Taxation of Income from Various Sources under Australian Income Tax Act

This article discusses the taxation of income from various sources under the Australian Income Tax Act. It covers the rules and analysis of scenarios related to capital gains tax, fringe benefit tax, and individual pay. It also provides expert advice on calculating capital gains tax using the indexation method or discounting procedure method. The article includes case laws and provisions of the Australian Income Tax Act to arrive at conclusions.

Answer -1
Issue - Hilary was a well – known peak climber and was the best in her sport . She was too passionate
about the climbing of mountains and due to her such passionate and professional nature she was able
to make a huge fan following for her who wanted to know her life story from the begining so that the
young youth can get movitation and inspiration through the hard work she had done to reach such a
great level in life. Hence, the daily terror newspaper offered her an amount if $10000 to write the story
about herself and transfer all the related rights, interest, title and copyright of the story to the
newspaper who can later publish the same and make them available to the nation . Further, she was
also engaged in selling manuscripts of her achivements to the library . She was able to fetch $5000 from
selling the manuscripts to the Mitchell Library. She was also interested in photography and used to take
snaps of her climbing and sport which she managed to sell for $2000. Thus, through her popularity she
was able to earn money from various different sources .
Rule – According to Sec 6 of ITAA Act, 1936, any income earned from an individual effort is considered
as salary involving commission, pay, profits, rewards or commission in regard to any work performed.
Each of the items shall be considered as an individual pay as per the Australian Income Tax Act.
Analysis - From the above given scenario it is observed that the payment received for writing the life
story from the daily terror newspaper is not the work she is regualarly engaged in . However, the income
earned from other two sources is something Hilary is usually engaged in . Thus, the amount received
from the newspaper cannot be considered as an income received under the individual pay unlike the
receipt of other two incomes (Acts 2015)
Conclusion - With the above provisions of the case it is concluded that the income of $2000 and $5000
respectively earned from selling of photographs and manuscripts shall be taxed under the provisions of
individual pay whereas the income of $10000 received from the Daily Terror newspaper shall be
specifically excluded from the provisions of Individual pay and shall be treated separately.
As per the question asked if Hilary was engaged in full time story writing and would write the story on
her own without being asked by the newspaper agencies and companies , and later sell it , would
contribute such income under the concept of Individual pay along with the other income earned from
two different sources rather than treating it seperately as treated above.
Answer – 2
Issue – As per the Australian Income Tax provisions frienge benefit tax is levied on the employer on
providing non monetary perquisites to his employees whether given directly or indirectly . In the given
scenario, the employer has provided a car to his empployee for his use who in turn has used the car for
183 days during the year and has paid $1000 towrads the cost of running the car to his employer along
with the necessary relevant documents . The employee has covered a total distance of 16000 kilometres
with the car within 183 days of his possession. The car was purchased by Eric (the employer) at a cost of
$50000 in the last year.
Rule – The car fringe benefit tax is levied in case the employee is received a car from his employer for his
personal purpose. However, if it is used for both the personal and official purpose, then the tax is levied
on proportionate basis on the employer for the part being used for private purpose. Thus, fringe benefit
tax is levied on the non-monetory perquisites provided by the employer to his employees in the course
of the employment. The tax on such perquisites can be calculated either by the statutory formula
method or by operating cost method. However, we have been asked to calculate the tax as per the
statutory method and so the same is discussed. The statutory formula method allows the deduction of

any amount paid by the employee in this context to the employer. Further, if the asset is purchased or
leased for four or more years, then the base price of the asset shall be reduced to two third of its value
along with a flat rate of 20 percent is applied for calculating the taxable value of the non monetary
perquisites.
Analysis - The base value of the car shall remain equal to its cost price since four years had not elapsed
as the car is being in the last year itself. Further it has travelled a distance of 16000 kilometres . Thus,
the taxable value shall be calculated as 20% of [(50000-1000)*183/365] amounting to $ 4914
approximately (Givernment 2015)
Conclusion – As per the above provisions and calculations it is concluded that the employer is liable to
pay tax on the non monetory perquisites provided to the employee and similarly Eric shall pay
applicable rates of tax on the taxable value of $4914 as a car fringe benefit tax in respect of the car given
to employee for its use.
Answer – 3
Issue – The capital gains tax shall be taxed as per the Australian Income Tax Act. The given scenario
deals with the relationship between the mother and son. The mother has provided a housing loan of
$40000 to her son which the latter has to repay by the end of five years a consolidated amount of
$50000. The mother has given the loan without any security against it and has also not demanded any
interest for the loan. All the terms and conditions regarding the loan was agreed by both the parties and
the same was not on legal papers but merely over an oral conversation between the two. Thus, it clearly
establishes the affection of the two towards each other for the transaction to occur. However, in the
given case, the son repaid the loan within two years along with a five percent additional amount to his
mother and the repayment was made through one single cheque .
Rule – Since the arrangement was not between the unrelated parties on a legal basis but was a result of
pure love and affection between a mother and son that too on oral basis without any formal
agreement,so there is no specific provisons relating to such transactions. However, we can refer to case
laws regarding such arrangements to arrive at a conclusion.
Analysis – It was held in the case of Riches vs Westminster Bank Limited (1947), AC 390, that the
commission charged shall not be treated as interest. Here, in this case as per the circumstances stated it
can be said that the arrangement was fully out of pure love and affection and didn’t had any legal
obligation on the son to pay interest to his mother on the loan taken. Thus the same shall be treated as
gift in the hands of the mother from his son (Halstead 2015)
Conslusion - Hence with regard to above circumstances and case law it is concluded that the above
arrangement betweeen the mother and son shall be treated as gift rather than income in the hands of
the mother because the transaction being entered into is not due to any legal obligation but out of the
love and gesture between the mother and the son (conversation 2015)
Answer – 4
Capital Gains is tax levied on transfer of capital assets at a value more than its cost of acquisition to
other person whether or not in the course or furtherence of business and where the asset is transferred
at a price less than its cost then capital loss may occur to the assessee which can be set off or carried
forward for a prescribed time period against any other capital gains. Where the asset is being hold for
more than a year then the cost of such asset shall be increased by way of indexation method and the
income as per capital gains shall be reduced to fifty percent of the total income. As per the Australian

Income Tax Act, any asset acquired prior to 20.09.1985 is not liable to capital gains tax irrespective of
the amount of sale or transfer . The asset may be held either by an individual or by any non-individual
person as well. However, an individual holding capital asset has an option to calculate the capital gains
tax either by discounting procedure method or by the refund procedure methodology.
Part A
The given scenario states that an individual resident of Australia named Scott who is an accountant by
profession had acquired a vacant land therein on 01.10.1980 and constructed a flat upon the land on
01.09.1986 which cost around $6000 and the fair market value of land on the sate of construction was
$90000. The constructed flat was given on rent by scott to fetch some income therefrom. After some
time it was witnessed that scott had sold the land cum constructed flat for the total consideration of
$800000 on March 1. This sale of property is subject to capital gains tax and being an individual scott has
an option to compute the capital Gains either by opting the discounting procedure or the indexation
method whichever is more beneficial to him. Hence, both the methods are being tested to acknowledge
the lower capital gains in the hand of scott on account of such transfer.
Indexation Method –
This method involves increment in the cost of acquisition of the asset on the basis of the inflation rate
prevailing in the country as compared to that time when the asset was actually acquired.
Indexation for the year of sale on 1999 was 68.7
Indexation for the year of construction of building was 43.2
Indexation for the year of purchase of land is not considered since as per the provisons of the Australian
Act any asset purchased or acquired before 20.09.1985 is exempt from the capital Gains Tax. Thus, the
transfer of land is not subject to Capital Gains.
Therefore, indexed cost of Building amounts to ($60000*68.7/43.2) = $95400/-
Proportionate Sale value of the building amounts to [$800000*60000/(90000+60000)] = $320000/-
Income under Capital Gains = (320000-95400) = $224600/ (Burman 2015)
Discounting Procedure Method –
Since the land was acquired before 20.09.1985, the same is exempt under the Australian Income Tax
Act. The total cost of land and building was $150000 out of which the cost of building is $60000
comprising 40 percent of the total cost. Hence, the sale price would also contribute towards 40 percent
of the total sale amounting to (800000*40%) = $320000 and so only the proportionate amount would be
taxable in the hands of Scott.
Capital Gains = $(320000-60000) = $260000/-
Being an individual, the 50 percent of such amount would contribute as an capital gains income of the
assessee. Hence the capital gains shall reduce to fifty percent of $260000 amounting to $130000 (Clark
2015)
Thus after considering both the methods it is concluded that the capital gains income under the
discounting procedure method is much less as compared to Indexation Method. Thus the assessee
should opt for the Discounting method in respect of such transfer.

Part B
The sale value of the property as per the Australian Income Tax Act, shall be higher of the actual sale
value or the stamp duty value . In given scenario the property is being sold to his Daughter for $200000
but the same does not affect the taxability since the market price shall be considered which is $800000.
Thus, the sale value shall remain same as that in Part A , the capital gains income would also remain
same ie- $130000.
Part C
The discounting procedure is only applicable to individuals. Thus, in the given circumstance the owner of
the property is a Company, so it have only an option of Calculating its income by indexation method.
Thus, the capital gains income under the indexation method as calculated above amounts to $224600 in
the hand of the company.
Bibliography
Acts, CC 2015, INCOME TAX ASSESSMENT ACT 1936,
<http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1936240/>.
Burman, L 2015, Taxing Capital Gains in Australia:,
<http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/411857-Taxing-Capital-
Gains-in-Australia-Assessment-and-Recommendations.PDF>.
Clark, A 2015, Capital gains tax:, <https://static.treasury.gov.au/uploads/sites/1/2017/06/03Clark.pdf>.
conversation, T 2015, Articles on Capital gains tax, <http://theconversation.com/au/topics/capital-gains-
tax-2813>.
Givernment, A 2015, Car fringe benefits,
<https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Car-fringe-
benefits/>.
Halstead 2015, RICHES V WESTMINSTER BANK LTD: 1947, <http://swarb.co.uk/riches-v-westminster-
bank-ltd-1947/>.