Discuss about the Separate Assets for CGT Purposes.
In the given case, Hilary who is a well known mountain climber decides to his story to Daily terror newspaper for $10,000. She writes the story and assigns all the related rights to the news paper. Along with the same she even sold the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for $2,000.
As per the provision of Australian taxation law, any income that has been received by a person from his personal skills and efforts will be regarded as personal services income. An income that has been received will be classified as personal services income if 50% of the amount that has been received by the person is for labor, skill and expertise that have been possessed by the person. If the amount of income that has been received is majorly for the material, tools and equipment i.e. more than 50% then in that case, the entire income will not be classified under PSI income. The personal service income does not get impacted even if the same has been earned by a person who is receiving income from salary or wages. In case of a company or a partnership, if more than one person is working for the company, then for the purpose of the PSI calculation and rules, the same will be applied separately for them. However, there are certain exceptions to the rule. The PSI rules does not apply to the income that has been received by the individual from granting his intellectual property rights like book or computer program me etc. (ATO.Gov)
Thus applying the provisions of above tax laws, it is evident that any income that has been received by a person from sale of his intellectual property rights will not be covered under personal services income. In the given case, being Hilary decides to his story to Daily terror newspaper for $10,000 along with all the related rights to the news paper. Along with the same she even sold the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for $2,000. The life story in this case is form of a book thus in no case, the income that has been received from the sale of life story will be covered in the definition of personal service income. On the other hand, along with the life story, the Hilary sold the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for $2,000. These both will be regarded as personal service income and thus will be taxed accordingly.
If she would have written the story for his own satisfaction and then shoe would have sold later on, in that case as well, the same would not make any difference and still the provision of personal services income will be same as projected above.
In the given case, a mother lent $40,000 to his son as a housing loan. There was a verbal agreement under which the son agreed to give $50,000 back to his mother at the end of 5 years. There was no formal agreement to this loan and the mother did not keep any security in relation to the loan that she has provided to his son. The mother later on asked his son not to provide any interest amount on the loan that she has taken from her. But the son at the end of 2nd year paid the entire amount with the amount of interest that has been calculated at the rate of 5%. He gave one cheque and made the full and final settlement for the entire loan amount.
As per the provision of Australian tax laws, any income that has been received by a person on account of interest income on the loan amount that they have given to the any person or to any financial institution will be taxed as per the income tax laws. However any expenses that has incurred by the person in relation to the interest income will be allowed as deduction. (ATO.Gov)
In the given case, a mother has lent $40,000 to his son and agreed verbally for interest worth $10,000 at times when the amount will be paid by the person. However later on she denied and asked his son to pay the principle amount and ignore the interest component. The intention of the person at times of lending the amount was to earn the interest income but being the agreement was not formal she denied and asked the son to ignore the interest amount, but in spite to the fact, the person paid the interest amount to his mother. In this case the amount of interest so received by the mother will be taxed in his hands as per the provision of the Australian tax laws. The son paid the interest amount at the rate of 5% and made one full and final settlement for the loan amount.
Thus considering the overall picture and the provision of the tax laws, the amount of interest that has been received by the mother from his son on behalf of the loan will be taxed in his hands and will be treated as income.
In the given case, Scott an accountant purchased a vacant land in the year 1980. In the year 1986, Scott decides to construct the house. The cost of the land at the time of purchase was $90,000 and he spent $60,000 on the construction cost. Scott in order to earn rental income decides to rent out the property. The property as result was rented out from the year the same was constructed. In the current year Scott decides to sell the property and sold the same in an auction for $800,000.
As per the provision of Australian taxation law, a capital gain is a difference between the cost price of the asset and the price at which the same has been sold. The government has imposed tax on the capital gain that has been earned by the person. If there has been capital loss in one year, the same cannot be set of from other income of the year but the same can be carried forward and be set off capital gain that has been earned by the person in the coming years. As per the taxation laws, there are certain exemption to the capital gain tax. The house that has been owned by a person plus the depreciable assets etc are not covered in the definition of the capital gain tax and thus the same is ignored. Further, most of the real estate other than the main residence is subject to the capital gain tax laws that have been imposed by the government. From the perspective of real estate, capital gain tax includes vacant land, rental properties etc. Further if nay asset has been held for more one year, the capital gain will be computed after considering the consumer price index (CPI). Further the capital gain tax has been introduced in the country in the year 1985. Thus any asset that has been acquired before 1985 will not be subject to the provision of the capital gain tax laws. On the other hand, for the purpose of the tax laws, the land and the building that has been constructed will be considered as separate. As per the tax laws, any building that has been constructed on the land that has been acquired before 20th Sept 1985 will be treated as a separate asset all together. (ATO.Gov)
Considering the provision of the capital gain tax laws, Scott has purchased the land in the year 1980 for $90,000. The capital gain tax laws were introduced in the year 1985. Thus being he purchased it before the specified date thus, he will not be covered under the provision of the capital gain tax laws. In the given case being the construction has been started from the year 1986, the same will fall in the tax bracket and thus the building so constructed will be covered in the definition of the capital gain tax. In the given case, in order to segregate the portion of the amount that has been received at the time of sale of the house into land and building is difficult. In the given case being the segregation hasn’t been provided thus we will proportionate the same in ratio of the purchase. Thus in that case, the amount received from the sale of the entire construction will be $480,000 for the land and $320,000 for the construction. Now, being the land is not a capital gain asset, thus the same will not be eligible for tax but Scott has earned capital gain worth $260,000 ($320,000- $60,000) from the construction. Thus in that case, Scott will have to pay capital gain tax on $260,000.
If Scott has given the asset to his daughter from $200,000, in that case for capital gain purposes, the transaction will be assumed to be taken place at arm’s length price and thus the capital gain will be computed accordingly. Thus the capital gain will remain same as per above calculation.
In case if the owner of the property would have been a company instead of an individual, then also the provision of the capital gain would have been remained the same.
Thus in the given case, Scott will have pay the capital gain tax on capital gain worth $260,000. In case he would have sold the property to his daughter, the capital gain will be computed at arms lengths price and will be taxed accordingly Further, it doesn’t make any difference whether the property would have been owned by a company or individual.
ATo.Gov.au, Separate assets for CGT purposes, viewed on 29th April 2017, Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Separate-assets-for-CGT-purposes/
ATo.Gov.au, working out your capital gain, viewed on 29th April 2017, Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/
ATo.Gov.au, Capital gains tax, viewed on 29th April 2017, Retrieved from https://www.ato.gov.au/general/capital-gains-tax/
ATo.Gov.au, why do you need a market valuation? viewed on 29th April 2017, Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Transferring-real-estate-to-family-or-friends/?page=3