” generally the receipts from the personal service income are considered for taxable purpose.

Tax Implications of Selling Manuscripts and Photographs

The case study provides that Hilary received a payment of $10,000 which should be classified as receipt from personal exertion. This is because Hilary was required to render the service in order to obtain income. The amount that was provided to the Hilary by the Newspaper was reward for service which is generally taxable as the ordinary income under “section 6-5 of the ITAA 1997”. The amount would be included into the Hilary taxable income would be considered for assessment.

Latter events that unfolds in the case study provides that Hilary on one occasion sells the manuscript to the library for $5,000. There were several photographs that was taken by Hilary when she was climbing the mountain. The photographs were sold by Hilary and she received $2,000. The amount of $5,000 and $2,000 should be viewed as the ordinary income and should be included into the taxable income of Hilary. With reference to “section 6-5 of the ITAA 1997” the amount that was received from selling was derived by the taxpayer in the relevant income year (Krever & Mellor, 2016). Referring to the case of “Housden (Inspector of Taxation) v Marshall (1942)” where an agreement was made by the taxpayer where he would be making all the experience available as the Jockey that included the sale of the newspaper cuttings and photographs.

Preceding the explanation from the above cited case it can be stated that the selling of the photographs and manuscripts to the library would be treated as income that is derived from the sale and was having the appropriate connection with the activities of Hilary.

An alternative situation that is faced with the case of Hilary is understanding the tax consequences upon the event if the book was written by taxpayer for personal purpose and then selling those books in the market. It is worth mentioning the judgement of the taxation commissioner in “Hobbs v Hussey (1942)” provided that taxpayer had apparently been the criminal and obtained an amount by selling the rights for his autobiography to the newspaper media that was published (Black, 2017). Similarly, in the above considered situation is applicable in the case of Hilary to determine the nature of receipts. The sale of book and receipts will be considered as the royalty in the event of Hilary. These receipts should be treated as income under “section 6-5 of the ITAA 1997” within the ordinary concepts.

Taking into the consideration the above stated analysis it can be stated that the information provided as the result of exclusive media rights by Hilary would be considered as the assessable income since it constituted personal service income. The income should be classified as the personal exertion income and should be considered for taxation under the ordinary concepts of “section 6-5 of the ITAA 1997”. On the other hand, selling the manuscripts and photographs constitutes income from personal exertion and taxable as the ordinary income under “section 6-5 of the ITAA 1997”.       

Tax Consequences of Book Writing and Sales

The issue is related with determination of whether the interest that is earned by the taxpayer during the relevant income year would be considered as assessable ordinary income under “section 6-5 of the ITAA 1997”.  

  • “Section 6-5 of the ITAA 1997”
  • “Scott v Commissioner of taxation (1935)”
  • “FCT v McNeil (2007)”

Interest are generally received, unless in the interest of lending money or the interest payment that is associated with the part of the business activities. These interest are considered as income when the taxpayers earns those incomes either as the gain or derived beneficially. Referring to the “section 6-5 of the ITAA 1997” ordinary income is those incomes that comes into the taxpayer in the form of the ordinary income (Marriott, 2016). Receipts are considered as the income and should be treated in compliance with the ordinary concepts of “section 6-5 of the ITAA 1997”. Accordingly, in the case of “Scott v Commissioner of taxation (1935)” receipts must be treated as ordinary income under the ordinary concepts.

It is worth mentioning that an element carrying the nature of income is regarded as income snice it is home coming for the taxpayer. An item of having the character of income has been derived when it carries the realisable value (Joseph et al., 2015). It is necessary for the taxpayer to judge the character of income in the circumstances when it is derived by the taxpayer. In order to have the income nature an amount that is derived by the taxpayer should be a gain.

As understood in the situations of “FCT v McNeil (2007)” the judgement explained that income should be judged based on the circumstances of the derivation by the taxpayer (Saez, 2014). The case study explains that the taxpayer made loan to the son for the purpose of short term finance. The agreement of the loan provided that the son would repay the loan amount by within five years. However, it was noticed that the son within the span of two years repaid the principle loan amount and also paid the interest amount.

The interest that was received by the taxpayer constituted income based on the ordinary concepts of section 6-5 since it carried the characteristics of home coming for the parent. Referring to “FCT v McNeil (2007)” the receipt of interest from loan carries the character of income which attracts tax liability (Sharkey, 2015). The amount would be included into the taxpayer’s assessable income as the chargeable income however, the parent is not required to include the loan principle since it is regarded as the income since it carries the element of gain for the parent.        

Determining Assessable Ordinary Income from Interest

The amount of interest received would be included into the taxpayer’s assessable income as the chargeable income under “section 6-5 of the ITAA 1997” on the basis of the ordinary concepts.                                       


According to the “section 102-5 of the ITA Act 1997” provides that an individual is required to include into their tax return the net amount of the capital gains during the income year into their taxable income (Richardson, 2016). The capital gains tax is applicable only on the assets that are acquired on after the 20 September 1985. “Section 110-25 of the ITAA 1995” provides the cost base of the property (Klein, 2016). However, “section 110-35 of the ITAA 1997” provides that the cost base of the property is also includes the incidental costs. According to the “section 108-5 of the ITAA 1997” an explanation of the CGT assets has been provided. The CGT assets includes any form of property or any form of legal or the equitable rights. The first and the foremost step in understanding the transaction or the event that is subjected to the CGT is to assess whether the CGT event has taken place.

Assets that are acquired prior to the introduction of the capital gains tax will be exempted from the capital gains tax (Cao et al., 2015). The current situation provides that the Scott was the owner of the vacant land that was purchased by him prior to the introduction of the CGT. However, Scott started construction the land after the introduction of CGT (Lombard, 2017). The house was built on 1st September 1986 and as a result it would classified as the CGT asset based on the “section 105-55 (2) of the ITAA 1997”.

CGT event A1 occurs when an individual sells an asset and makes a capital gains or loss from there on. Later the land was sold by Scott after using the land as the rental property. The sale of land has given rise to the CGT event A1 (Jacob, 2018). The sale of land has given rise to the capital gains tax and would be considered for taxation purpose.


The purchase consideration and the cost of construction forms the part of the cost base of the property.  As evident from the above stated computations it can be stated that the gross amount of the capital gains from the sale of the land was stood $800,000 whereas the net capital gains stood 650,000.

Laws and Applications

As understood from the case study, in another alternative it is noticed that the Scott has decided to sale the property to his daughter for an amount of $200,000. It can be stated that the property was sold to the daughter below the current market value however upon sale it resulted in gain. Similarly, upon the sale of the property a capital gains tax of $50,000 was made after deducting the construction costs and the purchase costs. Therefore, Scott would be held liable for taxation relating to the capital gains that is made from sale.

In the final alternative if it is noticed that the owner of the property was the owner rather than the individual then in that case there should be deduction of the amortization cost and the tax amount on the part of the company.

Reference List:

Black, C., (2017). The Attribution of Profits to Permanent Establishments: Testing the Interaction of Domestic Taxation Laws and Tax Treaties in Practice.

Buchanan, R. & Consett, E., (2016). Section 974-80 ITAA97: The current state of play. Tax Specialist, 19(5), p.217.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ... & Wende, S. (2015). Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Clarke, D., (2017). Private mineral royalties in resource sector: M and A transactions-another taxable commodity. Australian Resources and Energy Law Journal, 36(1), p.82.

Jacob, M. (2018). Tax regimes and capital gains realizations. European Accounting Review, 27(1), 1-21.

Jones, D., (2017). Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.

Joseph, S.A., Walpole, M. & Deutsch, R., (2015). Taxation of Sovereign Wealth Funds-A Suggested Approach. J. Australasian Tax Tchrs. Ass'n, 10, p.119.

Klein, E., (2016). Universal basic income. Arena Magazine (Fitzroy, Vic), (142), p.6.

Krever, R. & Mellor, P., (2016). Australia, GAARs–A Key Element of Tax Systems in the Post-BEPS World.

Lombard, M., (2017). Everything producers need to know about tax: current affairs. FarmBiz, 3(2), pp.10-11.

Marriott, L., (2016). Taxing corruption in Australia and New Zealand. Austl. Tax F., 31, p.37.

Peiros, K. & Smyth, C., (2017). Successful succession: Tax treatment of executor's commission. Taxation in Australia, 51(7), p.394.

Richardson, G. (2016). The Determinants of Tax Evasion: A Cross-Country Study. In Financial Crimes: Psychological, Technological, and Ethical Issues (pp. 33-57). Springer, Cham.

Saez, E., (2014), February. Income Concentration and Top Income Tax Rates. In Presentation at the Tax Policy Center & USC Conference: Growing Income Inequality: Is Tax Policy the Cause, the Cure or or Irrelevant.

Sharkey, N., (2015). Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), p.10.

Stewart, M., (2017). Australia’s Hybrid International Tax System: Limited Focus on Tax and Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer, Cham.

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