1. Issue

As per the highlighted details of the case, a renowned mountaineer Hilary has been given the following payments.

• Proceeds for selling the copyrights associated with the story amounting to $ 10,0000
• Proceeds for selling the manuscript associated with the story amounting to $ 5,000
• Proceeds for selling the photographs clicked on expeditions amounting to $ 2,000

The payments above need to be analysed with relation to the underlying circumstances, intent of Hilary along with her skillset and opinion needs to be tendered on whether these are indeed linked to personal exertion income or not as outlined in s.6(5), ITAA 1997.

Rule

Personal exertion income is derived only when there is involvement of the taxpayer into any productive activity which has some commercial worth and therefore it is fair to expect that the underlying taxpayer would have some expertise in relation to this. Due to the above understanding, it becomes critical to highlight the exact source of derivation of commercial worth which would essentially determine the underlying taxation treatment of the underlying payment (CCH, 2013).

A case worth discussion in order to establish the above aspect is Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. For the given case, the critical details are outlined below (Barkoczy, 2013).

A newspaper agency enacted a contract with the taxpayer, who happened to be married to a convicted robber having involvement in a famous robbery at that time. As per the contract, the newspaper agency desired access to the details of the personal relations between the two and paid a hefty amount for the same. To pass the relevant information to the newspaper, the wife was subject to a series of interview which extended around a week. This information was then summarised in a book and to establish the authenticity of the underlying book, it was required that the wife put signature on each of the pages thereby verifying that the content represented is correct to the best of her knowledge. The pivotal issue for which the matter landed in the court was in relation to the correct taxation treatment being accorded to the proceeds derived by the taxpayer (Coleman, 2011).

In the above mentioned case, a verdict was reached whereby the court concluded that no tax liability would arise on the proceeds as these were capital receipts. Citing this verdict, the court argued that the central reason for reaching the above verdict was that the source of commercial worth was essentially the information which was conveyed through the interview which was already available before also. The activity of giving interview did not produce anything tangible or intangible item of commercial value which previous did not exist. Similar argument was extended to the signature which had no intrinsic worth as a autograph but added sanctity that the book is a faithful representation of the interview transcript  (Gilders et. al., 2016).

Application

The central argument highlighted by the court in the Brent v. FCT case is also applicable for the proceeds derived by Hilary as indicated below.

• The personal exertion experienced by Hilary during writing her story does not result in any piece of literature which had any intrinsic value. But despite that a newspaper gave an unsolicited offer to Hilary to pay her $ 10,000 despite she was a novice in this regard.  This offer is indicative that the interest of the offeror (i.e. newspaper) did not lie in writing skills of Hilary but the sole intention was to get hold of the actual content which could have been then formatted and rewritten in a more presentable manner. Considering that Hilary was famous, there would be readers for her story and hence the newspaper wanted to obtain the rights for the same so that no one else could capitalise on the same. Also in relation to the relating manuscript and photographs also, same argument is valid as their inherent worth is on account of their relationship with Hilary and not as pieces of art. The net conclusion is that all the payments which Hilary obtains would be termed as capital receipts and thus exempt from any taxation and will not be classified as personal exertion related income.

Change of Motive

In the event that Hilary’s sole concern to indulge into book writing is only satisfaction, then the same would be classified as a hobby. This is because Hilary has not written anything before and is indulging in an activity not for commercial gains. Further, she is not seeking outside help and not acting as a professional writer. One of the key aspects with regards to income from personal exertion is that the activities are conducted so as to derive income in some form. Thus, any income derived from the story would not be income from personal exertion (Sadiq et. al., 2014).

2. Issue

The given facts which pertain to the given situation are summarised in the manner indicated below.

• A sum of $ 40,000 is extended from parent to son as help as buying home and no collateral is taken for the same.
• The parent has the expectation of only principal repayment within the promised period of five years with the same being communicated to the son who till insists on payment of interest @ 5% per annum.
• The son did not require five years to return the loan and instead too only two. He gave a cheque to the parent of total amount $ 44,000.

The central concern is to opine on the assessable income generated for the parent on account of the cheque given by the son.

Rule

The repayment of loan typically has two sub-components which needs to be segregated for taxation purpose (Woellner, 2013).

• Repayment of principal – This component is tax free since these are essentially receipts of capital nature.
• Incremental Payment – This may contribute to the assessable income or may be exempt from tax which can be determined only by considering the facts of the situation.

Incremental Payment  

For the incremental payment to contribute to assessable income, it has to fall within the ambit of the following two sections (Deutsch et. al., 2015).

• Section 6-5 – For this to be applicable, it is imperative that the taxpayer must be involved in a money lending business where such transactions are repetitive in nature.

• Section 15-15 – In case of any lending transaction of isolated nature, assessable income may be produced if the primary intention behind extending of financial help is to profit through interest income.

A third option is that the extra payment be considered as gift in line with the terms outlined in TR 2005/13 (ATO, 2005)

• Along with exchange of the gift, ownership change in mandatory.
• The gift transfer should not be on account of force or obligations but rather voluntary intent.
• No reciprocal expectations must arise on transferor’s part for the extension of gift to the transferee,
• The transfer should arise on account of benevolent feelings towards the transferee.

Application

Based on the relevant rule outlined above, the principal repayment amounting to $ 40,000 would not be considered for tax. Thus, the discussion would essentially revolve on the classification of the incremental amount of $ 4,000.

In accordance with the given details, it is apparent that the extension of loan to the son has not been carried out in a professional manner which indicates the non-involvement of mother in a business of money lending and hence puts the incremental $ 4,000 outside the ambit of s. 6-5. Further, lack of intent to profit from the lending in the form of interest also puts the incremental money of $ 4,000 outside the ambit of s. 15-15.

Hence, the extra payment derived from son to the tune of $ 4,000 will be classified as gift as it satisfies all the requisite conditions in this regard as illustrated below.

• The transfer of ownership in favour of parent has been completed.
• Parent did not want any extra payment but still the son paid the same.
• No extra expectations arise on behalf of the son owing to the payment given.
• It derives out of gratitude towards the parent on behalf of the son.

On the basis of the discussion above, the incremental payment will not attract any tax as it is a gift.

Conclusion

It is fair to opine that no incremental assessable income would result for the parent on account of repayment by the son.

3.

Part a)

The property owned by Scott essentially has two assets which require bifurcation on account of differential capital gains treatment on liquidation. The land purchase was secured before September 20, 1985 which makes is immune against application of capital gains tax while the same is not extended to the house which got constructed after the threshold date (Barkoczy, 2013). Based on the information provided, the derivation of valuation at present for the assets especially the house can be carried out as follows.

Hence, sales proceeds from the house currently would be considered as $ 320,000 while the original cost base is taken as $ 60,000. The taxable capital gains on the above may be worked out using the methods outlined below (CCH, 2013).

• Indexation Method

There would be an adjustment of the cost base taking in account the differential in inflation from the construction time to September 1999.

Home’s adjusted cost base after accounting for inflation differential = 60000*(68.72/43.2) = $ 95,4000

Net capital gains on which the CGT liability would be levied = 360000 – 95400 = $224,600

Discount method

Gross capital gains on the house = Sale price – cost base = 320,000 – 60,000 = $ 260,000

The discount method allows for rebate to the tune of 50% on long term capital gains provided the asset holder is an individual taxpayer.

Hence, net capital gains on which the CGT liability would be levied = 0.5*260,000 = $ 130,000

For Scott, the preferred option would be to go ahead with the discount method as choice exists.

Part b)

The given case involves selling of the asset at a sizable discount to the current market price but still the capital gains on which CGT would apply will not undergo change. This is made possible through s. 116-30 ITAA 1997 which makes it mandatory for the calculating agency to use greater value between the actual selling price and also the prevailing market price for the concerned property (Sadiq et. al., 2014). This value here comes out to be $ 800,000 resulting in discarding of the selling price of $ 200,000. Thus, there is no change in CGT liability for Scott.

Part c)

The change to company structure from individual taxpayer would lead to elimination of discount method as the option and hence it narrows down the choice to only indexation method which leads to net taxable capital gains of $ 224,600 (Gilders et, al., 2016).

References

ATO 2005, TR 2005/13, Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001 [Accessed May 03, 2017]

Barkoczy, S 2013, Foundation of Taxation Law 2013,5^theds., North Ryde: CCH Publications

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

Coleman, C 2011, Australian Tax Analysis, 4^th eds., Sydney: Thomson Reuters,

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

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

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2014 , Principles of Taxation Law 2014, 7th eds., Pymont: Thomson Reuters

Woellner, R 2013, Australian taxation law 2013, 7^th eds., North Ryde: CCH Australia