Taxation Law Assignment Sample Online

Question 1 (5 Marks)

Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.

Requirement:

Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?

Question 2 (5 marks)

Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years. Reconsider this question in light of the following facts. The loan was

made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.

Requirement:

Discuss the effect on the assessable income of the parent.

Question 3 (10 Marks)

Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was 60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000.

Requirement:

a) Based on the information above, determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

b) How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?

c) How would your answer to (a) differ if the owner of the property was a company instead of an individual?

Solution 1

S 393-10 of the ITAA 1997 includes income from salaries, bonus, commission, fee, pension and similar retirement benefits received by an employee, income from business as well as subsidy received, and the income from any property forming part of the service or employee emoluments, the income from sale of property and similar other income earned within the purview of income from personal exertion as these payments are received in lieu of the taxpayers time and services. S 6 of the ITAA 1997 specifically excludes iinterest income received except in the business of lending and rents and dividends from the purview of the definition due to the same reason. (Austlii.edu.au, 2016)

Based on the above, the payment of $ 10,000 received by Hilary ought to be her personal exertion income. This is also substantiated through the case of Brent v FCT (1971) 125 CLR 418. The facts of the case were that the taxpayer had sold the copyright of her husband’s life story; and it was held that she had earned assessable income instead of a capital gain as the payment was made in exchange of her time and services. Hilary is also treated accordingly on the income earned by her on the sale of her right, title and interest in the story that got published and which she was duly paid.

$ 5,000 earned by Hilary for the selling the story manuscript to Mitchell Library also ought to be part of her personal exertion income due to the same justification as held in the case mentioned above even though she did not carry any business or profession.

$ 2,000 for the sale of photographs also ought to be treated as part of her personal exertion income. This payment was received due to her skill of mountain climbing and involved her own exertion. So it is a rightful personal exertion income. (Aut.researchgateway.ac.nz, 2016)

Where Hilary first wrote the story on her own will and sold it later; the same treatment mentioned above would apply as the income was still earned by her personal efforts.

Solution 2

The effect on the assessable income of the parent regarding $ 40,000 that was lent for the purpose of a short term housing loan would attract tax on the excess payments received at the end of 5 years i.e. $ 10,000. The loan was obviously not a gift as it was to be repaid.

However, the capital repayment of $ 40,000 would not be part of the assessable income of the parent. The interest received would be subject to tax at the end of the fifth year when it was actually received by the parent and ought to be shown as part of the income for the return filed in respect of the fifth year.

Reconsidering the scenario on the change in facts wherein the loan is given by the parent devoid of any formal express agreement or demand of security and with a verbal foregoing of the interest income; one would initially consider the exemption of the interest income received. The capital repayment of $ 40,000 would not be part of the assessable income of the parent in this instance as well and would not attract any gift tax liability.

However, where the loan is repaid at the end of two years with an interest income of $ 4,000 received by the parent, it would be a part of the assessable income the parent. The interest received would be subject to tax at the end of the second year when it was actually received by the parent and ought to be shown as part of the income for the return filed in respect of the second year.

The mode of payment adopted in this case whether by single cheque or any other mode does not affect the assess ability of the income as such. What matters is the intention of the parties as revealed by their actions. It is important to note in this context that within the purview of Australian tax laws, the ATO has the power to treat a payment made to friends , relatives or acquaintances where the circumstances of the case warrant so as a gift.

The gift tax rules in this regard may also affect the pension payment received by the parent (where the parent is retired) which may further increase the assessable income of the parent by making the parent subject to tax. The parent is allowed a gift tax limit of $ 10,000 per year, or $30,000 in 5 years taken together, whichever is less. Any gift or payment made above this limit would be part of the assessable income of the parent. These provisions also need consideration in the instance specified in the question. (Humanservices.gov.au, 2016)

Solution 3

a) Determination of Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Facts of the case

• Scott is a resident of Australia and is assessable on any income earned by him throughout the world including income earned from the sale of land located in Brisbane which is a part of Australia

• CGT event A1 is attracted on the disposal of the land by any mode including sale by auction and the computation will be done accordingly for Scott.

Amount in $

Calculation of the cost base of the land

Capital Gain or loss computation

The CGT discount method is applicable in the case as the property was held for a period greater than a year.

Also , even though the acquisition date is before 20 September 1985, the property will not be exempt from CGT (CGT; 2016) , due to the construction involving substantial change that was done on the property on 1st September 1986 .The capital gain on the disposal of the property will be calculated as the disposal proceeds less the cost base calculated above. CGT Event A1 is attracted on the sale or disposal including sale of property by auction as per s 104-10. (Austlii.edu.au, 2016)

(Amount in $)

Block of land with house (sale took effect on March 1 of the current year)

ITAA 1997, s 104-10

The main place of dwelling assumption will not be available to Scott as he is earning rent income from the property and is not using it for his dwelling.

The said exemption is available to a tax payer in Australia in respect of house property acquired after 7.30pm on 20 August 1996 and used for personal residence. The property would be CGT free for all assessment years before 1st September 1986 when construction was done on the property as it was acquired before 20th September 1986.

b) Even if Scott sells the property to his daughter for $ 2, 00,000; the amount he received from his daughter would be substituted for the reasonable market value at the time when the sale was made. So, the Australian tax provisions would not allow the assessed to disguise gift as a sale transaction and avoid tax liability.

Where an asset is gifted to a family member friend or acquaintance capital gain tax may be attracted under the tax rules. The reasonable market value is often substituted for the sale proceeds received partly or not received where no disposal proceeds are received or less than the market value of the sale proceeds has been received or where the involved transaction is not done at a fair arm’s length price devoid of both parties affecting each other’s decision regarding the sale. (finder.com.au, 2014)

c) Companies in Australia pay a flat rate of 30 % on the capital gains made. The company as well as the responsible officers of the company are liable to pay the taxes as mentioned above.

Amount in $

The 50% CGT exemption will not be available in the case of a company.

References

Austlii.edu.au. (2016). INCOME TAX ASSESSMENT ACT 1936 - SECT 6Interpretation. [online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html [Accessed 28 Apr. 2016].

Austlii.edu.au, (2016). INCOME TAX ASSESSMENT ACT 1997 - SECT 104.5Summary of the CGT events. [online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html [Accessed 28 Apr. 2016]

Austlii.edu.au, (2016). INCOME TAX ASSESSMENT ACT 1997 - SECT 110.25General rules about cost base. [online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html [Accessed 28 Apr. 2016].

Aut.researchgateway.ac.nz. (2016). [online] Available at: http://aut.researchgateway.ac.nz/bitstream/handle/10292/735/GuptaR.pdf?sequence=5 [Accessed 28 Apr. 2016].

Finder.com.au. (2014). Avoid fees and charges when transferring property to family. [online] Available at: http://www.finder.com.au/avoid-fees-transferring-property-to-other-family-members [Accessed 28 Apr. 2016].

CGT, (2016). [online] Available at: ? https://www.ato.gov.au/printfriendly.aspx?url=/General/Capital-gains-tax/ [Accessed 28 Apr. 2016].

Humanservices.gov.au. (2016). Gifting - Australian Government Department of Human Services. [online] Available at: https://www.humanservices.gov.au/customer/enablers/gifting [Accessed 28 Apr. 2016].