Taxation Implications For Individuals And Loans

Taxation Implications of Copyright Sale

1. For an individual taxpayer having a copyright, it is crucial to determine the nature of the copyright in the form of either capital asset or ordinary income for taxation purpose. In case, the copyright holder is a professional artist or writer, the copyright would be considered as ordinary income. On the other hand, the absence of professional certification of the holder; however, possessing the required expertise could be considered as capital asset (Barkoczy 2016).

From the provided case study, Hillary is the taxpayer, who is popular for climbing mountains. Therefore, it is assumed that Hillary holds permanent Australian citizenship, which mandates the need to dispose off her taxable incomes by conforming to the Australian taxation laws. It has been found that the lady does not have any past knowledge related to services of professional writing and thus, she has narrated her entire experience in the story for the first time. As a result, the income recognised from the specific copyright sale is the capital gain for Hillary.

However, it is to be noted that Hillary has been convinced on the part of Daily Terror for making an agreement. Thus, the income received is a primary term depicted in the agreement (Barkoczy 2016). Hillary does not own the copyright nor did she hand over the same, rather it has been provided to comply with the agreement terms. Hence, the income realised from the copyright sale is to be regarded as normal income. This has been gathered because of the service delivery in compliance with the agreement as per the “Section 393-10 of the Income Tax Assessment Act 1997”.

Along with this, Hillary has sold some photographs and the overall story manuscript. Hence, these two-depicted items are to be adjudged as the personal assets of Hillary. According to the case outcome of “Brent v FCT (1971) 125 CLR 418”, sale could be recognised, which would receive the treatment of normal income. Thus, this type of sale of the asset is to be taken into account as Capital Gains Tax (CGT) events (Bird and Zolt 2014).

If Hillary has shared her experience in the form of story for her own comfort and sell the same in future, the transfer of the ownership related to copyright could be regarded as CGT events. Such consideration has been made to conform to “S-15-2 of Income Tax Assessment Act 1997”, as the income could not be generated through any sort of agreement (Cao et al. 2015).

Taxation Implications of Loan Repayment and Additional Interest

2. It has been detected from the given case study that the client is a parent and they have extended loan to his son with an amount of $40,000. When providing the entire amount of the loan, both the parties have conformed to a mutual agreement, where the borrower has promised to repay the entire loan amount along with an additional $10,000 after five years. However, the overall loan amount has been repaid within two years along with interest charges. Therefore, the additional amount paid to the client is $4,000 ($40,000 x 5% per year x 2 years). Under such circumstances, it is worth mentioning that there has been sort of demand on the part of the parent to pay any interest amount.

The client has forfeited the loan amount for two years, which necessitates the need to treat the additional payment as interest income. According to “Section 6 subsection (5) of the Income Tax Assessment Act 1997 in the form of interest income”, the additional amount of $4,000 could be recognised as the assessable income of the parent in relation to taxation (Lang 2014). However, as inherent from the provided case, at the time of providing the loan, no formal agreement or security was made or present, which would help the client in representing this loan amount as financial aid to the son.

Moreover, the borrower could represent the amount of interest paid to the client as financial aid as well. With the help of such representation, the client could declare that the additional income is not a part of the lent amount. Therefore, in such a situation, the additional sum of money could not be adjudged as ordinary income, as per “Section 6 Subsection 5” (Lignier, Evans and Tran-Nam 2014).

The borrower has obtained the loan from the client to buy a new home. Due to this, the borrower could claim for subtraction for the amount of interest on the housing loan. Therefore, in this scenario, if the son claims deduction for the additional amount provided to the parent, the latter is needed to depict the amount in the form of assessable income. Hence, the consideration of interest income would be made in such situation (Saad 2014).

3a. According to the given case study, Scott is assumed to hold a permanent Australian citizenship and he is not involved with any sort of trade related to real estate. Hence, this has a clear representation that land and building are realised as the personal properties of Scott, rather than trading stocks. The capital gain or loss incurred from the sale of the building is calculated depending on the below-stated points:

Taxation Implications of Selling Rental Property

Land Acquisition Date:

As observed from the case study, the date, at which the land had been acquired, was before 20^th September 1985. Hence, it comes under the pre-CGT asset category and the sale of land could not be included from the taxation related to CGT (Taylor and Richardson 2013).

CGT Computation:

Since the building has been developed after 20^th September 1985, it could be identified under the post-CGT asset category. The CGT calculation has been conducted on the proportionate selling price of the building. Therefore, the proposed selling price of the building is calculated as $320,000 [$800,000 x $60,000/ ($60,000 + $90,000)].

Cost Base Of The Building:

As the building has been constructed before 20^th September 1999, the cost base of the building could be computed by seeking help of the indexation method (Ato.gov.au 2017). On the contrary, as Scott is not an organisation, the discounted method could be used as well for obtaining the overall net CGT computation. In accordance with the provided case, Scott needs to calculate CGT with the help of the two above-stated methods and then he needs to select the one, which would reduce the payment of tax (Ato.gov.au 2017). 

Based on the above-stated points, the entire capital gain or loss recognised from selling the rental property is depicted as follows:

Name of Taxpayer : Scott
Type : Individual
Calculation of Net Capital Gain/Loss
for the period ending on 30th June,2016
Particulars	Discounted Method	Indexation Method
Amount (in $)	Amount  (in $)	Amount  (in $)	Amount  (in $)
a) Sale of Holiday Home :
Sales Consideration		3,20,000		3,20,000
Less : Cost Base of the Property		60,000		97,055
Capital Gain on Sale		2,60,000		2,22,945
Less : 50% Exemption on Capital Gain		1,30,000
Taxable Capital Gain		1,30,000		2,22,945

Table 1: Computation of net capital gain or loss using discounted method and indexation method

(Source: As created by author)

From the above table, it could be stated that Scott needs to incur lower tax payments, if he decides to follow the discounted method. Hence, the entire capital gain to be recognised from selling the rental property for the existing tax period would be $130,000 (Ato.gov.au 2017). 

3b. If Scott has decided to sell the property to his daughter at a lower price, the consideration of sales would be determined depending on the market of the asset for taxation. It has been observed that there has been an arrangement of auction for selling the property, in which the asset has been sold. Henceforth, the sale price in auction could be considered as the market price of the asset. In such situation, the entire capital gain projected to be recognised from the property sale to the daughter would be same as above (Ato.gov.au 2017).

3c. According to the provided scenario, it is assumed that an organisation is the owner of the property. Therefore, the calculation of capital gain would be conducted through the indexation method. Under such situation, the entire capital gain anticipated to be recognised from selling the rental property would be $222,945.

References:

Ato.gov.au. (2017). Exemptions | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/CGT-exemptions,-rollovers-and-concessions/Exemptions/#collectables [Accessed 15 Apr. 2017].

Ato.gov.au. (2017). Selling your home | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/capital-gains-tax/your-home-and-other-real-estate/selling-your-home/ [Accessed 30 Apr. 2017].

Ato.gov.au. (2017). The indexation method of calculating your capital gain | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed 30 Apr. 2017].

Ato.gov.au. (2017). Transferring real estate to family or friends | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Transferring-real-estate-to-family-or-friends/?page=3 [Accessed 30 Apr. 2017].

Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Bird, R.M. and Zolt, E.M., 2014. Redistribution via taxation: the limited role of the personal income tax in developing countries. Annals of Economics and Finance, 15(2), pp.625-683.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Lignier, P., Evans, C. and Tran-Nam, B., 2014. Tangled up in tape: The continuing tax compliance plight of the small and medium enterprise business sector.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.