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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.

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

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

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 - Sale of antique impression painting

Issue: Helen's father had purchased the antique painting in February 1985 and the painting had been sold by Helen in December 2018 for the amount of $12000. Hence Helen wants to know the consequences of Capital Gain Tax.

Provisions: As per the provisions of Sections 100.20 of the Income Tax Assessment Act1997, the assets which are acquired before 20 September 1985 are not liable to the Capital Gain Tax consequences. Hence the assets are exempted from the Capital Gain Tax. As per the provisions of Australian Taxation Office, the collectables are chargeable to Capital Gain if the assets are acquired at a cost of more than $500.

Application: Helen had sold the painting which is considered as the collectable and may be chargeable to Capital Gain Tax as the cost of the acquisition of the asset is more than $500. But the asset had been acquired before 20 September 1985, hence it will be exempted from the Capital Gain Tax provisions.

Conclusion: The sale of the antique painting is exempted from Capital Gain Tax.

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

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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 - Sale of historical sculpture

Issue: Helen had purchased the historical sculpture in December 1993 for the amount of $5500 and the sculpture had been sold by Helen in January 2018 for the amount of $6000. Hence Helen wants to know the consequences of Capital Gain Tax.

Provisions: As per the provisions of Section 118.10 of the Income Tax Assessment Act1997, the collectables are chargeable to the Capital Gain Tax provisions if the cost of the asset is more than $500.

Applications: The above provisions show that the sculpture is being considered as the collectable and the Capital Gain Tax provisions will apply as the cost of the asset is more than $500. Thus the Capital Gain will be the difference between the cost of acquisition and the sale value of the sculpture. The asset had been held by Helen for a period of more than 12 months thus the discount method or the indexation method can be used for the calculation of the Capital Gain.

Conclusion: The discount method will be used for the computation of the Capital Gain.

Particulars

Amount

Amount received from sale of sculpture

$6000

Less: acquisition cost of sculpture

$5500

Capital Gain

$500

Less: discount @50%

250

Net Capital Gain  on sale of sculpture

$250

Case law: RESOURCE CAPITAL FUND IV LP v FC of T, Federal Court of Australia, 05 February 2018.

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 - Sale of antique Jewellery

Issue: Helen had purchased the antique piece of jewellery for the amount of $14000 in October 1987 and the jewellery had been sold in March 2018 for the amount of $13000. Hence Helen wants to know the consequences of Capital Gain Tax that may arise.

Provisions: As per the provisions of Section 108.10 of the Income Tax Assessment Act1997, the Capital Loss in relation to the collectable's Capital Loss can be set off against the collectable's Capital Gain only.

Application: The above case shows that Helen had sold the jewellery which is considered as the collectable and thus the Capital Gain Tax provisions will apply. Hence the Capital Gain or Capital Loss will be accordingly calculated. As the jewellery had been sold at a price less than the actual cost, thus the Capital Loss will arise which can be set off against the Capital Gain on other assets considered as collectable.

Conclusion: the calculation of the Capital Loss arising on sale of jewellery is as under:

Particulars

Amount

Amount received from sale of jewellery

$13000

Less: acquisition cost of jewellery

$14000

Capital Loss

1000

The Capital Loss arising on sale of jewellery will be eligible for the set off against the Capital Gain on other collectable assets.(3)

Case law: NOZA HOLDINGS PTY LTD & ORS v FC of T, Federal Court of Australia, 04 February 2011.

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

Answer - Sale of picture

Issue: Helen's mother had purchased the picture in March 1987 for the amount of $470 and the picture had been sold in July 2018 for the amount of $5000. Hence Helen wants to know the consequences of Capital Gain Tax provisions that may arise.

Provisions: As per the provisions of Section 109.5 of the Income Tax Assessment Act1997, the cost of the inherited asset is the actual cost at which it was acquired by the person by whom it is inherited. The collectables are not liable for the consequences of the Capital Gain Tax if the amount of cost of acquisition is less than $500.

Application: Helen had inherited the picture from mother thus the cost of acquisition of the picture will be the actual cost incurred by mother. Hence the cost of acquisition to be considered for the Capital Gain Tax provisions is $470. The picture is considered as the collectable Capital Gain asset hence the Capital Gain Tax provisions will not apply on sale of picture as the cost of acquisition of picture is less than $500.

Conclusion: The sale of picture is exempted from the provision of Capital Gain Tax.(4)

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

The net amount of Capital Loss that need to be carried forward in relation to the collectable Capital Gain Tax asset= $1000-250= $750.

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Question 2 - Discuss each of the above 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 - Writing of book after accepting the contract

Issue: Barbara is a person engaged in doing research. She had received an offer for writing the book and the copyright in relation to the book had been sold at a price of $13400 to eco books ltd. She had also sold the manuscript of the books to the library at the cost of $4350. She had also sold the manuscripts of the interview which were collected by her at a price of $3200. Thus Barbara wants to know the income of Barbara that arises by way of personal exertion.

Provisions: In accordance with the laws and regulations of Section 6-5 of the Income Tax Assessment Act1997, the income which is obtained in relation to the ordinary concepts is being considered as the Ordinary Income. Ordinary Income is determined by analyzing the connection amongst the activities performed and the amount of income received in relation to the transaction. The income is considered as the Income by way of Personal Exertion if the individual possesses the knowledge and skills and they are being used in order to earn a particular income. In accordance with the provisions of Section 6(1) of the Income Tax Assessment Act1997, the Personal Exertion income may include different type of income such as salary, wages, bonus, retirement allowances, and also various other amount which are received in relation to the performance of activities. The receipts of amount which are not considered as the Personal Exertion Income are rent, interest and dividend. In accordance with the provisions of Section 85.3 of the Income Tax Assessment Act1997, the receipt of amount in relation to the personal services business will not come under the ambit of Personal Exertion income.

Application: In this case, Barbara is writing the book after accepting the offer hence it is being considered as the person is using its skills to complete the work and thus the proceeds of copyright of book will be considered as the Personal Exertion Income. The sale of the manuscript to the library comes under the commercial transaction and practice, thus it will not come under the ambit of Personal Exertion income. The amount that is being received in relation to the sale of manuscripts if interview is considered as commercial transaction, thus it will not be considered as the Personal Exertion Income as the receipt of amount is not having any connection with the skills and knowledge possessed by Barbara.

Conclusion: The Personal Exertion Income is being disclosed below:

Particulars

Description

Copyright income of book of $13400

Personal Exertion Income

Sale of manuscript of books to library at a price of $4350

Business income

Sale of interview manuscripts at a price of $3200

Business income

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Writing of book before accepting the contract

Issue: In this case, Barbara had not entered into any contract in relation to writing the book and the book was written for personal satisfaction. But later on decision had been taken to sale the book. Hence Barbara wants to know whether the income arising by way of sale of books, sale of manuscripts is considered as the Personal Exertion income.

Application: The above provisions will also apply in this case also. The book was written by Barbara for personal satisfaction and was entered into sale at a later date. Thus the writing of book had been converted into the commercial transaction. Thus no skills and knowledge is being involved in the sale of copyright of the book. The Personal Exertion Income does not include the income that arises by way of commercial transaction thus it will be considered as the business income and will be shown accordingly in the assessable income. Hence the amount received by way of copyright of books, sale of manuscripts of books and sale of manuscripts of interview are not considered as Personal exertion Income. (6)

Conclusion: The Personal Exertion Income is being disclosed below:

Particulars

Description

Copyright income of book of $13400

Business income

Sale of manuscript of books to library at a price of $4350

Business income

Sale of interview manuscripts at a price of $3200

Business income

Case law: In re THE INCOME TAX ASSESSMENT ACT1936 OF QUEENSLAND, Court of Review (Queensland), 01 August 1939.

In re THE INCOME TAX ACTS (Q'ld 1934 No. 1), Court of Review (Queensland), 06 February 1934.

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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: Patrick had given amount of $52000 to his son in order to engage in the business. The amount of loan will be repaid after the period of 5 years at amount of $58000. They both not entered into any formal agreement in relation to the loan. He had told his son that he does not require interest on the amount. But his son had paid the amount after two years by cheque with the additional amount of 5% of the amount of borrowing. Thus Patrick wants to know the income tax consequences that may arise in relation to provision of loan.

Provisions: The assessable income includes ordinary income in accordance with Section 6.5 of the Income Tax Assessment Act1997 and Statutory Income in accordance with Section 6.5 of the Income Tax Assessment Act1997.

Applications: The analysis of the above case shows that interest is being received by Patrick in his bank account in relation to the loan that is being given to his son. Hence the interest comes under the assessable income as the amount is being received in relation to letting the amount to son. The assessable income provisions show that the principal amount is not considered as the income and only the interest received in relation to loan is considered as the income. Thus the principal amount received by Patrick will not be liable for the purpose of inclusion in the assessable income. The amount of interest received by Patrick will be considered as the assessable income. The income is to be recorded even if no formal agreement had been entered in relation to loan as the agreement does not have any impact in the disclosure of income. The additional amount is basically the interest which is paid to father by the son. (7)

Conclusions: The interest amount will be considered as the assessable income. The additional amount of 5% received by Patrick is actually the amount of interest and will be shown under the assessable income. Hence the amount of interest which will be shown in the income tax return as the assessable income= $52000*5%= $2600.

Case law: INTEREST PTY LTD & ORS v FC of T, Administrative Appeals Tribunal of Australia (Queensland), 10 August 2001.

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