Taxation Law Case Study

Issue 1: Income from personal exertion

1). 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?

2). Eric provides his employee with the use of a car for 183 days during the FBT year. During this period the car travelled 16,000 km. Eric purchased the car last year for $50,000. The employee contributed $1,000 towards the cost of running the car and has provided Eric with relevant documentation.

Requirement:

Calculate the taxable value of the car fringe benefit using the statutory formula.

3). 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.

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.

4). 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?

1). Issues:

The issue is related to the ascertainment of the income that is obtained from the media publications under “section 6-5 of the ITAA 1997”?

Rule:

Referring to the definition provided under “section 6-5 of the ITAA 1997” states that income from personal exertion refers to the income that an individual taxpayer earns from their personal efforts (Jones and Rhoades-Catanach 2015). This includes income from fees, wages, bonus or revenue that is earned from any business. It is noteworthy to denote that under “section 6-1 of the ITAA 1997” a person that earns the income from the personal exertion is required to include those incomes into the assessable income in the form of statutory or the ordinary income.

Referring to the “section 6-5 of the ITAA 1997” chargeable earnings includes those incomes that are derived through the ordinary concepts (Miller and Oats 2016). Generally, majority of the income that is earned by the individuals is regarded as the ordinary income. The federal court in “Scott v Commissioner of Taxation (1935)” provided an explanation that the receipts would be held as the income and an individual is required to treat those in accordance with the ordinary conceptions.

Any form of reward which is obtained by the taxpayer for service is assessable income. The significance relating to the provision of the service is reliant on the facts of the particular events (Keen and Mullins 2017). This consists of the quantum of the payment which is given to an individual must be significant and must not simply be the nominal in order to cover the cost of the inconvenience that is incurred by the taxpayer. The taxpayer would only receive money if the services are rendered by the taxpayer.

In order to support the payment in the form of income an instances are noted in the event of “Federal Commissioner of Taxation v Brent (1971)” (Fleurbaey and Maniquet 2015). The events of the case suggest that the wife of the train robber obtained the income when the taxpayer was rewarded with the sum for narrating her life story to the newspaper publications.

Referring to the other example of “Housden (Inspector of Taxes v Marshall (1958)” the taxpayer in an agreement undertook the decision of making the experiences of Jockey (Kiprotich 2016). The taxpayer sold the photographs and the newspaper articles cuttings. The money that was received by the taxpayer for selling photographs and the newspaper cuttings was regarded as income as per the ordinary concepts which is taxable under “section 6-5 of the ITAA 1997”.

Rule 1: Section 6-5 of the ITAA 1997

Any form of income originating from selling the autobiographies is regarded as the royalty. As per the decision that has been made in the case of “Hobbs v Hussy (1942) TC 153)” the taxpayer was apparently held as the criminal and obtained money from selling the rights relating to his autobiographies which was published in the newspaper (Basu 2016). Hence, it is understood that the sum which is obtained from the sale of book is royalty that is assessable as per the ordinary perceptions of “section 6-5 of the ITAA 1997”.

Applications:

Considering the application of the above stated principles Hilary was well-known as the mountain climber. On one occasion she was approached by the local newspaper company that offered her with a sum of $10,000 to write the book and make the rights available for the newspaper publication. The sum of $10,000 must be classified as income from the personal exertion as the quantum of the payment which is given to an individual was significant. Mentioning the case of “Scott v Commissioner of Taxation (1935)” the receipts of $10,000 constituted income from the ordinary concepts (Mau and Liebig 2016).

Hilary received money by the newspaper publications when the services are rendered by the taxpayer. The sum of $10,000 must be viewed as the reward for service since the taxpayer was required to render the service to receive the money. Quoting the instance of “Federal Commissioner of Taxation v Brent (1971)” the amount will be held taxable since it was reward for services rendered which is assessable income under “section 6-5 of the ITAA 1997” (Genser and Holzmann 2016).

In the next stage of the case study it is noticed that Kate sold the manuscript and the photographs of the mountain climbing to the Hitcher Library. The money that is obtained from sale is held as income from the personal exertion. Citing the reference of federal court in “Housden (Inspector of Taxes v Marshall (1958)” the amount of $5,000 and $2,000 would be considered taxable based on the income from the ordinary concepts under section “section 6-5 of the ITAA 1997” (Barkoczy 2016).

On the other hand, if a decision is taken by Hilary to write the book for personal satisfaction and selling those books would result in royalty income. By taking into the consideration the instances of the “Hobbs v Hussy (1942) TC 153)” selling the book by Hilary that is written by her would be considered chargeable as ordinary income which is assessable under “section 6-5 of the ITAA 1997” (Woellner et al. 2016).

Application 1: Hilary’s case

Conclusion:

Referring to the above decision that has been made an assertion can be bought forward by stating that each of the amount that is earned by Hilary would be considered taxable income as income from personal exertion. The amount that is earned by Hilary must be viewed in meaning of the ordinary concepts which is assessable in “section 6-5 of the ITAA 1997”.

2). 

                                                            

3). Issue:

Will the taxpayer be held liable for taxation purpose relating to the interest derived from the loan based on “section 6-5 of the ITAA 1997”?

Rule:

According the rule of “section 6-5 of the ITAA 1997” for an item to be classified as the income character in should be home coming for the taxpayer. The existence of any kind of illegality or morality does not preclude the derivation of income (Barkoczy 2016). An item possessing the character of income should be derived till the amount of the realisable value. The law court in the circumstances of “McNeil v Federal Commissioner of Taxation (2007)” stated that the character of an element of income is ought to be determined based on the circumstances of derivation by an individual.

In another reference made by the court of law in “Hochstrasser v Mayes (1960)” it was stated that to have the character of the income the item should be held as the element of gain by the taxpayer that derives it (Woellner et al. 2016). There cannot be any form of gain unless the item of income is derived by the taxpayer beneficially.

Application:

The case study provides that an interest free loan was made by the taxpayer to the son. Though the agreement stated that loan would be paid within the time period of five years however the loan amount was paid by the taxpayer within two years. The son paid the loan amount along with the interest as well. Citing the reference of “McNeil v Federal Commissioner of Taxation (2007)” the interest that was received by the parent contained the element of income (Kiprotich 2016).

Quoting the reference of “Hochstrasser v Mayes (1960)” the interest amount received by parent constitute gain which would be considered as income. The receipt of interest would be subjected to assessment under “section 6-5 of the ITAA 1997” as income under ordinary concepts however the principle loan amount is not assessable since it is a capital amount (Miller and Oats 2016).  

Issue 2: Car fringe benefit

4) a. According to “section 102-5 of the ITAA 1997” it comprises of the net capital gains that is derived from the income year in the assessable income of the taxpayer. “Section 104-5 of the ITAA 1997” is associated with the identification of the CGT event (Jones and Rhoades-Catanach 2015). According to the “section 110-25 of the ITAA 1997” the cost base of the property also includes the incidental costs that incurred in the property. Land is held one of the separate CGT assets. An individual taxpayer is required to consider time when the land is acquired. This includes differentiating the property between the pre-CGT and post-CGT event.

Evidently in the situation of Scott the vacant block of land that was bought on 1^st October 1980 constituted a pre-CGT event while construction on land on 1^st September 1986 resulted the land being held as the post CGT event. Denoting the explanation of “section 105-55 (2) of the ITAA 1997” the land property should be classified as the post CGT asset. Under “section 104-10(1) of the ITAA 1997” sale of property by Scott results in CGT event A1. The computation of capital is stated below to support the analysis;

                                                                         

If the decision is made by Scott to sell the property to the daughter the amount that would be made from such sale is considered as the capital gains. An important consideration can be bought forward in this regard is that Scott has transferred the ownership of the property to his daughter. It is worth mentioning that the sales considerations should take place based on the market value rather taking into the consideration the transfer amount.

b).

                                                                                  

c). In alternative situation if the taxpayer was not the individual and instead the owner of the property was a company then in such circumstances the amortization cost and the tax payment should be subtracted.  It is worth mentioning that the given the owner of the property was the company then it is required to follow the discounted based capital gains tax and the indexation method should be ignored. The indexation method is only applicable to individuals. The taxable amount of the capital gains stands $325,000 from the sale of property.  

Calculations of Capital Gains Tax
For the Year ended 30th June
Particulars	Amount ($)
Month & Year of Purchase	Sep-86
Sale Price	8,00,000.00
Month & Year of Sale	Jun-18
Capital Gain	8,00,000.00
Purchase Price	90000
Construction cost	60000
Total cost of land	150000
Disposal Proceeds	800000
Net Capital gains	650000
Less: 50% CGT Discount	325000
Taxable Capital Gains	325000
Assessable as company	325000

Reference:

Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.

Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Fleurbaey, M. and Maniquet, F., 2015. Optimal taxation theory and principles of fairness (No. 2015005). Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

Genser, B. and Holzmann, R., 2016. The taxation of internationally portable pensions: Fiscal issues and policy options.

Jones, S. and Rhoades-Catanach, S., 2015. Principles of Taxation for Business and Investment Planning. McGraw-Hill Higher Education.

Keen, M. and Mullins, P., 2017. International corporate taxation and the extractive industries: principles, practice, problems. International Taxation and the Extractive Industries, New York and London: Routledge.

Kiprotich, B.A., 2016. Principles of Taxation. governance.

Mau, S. and Liebig, S., 2016. When is a Taxation System Just? Attitudes towards General Taxation Principles and towards the Justice of One’s Own Tax Burden. In Social Justice, Legitimacy and the Welfare State (pp. 115-140). Routledge.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.