Australian Income Tax Act: Taxation On Individual Pay, Fringe Benefits Tax, Gift Tax, Capital Gains Tax - Essay.

Issue: Hilary's income from Daily Terror newspaper, manuscript sales and sale of sport snaps

Discuss about the Riches V Westminster Bank Ltd.

Issue : Hilary is a well renouned and a popularly known lady from the sports background who  had gained immense popularity. She was a peak climber and was very musch professional in her sport. This professionalism and popularity drove her to earn money from different soucrces and from her sport. She gained immense fan followers who would like to know everything about her and her success. Thus she was offered an amount of $10,000 by the Daily terror newspaper who wanted to publish her life story for her fans and general public. Eventually she was required to assign all her title, rights and interest in the copyright to the Daily terror newspaper. Besides, she was interested to have snaps of her sport which she managed to put on sale for which she received $2,000 and she also earned $5,000 by selling manuscripts to the Mitchell Library.

Rule : As described in section 6 of ITAA, 1936, wage from an individual effort is characterized as ‘salary comprising of profit, pay rates, commission, compensation or rewards in connection to any adminstrations rendered. Each one of this pointers would be deemed to be treated as a pay of an individual as per the Australian Income Tax Act (Acts, 2015)

Analysis : According to the given scenario the pay received from the daily terror newspaper cannot be treated as an individual pay while the other two payments received by Hilary shall be considered as an individual pay as she is regularly engaged in such work.

Conclusion : Thus with a view to above scenario and rules it is concluded that the two payments of $2000 and $5000 respectively are taxable under the individual pay and the payment of $10000 is to be treated seperately.

Hilary was a peak climber lady and not an author or a story teller. In case she was engaged in full time job of offering articles on her life story for her living, then the amount earned would have been considered as an individual wage.

Issue : Fringe benefit tax is the tax applied by the Australian Taxation system levied on the non-monetary benefits provided by the employer to his employees in the course of employment. This tax is levied on the employer irrespective of the fact that the employee is getting the benefit directly or indirectly. Under this context the employee includes all employees whether former or current but excludes casual and contractual persons working for the enterprise. In the given issue, Eric has provided a car to his employee for use for a period of 183 days during a year which he had purchased at an amount of $50,000. The distance covered by the employee during the said period is 16000km and the employee had contributed $1000 to his employer, Eric towards the running cost of the car along with the relevant documents.

Rule: Definition of wages under section 6 of ITAA, 1936

Rule : Fringe benefit tax is levied on the employer in case the employer provides the employee with a car for the purpose of the employee’s private use. The tax is not levied if the car is provided for work purpose. Thus, if the car provided is used for the dual purpose, then the tax shall be levied on proportionate basis on the employer. The taxable value of the fringe benefit tax can be calculated using two methods namely Statutory formula method and operating cost method. Statutory Formula prescribes that the base value of the car shall be reduced by one third of its value if the same is being leased or owned for four years or more. Further, a falt rate of twenty percent is applied irrespective of the diatance travelled for a single car. The contribution received from the employee shall be deducted while computing the taxable value under statutory method. However, we are required to calculate the fring benefit tax using the statutory formula method and the same is being calculated hereunder (Givernment, 2015)

Analysis :  Total distance travelled is 16000km.

The base value of the car shall be $50000 since four yaers has not been elasped from the FBT period to get the one-third reduction.

The taxable value using the statutory method [{(50000-1000)*20%}*183/365]    =  $4,913.4

Conclusion : Hence, in context of the above secnario and with respect of the above provisions of the Australian Income Tax Act , the employer shall be liable to pay car fringe benefit tax for the car provided to his employee for his private use and the total taxable value calculated on such transaction comes to $4,913.4 which is taxable in the hands of the employer and on the other hand the employee is exempt from any tax to be paid on such transaction.

Issue : In the given scenario the mother has given a short term housing loan of $40,000 to her son which the latter has to repay after five years a consolidated sum of $50,000. This was agreed by both the mother and the son. The arrangement was not on papers but was just a mere oral communication between the two which established that the arrangement was purely based on a relationship between the mother and the son. Also, the loan was advanced without any security .Further, the mother has specifically requested the latter not to pay any interest amount in the five years. Now, the son had repaid the loan after two years along with 5% additional amount . The whole amount was repaid through a single cheque by the son to his mother.

Analysis: Taxability of Hilary's income

Rule : The contract or arrangement was totally based on a mother - son relationship and neither any formal contract nor any security was involved on a loan of $40000 advanced to the son by his mother. So, no appropriate provisions shall relate to such a scenario and hence we should look forth other case laws to comprehend the certainities and appropriateness of the case.

Analysis : In view of case of Riches v Westminster Bank Limited (1947) AC 390, it ws held that the commission charged shall not be treated as interest. Further, in this case there is no obligation on the son to pay the interest to his mother on the loan advanced by his mother but the son has paid an additional amount out of courtesy. Thus we can say that the additional amount paid was made out of love and gesture and not by any legal obligation. Hence, such amount shall be treated as a gift in the hands of mother from his son rather than an income in form of compensation (Halstead, 2015)

Conclusion : With view to above case law and the issues involved in the scenario it is concluded that the additional amount received by mother from his son after two years is just out of love and courtesy and not through any legal obligation. Hence, such amount is not taxable in the hands of mother and shall be treated as gift from his son.

In simple language Capital Gains’s is described as an excess of sale value of an capital asset over its actual cost of acquisition. Similarly, Capital Loss is defined as an excess of actual cost over its sale value. For the capital gain / loss to be incurred it must be assured that the asset sold or transferred must be a capital asset. The capital loss can be carried forward for a definite time period and can also be allowed to set off against other capital gains as per the provisions of the australian Income Tax Act. Where the asset transferred is a long term asset , the cost of acquisition of such asset shall be subject to indexation method. Further, if the owner of the asset is an individual, then it has an option to opt refund methology or discount procedure. However, the same is not available for persons other than individual. On the other hand any asset purchased before 20.09.1985 wpold not be subject to capital gains as per the Australian taxation rules.

Conclusion: Tax treatment of Hilary's income

The case is about an individual named Scott who is an accountant by profession residing in Australia. He purchased a vacant land for the first time in Brisbane on 01.10.1980.  He further constructed a house on that land on 01.09.1986 costing $60000 when the fair value of land purchased on an earlier date was $90000 and the same constructed flat was given on rent by Scott. However, it was witnessed that Scott sold the said property at auction on 1^st of March for a total consideration of $8,00,000. Hence with a view to above provisions it is clear from the facts that the transfer of property is liable to Capital Gains in the hands of Scott. However, being an individual he has an option of opting either the indexation method or the discounting procedure whichever is more beneficial to him. The computation from both the methods are hereunder  (Clark, 2015)

The value of both land and building constructed on land amounts to $1,50,000 being 60% contributed towards land and balance 40% towards building. As per the Australian laws, the property purchased before 20.09.1985 shall be exempted from capital Gains. Hence only the 40% of the portion shall be taxable for the purpos of computing capital Gains tax.

Selling Price of the Property = (800000*40%)   = $3,20,000

Cost of Acquisition                                                = $ 60,000

Capital Gains = (320000-60000)                         = $ 2,60,000

Now, Scott being an individual and property being held by him for than 12 months , refund of half the capital gains would be allowed to him. Hence =, the capital Gains Income would come to (260000*50%) = $1,30,000 .

This method involves exploring the cost of acqisition of the property by considering the inflation rate of the economy.

Indexation for the year of sale ie 1999 was 68.7

Indexation for the year of construction ie 1986 was 43.2

Indexed Cost of aquisition of building [68.7/43.2*60000] = $95,400

Sale Value of the property is $3,20,000

Capital Gains Income = (320000-95400) = $2,24,600.

It is observed from both the methods that the capital gains income in the discounting method was much lower as compared to Indexation method and so Scott shall choose the discounting method that would ethically reduce its tax liabilty.

In the given scenario the property is being sold to his daughter for a consideration of $2,00,000. As per the provisons of the Australian Tax Laws the sale value of the capital asset on being transferred shall be higher of the market value of the property as estimated by the Government or the actual sale value. Hence, in the given circumstance, the sale value of the property shall be considered as $8,00,000 and not the actual sale value ie $2,00,000.

Accordingly, being the sale value same as that in Part A, the Capital Gains income of Scott shall be same as Part A ie- $1,30,000 (conversation, 2015)

In the given situation the owner of the property is a Company and not an individual. In such a case, the provisions of Discounting method shall not be applicable to the company and the company shall follow the Indexation method compulsarily.

Thus, the indexation method would result in the Capital Gains Income of $2,24,600 in the hands of the company as caluculated in Part A of the question (Burman, 2015)

Acts, C. C. (2015). INCOME TAX ASSESSMENT ACT 1936. Retrieved from https://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1936240/

Burman, L. (2015). Taxing Capital Gains in Australia:. Retrieved from https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/411857-Taxing-Capital-Gains-in-Australia-Assessment-and-Recommendations.PDF

Clark, A. (2015). Capital gains tax:. Retrieved from https://static.treasury.gov.au/uploads/sites/1/2017/06/03Clark.pdf

conversation, T. (2015). Articles on Capital gains tax. Retrieved from https://theconversation.com/au/topics/capital-gains-tax-2813

Givernment, A. (2015). Car fringe benefits. Retrieved from https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Car-fringe-benefits/

Halstead. (2015). RICHES V WESTMINSTER BANK LTD: 1947. Retrieved from https://swarb.co.uk/riches-v-westminster-bank-ltd-1947/