The key concern in the given scenario is to comment as to whether the three payments derived by Hilary would be termed as income derived from personal exertion and thereby taxation-law under s. 6(5) ITAA 1997.
For any cash inflow to be considered as ordinary income, it should fall within the ambit of either of the following sections (CCH, 2013).
Section 6(5) – This refers to any payment which the individual derives from personal exertion, employment or business income. Further, investment income such as dividends, interest and rent also are included under this section.
Section 15(15) – Any income which tends to arise from isolated transaction entered into with intent to profit.
On the other hand, any proceeds from the capital asset sale would be classified as capital receipts and hence non-taxable even though the gains may attract capital gains tax as per s. 108-5, ITAA 1997 (Woellner, 2014).
A relevant case law which merits discussion is Brent vs Federal Commissioner of Taxation (1971) 125 CLR case. In this case, payments were derived by the wife of a robber who had involvement in a famous robbery. This payment was given in lieu of the disclosures in relation to private information pertaining to their relationship and the treatment that her husband extended towards her. The newspaper which paid for this information sent its journalists to derive the useful information by way of interviews (Deutsch et. al., 2016). There was a disagreement between the taxpayer and Tax Commissioner in relation to the assessability of these payments. The court ruled that the payments were capital receipts as the wife had sold information which had commercial value and did not produce anything productive by engaging in interviews. Those interviews were a mode of transferring information and the newspaper purchased a capital asset and hence the payments were held exempted (Gilders et. al., 2016).
The given situation would be analysed considering the decision given by the honourable court in the Brent v. FCT case,
It is given that Hilary had never written a book before and hence the newspaper did not approach her for her superior writing skills. Though the autobiography, the newspaper aims to extract personal details about Hilary which has commercial value owing to her fame as a mountaineer. Thus, the act of writing does not lead to assessable income generation, instead it is the information about her personal life which is the asset which is being bought by the newspaper in this case.
With regards to photos also, the value does not come from Hilary’s photography skills but instead it is the subject matter which is valuable which is that these photographs deal with Hilary’s expeditions. Also, the value of manuscript also does not arise on account of Hilary being a great writer but only because of the subject matter which is important because of her fame. management, it would be appropriate to treat these payments as capital receipts and these would not be classified as income from personal exertion.
In the event that Hilary writes her story for self-satisfaction also, then also the income derived from the sale would not be considered as income from personal exertion. This is because the presence or absence of profit motive is not critical in this situation as the act of writing does not have any commercial value and instead acts only as a medium to communicate the relevant asset to potential buyer (Barkoczy, 2015).
In accordance with section 9, Fringe Benefit Tax Assessment Act, 1986, the statutory method formula for determining the taxable value of car fringe benefit is given below (Woellner, 2014).
As per s. 9 and the information presented, the base value of the car would be $ 50,000. No depreciation would be charged since the car was purchased last year and four years have not passed. The statutory percentage is independent of the distance travelled and is taken as 20%. Also, the annual days of utilisation has been provided as 183 with no adjustment for unavailability due to repairs or other reasons. Besides, as per s.10A deduction for employee expense on car would also be available since there are relevant records for the same (Sadiq et. al., 2016).
Hence, taxable value of car fringe benefit = (50000*0.2*(183/365) – 1000 = $4,013.7
The central issue is to review the tax impact of the given transaction where money is lent to the son for five years but is returned earlier by the son with some interest.
Additionally, there is a third possibility if the above two do not hold which is that the interest payment could be a gift which would require satisfaction of the conditions highlighted in TR2005/13 (ATO, 2005).
In the given situation, the principal component is $ 40,000 and total payment received was $44,000 which consisted of $ 4,000 paid as interest charged at 5% p.a. The analysis of these payments is highlighted below.
It can be concluded based on the above arguments that no tax implications would arise for the parent owing to the transaction since principal repayment is capital receipt while interest amount is gift and hence both are non-taxable.
In the given case, the land is a CGT exempt asset owing to purchase before September 20, 1985 but the same cannot be said about the house which was constructed only after CGT (Capital Gains Tax) had been introduced. As a result it is imperative that two separate assets would be considered in this given case whose separate value needs to be ascertained using the following table (Barkoczy, 2015).
In line with the above computations, only the property value attributed to the house could be levied CGT and hence the asset value would be considered as $320,000 for CGT computation which can be done through the following two methods (Gilders et. al., 2016).
Indexation Method (s. 110.36 ITAA 1997)
Discount method (s. 115-25 ITAA 1997)
Scott would choose the method which would result in lower CGT liability and thus the discount method would be preferred. As a result, taxable capital gains would amount to $ 130,000.
Even if Scott sells his property at a lower price to his daughter, then also taxable capital gains would not alter since s. 116-30 ITAA 1997 highlights the price considered for capital gains computation is the higher between the market value and the actual price at which the asset is sold (Austlii, nd). Since, the higher price is market value ($800,000), hence the lower selling price ($400,000) would be ignored.
There has been a change in ownership owing to which the company is now owned by a company and not an individual. The discount method under s. 115-25 is not applicable for companies that have to use only indexation method available under s. 110-36 (CCH, 2013). Hence, in line with this method, there would be an increase in the taxable capital gains to $224,600
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 16, 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 16, 2018)
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Accounting: 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, Business-law, 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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