Taxation Law: Understanding Taxable Income and Capital Gains Tax

This article provides a detailed explanation of taxable income and capital gains tax under the ITA Act 1997. It covers different scenarios and provides examples to help readers understand the rules and regulations. The article also includes answers to common questions and is a comprehensive guide to Taxation Law.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

2TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................3
Answer to question 2:.................................................................................................................6
Answer to question 3:.................................................................................................................6
Answer to question 4:.................................................................................................................8
Reference List:.........................................................................................................................11

3TAXATION LAW
Answer to question 1:
Issue:
Are the monies that received for providing services amounts to reward from service
and would such kind of amount would be liable for tax with respect to the “section 6-5 of the
ITA Act 1997”?
Rule:
The rule here in “section 6-1 of the ITA Act 1997” explains that a person that obtains
the income their private effort is regarded as income that has been obtained by the person
from the private exertion (Travers 2014). Under the income from the private exertion the
income that are derived are the wages that is paid to the taxpayer or the salaries that is
received from the personal exertion. This also include the payment which is received as the
fees or pensions, gratuities, allowances or an individual taxpayer deriving revenue from the
business that is carried on by himself or in partnership.
The general rule of the “section 6-5 of the ITA Act 1997” provides an explanation of
the ordinary income as the income which is determined as per the ordinary concepts (Becker,
Reimer and Rust 2015). In an important explanation that has been in the example case of
“Commissioner of Taxation v Scott (1935)” that it is necessary to determine whether the
amount that is derived is treated as income according to the ordinary concepts.
There is an important explanation of the “section 6-5 of the ITA Act 1997” monies
that is received by the taxpayer as the reward for the services is would be considered for
taxation purpose (Peiros and Smyth 2017). Any kind of receipt from the media relating to the
narration of life story is regarded as the reward for service and money that is obtained from
the such reward through media is taxable under the “section 6-5 of the ITA Act 1997”

4TAXATION LAW
because without providing service money cannot be received. A leading explanation of
“Brent v Federal Commissioner of Taxation (1971)” can be explained where it was noticed
that the wife of the train robber has received income from the personal service that was
rendered for telling her life story to media publication was considered having the nature of
income (Smith 2015). These income would be classified as ordinary income and with respect
to “section 6-5 of the ITA Act 1997” it is taxable.
Taking into the consideration the “Housden (Inspector of Taxes v Marshall (1958)”
an explanation can be provided that taxpayer in the present situation decided to make the
Jockey experience available (Van Rensburg 2015). As a result of this the photographs that
were taken by the taxpayer and the cuttings relating to the newspaper was sold. The money
which is obtained from the sale of the photographs and cuttings of newspaper is regarded as
income according to the ordinary concepts and taxable with respect to the provision of the
“section 6-5 of the ITA Act 1997”.
Selling of autobiographies that is written by the taxpayer and obtaining income from
such sale of autobiographies would be counted as the Royalty which is taxable under
provision of the “section 6-5 of the ITA Act 1997” (Mintz 2016). Leading example of
“Hobbs v Hussy (1942) TC 153)” provides an explanation that criminal who was notorious
derived $1500 from selling his autobiographies to newspaper article for publications. The
money that was received should be classified as income and taxable under provision of the
“section 6-5 of the ITA Act 1997”.
Applications:
The applications of the above stated principles can be in the situation of Hilary who
was the famous mountain climber and one occasion after being approached by the Newspaper
to tell the life story she agreed to write the book to narrate her experience in exchange for a

5TAXATION LAW
sum of $10,000. With reference to the “section 6-1 of the ITA Act 1997” these amount is an
income from the personal exertion. (Contractor 2016) Mentioning the example of
“Commissioner of Taxation v Scott (1935)” the sum of $10,000 should viewed as ordinary
income and liable for taxation under “section 6-5 of the ITA Act 1997”. The amount received
by Hilary is a personal service reward and the instances of “Brent v Federal Commissioner
of Taxation (1971)” can be applied to consider the sum of $10,000 for taxation purpose under
“section 6-5 of the ITA Act 1997” as the ordinary concept income.
Later Hilary sold the photographs and the manuscripts to the library for $5,000 and
$2,000 respectively. With respect to the illustration made in “Housden (Inspector of Taxes v
Marshall (1958)” the money received from selling the photographs and manuscripts is
taxable as an ordinary income under the provision of “section 6-5 of the ITAA 1997”.
If Hilary decides to write the book herself then the money received from the sale of
autobiographies would be held as royalty income. Referring to the illustrations of the “Hobbs
v Hussy (1942) TC 153)” these sale of books written by Hilary and obtaining the income
from the selling of autobiographies is taxable income as per the ordinary concepts explained
under the provision of “section 6-5 of the ITAA 1997”.
Conclusion:
After analysing the case of Hilary the amount of $10,000 as well as the money
received sale of photographs and manuscripts should be considered as private exertion
income. These amounts are taxable as per the ordinary concepts of “section 6-5 of the ITAA
1997”.

6TAXATION LAW
Answer to question 2:
Particular Amount ($) Amount ($)
Base value of the car 50000
Statutory rate 20%
Car Available for Private use (Days) 183
Number of days in the FBT year 365
Gross Taxable Value of the Car Fringe benefit (A) 5041.09
Employee contribution (B) 1000
Taxable value of the benefits (A) - (B) 4041.09
Computation of Taxable Fringe benefits
Statutory Method
Answer to question 3:
Issue:
The issue here revolves around in understanding the nature of interest and
determining whether such receipt of interest relating to the loan made by the taxpayer to the
son is held taxable income based on the provision of “section 6-5 of the ITA Act 1997”.
Rule:
The primary rule that is evidently explained in the “section 6-5 of the ITA Act 1997”
is that in order to understand the characteristics of income it is very much necessary that the
those home income should be coming into the home for the taxpayer (Sykes et al. 2015). The
prevalence of unlawfulness, or the ethics is not an important matter for the person that obtains
the income. It is noteworthy to denote that item that is having the characteristics of the
income then it is vital to determine that the income up to the extent to which the amount is
realised. In an important declaration that has been made in the leading case of “McNeil v
Federal Commissioner of Taxation (2007)” the judgement that was provided explained that it
is very much necessary to determine the nature of the income in respect of the situations
when it is earned by the person (Ciconte et al. 2016).

7TAXATION LAW
The necessary explanation was also made by the court by providing the necessary
declaration in the leading case of “Hochstrasser v Mayes (1960)” that an individual is under
the obligations of classifying the income that is having the vital characteristics of gain
(Stiglitz and Rosengard 2015). It is noteworthy to denote that the decision that was stated by
the court relatively provided an explanation that there is no type of gain until and unless the
item is beneficially derived by a person.
Application:
In the instances that is gained from going through the case study of the client it is
learnt that the parents in this case study has made loan to their son for the purpose of
developing house. It is worth mentioning that the parents did not charged with any kind of
interest from the son while the conditions of the loan contained that the son will repay the
principle amount of the loan inside the span of five years after taking such loan. In the later
evidences that has been gained following the study that the principle amount of the loan that
was made by the son was paid to the parents but only within the span of two years. The loan
principle amount was repaid but also accompanied the current market value interest for the
loan that was taken by the son. A reference should be made regarding the example of
“Federal Commissioner of Taxation v McNeil (2007)” that the amount of interest that was
paid by the son to the parents possessed the necessary characteristics of income (Auerbach
and Hassett 2015).
Taking into the consideration the evidences that has been made after making a
detailed analysis of the case is that the situation of “Hochstrasser v Mayes (1960)” can be
implemented to arrive at the decision that the interest that was obtained by the taxpayer has
the necessary element of the gain (Bronfenbrenner 2017). Taking into the considerations that
necessary explanation of the provision “6-5 of the ITA Act 1997” the interest that is obtained

8TAXATION LAW
by the parents will be classified as income with respect to the ordinary conceptions. The
taxpayer in the current case is not required to consider the principle amount of loan as income
because it was having the element of capital while the income that is received in the form
interest is necessary required to be held for assessment purpose (Stantcheva 2017). The
taxpayer is include those receipt of interest in the taxable income which is taxable under the
provision of “6-5 of the ITA Act 1997”.
Conclusion:
On arriving at the conclusion of the above stated case, it can be bought forward that
loan interest that was received by the taxpayer from son was carrying the necessary element
of income and taxable under “section 6-5 of the ITA Act 1997”.
Answer to question 4:
Answer to A:
The situation opens with the conditions that Scott is owner of the vacant land that was
purchased by him on 1st September 1980. Later Scott, undertook the construction on the land
during 1st October 1986. The property was employed by Scott as the income producing
element and used the property for a period of thirty years before finally selling the property.
Capital gains tax is only applied to determine the assets that is obtained or acquired
during or after the 20 September 1985 (Jacob 2018). It is worth mentioning that the terms of
the pre-CGT and the Post CGT is used commonly for the assets that has been acquired after
the events or situations that are happening before or after the date. The system of capital
gains tax is based on the realised amount of capital gains or losses that is made from the sale
of the property or the assets or from any other specified events.

9TAXATION LAW
The first and the foremost step in the determination of the capital gains tax is whether
any kind of CGT event has happened (Tanzi 2014). A capital gains or loss can only originate
when the asset has involves the CGT event. According to the “section 104-5 of the ITA Act
1997” it is related with the recognition of the capital gains tax event. An important
explanation has been made under the “section 110-25 of the ITAA 1997” that any kind of
incidental cost that occurs is included into the cost base of the property (Faccio and Xu
2015). Land is usually classified as the separate form of capital gains tax asset. In order to
work out the capital gains tax it is vital for the person to understand whether the assets belong
to Pre-CGT or the Post CGT events.
According to the evidences obtained it provides a suggestion that Scott bought a
vacant block of land on 1st October 1980 which is pre-CGT event and construction was
commenced on the land by Scott on 1st September 1986 therefore land in this current case
should be classified as post CGT asset. With respect to “section 104-10(1) of the ITAA 1997”
selling the land have resulted in CGT event A1. The calculation is stated below;
Particulars Amount ($)
Purchase Price 90,000.00
Month & Year of Purchase Sep-86
Salling Price 8,00,000.00
Month & Year of Sale Jun-18
Capital Gain 8,00,000.00
Tax with Indexation 1,60,000.00
Purchase Price 90,000
Cost of Construction 60,000
Total Cost of Land 1,50,000
Disposal Proceeds 8,00,000
Net Capital gains 6,50,000
Calculations of Capital Gains Tax
For the Year ended 30th June

10TAXATION LAW
Answer to B:
In the alternative situation if Scott sells the property to the daughter for $200,000
there Scott would make a capital gain of $50,000. The calculations is stated below;
Particulars Amount ($)
Purchase Price 90,000.00
Month & Year of Purchase Sep-86
Salling Price 2,00,000.00
Month & Year of Sale Jun-18
Capital Gain 2,00,000.00
Tax with Indexation 60,000.00
Purchase Price 90000
Cost of Construction 60000
Total Cost of Land 150000
Disposal Proceeds 200000
Net Capital gains 50000
Calculations of Capital Gains Tax
For the Year ended 30th June
Answer to C:
In the second alternative situation if it is noticed that the owner of the property was
the company then the amortization cost and the tax expenses should be subtracted.

11TAXATION LAW
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
Calculations of Capital Gains Tax
For the Year ended 30th June

12TAXATION LAW
Reference List:
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American
Economic Review, 105(5), pp.38-42.
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International.
Bronfenbrenner, M., 2017. Income distribution theory. Routledge.
Ciconte, W., Donohoe, M., Lisowsky, P. and Mayberry, M., 2016. Predictable uncertainty:
The relation between unrecognized tax benefits and future income tax cash outflows.
Contractor, F.J., 2016. Tax avoidance by multinational companies: Methods, policies, and
ethics.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and
Quantitative Analysis, 50(3), pp.277-300.
Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting
Review, 27(1), pp.1-21.
Mintz, J., 2016. Taxes, Royalties and Cross-Border Investments. International Taxation and
the Extractive Industries.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor's
commission. Taxation in Australia, 51(7), p.394.
Smith, J.P., 2015. Australian state income taxation: a historical perspective. Austl. Tax F., 30,
p.679.
Stantcheva, S., 2017. Optimal taxation and human capital policies over the life cycle. Journal
of Political Economy, 125(6), pp.1931-1990.

13TAXATION LAW
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International
Student Edition. WW Norton & Company.
Sykes, J., Križ, K., Edin, K. and Halpern-Meekin, S., 2015. Dignity and dreams: What the
Earned Income Tax Credit (EITC) means to low-income families. American Sociological
Review, 80(2), pp.243-267.
Tanzi, V., 2014. Inflation, indexation and interest income taxation. PSL Quarterly
Review, 29(116).
Travers, G., 2014. Personal services income. Tax Adviser's Guide to Part IVA: A Practical
Guide to the Application of the General Anti-avoidance Rule, The, p.49.
Van Rensburg, E.J., 2015. The origins and development of the general deduction formula in
income tax legislation of the Cape Colony. SA Mercantile Law Journal= SA Tydskrif vir
Handelsreg, 27(1), pp.92-127.