Assessment Of Income And Net Capital Gain Or Loss

Income assessment for personal exertion income

The present case involves an issue whether the three payments made to Hillary constitutes income from personal exertion. Further, the case involves an issue with respect to the assessment of income from personal exertion if Hillary wrote the story for self- satisfaction and decided to sell later.

As per the regulation of Australian Taxation System, personal exertion income is derived from the skills or efforts of a person in almost all industry related to trade and professions. The regulation further states that an income is considered as income from the source of personal exertion if the same incorporates more than 50% from a professional contract for the individual’s expertise and skill. However, section 6-5 of ITAA 97 contains the regulation on ordinary income that is considered as assessable income and incorporates the income from personal exertion, property and business (Ato.gov.au 2017).

In the present situation, Hillary was a mountain climber derived income amounted to $10,000 from her story writing for a publishing newspaper. Additionally, she sold the manuscripts for $5,000 and photographs for $2,000 to Mitchell Library. Considering the case of Brent v FC of T (1971) 125 CLR 418, the issue was raised for measuring the income as personal services to be assessable as an ordinary income. The court held that the taxpayer was not carrying any business or profession as she had no “stock- in- trade” and the expenditure incurred by her was not related to the income (O’Connor 2016). Also in case of Henderson v FC of T (1970) 119 CLR 612, it was held that the income earned by assessee was not considered as income since the income was not constituted from the partnership business.

Accordingly, the regulations for Personal Service Income (PSI), income from writing stories amounted to $10,000 by Hilary would not be considered as an ordinary income because Hillary was not involved in writing business. Further, sale of manuscripts or photographs also does not constitute as income as an ordinary income since, Hillary was not involved in such business during the taxation year (Mares and Queralt 2015). It was noted that the mountain climbing has been a hobby of Hillary and writing story or sale of manuscripts and photographs was not a regular activity hence, the same cannot be considered as income from personal exertion. Therefore, all the three incomes earned by Hillary cannot be considered as income from personal exertion or ordinary income hence, will not be included as assessable income.

Moreover, if Hillary wrote her story for self- satisfaction and decided to sell it later, then also the amount generated from the sale of story writing would not be constituted as ordinary income or from personal exertion. Writing a story for self- satisfaction based on the mountain climbing is considered as income generated from hobby and not as income from skills or business. Therefore, income from sale of writing for self- satisfaction would not be considered as income from personal exertion.

The present case involves an issue for determining the effect on assessable income of the parent who lent $40,000 to her son with respect to housing loan for short- term period. The loan was based on the agreement that the son would repay the amount of loan $50,000 at the end of the five years. Hence, it is required to assess the effect of money on the assessable income of the lender.

Assessment of loan impact on the parent’s income

According to the regulations of Australian Taxation System, special provisions are applicable for the assessment of income of minors and parents. Income from the distribution from family trust distributed in the hands of minors is taxed at higher rates. However, the amounts received as maintenance charges for the purpose of self as well as children from spouse would not be considered in the taxable income of the parent (Ato.gov.au 2017). In case the payment is received that is more than the basic rate applicable for family tax benefit as well as income from other items would be included in the taxable income as per the rules of Australian Tax Act.

In the present case, the parent lent an amount of $40,000 to the son as housing loan for short- term period with an agreement to repay the amount $50,000 in five years. It has been noted that the loan was not made with any formal agreement or security together with the non- requisite for payment of interest (Noble et al. 2015). Besides, the son repaid the amount after two years together with the amount of interest at the rate of 5% per annum. Based on the rulings of Smith v FC of T (1992) ATC 4380, it was contended that the amount of interest would be included in the assessable income of since the amount of interest expense had sufficient connection with the business activities. Also in case of Yeung v FC of T (1988) ATC 4193, the amount of interest would be included in the assessable income since the amount was in connection with the investment property of the owner entitled to be included for tax purpose.  

(a) According to the regulations of Australian Taxation System, determination of net capital gain or loss in the books of Scott during the year ended 30 June in the current tax year.

Computation of net capital gain or loss
Particulars	Amount $	Amount $
Sale value		800,000.00
Land purchased on 1 October 1980	90,000.00
Construction on 1 September 1986	60,000.00
Total cost	150,000.00
Proportionate price of construction (%)	40%
(60000/150000* 100)%
Proportionate sale value @40%		320,000.00
Less:  cost of construction		(60,000.00)
Profit on sale of property		260,000.00
A. CGT discount method
Since the property is held for more than 12 months
Discount @ 50%		130,000.00
Assessable Income		130,000.00

B. Indexation method
Since the property is held for more than 12 months
Index factor for September 1999= 68.7
Index factor for September 1986= 43.2
Proportionate sale value @40%		320,000.00
Less:  cost of construction		(95,416.67)
(60000*68.7/43.2)
Net capital Gain		224,583.33

                Table 1: Computation of net capital gain or loss for Scott

                                     (Sources: Created by author)

According to the Australian Taxation System regulation, land property or shares acquired before September 20, 1985 would not be considered for measuring the capital gain tax. As per the rulings of the case Spencer v Commonwealth (1907) HCA 82 CLR 418, court held that the claim for deduction on land valuation was not allowed since it was excessive than the actual value (Ato.gov.au 2017). Accordingly, the proportionate value of land acquired by Scott would not be considered for valuation of the amount of net capital gain.

Moreover, two methods have been considered to determine the value of net capital gain, which is held for more than 12 months that is discount method as well as indexation method. As the value of capital gain in discount method is lower than the value in indexation method, Scott is required to consider the capital gain amount $130,000 determined under discount method.

(b) If Scott sold off the property to his daughter for an amount of $200,000 then the tax liability as per the Australian Taxation System will be different. The regulations of capital gain tax would be applicable to the taxpayer if the property is sold to the family member at a value below market value. In case of Hamlin v Great Northern Railway Co (1856), court held that the value of land was sold at a value less than the market value hence, the same would be included in the assessable income at fair value (Ato.gov.au 2017). Hence, in the present situation, assessee is required to value the property sold by the professional valuer to determine the fair value.

Calculation of net capital gain or loss using discount and indexation methods

Sale of property to the daughter involves value of $200,000 that is less than the fair value hence; Scott is required to ascertain the fair value from the professional valuer and is required to consider the differential amount as an amount of capital gain. As per the discussion in above requirement (a), the market value has been assumed at $800,000 hence, the difference of amount $600,000 ($800,000- $200,000) would be considered as capital profit.

(c) As per the Australian Taxation System rules, tax on capital gain is applicable on the asset sale excluding several exemptions as per the regulations stated in the Taxation Act. If the asset has been held for a period exceeding 12 months then the method of discount and indexation would be applicable to measure the net capital gain or capital loss (Ato.gov.au 2017). If the asset has been held for less than 12 months then the value of capital gain is measured by using other word. Besides, if the taxpayer assessee is a company rather than an individual then the discount method would not be used for net capital value. The company assessee is entitled to measure the value only by using a method of indexation as the property was held for more than 12 months.

Accordingly, in the present case, if the taxpayer for property valuation is a company instead of Scott then the capital valuation would be calculated as follows:

Computation of net capital gain or loss
Particulars	Amount $	Amount $
Sale value		800,000.00
Land purchased on 1 October 1980	90,000.00
Construction on 1 September 1986	60,000.00
Total cost	150,000.00
Proportionate price of construction (%)	40
(60000/150000* 100)%
Index factor for September 1999= 68.7
Index factor for September 1986= 43.2
Proportionate sale value @40%		320,000.00
Less:  cost of construction		(95,416.67)
(60000*68.7/43.2)
Net capital Gain		224,583.33

Table 2: Computation of net capital gain or loss for Compa (Sources: Created by author)

As the land was bought on October 1, 1980 that is before the capital gain tax application, it would not be assessed for capital gain valuation. Additionally, the asset was constructed on September 1986, hence the index factor of the year 1986 would be considered while the company would be liable to pay an amount as capital gain tax on $224,583.33 in the present taxation year.

Reference List and Bibliography

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