The key concern in the given scenario is whether the payments derived by Hilary through writing autobiography, sale of photographs and manuscript can be considered as income derived on account of personal exertion.
In order for a given stream of payments to be considered as income in ordinary sense, it is imperative that a given section from the following choices must be applicable (CCH, 2013).
Section 6(5) – In accordance with this section, ordinary income would comprise of the income that is earned in accordance to ordinary concepts. With reference to appropriate cases, the ordinary income under this section would include personal exertion related income (employment or business) coupled with investment related income derived as rent, interest or dividends.
Section 15(15) – The profits that are earned by engaging in an isolated transaction driven by profit motive would also be tagged as ordinary income.
Besides, a key aspect is that capital receipts obtained when there is liquidation of a capital asset are not subject to taxation but any capital gains can potentially be taxed as per CGT (Woellner, 2014).
In order to analyse the better situation in a better manner, it is imperative to consider Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. In this case, the relevant taxpayer was the wife of the a robber having involvement in a famous robbery at the time. She was approached by a newspaper that offered her money in lieu of sharing various intimate details about her marital relationship. This information was shared by the taxpayer through the medium of interviews that stretched over several days (Sadiq et. al., 2016). There was disagreement between the taxpayer and the tax commissioner with regards to the assessability of the tax receipt. Subsequently, the case was taken to court where the decision came in the favour of taxpayer since the court indicated that there was the transfer of a capital asset which is information about martial relationship. The income would not be considered arising from personal exertion since the act of attending interviews did not produce anything of commercial value but only acted as a medium to share information or facilitate the asset transfer (Gilders et. al., 2016).
Hilary has derived three payments whose appropriate tax treatment would be outlined considering the case law and statute identified above.
The given facts highlight that even though Hilary has never engaged in writing but yet a newspaper was willing to give her $ 10,000 for writing. This clearly highlights the interest of the newspaper in the details of Hilary’s life and not her writing. The details about her life are of utility to the newspaper considering that she was a famous person and hence people would like to know about her life. Besides, the act of writing does not produce anything which is commercially of any value and hence this only acted as a transferring mode of information related to her life to the newspaper. It did not lead to creation of any incremental asset. Thus, the payment derived would be labelled as capital receipts and considered as exempt from tax.
The argument highlighted above can also be extended to these assets which have commercial value on account of the underlying subject which they capture rather than the underlying skills of the person who engaged in photography or writing. Therefore, if the photos did not pertain to Hilary’s expeditions, the commercial worth would not exist. Hence, through the means of manuscript and photos essentially valuable subject related information is being transferred and hence the receipts from these would also fall within the ambit of capital receipts and thereby would not be levied tax.
Now if there is change of the underlying motive which is driving Hilary to write her autobiography, the question is whether there would be any change in the tax treatment. Under this situation also, no alteration in tax treatment would happen considering the fact that intent with which writing activity has been undertaken is immaterial considering that writing does not have any commercial worth owing to Hillary not being a famous writer (Barkoczy, 2015).
None of the receipts would be considered as income from personal exertion. Instead these receipts are capital receipts which are exempt from tax. This treatment would not alter even if Hilary had written the book for her self-satisfaction and not for earning profit.
The central issue is to determine the taxable value of the car fringe benefit that has been extended to the employee in accordance with the relevant provisions of Fringe Benefit Tax Assessment Act, 1986 (FBTAA)
In accordance with section 9, FBTAA, the statutory formula for determination of car fringe benefit taxable value is as highlighted below (Woellner, 2014).
As highlighted under s.9, the base value of the car is usually the purchase value. Depreciation is not applicable on annual basis but after 4 years. Also, the value of statutory percentage in the above formula is always pegged at 20% without any reference to the distance travelled by the employee for personal use. Also, s. 10A allows that expense contributions be deducted but only if these have proof in terms of relevant documentation and records to establish that the expense was indeed done (Sadiq et. al., 2016).
Cost base of the car = $ 50,000
Statutory Percentage is 20%
Days of utilisation is 183
Employee expenses are $1,000 and also relevant documentation exists to establish the same.
On the basis of the above computation, it is evident that requisite taxable value arising on account of car fringe benefit is $ 4,014 approximately.
The major issue in the given scenario is to outline based on relevant tax statutes and case law the potential tax implications of the money that the son has paid to the parent for clearing the outstanding debt.
In the context of payment received by the lender for settlement of debt, there would be essentially two components namely interest and principal. The requisite tax treatment of these two items is indicated below.
Besides, there is another possibility when such an interest payment may not attract any tax owing to it being considered as gift. However, in accordance with TR2005/13, this is possible only if certain pre-requisites are fulfilled which are mentioned as follows (ATO, 2005).
In the case under consideration, the total principal that has been given as financial assistance to the son is $ 40,000. The son while making the repayment of this financial assistance has also extended incremental amount to the tune of $ 4,000. The key issue is to ascertain if the $ 4,000 would contribute to assessable income of the parent or not since $ 40,000 would be tax exempt capital receipt.
The key arguments highlighted above lead to the conclusion that the receipt of $ 44,000 cheque from son has no tax impact for the parent as the entire amount is not subject to tax.
In the scenario presented, the asset is to be sub-divided into two assets i.e, land and house. This becomes necessary considering the origin of the assets happens at different times. The land originated in the pre-CGT era whereas house construction was done post introduction of CGT. As a result, no CGT would apply on the land but the opposite treatment would be extended to house. The current market price of the property is $ 800,000 which comprises both land and house. The market value of house can be predicted taking into consideration the % contribution to value of property at the time of construction in 1986 (Barkoczy, 2015).
House share in property total value in 1986 = (60000/(60000+90000)) = 0.4
Thus, current market value of house = 0.4*800000 = $320,000
Either of the two methods highlighted below can be used for capital gains computations based on the sale of property (Gilders et. al., 2016).
Indexation Method- This method is outlined in s. 110.36, ITAA 1997 and allows capital gains to be derived on the basis of inflation adjusted asset cost base. This is exhibited below.
Discount method- The various aspects of this method are outlined under Division 115 and offers s 50% discount of any capital gains derived but these should be long term i.e. the asset must be held for more than a year.
Thus, capital gains on the property sale for Scott would be $ 130,000.
The situation highlights the sale of property to daughter for a price which is significantly lower than the applicable market value. However, despite this, the capital gains computation would not be impacted and would yield the same. Section 116-30 recommends that capital gains calculation must consider the higher value between actual selling price and market price for determination of capital gains (Austlii, nd). Thus, taxable capital gains would still be $ 130,000.
There is an ownership change which implies that the taxpayer that holds the ownership of the property being sold is a company. The capital gains taxable would change as Division 15 discount does not extend to companies and thus the taxable capital gains would be computed using indexation method which would yield the taxable gains as $ 224,600 (CCH, 2013).
References
ATO (2005), TR 2005/13 [online] Available at https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001 (Accessed on May 20, 2018)
Austlii (nd), INCOME TAX ASSESSMENT ACT 1997 – SECT 116.30, [online] Available at https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s116.30.html (Accessed on May 20, 2018)
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia
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