Taxation Laws and Provisions

This assignment provides a comprehensive review of the taxation system in Australia, covering various aspects such as individual tax rates, capital gains, and personal services income. It also includes a case study of a loan transaction between a father and son to illustrate how taxation provisions are applied. The report discusses relevant laws and regulations governing taxation in Australia, including the ATO's guidelines on taxable income and individual tax rates.

Questions
of
Taxation Law

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1...................................................................................................................................3
Question 2 ..................................................................................................................................4
Question 3...................................................................................................................................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
A tax is charged by the government on the income earned by an individual, company or
trust, also the value of a property or gift is taxable. Taxation law is body of rules, policies and
legal provisions under which a taxpayer has to pay a certain amount calculated on transfer value,
income etc. It is wider and inclusive in nature (Oats, L. (Ed.)., 2012). The scope is also wide
which covers many other areas. It is a source of revenue which is bifurcated into direct and
indirect income. The report has been drawn upon taxation law of Australia by solving questions
pertaining to different heads of the tax for better understanding of every area.
MAIN BODY
Question 1
This question explains capital gain. Capital gain refers to any profit or gain which is
earned by selling a capital asset. The capital assets are divided into two categories long term and
short term. When an item is held for less than 36 months from the date of acquisition, then it is
treated as short on the contrary, if the asset is held for 36 or more months, then it will be called a
long term asset. The treatment is different in both the cases. Furthermore, all the assets have been
categorised into different categories such as depreciable, exempted etc. Also, there are three
different methods for calculating the amount of capital gain or loss (Woellner, R., and et. al.,
2014). If sale price is higher than cost, then it will be a gain whereas if cost exceeds sale price, it
will be considered as loss. Capital loss can be carried forward and set off as per the provisions.
Stocks, bonds or real estate are termed as capital assets. When selling price of an item is reduced
from cost price, then positive amount is treated as gain and negative is considered as loss.
1. An antique impressionism painting Helen's father bought in February 1985 for $4,000.
Helen sold the painting on 1st December 2018 for $12,000.
Answer- Every antique item whose value exceeds $500 becomes taxable. However, such
assets if bought prior to 20th September 1985 and having a value of more than $500 is exempt
under section 104 to 110(5) ITAA, 1997. Hence, the profit of $8,000 ($12,000 - $4000) will not
be taxed.
2. Helen sold her historical sculpture on 1st January 2018 for $6,000. She has purchased
the piece on December 1993 for $5,500.

Answer- The law provides any sculpture bought after 20th September having a value of
more than $500 will be taxable under the Capital Gain head. In this case, Helen bought it in
December 1993 which is after 20th September and has a value of $5,500 which makes it taxable.
Indexation method would be appropriate as discount method is suitable only when losses have
been considered. The calculation of capital gain/loss through indexation method is as follows:
Indexation for December 1993 is 61.2
Indexation for 1st January 2018 is 112.6
Indexation factor for this question = 112.6/61.2
= 1.840
The indexed cost base is $5,500 x 1.840 = $10,120
Indexation is used to get gain and in case, there is a loss just like in this case ($6,000 - $10,120 =
-$4,120), therefore, the option to use any of the methods will completely depend on Helen by
considering the one that will give best outcome. Furthermore, it has separate exemption for
various goods which can be availed accordingly to reduce the amount of tax payable on capital
gain (Evans, Minas, & Lim, 2015).
3. An antique jewellery piece purchased in October 1987 for $14,000. Helen sold the
antique jewellery piece on 20th March 2018 for $13,000.
Answer- On solving this ($13,000 - $14,000), a loss of $1,000 is calculated, thus,
indexation method can not be used for an asset which will result in a loss. This loss can be
carried forward in future and set off against the income of assets falling under the same category
which is collectables as per Section 118-10(1). The first priority to set off will be given to
collectable incomes pertaining to same category as given under ITAA 1997.
4. Helen sold a picture for $5,000 on 1st July 2018. Her mother purchased the picture in
March 1987 for $470.
Answer- Assets like painting should have value more than $500 to be able to fall in the
ambit of taxation under this head. In this case, it was acquired for $470. Hence, the gain on sale
will not be taken into account as it is less than $500 (Cui, (2013).
Question 2
In this question, Barbara, who is an economist researcher and commentator has received
an offer of $13,000 for a writing a book from Eco Books Ltd., however, she accepts the offer and
proceed with the writing it. She assigned book's copyright for $13,400 to Eco Books Ltd. She got

paid once it's published. Furthermore, book's and interview manuscript were sold by her for
$4,350 and $3,200 respectively.
Answer- Copyright is a legal right to protect the work of an author. It is considered as an
intellectual property which in literal sense means the right to copy. Under this, author have the
right to authorise somebody else to use the his/her work (Faccio, & Xu, (2015). The laws
pertaining to this is applicable on literary works, live performance, photographs, movies,
paintings and many other items. Royalty has been defined in two different meanings. According
to s6-5 of Income Tax Assessment Act, 1997 if a royalty is an income then it will be treated
under this section. If its in the nature of capital, then the treatment will be done according to 15-
20 of ITAA 1997.
The treatment for each of the above mentioned amounts is provided below:
1. Offer amount of $13,000- This amount is paid by Eco Books Ltd. For writing a book
on “Principles of Economics”. Barbara has never written a single book on this subject has only
carries work of research and commentator. Thus, it will not be treated as her income from
profession. Therefore, it will considered as her personal income because it has been paid under a
contract (Meaning of personal income, 2019).
2. Copyright value of $13,400 – When an author has completed his or her work, he can
sell it to as many people as the author wants by charging a royalty. In this case, Barbara has sold
her copyright to Eco Books Ltd. For $13,400 which will be taxable under the head Income from
Other Sources. A rate of 30% will be applicable for charging tax on this income. Since, she is not
carrying her own profession and still in research work, thus, there is no chance to include it
under income from business and profession head.
3. Income of $4,350 from sale of book's manuscripts- Barbara has sold this out of free
will without any clause being applicable on her. There was no requirement of selling manuscripts
with the copyright, hence, it is purely her personal income. The manuscript was a result of her
own work which she did not make it with the intention to sell, however, now that she is selling it,
it will become a part of personal income (Meaning of royalty, 2019).
4. Income of $3,200 from sale of interviews' manuscripts- The treatment of this income
is same as of book's manuscripts. Thus, it will be charged by applying individual tax rates on
personal income.

If Barbara had written a book on the topic Principles of Economics then the treatment
would have been different. The income of $13,000 offered her in the contract would have treated
in the business and profession head. However, treatment of rest of the incomes would be same
that is Income from other source and personal income.
Question 3
Patrick who has established a new business, paid his son, David a payment of $52,000 for
helping him out in the business. Both of them were agreed on repayment of the amount this
amount will be repaid at the end of five years. There was no formal agreement or security deposit
for this loan. Patrick said that to David that interest is need not be paid. However, David repaid
the full amount after two years including an additional amount of 5% on the principal amount.
Answer- When an income is given by one person to another who is in family relation or
friends also, where no formal agreement of loan has been executed. Then in such case, it will be
treated as income from other sources (Burns, Le Leuch, & Sunley, (2016).
In this case, Patrick has given a loan of $52,000 with an intention to get repaid after
expiry of 5 years. It was given to his own son who has made the repayment after two years only.
The amount paid was $58,000 which included 5% in this amount. On looking at this, there has
not been any transfer as no formal agreement was executed between the father and the son.
Hence, the assessable income for Patrick would be $58,000 which will form a part of his net
taxable income. It will be taxed according under individual tax slab (Individual tax rates, 2019).
CONCLUSION
From the above report, it has been concluded that taxation is a great source of revenue for
government due to which it has implemented laws governing taxation system of Australia. There
are legal provisions regulating each aspects of tax from treatment of income to application of
rates on the income earned. Furthermore, the different treatments of capital gain and income
from other sources have been done to show how the taxation provision are applied to a particular
case. Along with this, related provisions with respect to each head and matter have been
discussed to show each section with more clarity.

REFERENCES
Books & Journals:
Oats, L. (Ed.). (2012). Taxation: a fieldwork research handbook. Routledge.
Woellner, R., and et. al., (2014). Australian Taxation Law 2014 (pp. 1-81).
Evans, C., Minas, J., & Lim, Y. (2015). Taxing personal capital gains in Australia: an alternative
way forward. Austl. Tax F., 30, 735.
Cui, W. (2013). Taxing indirect transfers: Improving an instrument for stemming tax and legal
base erosion. Va. Tax Rev., 33, 653.
Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative
Analysis, 50(3), 277-300.
Burns, L., Le Leuch, H., & Sunley, E. M. (2016). Taxing gains on transfer of interest.
In International Taxation and the Extractive Industries (pp. 176-205). Routledge.
Green, J. (2016). Australia. In Angels without Borders: Trends and Policies Shaping Angel
Investment Worldwide (pp. 163-175).
Tran, A. (2015). Can taxable income be estimated from financial reports of listed companies in
Australia. Austl. Tax F., 30, 569.
Online:
Meaning of royalty. 2019. [Online]. Available through:
<https://www.ato.gov.au/law/view/document?docid=ITR/IT2660/NAT/ATO/00001>.
Individual tax rates. 2019. [Online]. Available through:
<https://www.ato.gov.au/Rates/Individual-income-tax-rates/>.
Meaning of personal income. 2019. [Online]. Available through:
<https://www.ato.gov.au/Individuals/Tax-Return/2017/Supplementary-tax-return/
Income-questions-13-24/14-Personal-services-income-(PSI)-2017/>.

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