The given case is concerned with a famous mountaineer Hilary who has received certain payments. The main issue is to assess if these payments can be considered as income arising on account of personal exertion under the ambit of s. 6(5).
Hilary was approached by the local newspaper that paid $ 10,000 to her for writing her story. The key fact to notice here is that Hilary does not have writing experience nor is she known for her writing skills. Anything written by Hilary would not have any value commercially. Then, the key question which arises is as to why the payment was made to Hilary. The only explanation that would arise is that the money was paid to Hilary so that the information about her life can be obtained by the newspaper. Clearly, this information would be of interest to the newspaper considering the fact that Hilary was famous and thus people would be interested in knowing about her life and mountaineering expeditions. The act of writing had served only a medium which enabled the transfer of information but did not produce any commercial good or service (Barkoczy, 2015).
The consideration of writing as mere medium is validated by the decision pronounced by the honourable court in the Brent vs Federal Commissioner of Taxation (1971) 125 case. In this case also the wife of a famous robber was given money to reveal details about their marital life. The mode of collection of this information was interviews and these continued for about 2 weeks. However, the court held that the interview session acted as merely the mode of transfer of the pivotal information which is the asset (Woellner, 2014). The details of the given case closely resemble that of present situation. As a result, the $ 10,000 payment would not be labelled as personal exertion based income. The payment is essentially capital receipt earned through exchange of information.
The manuscript of the story along with some expedition photographs have been sold to the library. In relation to the manuscript, it is imperative to consider that the museum is not paying for the manuscript since Hilary has written it. Any literary work by Hilary would not have worth considering Hilary does not have necessary skills for the same. However, the manuscript becomes valuable owing to the subject matter which relates to Hilary and since she is famous, thus the manuscript becomes valuable (Gilders et. al., 2016).
In relation to the expedition pictures, the worth of pictures does not come from the activity of clicking photos since Hilary is not any famed photographer whose work is sought after. But again the subject matter is imperative. This is because the photos depict the various photographs related to the expeditions carried out by Hilary which is valuable since she is known as a mountain climber. Thus, the photograph skills do not have any role to play in the value of the photographs. Owing to this, the income derived from the sale of photos is not related to the activity of clicking photographs. Thus, the income would be termed as personal exertion based income and instead would be termed as capital receipt (Gilders et. a., 2016).
If the story is now written based on self-satisfaction instead of the motive to earn money, then also the appropriate tax treatment would essentially remain the same. This is because the central activity of writing is not related to income as it does not lead to anything productive. Based on the explanation above, writing is just a means of asset transfer and thus, the underlying intention does not real matter. The underlying intention would become useful when the act of writing was contribution to proceeds which is not the case here (Sadiq et. al., 2016).
Section 9, FBTAA 1986 highlights the formula to be deployed in computing the car fringe benefit related taxable value. This is given below (Woellner, 2014).
The key inputs denoted as A, B, C,D & E can be computed based on the information provided coupled with the relevant FBTAA provisions as highlighted as follows (Barkoczy, 2015).
The inputs highlighted in the above discussion are out in the formula set out in section 9 which leads to the following computation.
The case facts represent that a financial assistance of $ 40,000 was given to the son and there was no desire to derive any interest income out of this which was clearly stated at the time of providing the money. Also, there was no legal documentation or security taken to back the loan and thus it was given on mere trust. Further, the parent wanted that the money should be returned after five years. However, the son is able to return the principle after two years only and further also provided 5% interest for 2 years which works out as $ 4,000. In wake of these payments received by the parent, the appropriate tax treatment of this payment on the end of the parent needs to be discussed.
For the purposes of analysis of the payment received, it makes sense to sub-divide the payment into two tranches namely the principal and interest.
Another possibility is that the transaction in which the loan was given to son was an isolated transaction and interest income may be taxable under s. 15(15) ITAA 1997. However, for the interest income to be taxable, key condition to be met is that the loan should have been extended by the parent driven by the intention to profit through the interest income. But the case facts suggest a contrary situation here as the parent highlighted that she did not want any interest and hence profit motive is clearly absent. Thus, the given payment is outside the purview of s. 15(25) (Gilders et. al., 2016).
Since the above two approaches have failed, then it is likely that the incremental amount given as interest is gift. This can be shown through the following facts which are in line with the demands of gift as stated in TR2005/13 (ATO, 2005).
Based on the arguments that have been stated above with regards to the principal and interest tax treatment, it would be correct to assume that no tax would arise on parent’s behalf based on the amount paid by son.
Scott who is an accountant by profession has bought a vacant land in Brisbane in 1980. It is noteworthy that capital gains tax came into existence only on September 20, 1985 and hence all assets purchased before this period are exempt from any taxation of capital gains. Further, in 1986, Scott started construction of a house on the vacant land which was completed in 1986. Also, it is known that the house was given by rent ever since construction and therefore would not qualify for main residence exemption under Division 119B (CCH, 2013).
The only asset which would be subject to capital gains tax would be the house since it was constructed after capital gains came into place. The first objective is to determine the present market value of house given the information stated in the question. This is carried out below.
The calculation regarding capital gains that would be taxed and are related to house is done below (Barkoczy, 2015).
As per discount method (Division 115), a 50% discount is available on long term gains i.e. when the assets have been held for more than a year. Thus, capital gains subject to capital gains tax = (50/100)*(320000-60000) = $ 130,000
As per indexation method, the cost of the house would be indexed as per inflation from 1986 all the way to September 1999 and then this inflation adjusted value would be sued for computation. Thus, capital gains subject to capital gains tax = 320000 – (68.72/43.2)*60000 = $224,600
Capital gains realised on property that would be taxable $ 130,000
Scott sells the property to her daughter for only $ 200,000 while the market value is $ 800,000. But, s. 116-30 clearly states that in case of non-convergence between the market value and sales proceeds of the asset, the higher ought to be used for CGT purposes (Sadiq et. al.,2016). The higher value is the market value of $ 800,000.
Hence, capital gains realised on property that would be taxable $ 130,000
The property owner is no more an individual but a company. This would have a implication for capital gains tax computation since discount method cannot be availed by companies (CCH, 2013). Hence, the capital gains would be computed in accordance with indexation method that has been demonstrated in part (a).
Hence, capital gains realised on property that would be taxable – $224,60
References
ATO (2005), Tax Ruling TR 2005/13, [online] available at https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001
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., and Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and 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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