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Taxation Law : Personal Exertion Of Hillary

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Question:

Describe about the Taxation Law for Personal Exertion of Hillary.

 

Answer:

Introduction:

The study deals with critical evaluation of the personal exertion of Hillary, a mountain climber on two different provided scenarios. The second segment relies on significant assessment of the impact on the assessable income of the client; given the client is a parent. The latter portion of the study sheds light on ascertaining the net capital gain or loss of Scott based on the provided information and the other two alternative scenarios.

Personal exertion of Hillary:

In order to assess the payments of Hillary, it is presumed that Hillary is a permanent citizen of Australia and the woman is legally accountable for paying tax on the income generated in order to comply with the laws of Australian taxation. Hillary could not be adjudged as a professional writer and it is the first time, she has written a ghost story. Thus, the payments received on the part of Hillary by selling the story copyright could be contemplated as the income arising from Capital Gains Tax (CGT). The details of the agreement and the compliance with the Australian taxation law have been presented in a table (Refer to Appendices, Appendix 1).  

Additionally, it has also been observed that Hillary has sold the manuscript to the Mitchell Library along with some photographs. In this context, Smith (2015) stated that the selling of manuscript and related photographs could be termed as the personal assets of the seller. For instance, ‘Brent v FCT (1971) 125 CLR 418; 71 ATC 4195’ deals with the issue of income associated with personal services. In addition, the case also takes into account the consideration associated with the biography of an individual, which could be classified as ordinary income or income from capital gains. The details of the verdict have been presented in the form of a table (Refer to Appendix, Table 2).

According to the alternative scenario, it is assumed that Hillary has written the story for her own contentment and decides to sell the same at a future date. In that case, the transfer of copyright ownership would be treated as the events arising from CGT. This would fall under the ‘Section 15(2) of the Australian Income Tax Assessment Act 1997’. As commented by Athanasiou (2015), the income falling under such section could not arise out of any agreement. Therefore, no agreement could be generated under such circumstances. Hillary has written her autobiography only to earn a certain sum of money from the Daily Terror by infiltrating into an agreement. Therefore, the payments received as income have aroused out of the personal exertion of Hillary. On the other hand, the second scenario does not involve any agreement in the first place and therefore, it could not be treated as personal exertion.

Impact on the parent’s assessable income:

According to the case study, the client is a parent, who has provided $40,000 to her son. The son has made an agreement to repay the debt with additional money amounting to $50,000 after five years. However, the son has cleared off his debt within two years of borrowing along with interest of $44,000. The client has disclosed that the person did not ask for any interest to be paid along with the borrowed amount. The interest amount has been S4000 (40,000 x 0.05 x 2 years), since the amount has been borrowed at 5% rate of interest per annum.

As cited by Petty et al. (2015) remarked that income earned as interest from loan could be regarded as the assessable income of an individual, which is taxable under law. This statement has been further supported by ‘Section 6(5) of the Australian Income Tax Assessment Act 1997’, which deals with interest income. Hence, according to this Australian tax law, the interest amount of $4000 could be classified as the assessable income of the client. For instance, ‘Riches v Westminster Bank Limited ([1947] AC 390 at 400’ highlights the essence of interest, which is a kind of due payment yet to be received on the part of the creditor. In the words of Nyst and McAdam (2014), this could be termed as the profit enjoyed by the creditor through the utilisation of lent money or loss incurred due to no potential utilisation.   

In the provided case, the client has received the lent money before the due date with additional amount of $4,000. Hence, this is a payment received with interest, which depicts the effective utilisation of the lent amount of the creditor. The borrower could present the interest amount paid to the parent in the form of financial support. The client could assert that the additional amount earned is not a portion of the borrowed amount. Under such circumstance, the excess amount earned could be categorised as the ordinary income. This complies with the Australian taxation law of Section 6(5) (Butler, 2016).

Additionally, it has been observed that the loan has been granted to the son for purchasing a house. Therefore, the son could claim reduction for the interest paid on the short-term housing loan. In such a situation, the client needs to present the additional amount earned in the category of assessable income. In this regard, Edmonds, Holle and Hartanti (2015) advocated that the assessable income would be treated as the income arising from interest. Therefore, the sum of $4000 received on the part of the client on the borrowed amount could be treated as the assessable income of the parent for the purpose of taxation.

 

Net capital gain or net capital loss:

a. Net capital gain or loss of Scott based on the provided information:

It is assumed that Scott is a citizen of Australia and engages in the profession of accounting practices. The person has purchased a plot of land in Brisbane on 1980 and constructed a house on the same in 1986. Henceforth, the plot of land and the house would be treated as the personal assets of Scott. As commented by Jones (2016), the personal assets could not be treated as the trading stocks. The net capital gain or loss from the sale of Scott’s house has been computed based on the subsequent points:

The land has been purchased before 20th September 1985. Therefore, it would be treated as the pre-asset related to capital gains tax and the value realised from the sale of the land would not be taken into consideration for capital gains tax (Faccio and Xu, 2015).

The house has been constructed after 20th September 1985. Thus, it would be considered as the post-asset associated with capital gains tax.

Since, the building was constructed before 20th September 1999; the cost base related to the house could be ascertained with the help of the indexation method (gov.au. (2016). Under such circumstances, Scott needs to compute the method of tax indexation. Accordingly, capital gains tax of the individual would be computed.

Considering the above-mentioned pints, the net capital gain or loss of Scott from the rental property sale and the detailed evaluation has been presented in the form of a table (Refer to Appendices, Appendix 3).

b. Net capital gain or loss of Scott in case of the first alternative:

According to the case study, Scott decides to sell the property to his daughter at a promised sum of $200,000. In such a scenario, the person would not be able to enjoy the benefits of sales consideration. As mentioned in the “Income Tax Assessment 1997”, when properties are sold to a member of the family below the market value, the market value would be adjudged as the selling price of such asset. Based on this, the capital gain needs to be calculated by subtracting the market value of the asset on the transfer date from the acquisition cost irrespective of the indexation. Henceforth, the net capital of Scott would remain identical to that of the first alternative.

c. Net capital gain or loss of Scott in case of the first alternative:

The method of indexation could still be applied to determine the net capital gain or loss of Scott. This is because the organisations do not have the relevant right to apply the discounted method under the Australian taxation law (Niemann and Sureth, 2013). Hence, the capital gain would remain the same, as in case of the first alternative.

Conclusion:

From the above discussion, it has been found that Hillary has received the payments from Daily Terror as a part of the income related to capital gains tax by entering into an agreement with the latter. However, the second scenario does not warrant the personal exertion of Hillary, as the sale has been conducted at a future date with no prior intention in the initial stage. From the second scenario, it has been identified that the interest income of the client is $4000, which is taxable under the Australian taxation laws. Finally, the study has concentrated on computing the net capital gain of Scott, in which the value would remain the same for three different scenarios.

 

References:

Athanasiou, A., 2015. Acounting for tax: Accountant as executor... really?!.Taxation in Australia, 50(1), pp.44-45.

Ato.gov.au. (2016). The indexation method of calculating your capital gain | Australian Taxation Office. Available from: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed on 3 Sep. 2016].

Butler, D., 2016. Superannuation: Transferring foreign super fund amounts to an Australian resident. Taxation in Australia, 50(8), pp.481-485.

Edmonds, M., Holle, C. and Hartanti, W., 2015. Alternative assets insights: Super funds-tax impediments to going global. Taxation in Australia, 49(7), pp.413-415.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

James, S.R., 2012. A dictionary of taxation. Edward Elgar Publishing.

Jones, D., 2016. Capital gains tax: The rise of market value?. Taxation in Australia, 51(2), pp.67-70.

Niemann, R. and Sureth, C., 2013. Sooner or later?–Paradoxical investment effects of capital gains taxation under simultaneous investment and abandonment flexibility. European Accounting Review, 22(2), pp.367-390.

Nyst, C. and McAdam, R., 2014. Family law: Tax Office takes aim at separation property settlements: Draft ruling impacts private company transfers. Proctor, The, 34(4), pp.24-27.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Richardson, D., 2014. The Taxation of Capital in Australia: Should it be Lower?. In Challenging the Orthodoxy (pp. 181-199). Springer Berlin Heidelberg.

Smith, J., 2015. Australian state income taxation: a historical perspective. Available at SSRN 2704627.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. Oxford University Press.

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