Hilary is a famous mountain climber and has derived the following income.
The central concern in wake of the above facts is to determine if the income above is earned from personal exertion or not and hence comment on the tax treatment of the payments mentioned above.
It is imperative that income is attributed to personal exertion when the taxpayer is involved in a productive activity which results in creation of commercial value and thus should be an activity in which the taxpayer must have expertise in. In the wake of the above argument, it makes sense to understand the precise source which leads to creation of commercial value as the payment derived or earned would be attributed to that (CCH, 2013).
A relevant case which merits discussion in this regard is the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. The relevant facts of this case are summarised below (Barkoczy, 2013).
A contract was enacted between a newspaper and the wife of a famous robber as per which the wife was supposed to share the information about her marital life in reference to her husband’s behaviour towards her. The mode of transfer of this information from the wife to the newspaper was through the two journalists appointed by the newspaper for this purpose. These journalists did interviews of wife over a period stretching into almost a week to derive every useful information. Based on the information, they represented the same in the form of a book and the wife was requested to sign it from the front page to the last page to ensure that information is correct and has been obtained from the right source. There was issue with regards to the money received by the wife being termed as capital receipts or revenue receipts (Coleman, 2011).
The court reached the verdict that the proceeds would be capital and not revenue since the interview did not lead to creation of an commercial value as the real asset that the newspaper was seeking from the wife was the information and interview was only a transfer mode. Similarly, the signature of wife was asked only to ensure authenticity and had no intrinsic value as she was not famous. Hence, there was a transfer of copyrighted information from wife to newspaper and the sale of capital asset would result in capital proceed being derived by the wife (Gilders et. al., 2016).
There is stark similarity between the given situation and Brent v. FCT case and hence the various arguments can be extended here.
The commercial value for Hilary on personal exertion would be earned through mountain climbing as she is known for that. However, with regards to writing, she has no experience but still bags an offer worth $ 10,000. It is obvious that the newspaper was least interested in the literary value of the Hilary’s story and was interested only in the informational value since it discloses incidents about her personal life which the readers would like to know considering her famed status. Similar conclusion could be drawn for the photos and manuscript which are provided to the Mitchell Library. The intrinsic worth is not derived from the underlying skill of photography or writing but essentially the subject matter they pertain to, Hence, the receipts would be capital in nature and not income from personal exertion.
Story writing driven by self -satisfaction
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).
The relevant facts summarising the situation are highlighted below.
Son seeks financial help of $ 40,000 from mother without any collateral or legal documentation.
He promises to return $ 50,000 at the end of 5 year tenure but the mother clarifies that he is not interested in earning any interest income.
The loan is returned back by son after two years when a cheque of $ 44,000 is handed over to the mother.
The purpose is to discuss the tax treatment from the perspective of the mother.
Whenever a loan is repaid back to the lender, the money can be categorised into two different subheads (Woellner, 2013).
Principal Repayment which is classified as capital receipts
Payment over and above the principal which may be classified as either gift or interest depending on the case facts.
Incremental Payment – Interest
In order for the interest payment to be considered as ordinary income and hence assessable, there are two relevant sections (Deutsch et. al., 2015).
Section 6-5 – Income derived from money lending business or income derived from any security which provides interest income.
Section 15-15 – Any isolated transactions that may be entered into by the taxpayer with the prime intention of earning income in the form of interest.
Incremental Payment - Gift
The payment can be classified as gift and become free from any tax on the fulfilment of the conditions given in TR 2005/13(ATO, 2005)
The transfer of ownership of the gift is pivotal.
The gift has to be transferred purely on voluntary grounds without any threat or pressure.
The gift has to be transferred without expectation of any present or future help or favour from the transferee.
Personal relations and feelings tend to act as the main reason for gift.
The relevant facts of the situation have already been stated. From the same, there is no clue available to indicate that a money lending business is being operated by the mother. It is clear that the transaction is casual since documentation and collateral is lacking. However, since intention to earn interest income is also absent, hence the payment would not be assessable under Section 15(15).
Therefore, the only choice left is to check whether the payment of $ 4,000 is indeed interest. The relevant arguments are summarised below.
Ownership Transfer –Cheque given to mother and drawn in her favour
Voluntary – Mother lacked any intention to obtain income from interest.
Return Expectations – None from son side for the payment made
Gratitude – Payment given as a symbolic gesture
It is evident from the above that the $ 4,000 payment would be a gift and tax exempt.
It is apparent that the cheque of $ 44,000 would not be assessable at the end of the mother.
It is known that Scott purchased land in October, 1980 while the construction of house happened almost six years later in September, 1986. The land would not attract any capital gains tax due to the acquisition date lying before September 20, 1985 and the house would attract capital gains (Barkoczy, 2013). Thus, due to difference in CGT treatment, it is recommended that the property be seen as the following two assets which is summarised below.
It is evident from the computation above that only $ 320,000 would be applicable for CGT application since it is current price of the house. For the taxable component of capital gains calculation, the methods available for Scott (an individual taxpayer) are the following two approaches (CCH, 2013).
In this method, the construction costs are increased to account for inflation from 1986 to 1999.
Adjusted cost of construction for Scott’s house = Actual construction cost *(CPI 1999/CPI 1986) = 60000*(68.72/43.2) = $ 95,4000
Thus, CGT applicable gains = 360000 – 95400 = $224,600
Capital gains (House) = 320,000 (Sales proceeds from house) – 60,000 (Construction cost actually incurred) = $ 260,000
After applying for a 50% capital gains discount since gain is long term (holding period more than 12 months), CGT applicable gains on house = 0.5*260,000 = $ 130,000
Scott would apply the discount method and thus the taxable gains derived from the property would be $ 130,000.
For such transactions where there is mismatch between the property’s market value and selling value, Section 116-30 ITAA 1997 is highly useful. This provision states the following (Sadiq et. al., 2014).
The computation of capital gains is carried out by choosing the higher value of the two given values i.e. selling value and the current market value.
Assuming that the auction price to be the market price of property, hence the capital gains will be calculated taking into consideration $ 800,000. Again, the discount method would be applied and taxable capital gains would amount to $ 130,000 as shown above.
The company ownership structure cannot avail the discount method and thus computed using the indexation method (Gilders et, al., 2016). This calculation has already been performed in part (a), and the taxable capital gains derivable form Scott’s property amounts to $ 224,600.
ATO 2005, TR 2005/13 Taxation Office, Available online from http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001 (Accessed on September 3, 2016)
Barkoczy, S 2013, Foundation of Taxation Law 2013,5th eds., CCH Publications, North Ryde
CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney
Coleman, C 2011, Australian Tax Analysis, 4th eds., Thomson Reuters, Sydney
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 9th eds., 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., Thomson Reuters, Pymont
Woellner, R 2013, Australian taxation law 2013, 7th eds., CCH Australia, North Ryde
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