Ha3042 Taxation Law: Determining The Assessment Answers

1.

Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.

Requirement:

Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?

2.

Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years.

Reconsider this question in light of the following facts. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.

Requirement:

Discuss the effect on the assessable income of the parent.

3.

Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000.

Requirement:

1. Based on the information above, determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
2. How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?
3. How would your answer to (a) differ if the owner of the property was a company instead of an individual?

1.

The key concern relates to determining the status of the various payments derived by a professional mountain climber Hilary in accordance with Section 6(5), ITAA 1997. In accordance with the material facts, Hilary is approached by a local newspaper that is willing to make a payment of $ 10,000 if Hilary would write her life story. Hilary agrees for the offer extended for the newspaper and completes the story without assistance of any ghost writer. The story along with all the related copyrights is sold to the newspaper for a consideration of $ 10,000. Further, manuscript of the story along with photographs clicked during her expeditions are also sold to a library for a total consideration of  $ 7,000.

In order to ascertain whether the above payments would be income from personal exertion, it is essential to consider the verdict in the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. In the given case, compensation was given to the wife of a famous thief in order to disclose personal details about her husband’s life and his relation with her.  The proceeds from this were adjudged as non-assessable income as the court indicated that the taxpayer merely narrated the information she already possessed. Further, the newspaper was also interested in obtaining the information with no reference to the means (Barkoczy, 2015).

The above case verdict can be related to the current situation when the newspaper has not paid money for Hilary’s skills as a writer but paid money for obtaining information about her life that could be used to make money considering her fame in the profession of mountaineering. Hence, the payment was on account of acquisition of the asset in the form of copyright on the personal details while writing was merely a mode of expression which lacked intrinsic value. Similar argument can be extended for the photographs and manuscript which without Hilary’s fame had no intrinsic value and could not be considered as commercial pieces of art or literature. Hence, it may be concluded that the payments do not amount to ordinary income but are capital receipts (Sadiq et. Al., 2016).

Even if Hilary was prompted to write the story not for commercial gains but rather for her own satisfaction, then also there would not be any change in the assessability of the proceeds obtained by the sale. This is because in this case also the value of the book would not be derived from the literary style or Hilary’s skill as a writer but rather it would be derived on the basis of the content of the information and would be considered as an asset and not the product of personal exertion (Nethercott, Richardson and Devos, 2016).

2.

The given case revolves around a loan of $ 40,000 taken by the son from his mother. The son committed that he would be returning the lent amount within 5 years along with a 5% p.a.  interest. However, the mother informed the son that she expected only the principal to be returned back and does not intend to earn interest income. Her son returned the loan amount after only two years and made a cheque payment of $ 44,000. The objective in wake of the above facts is to opine on the assessability of the above amount for the mother.

It is noteworthy that initially $ 40,000 was lent, hence out of the total amount given by the son, $ 40,000 would be essentially capital receipts and exempted from any tax (CCH, 2013). With regards to the remainder $4,000, for the amount to constitute assessable income, it must fall within one of the following.

• Ordinary income (s. 6-5)
• Statutory income (s. 6-10)
• Profit on isolated transactions (s. 15-15)

In order for the interest to be classified as ordinary income, it needs to be proved that the mother was engaged in the business of money lending. But the circumstantial evidence contradicts this as there was no proper documentation, no collateral and even the mother did not want to take the interest income. Hence, the mother is not engaged in money lending business and thus $ 4,000 is not ordinary income (Gilders et.al., 2016).

Further $ 4,000 cannot be statutory income as it is readily convertible into cash and thus cannot be statutory income. Besides, to be adjudged as assessable income under s.15-15, one of the pre-conditions is the presence of profit motive. However, here the mother had clarified her expectations of not wanting any interest income which implies that $ 4,000 is not covered by this section (Deutsch et. al., 2015).

Thus, as per TR 2005/13, the given payment is tax because of the voluntary nature without any desire for any reciprocal benefit driven by the gratitude of son towards her mother. Thus, this amount would be tax exempt (ATO, 2005).

3.

Part a)

The given asset needs to be divided into land and house as land would not attract any capital gains tax (CGT) but it would be applicable for the house. Land is exempt from CGT as the purchase date of land is before September 20, 1985 (Barkoczy, 2015).

Cost base of the house would be equal to the construction cost or $ 60,000.

The proportion of value attributed to each asset is assumed to be constant (CCH, 2013).

Hence, current value of the house (excluding land) = [60000/(60000 + 90000)]*800000 = $ 320,000

For capital gains computation the following options are available for individual taxpayer Scott (Sadiq et. al., 2016).

Indexation Method

Construction cost (inflation adjusted) = 60000*(68.72/43.2) = $ 95,400

Here, 68.72 and 43.2 are the respective CPI indices corresponding to September 1999 and September 1986 respectively.

Capital gains subject to CGT = 360000 – 95400 = $224,600 

Discount method

Gross capital gains from house = 320000 – 60000 = $ 260,000

Since the capital gains is long term, hence 50% discount may be availed which reduces the net capital gains to $ 130,000 (Gilders et. al., 2016).

Scott would prefer CGT liability computation through discount method which leads to lower CGT payable. 

Part b)

Section 116-30, ITAA 1997 would be applicable here as per which the CGT computation will be derived on the basis of the higher of the two values i.e. selling price and the market value of the underlying asset (Deutsch et. al, 2015).  As per material details, in the given case the higher value is the market value which stands at $ 800,000 only. Thus, there would not be any change in taxable capital gains.

Part c)

Now, instead of the owner being an individual taxpayer, it is a company which implies that only the indexation method would be available for computation of taxable gains (Barkoczy, 2015). From computation carried out in (a) part, taxable capital gains as per indexation method are $ 224,600.

References 

ATO 2005, TR 2005/13 Australian Taxation Office, [Online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001  [Accessed April 17, 2017]

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7^thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2015, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters