Taxation Law: Understanding Taxable Income and Capital Gains Tax

This article discusses taxable income and capital gains tax in Taxation Law. It explains the laws, applications, and calculations involved in determining taxable income and capital gains tax. The article also provides expert guidance from Desklib. The subject is Taxation Law, and the course code and college/university are not mentioned.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................5
Answer to question 3:.................................................................................................................5
Answer to question 4:.................................................................................................................7
References:...............................................................................................................................11

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Answer to question 1:
Issue:
Is the receipt of money by the taxpayer for the reward of service constitute a taxable
income based on “section 6-5 of the ITAA 1997”?
Laws:
 “S-6-5 of the ITA Act 1997” “Ostrum v British Columbia (1904)” “F.C of T v Kelly” “S-995 of the ITA Act 1997” “F.C of T v Brent (1971)” “Marshall v Housden (Inspector of Taxation)”
 “Hobbs v Hussey (1942)”
Applications:
In order to consider the ordinary income as the portion of the taxpayer’s chargeable
earnings for a year in “S-6-5 of the ITA Act 1997” the income should be earned during the
relevant year by an individual (Clarke 2017). The receipts would only be considered as the
private exertion income given those receipts are produced from the personal services or
employment holds appropriate association with the activities. The judgement in “Ostrum v
British Columbia (1904)” provided an explanation that proceeds earned from employment or
services provided is considered as income (Stewart 2017).
In the further explanation provided by the taxation commissioner in “F.C of T v
Kelly” explained that there must be an adequate association among the earnings that is
derived through both the indirect and direct sources (Peiros and Smyth 2017). Generally

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association between the services rendered and employment are regarded as the significant
element in classifying the income as the ordinary income (Buchanan and Consett 2016).
Income such as earnings from wages, salaries, compensation, fees, benefits, gratuities or
business proceeds are regarded as the personal exertion income.
An instance of Hilary states that she is a well-known mountain climber. Later events
explains that she agreed to write a book when she was offered with the amount of $10,000 by
the newspaper publication company regarding the narration of the story of her life. The
agreement contained that she is write the book and assign the title or interest of the book to
the newspaper publication company.
Signifying the elucidation of “S-6-5 of the ITA Act 1997” is it understood that on the
event of receiving money from the media publication regarding the narration of life story is
regarded as the chargeable income (Burton 2017). It is worth mentioning that prior to media
interview the agreements which is signed by the taxpayer and the money obtained from such
media interview are regarded as assessable income for the recipients. All the rights or the
interest of the life story of taxpayers exclusively remains vested in the hands of the media
channel. Under “section 995-1 (1) of the ITAA 1997” the meaning of the word derivation is
explained that is in accordance with the meaning stated in “S-6-5 of the ITA Act 1997”.
Where a taxpayer renders any personal services and derives money from the same is
considered as taxable income (Jones 2017). Citing the case of “F.C of T v Brent (1971)”
usually personal services receipts are classified as the income from personal exertion and
taxable under ordinary meaning of “S-6-5 of the ITA Act 1997”.
Preceding from the above stated case example the circumstantial evidences gathered
from Hilary’s case suggest that the receipt of $10,000 is held as the personal exertion income.
In order to receive the sum of $10,000 the taxpayer was required to perform the service by

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writing the book. The receipt from the newspaper company should be viewed as reward for
service which is held taxable under ordinary meaning of “S-6-5 of the ITA Act 1997”.
On the other hand of the case study, Hilary was found to have sold the photographs of
her mountain climbing and manuscripts to the library. This resulted her receiving a sum of
$5,000 and $2,000. Moreover, these receipts are viewed as the ordinary income within the
meaning of “S-6-5 of the ITA Act 1997” (Krever and Mellor 2016). More importantly the
sum of $5,000 and $2,000 would be accounted into the current year in which the taxpayer
derived the relevant income. An instances stated in “Housden (Inspector of Taxation) v
Marshall (1942)” explained that where the taxpayer would be making the experience of
Jockey available by selling the cuttings of newspaper and photographs taken by him (Cooper
2017).
As evident from the above stated case the sale of photographs along with the sale of
manuscripts by Hilary to a local library should be viewed as income that is obtained through
personal exertion. This has sufficient association with the activities of the taxpayer and would
be taxable under “section 6-5 of the ITA Act 1997”.
In the alternative situation if Hilary chooses to write the book for herself and then
selling it to the market the income which she would be earning from the book sale would
amount to Royalty. Taking in the account the judgement that was made by the court in the
case of the “Hobbs v Hussey (1942)” the taxpayer was viewed as the criminal however the
taxpayer sold the privileges of his autobiographies with the objective of publications in to the
newspaper media (Black 2017). The receipts is ought to be treated as the income from
royalties in compliance with the meaning of “section 6-5 of the ITA Act 1997”.
Conclusion:

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The conclusive evidences that has been obtained from the above stated case is that the
amount that is derived by Hilary for writing the book and narrating the story the related to her
life would be amounted as the personal service income or income from personal exertion.
The receipts would be treated as the ordinary income under the ordinary concepts of “section
6-5 of the ITA Act 1997”. Moreover, the selling of the photographs and manuscripts too
forms the part of income from personal exertion and is chargeable under the ordinary
meaning of the “section 6-5 of the ITA Act 1997”.
Answer to question 2:
Answer to question 3:
Issue:
The existing issue is related to the ascertainment of the tax consequences that would
originate from the amount of interest that is received for the loans made by the parents of the
taxpayer to their son within the ordinary meaning of the “section 6-5 of the ITAA 1997”.
Laws:  “S-6-5 of the ITAA 1997”

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 F.C of T v Scott (1935)” “F.C of T v McNeil (2007)”
Applications:
An individual taxpayer receives interest, except on the circumstances when the
interest received from lending of money or the interest payment is related with the business
activities. The amount received from interest is viewed as the portion of income given an
individual earns the interest either beneficially or as a gain. According to the explanation of
“S-6-5 of the ITA Act 1997” ordinary income refers to income that an individual derives
through ordinary concepts (Joseph, Walpole and Deutsch 2015). Receipts are viewed as
income and must be accounted within the ordinary meaning of “S-6-5 of the ITA Act 1997”.
The legislative approach in “F.C of T v Scott (1935)” explains that the word income is not a
term of art and requires an appropriate treatment based on the ordinary conceptions of “S-6-5
of the ITA Act 1997” (Burton 2017).
It is noteworthy to denote that the item that carries the characteristics of income is
viewed as income when the same comes home to the taxpayer. The element of income is
earned when the same has the home coming characteristics present in it (Murray and Wright
2015). Therefore, it becomes obligatory for the taxpayer to judging the nature of income that
is earned by the taxpayer based on the circumstances of the derivation by the taxpayer. An
amount is only held as income when it has the elementary existence of gain.
Taking into the consideration which the commissioner of taxation has provided in
“F.C of T v McNeil (2007)” the verdict denoted that income must be viewed in accordance
with the derivation by an individual (Van Niekerk 2016). Circumstantial evidences that has
been gathered provides an explanation that the parents of taxpayer provided the son with a
sum of $50,000 for the short period housing finance. The conditions of the loan explained

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that the principle loan amount to be returned within five year time period however no interest
was required by the son to be repaid. Later instances provides that the full amount of loan
was repaid by son within two years of such time and also paid the interest thereon.
Referring to the meaning of “S-6-5 of the ITA Act 1997” the interest amount that was
received by the parents should be viewed as income based on ordinary concepts since it
carried the element of home coming (Richards 2014). An instance of “F.C of T v McNeil
(2007)” can be cited to explain that the interest received from loan contained the income
characteristics that will be held liable for taxation (Auerbach and Hassett 2015). Therefore,
the interest amount constitute the portion of the taxable income for the parents within the
ordinary meaning of “S-6-5 of the ITA Act 1997”. However, the principle loan amount is
held as capital and it is not included into the taxpayer’s assessable income.
Conclusion:
The interest income received by the parent contained the constituents of gain. The
amount would be treated for taxation purpose within the ordinary meaning of “S-6-5 of the
ITA Act 1997”.
Answer to question 4:
Answer to A:
As stated under the “S-102-5 of the ITAA 1997” an individual taxpayer is under
obligation of including the sum of capital gains that is made throughout the income year. The
capital gain tax is levied on assets that is purchased by the taxpayer following the 20th
September 1985. As stated under the “S-110-25 of the ITA Act 1995” it is mainly related
with the property’s cost base (Stantcheva 2017). Nevertheless, “S-110-35 of the ITA Act
1997” explains that any form of incidental costs is regarded as the property cost base
(Auerbach and Hassett 2015). A detailed explanation relating to the CGT asset is explained

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under the “S-108-5 of the ITAA 1997”. CGT assets are usually classified as any type of
property or any kind of legal rights. One of the primary step in determining the capital gains
tax is understanding whether there is any occurrence of the capital gains tax event.
Any kind of assets that an individual purchases before the existence of the capital
gains tax will be subjected to exemption from CGT. The present situation lay down that a
vacant block of land was owned by Scott before the existence of the CGT. Later, the property
was constructed on land for rental purpose. The construction of house was done during 1st
September 1986. Therefore, with reference to “S-105-55 (2) of the ITA Act 1997” the
property should be held as the post CGT asset (Stantcheva 2017).
Accordingly, a CGT event takes place when the property is sold out by the taxpayer
and derives a capital gain or losses from such property (Joseph, Walpole and Deutsch 2015).
In the later part of the case study the property after being put into use for rental purpose was
sold by Scott. The selling of property has resulted in capital gains tax event A1. Therefore,
such sale of property and making gains there on would be liable for tax.
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
Answer to 4 B:

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Evidences gained from the case study suggest that the Scott undertook the decision of
selling the property to his daughter. If Scoot choses to sell the property for $200,000 to his
daughter then Scott would make a capital gains tax of $50,000. As a result of this, Scott
would be considered for assessment relating to the capital gains that is made through such
sale.
Particulars Amount ($)
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 4 C:
In the last alternative situation evidences provides that if the owner of the property
would have been the company as the replacement of the owner then in situation like this the
cost relating to amortization and tax payment should be ignored for the company.

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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

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References:
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American
Economic Review, 105(5), pp.38-42.
Black, C., 2017. The Attribution of Profits to Permanent Establishments: Testing the
Interaction of Domestic Taxation Laws and Tax Treaties in Practice.
Buchanan, R. and Consett, E., 2016. Section 974-80 ITAA97: The current state of play. Tax
Specialist, 19(5), p.217.
Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes
of the Australian Income Tax. J. Austl. Tax'n, 19, p.50.
Clarke, D., 2017. Private mineral royalties in resource sector: M and A transactions-another
taxable commodity. Australian Resources and Energy Law Journal, 36(1), p.82.
Cooper, G.S., 2015. The defective jigsaw. Austl. Tax F., 30, p.783.
Cooper, G.S., 2017. The news 974-80-more obscure than ever. In Australian Tax
Forum (Vol. 32, No. 4, p. 709). Tax Institute.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1),
p.14.
Joseph, S.A., Walpole, M. and Deutsch, R., 2015. Taxation of Sovereign Wealth Funds-A
Suggested Approach. J. Australasian Tax Tchrs. Ass'n, 10, p.119.
Krever, R. and Mellor, P., 2016. Australia, GAARs–A Key Element of Tax Systems in the
Post-BEPS World.

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Murray, I. and Wright, S., 2015. The taxation of native title payments for Indigenous groups
and resource proponents: convergence, divergence and reform. UW Austl. L. Rev., 39, p.99.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor's
commission. Taxation in Australia, 51(7), p.394.
Richards, R., 2014. Taxation: Employee share schemes. Law Society Journal: the official
journal of the Law Society of New South Wales, 52(3), p.40.
Stantcheva, S., 2017. Optimal taxation and human capital policies over the life cycle. Journal
of Political Economy, 125(6), pp.1931-1990.
Stewart, M., 2017. Australia’s Hybrid International Tax System: Limited Focus on Tax and
Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer,
Cham.
Van Niekerk, D.P.E., 2016. The taxation of illegal income: an international
comparison (Doctoral dissertation, University of Johannesburg).