Subdividing And Amalgamating Land

The given case is related to personal exertion income norms that are applicable in Australia. As per the information provided, the case deals with Hilary who happens to be a famous mountain climber. Due to her fame, people are interested in knowing more about Hilary’s personal life. Inspired by this thought, a newspaper (Daily Terror) offers a sum of $ 10,000 to Hilary for writing her life story.  Even though Hilary lacked any previous experience in writing, but still she could manage to complete her story without taking any external assistance. Hilary took $ 10,000 from the newspaper and sold the story along with all the related rights. The manuscript of her story was sold for a consideration of $ 5,000 to Mitchell Library. Further, the photos clicked during her mountain expeditions were also sold to a museum for a consideration of $ 2,000.  The aim of this case is to ascertain the income from amongst the above that would be classified as personal exertion income.

In accordance with Section 393-10, ITAA 1997, personal exertion income constitutes the following income (Sadiq et. al., 2015).

• Income earned in the form of commission
• Bonus
• Fees
• Wages/Salaries
• Pension & Superannuation allowances

It is imperative that the above mentioned income should be received by the employee in lieu of services offered by the individual either on standalone basis or partnering with another person.

Based on the above discussion with regards to personal exertion income definition, it may be derived that for Hilary all the money derived would be taken as personal exertion income (Barkoczy, 2015). The explanation in this regard is offered below.

• The newspaper gave her $ 10,000 for writing the story and hence she got the money for indulging in writing which she carried out alone. Also, she indulged in writing with the underlying intention of making money as she started writing only once the offer was given by the local newspaper.
• The manuscript was derived because of the offer by the local newspaper which got her into writing the book about her life. If she had not indulged in writing of the book, there would not be any income in relation to the manuscript.
• The income to the tune of $ 2,000 that she obtained by sale of photographs during her expeditions were also attributed to the offer by the newspaper as without the book writing exercise, this income would not be derived.

Hence, from the above discussion, it is apparent that all the three types of income are directly or indirectly attributed to the offer of story writing by the newspaper. As a result, it is concluded that all the income to the tune of $ 17,000 would be treated as personal exertion income. Thus, assuming no other source of income, the taxable income for Hilary would be $ 17,000 and since this is lower than the taxable limit, hence no tax would be levied.

In case, Hilary was driven by only self-satisfaction while writing the story, in that case also, the derived compensation will be given the same treatment as above. This is in line with the arguments stated in the Graham v CIR [1961] NZLR 994 case. In this particular case, the taxpayer was engaged in activities related with preaching and was solely driven by self –satisfaction. However, the court reached the verdict that any income or proceeds collected from followers would be termed as personal income exertion irrespective of the fact that the central objective of the taxpayer was not to earn any income. This was because in the position that the taxpayer was in, it was natural to expect some gifts from the followers and thus due to expected nature of proceeds, these were considered income (Gupta, 2009). The essence of the above case can be applied in the Hilary’s case since even though she might write driven by her satisfaction, but she is well aware that her story would have some commercial value because of her fame as a mountain climber and hence could expect some proceeds or income from sale of the book and also the manuscript. Thus, the income derived above would be still treated in the same manner as above

The given case pertains to the income tax implications of the principal repayment along with the interest income. As per the given information, a sum of $ 40,000 is lent to the son which the son promises would return after five years.  The two of them do not enter into any formal agreement for the loan and the mother also does not demand any security from the son as collateral. The mother does not expect to earn any interest income from the amount lent as a result of the relationship that the lender shares with the borrower. The son repays the whole amount along with an interest of 5% after two years only instead of the promised five years.

Hence, total interest given to the mother = (5/100)*40000*2 = $ 4,000

Therefore, the son paid a total amount of $ 44,000 through a single cheque and hence did not indulge in any bifurcation of the principal and the interest amount. The interest income typically falls within the ambit or ordinary income that is covered under Section 6(5), ITAA 1997.  In order for the interest income to be taxed, either it should be invested in an instrument which pays interest or the person concerned should be engaged in money lending business (Gilders et. al., 2015).

In the given case, it is apparent from the given information that the mother is not engaged in the business of money lending. This is apparent from the fact that she does not execute any formal loan agreement with the son and does not demand any collateral to ensure recovery in case of default. Besides, it is clearly stated that she had no intention of earning interest on the money extended but hoped to just gain back the principal after five years (Deutsch et. al., 2015). Thus, logically it can be derived that the interest income of $ 4,000 would not be taxable income for the mother and would be considered as gift from the son which is voluntary and driven from the personal relationship that the two share. Hence, the entire amount of $ 44,000 that has been paid to the mother by the son is out of the ambit of tax. Thus, there would not be any tax implications of the incremental amount received by the mother on account of extending financial help to the son.

CGT or Capital Gains Tax is levied in the event of the liquidation of any capital asset by a particular entity. The formula for computation of capital gains is given below (Barkoczy, 2015).

Capital gains = Selling price of the asset – Cost base of the asset

Typically, the asset’s cost base not only contains the cost of acquisition but also the incidental costs involved and any cost incurred for asset value improvement. For any capital asset whose holding period is in excess of 12 months, the capital gains tax may be determined using the following two approaches (Sadiq et. al., 2015).

Discount Method: This approach is only valid for individuals and certain small businesses. As per this method, a rebate of 50% in the capital gains is offered and therefore only the remaining 50% id subject to CGT purview.

Indexation Method:  This method may be applied only for those capital assets that were bought before 21^st September, 1999. The indexation method enables enhancement of cost base on the basis of the CPI or consumer price index. This indexed cost can then be utilised to calculate the taxable capital gains.

As per the information provided, the `sales proceeds derived from the property liquidated on March 1, 2015 is $ 800,000. It is apparent that property comes under the aegis of CGT since the house was built after September 20, 1985.  At the time, the house was built, the land value was estimated at 90,000 while that of construction was $ 60,000. Scott can avail either of the methods of CGT i.e. discount method and indexation method. In order to enable a rational choice, the taxable capital gains have been computed using both approaches as shown below.

Thus, it is apparent from the above computation that taxable capital gains in accordance with discount method amounts to $ 325,000.

Based on the above calculation, it is apparent that the taxable capital gains would amount to $ 565,285.

Since the taxable capital gains are lesser in discount method as compared to the indexation method, hence Scott would prefer the discount method (ATO, 2015a).

As per the information provided, the property is now sold to Scott’s daughter for a consideration of $ 200,000 which is significantly lesser than the stated market value in the above case. Due to the sale being done to a family member, the transaction has not being done at an arm’s length. In such cases, the capital proceeds arising from the asset would be the higher of the current market value and the capital proceeds on actual sale (ATO, 2015b). In the given case, it is apparent that out of the actual sales proceeds (i.e $ 200,000) and the fair value of the property (i.e. $ 800,000), the higher amount is $ 800,000 which would be considered for computation of capital gains. As a result, the taxable capital gains for this transaction also would be $325,000 as computed using the discount method shown above.

Now it is known that asset owner is not an individual but a company and hence the answer would vary. From the discussion in part a, it is known that discount method is not applicable for companies. Thus, discount method could not be used and only option available would be the indexation method of taxable capital gains computation. As per this method, the taxable capital gains are $565,285 as shown in part (a).

ATO 2015a, Subdividing and amalgamating land, Australian Taxation Office, Available online from https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Subdividing-and-amalgamating-land/ (Accessed on August 16, 2016)

ATO 2015b, Why do you need a market valuation, Australian Taxation Office, Available online from https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Transferring-real-estate-to-family-or-friends/?page=3 (Accessed on August 16, 2016)

Barkoczy, S. 2015. Australian tax casebook. CCH Publications, 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 2015, Understanding taxation law 2015, 8th eds.,  LexisNexis/Butterworths.

Gupta, R. 2009. Receipts from Personal Exertion: Mere Gifts or Gross Income?, Auckland University o Technology, Available online from https://aut.researchgateway.ac.nz/bitstream/handle/10292/735/GuptaR.pdf?sequence=5 (Accessed on August 30, 2015)

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015 , Principles of Taxation Law 2015, 8th eds., Thomson Reuters, Pymont