HI6028 Taxation Law, Holmes Institute, Australia

Taxation Theory, Practice & Law

Analysis and Interpretation of Australian Taxation Law

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Question 1: Your client Helen wants to fund her business as a fashion designer, therefore she has sold some of the assets as follows:

a- 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: As per the guidelines stated by the Australian taxation office, the sale of any antique capital asset will said to be capital gain and on which capital gain tax will be applied. Under the Income Tax Assessment Act 1997 Section 100.25, there is no specific definition has been mentioned of the term ‘Antique piece' but the guidelines by Australian taxation office surely mentions that ‘Antique thing' will comes under the category of Collectable (Boerma and McGrattan, 2018).

As per the facts given in the said case, Helen owns an asset in the form of an antique painting which was bought by her father in February 1985 and she sold the same in year 2018. Now the question in fact is that whether such sale is liable for taxation or not. So considering the provisions prescribed by the Australian Taxation Office, any asset which was purchased prior to 20 September 1985 is not liable for taxation unless it is specifically mentioned (Scheuer and Werning, 2017). As mentioned in this case, the purchase of asset was made in the month of February 1985 which is prior to 20 September 1985 hence following the provisions, the income earned by Helen from the sale of the antique painting is not subject to tax and will not be liable for taxation.

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

Answer: As per the guidelines stated by the Australian taxation office, the sale of any historical sculpture is a capital asset will said to be capital gain and on which capital gain tax will be applied. Uunder Division 40 of the Income Tax Assessment Act 1997Section 100.25, it is provided that the artworks will be termed as both , Investment as well as Ddepreciable asset. As per the rule prescribed by the Australian taxation office, the depreciation rate of artworks are much lower than any other assets and its usefulness can be estimated for over 100 years.

As per the facts mentioned in the case, it is said that the historical sculpture is a part of Collectable which was here purchased in year 1993 for personal use and later sold in the year 2018 (Scheuer and Werning, 2017). Now the question raised here is that whether income generated from such sale is liable for tax or not? So considering the rules prescribed under Australian Taxation Office, which states that any income generated from the sale of historical sculpture will be consider as ordinary income under the heading of Capital gain and such income will be taxable under the category of capital gain tax and only exemption will be provided to the asset which was purchased prior to 20 September 1985 which should be specifically mentioned. Here as mentioned above the assets were acquired in the year 1993 which does not comes under the exemption therefore the income generated by the sale of historical sculptures i.e. $6,000 is subject to be taxable under the head of capital gain tax (Miller and Oats, 2016).

c- 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: As per the guidelines stated by the Australian taxation office,Under the Income Tax Assessment Act 1997 Section 100.25 the sale of any jewellery is a capital asset will said to be capital gain and on which capital gain tax will be applied. The facts of the case states that jewellery is a part of Collectable and also meant for personal use which was purchased in year 1987 and later sold in 2018 (Kennedy, 2018). Now the question raised here is that whether income generated from such sale is liable for tax or not? So considering the rules prescribed under Australian Taxation Office, which states that any income generated from the sale of jewellery will be consider as ordinary income under the heading of Capital gain and such income will be taxable under the category of capital gain tax and here only exemption will be provided to the asset which was purchased prior to 20 September 1985 which should be specifically mentioned. Here as mentioned above the assets were acquired in the year 1987 which does not comes under the exemption therefore the income generated by the sale of jewellery i.e. $13,000 is subject to be taxable under the head of capital gain tax.

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

Answer: As per the guidelines stated by the Australian taxation office, the sale of any photograph is a capital asset will said to be capital gain and on which capital gain tax will be applied. Analysis of the facts in the said case states that photograph is a part of Collectable and also meant for personal use which was purchased in year 1987 and later sold in 2018 (Mellon, 2016). Now the question raised here is that whether income generated from such sale is liable for tax or not? So considering the rules prescribed under Australian Taxation Office, which states that any income generated from the sale of photograph will be consider as ordinary income under the heading of Capital gain and such income will be taxable under the category of capital gain tax and here only exemption will be provided to the asset which was purchased prior to 20 September 1985 which should be specifically mentioned. Here as mentioned above the asset was acquired in the year 1987 which does not comes under the exemption therefore the income generated by the sale of photograph i.e. $5,000 is subject to be taxable under the head of capital gain tax Under the Income Tax Assessment Act 1997 Section 100.25(Svoboda, 2016).

Question 2: Discuss 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?

Answer: In the provided case, it has been stated that Barbara is a commentator and researcher of economics who has ample knowledge and skills regarding the subject economics and was offered to write a book from the Eco Books Ltd. Here, irrespective of the fact that whether she has written a book or not before, the main point to consider is that she has relevant knowledge and skill regarding the subject and she would not have been able to write any book without such knowledge on the subject matter (Wallace, 2015). In other words, it could be said that a layman cannot write a book on such specific subject matter without possessing the relevant knowledge and specialization. Hence, the question in fact was that whether the income generated by Barbara will considered as income from her personal exertion or not?

Under the provisions given by the Australian taxation office it has been suggested that the income generated from personal skill, efforts and knowledge will be considered as personal income or income from personal exertion and is subject to tax accordingly. Further it is stated that personal income can be of many types including categories of income generated from any business, trade, commerce or profession (Drautzburg and Uhlig, 2015). For example, personal income from profession could be named as IT Consultants, Solicitor, Advocates, and Medical Practitioners etc. Although, it must be considered that the income generated from personal exertion will never affect the other source of income of an individual even if he is drawing salary out of it or employed under some other organization

For better understanding of the above stated, we can analyse the decision given by the Court in the case Tupicoff v/s FCT where the fact stated were that, a individual who is an insurance agent will be considered as a taxpayer as he was receiving commission from the sale of the insurance policies. Here, the business activities were divided in such manner that one of the faily member was hired as an employee of the trust in salary basis and further the net profit of the business was divided among other members of the family (Jaimovich and Rebelo, 2017). But Later, it was observed that the profit generated by the trust was actually the result of the personal knowledge and skill of the agent. Therefore, it was stated by the court that the income generated here should be categorised under the personal income of the insurance agent and will be liable to tax as the ordinary income Under the Income Tax Assessment Act 1997 section 6-5(Pomeranz, 2015).

So here in the given case, it can be concluded that the income received by Barbara for writing the book should be considered as income from her personal exertion and will be liable for tax accordingly.

Further it is to be noted that all other income received by Barbara including payment of book for copyright worth $13,400, for manuscript worth $4,350 and interviews for manuscript worth $3,200 are directly related to the knowledge and skill of Barbara. Hence, the aforesaid income received by her will also comes under income from personal exertion and Under the Income Tax Assessment Act 1997 section 6-5this will be taxed as the ordinary income of Barbara (Brownlee, 2016). However, in case such income was received in a condition where Barbara had written the book on the same subject matter itself before agreeing to any sake contract with the Eco books ltd then the circumstances would have been changed and then such receipt of income will not be considered as personal excretion and no such tax would have been applied on the same.

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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: As per the facts given in this case, Patrick had lent money to his son of $52,000 to help him in his new business along with a promise that David will repay the amount within the duration of five years. Also, Patrick was not expecting any interest amount on the loan provided. All these terms were discussed informally and there was no formal agreement between the two parties.

However, after two years David repaid the amount of loan along with the interest of 5% on the principal amount (Jaimovich and Rebelo, 2017). Now the question raised here is that what will be the effect of these arrangement on the accessible income of Patrick?

As per the guidelines stated by the Australian taxation office that any gifts received from close friends, family members and relatives is not subject to tax unless the amount of gift is not that huge amount. But in this case no conditions of a gift deed could be seen as the amount of loan has been repaid even along with the amount of interest also. Here, the circumstantial evidence states clearly that a cheque has been given for repayment which must be considered as payment against loan in the income tax return(ASIC,2019). According to Australian taxation legislature the transaction incurred between Patrick and David must be recorded in income tax return (Jeanne and Korinek, 2018). In the matter of fact these transaction will be shown in two manners in the computation statement of Patrick i.e., one being the loan named for the initial amount which is the principal amount of $52000 and the other statement will be recorded as the amount of interest received against the given loan. Moreover, such amount of interest is to be recorded as the legal income while filing the returns. As the son paid an additional amount of interest of five percent this shows the most important legal obligation against the loan even where no interest rate has been promised and this definitely makes the amount eligible for the assessable income and should be considered to be taxable while filling the income tax return.

Therefore, the amount given to the David will be considered as loan irrespective of the absence of any formal agreement and the extra income generated by the Patrick in the form of interest on loan received will be legally taxable.

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Conclusion: The study in this paper provides a great insight and knowledge about the applicability of Australian taxation system on various categories of assets. Also elaborated the interpretation of various terminology applicable in different set of manner while filing the taxable returns.

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