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HI6028 Taxation Theory, Practice & Law Assignment - Questions of Taxation Law, Holmes Institute, Australia

Learning Outcomes -

1. Demonstrate an understanding of the Australian income tax system, the concepts of income and deductions, CGT, FBT, GST general anti-avoidance provisions and income tax administration.

2. Identify and critically analyse taxation issues.

3. Interpret the relevant taxation legislations and case law.

4. Apply taxation principles to real life problems.

Question 1 - Advise the Capital Gain Tax consequences of the transactions.

1- An antique impressionism painting Helen's father bought in February 1985 for $4,000. Helen sold the painting on 1 December 2018 for $12,000.

Answer - Capital Gain Tax in relation to antique painting

Issue: Helen had sold the painting in December 2018 for $12000 which he had purchased in February 1985 for the amount of $4000. Thus he is concerned with the Capital Gain Tax liability that may arise on sale of painting

Regulations: Under the Income Tax Assessment Act 1997, Section 100-20 the resources whose acquisition date falls before 20 September 1985 won't be considered accountable for Capital Gain Tax and will thereby do not fall under the capital gain. The provisions of Australian taxation office provides that the painting comes under the ambit of collectables and are eligible for Capital Gain Tax if the cost of acquisition of asset is more than $500.

Applications: The above provisions are applicable to the case of Helen and it is being considered as the capital asset as it is a collectable and the cost of acquisition of asset is also more than $500 but Helen had acquired the asset in February 1985, this date falls before the 20 September 1985. Hence this will not fall for Capital Gain Tax provisions and no liability will arise in relation to payment of the Capital Gain Tax.

Conclusions: No Capital Gain Tax will arise on sale of painting (Ato.gov.au, 2019)

Relevant case law: Macmine Pty. Ltd. v. Federal Commissioner of Taxation High Court of Australia, 05 April 1979.

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2- Helen sold her historical sculpture on 1 January 2018 for $6,000. She has purchased the piece on December 1993 for $5,500.

Answer - Capital Gain Tax in relation to the sale of the historical sculpture

Issue: Helen had sold the historical sculpture at a price of $6000 which he had acquired at a cost of $5500 in December 1993. He is concerned about the Capital Gain Tax liability that may arise on sale of the sculpture.

Regulations: The provision of section 118.10 provides that the sculpture is being regarded as the capital asset as the sculpture comes under the ambit of collectables. The Capital Gain arising from sale of collectable is taxable if the cost of acquisition of the asset is more than $500.

Application: The above provision is applicable on case of Helen as he had sold the asset for the amount of $6000 and it was originally acquired at the amount of $5500 which is more than the minimum cost of acquisition of $500. Hence the excess of the sale over the acquisition cost that will be liable to fall under the Capital Gain Tax. There are basically two methods associated with the calculation of Capital Gain, which are as follows:-

• Indexation method
• Discount method

Note: both these methods are applicable only when the assets are held for more than a period of 6 months.

Conclusion: By taking the use of discount method, Capital Gain can be determined as the capital gained in reference to the base of the cost. Below is the calculation for the Capital Gain (Ato.gov.au, 2019)

Case law:

AUGUST & ANOR v FC of T, Federal Court of Australia, Full Court, 07 August 2013

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3- An antique jewellery piece purchased in October 1987 for $14,000. Helen sold the antique jewellery piece on 20 March 2018 for $13,000.

Answer - Capital Gain Tax in relation to antique jewellery

Issue: Helen had sold the antique jewellery in March 2018 for the amount of $13000 and it was acquired in October 1987 for the amount of $14000. Hence Helen is concerned with knowing the Capital Gain Tax liability that may arise on sale of jewellery.

Regulations: Under Income Tax Assessment Act 1997, Section 108-10 the capital loss due to poor sale of collectables can only be used to set off the Capital Gain arising on sale of collectables.

Applications: The above provision applies on the case of Helen. As antique jewellery comes under the ambit of collectables and the capital loss of $1000 that is the excess of the cost base $14000 over the sale value of $13000 will be eligible for set off against the Capital Gain arising on collectable only.

Conclusions: The amount of calculation of the capital loss on sale jewellery will be done as under: (Classic.austlii.edu.au, 2019)

The capital loss arising on the sale of jewellery will be eligible for set off against collectable capital gains only.

Case law:

SANDINI PTY LTD & ORS v FC of T & ORS, Federal Court of Australia, 22 March 2017

4- Helen sold a picture for $5,000 on 1 July 2018. Her mother purchased the picture in March 1987 for $470.

Answer - Capital Gain Tax in relation to sale of picture

Issue: Helen had sold the picture which his mother had purchased in March 1987 for the amount of $5000. The picture is being purchased by his mother at the amount of $470. Thus Helen wants to know the Capital Gain Tax liability that will arise on sale of picture.

Regulations: Under Income Tax Assessment Act, Section 109.5, the cost of the asset that is being received as by way of inheritance will be the cost that is being incurred on the original purchase.

Applications: The above provision clearly applies in Helen under which he had acquired the picture from his mother. Thus the cost of acquisition of the collectable is $450 and the Capital Gain on collectable is exempted if the cost if acquisition is less than $500. Thus in this case, the Capital Gain which is made on sale of the picture will not fall for being considered as a measure of estimating the net income that is taxable.

Conclusions: The Capital Gain made on sale of picture is exempted and thus no Capital Gain Tax liability will arise. (Ato.gov.au, 2019)

Case law: METLIFE INSURANCE LTD v FC of T, Federal Court of Australia, 29 April 2008.

Net Capital Gain of Helen= 250-250= Nil.

The amount of capital loss on collectable carried to future years= 1000-250= $750.

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Question 2 - Discuss each of the payments to Barbara separately and states if these are income from Barbara's personal exertion. Would your answer differ if Barbara wrote the Principles of Economics' book before signing a contract with The Eco Books Ltd in her spare time and only decided to sell it later? Support your answer by referring to relevant statutory and case law.

Answer - Under Income Tax Assessment Act 1997, Section 6-5, Ordinary Income is defined as the total sum of money which is gained in relevance of the Ordinary Concepts. The most important element in the determination of whether the income is Ordinary Income or not is that there should be some coordination among the task performed and the sum of amount received from the tax payer. The amount of income received is being taxable in the period in which it is derived. The sum of money earned by means of Personal Exertion is the one which is mainly earned by way of the skills and knowledge that is being possessed by the individual. (S3.studentvip.com.au, 2019)

Under the Income Tax Assessment Act 1936, Section 6(1), the income from Personal Exertion will include different types of income such as wages, fees, salaries, bonuses, commissions, allowances paid on retirement, superannuation allowances, gratuities paid on retirement, and any other amount that is related with the provision of the services. However the amount earned, do not takes hold of rent and receipts as a part of the income which is received casually (Ato.gov.au, 2019)

Under Income Tax Assessment Act 1997, Section 85.3, the sum which is made via business of personal services will not be regarded as the personal exertion income. (Austlii.edu.au, 2019)

Amount received for writing the book: This is being regarded as the amount made out of the Personal Exertion for Barbara as there is a connection between the activity performed and the amount received by Barbara. Hence the income of $13400 is being earned by writing books which is the personal skill possessed by Barbara.

Amount received for selling the book to the library: The amount received by way of selling the manuscripts of the book to the library is not the income by personal exertion. This is being considered as the commercial practice. It will be considered as the business income.

Amount received for selling the interview manuscripts: the amount of $3200 received in relation to the interview manuscripts is not considered as the amount made out of the personal exertion as the collection of interview manuscripts had been as a part of commercial practice and no concept of using the personal skills that are being possessed by Barbara is being found in the case. Hence the amount will not be considered as personal exertion income in relation to Barbara.

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Conclusion

Amount received for writing the book: income from personal exertion

Amount received from selling the manuscripts: Not regarded as the amount made out of Personal Exertion

Amount made after putting the interview manuscripts on sale: Not regarded as the amount made out of Personal Exertion

Writing of book before signing the contract

Amount received for writing the book: The amount of $13400 will not be regarded as the amount received as personal exertion income as the receipt of amount is not related with the personal skills and efforts of Barbara. He is receiving the amount by way of selling the books. The sale of product is not regarded as the personal exertion income. The book was not written with a intention to sale and later a plan was being prepared. The personal exertion income excludes the amount made out of commercial practice and hence it will be considered as the business income.

Selling the book to library: In this case, Barbara is selling the manuscripts of the books to the library and the selling of books does not involve any kind of personal skills thus it will not be regarded as the amount received by way of personal exertion

Selling manuscripts: In this case, Barbara is selling the interview manuscripts and thus it will not be regarded as the income receive by way of personal exertion as they were collected during the time of preparation of book and it involves commercial substance.

Conclusion

Amount received for writing the book: Not regarded as the amount made out of Personal Exertion

Amount received after putting manuscripts on sale: Not regarded as the amount made out of Personal Exertion

Amount received after putting off interview manuscripts on sale: Not regarded as the amount made out of Personal Exertion

Case law:

Tinkler v. Federal Commissioner of Taxation., Supreme Court of Victoria, 10 October 1978

Federal Commissioner of Taxation v. Everett., High Court of Australia, 27 February 1980

DFC of T v BLACKMAN, Federal Court of Australia, 03 February 1992

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Question 3 - By referring to relevant statutory and case law, you need to discuss the effect of these arrangement on the assessable income of Patrick.

Answer - Issue: In this case, Patrick had given loan of $52000 to his son David which will be repaid after five years for the amount of $58000. But David had repaid the loan after two years with the interest of 5% in relation to the amount of borrowing. Thus Patrick is concerned with knowing the effect of above transaction on his assessable income.

Regulations: Under the Income Tax Assessment Act 1997, section 6.5 which includes the ordinary income, the provisions of section 6.10 of Income Tax Assessment Act 1997 includes the statutory income, Under Income Tax Assessment Act 1997, section 6.15 that includes the assessable income.

Applications: The analysis of the above case that the interest amount is being received by Patrick and hence the assessment of the interest income in the assessable income is to be done accordingly. The provisions specified in the above sections show that the amount of interest that is processed to the payer of income tax are to be as a part of the net income but the principal amount which is being received in relation to the loan repayment will not be included in the assessable income. Hence, the amount of interest that is received by Patrick that will be a part of the assessable income as this amount had been received in relation to lending the amount to David. The recording of the interest amount in the assessable income is not having any relation with the aspect that whether the formal agreement had been made or not.

Conclusion: The amount of interest as a part of the assessable income. Thereby, interest is accepted by Patrick at the rate of 5% hence the amount will be included in the assessable income of respective year. The total interest to be recorded in assessable income of respective year= 52000*5%= $5200. Hence this amount will be recorded in the assessable income as it is being received by son. The principal amount of loan which is being repaid by David that will not be a part of the assessable income of Patrick as it is not the income and it is just the return of loan amount that was being given by Patrick before two years. (Anon, 2019)

Case law: WHITING AND OTHERS (TRUSTEES OF ESTATE OF R. S. WHITING, DECEASED) v. FEDERAL COMMISSIONER OF TAXATION, High Court of Australia, 23 November 1942.

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