HA3042 Taxation Law: Case Study Analysis

HA3042 Taxation Law
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Contents
Question 1.............................................................................................................................................4
Question 2.............................................................................................................................................5
Question 3.............................................................................................................................................5
Question 4.............................................................................................................................................6
a. Determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current
tax year..............................................................................................................................................6
b. How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?. 7
c. How would your answer to (a) differ if the owner of the property was a company instead of an
individual?.........................................................................................................................................7
References.............................................................................................................................................8
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Question 1
Brief of the case : - the case basically relating on the question as to whether the amount
received from story writing, sale of manuscript and photograph would be considered as
income from personal exertion or not ?
What does the law says: - As per Australian tax laws, income from personal exertion include
income received as salary, pension, wages, bonus, superannuation allowance, retiring
gratuities and other retirement benefits. The allowances as well as gratuities collected in the
capability of the employee, or connecting to any services provided in the course of the
business run by the tax payer.
In the present case, even though Hillary is not a permanent story writer, however she has
received an offer from a Daily Terror (A news paper). She has written her story for the news
paper and received $10,000 for the same.
According to section 8-1 of income tax assessment act 1997, In this particular case, she has
written her life story without the help of ghost writer (i.e as per the terms and conditions of
agreement) and accordingly received the payment. So it is definitely an income from personal
exertion. Therefore it will be assessed as an ordinary income.
As far as income from sale of manuscript of her story to the Mitchell library for the amount
of $5,000 and sale of her mountaineering photographs is concerned, since this income is
considered as ordinary income, so it will be taxable as income from capital gains. She does
not have to pay income tax as per ordinary income taxation law.
In second case, if she writes the story for her own satisfaction and then decides to sell her
story to the news paper Daily Terror, then the income arising to her shall not be considered as
ordinary income rather it will be taxable as income from capital gains even though the daily
terror offers the same amount to her. Accordingly tax provisions relating to capital gain
taxation shall apply. So, in the first case income from story writing will be considered as
ordinary income and income from sale of manuscript and photograph will be taxable as
capital gain.
And in the second case entire income shall be taxable as capital gain.
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Question 2
Use of car for personal purpose is considered as fringe benefit/perquisites and taxable in the
hands of employee. Its valuation based on the statutory formula is as under : -
Cost of the car $50,000
Value as prescribed in the law 20%
No. of days for which used by employee 183 days
Valuation based on the formula $50,000*20%*183/365
$5013.69
Less : - Amount contributed by employee $1000
Value of fringe benefit $4013.69
Question 3
Brief history of the case: - The mother has provided home loan of $40000 to son without any
written agreement and son has not provided any security relating to repayment of loan and
interest amount. But son has repaid the loan along with interest, so the question is that
whether the amount of interest received by mother is taxable or not.
In this case, since mother has provided loan to son without the expectation of any interest so
it cannot be considered as part of normal income. The son had every right of not paying any
interest to the mother as he was neither legally bound to pay the interest nor was there any
written agreement that bound the son to pay any interest.
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But even then the son paid the interest to his mother. Now, interest has been paid @ 5% p.a
so the interest for two years amounting to $ 4000 has been paid by son to mother (client).
$4000 is interest received by the client without any right on her part so it is not to be
considered as ordinary income.
As per Australian tax laws, the tax can be charged only when the income exceeds the basic
threshold limit. In the present case, since the amount of interest received by mother is very
less so cannot be charged to tax.
Question 4
a.Determine Scott’s net capital gain or net capital loss for the year ended 30 June of the
current tax year.
Brief of the case: - It is provided that Mr. Scott is an accountant and has purchased vacant
land in 1980 and made some construction in 1986 and thereafter sold the same in the current
tax year. The question is the taxability of the income from sale of property.
First of all the rental income from property will be taxable as his ordinary income. However
the income from sale of property is discussed in following manner: -
The point to be noted is that Scott is an accountant and not engaged in dealing in properties
on full time basis therefore income from sale of house property cannot be considered as his
ordinary income rather it will be taxable as a income from capital gain so tax has to be paid
as per the rule of taxation applicable for capital gains. Capital gain has been defined as any
profit or gain that an individual derives through the sale of a capital asset . Capital asset
comprises of items like that of land, building, machinery, jewellery, intangible assets etc
Such capital gains will be taxable in the year in which transfer takes place.
Since the property has been held by scott for more than three years so it will be long term
capital gains. The calculation of capital gain is as under : -
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Nature of capital gains Long term
Selling price of the property $8,00,000
Cost of purchase of vacant land $90,000
Cost of construction $60,000
Long term capital gains. $6,50,000
b. How would your answer to (a) differ if Scott sold the property to his daughter for
$200,000?
However if the property is transferred to his daughter then there will not be any capital gains
as the provisions of capital gains does not arise if transfer happens due to inheritance or gifts.
Since Scott has reduced the price so it is assumed that he has transferred the property without
adequate consideration which is known as gift, so no capital gains shall arise.
c. How would your answer to (a) differ if the owner of the property was a company
instead of an individual?
If the owner is a company then answer will depend upon the fact that whether the company is
engaged in the business of real estate or not. If company is engaged in the business of real
estate then income from transfer of property shall be taxable as ordinary income otherwise it
will be taxable as income from capital gains.
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References
 Australian Government. (2017). Fringe Benefits Tax (FBT). [online] Business.gov.au.
Available at: https://www.business.gov.au/info/run/tax/fringe-benefits-tax [Accessed
20 May 2018].
 Austill. (2018). INCOME TAX ASSESSMENT ACT 1997 - SECT 82.135Payments
that are not employment termination payments. [online] Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s82.135.html
[Accessed 20 May 2018].
 Australian taxation office. (2018). Amounts not included as income. [online]
Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Income-
you-must-declare/Amounts-not-included-as-income/ [Accessed 20 May 2018].
 Australian taxation office. (2018). Capital gains tax. [online] Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 20 May 2018].
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