Analysis of Payments under Taxation Law

This article discusses the tax implications of various scenarios under taxation law. It covers topics such as personal exertion related income, FBTAA 1986, parent-child financial help, and capital gains tax. The article provides detailed analysis and references to relevant statutory provisions and case laws.

TAXATION LAW
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Question 1
Hilary, the famous mountaineer has received certain payments which need to be analysed in
light of s. 6(5) to ascertain if they can be termed as personal exertion related income or not.
Payment from newspaper
The newspaper has approached Hilary despite knowing that she lacks skills related to writing.
Also, a $ 10,000 hefty payment was offered as an incentive to Hillary so that she would write
her story. The key questions emerges is why a newspaper would give so much money to an
individual without writing skills. The answer lies in the subject matter. Since story of Hilary
would contain vital information with regards to Hilary which is valuable owing to her fame
due to which people would be interested in knowing about her. Here, the action of writing
does not lead to assessable income production but it only acts a the medium which enables
the example of information from Hilary to the newspaper. (Barkoczy, 2015).
This position is validated from the verdict in a similar case i.e. Brent vs Federal
Commissioner of Taxation (1971) 125. Here also, through interview vital information was
extracted about the martial life of a famous robber from her wife. Even though the interview
lasted for more than a week but the court pointed that the act of interview was only a means
to express the information that was already available to plaintiff. (Woellner, 2014). Thus, the
given payment of $ 10,000 would not be termed as income related to personal exertion.
Payment from Library
Taking a cue from the above discussion, it would be appropriate to establish that the
manuscript does not have any intrinsic value on the fact that Hilary has written the same.
Hilary does not have writing skills for which the people would consider the books as
commercially useful and hence the value is derived on the basis of the underlying content
which relates to Hilary’s life and something in which people would be interested (Gilders et.
al., 2016).
The similar logic is extended for the pictures of the expedition which do not have any
intrinsic worth on the basis of Hilary clicking the photographs. Thus, no value has been
created on the basis of these photos clicked by Hilary because she is not famous for her
photography. The underlying value of the photography is derived on the basis of the subject
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matter which is expedition of Hilary which is something of interest to people since Hilary’s
name is associated with mountaineering. As a result, the proceeds cannot be termed as
income derived on account of personal exertion in either of the cases (Gilders et. a., 2016).
Change of Intention
In this case, it needs to be addressed if the change of motive would alter the tax treatment.
The tax treatment would not change even if the story is written by Hilary driven by only self
–satisfaction. This is because the act of writing is itself does not produce anything valuable.
The key asset is the information which already exists and writing is the medium of
communication. Thus, the underlying intent would not make any difference and the proceeds
would still be not recognised as personal exertion based income (Sadiq et. al., 2016).
Question 2
The requisite formula in accordance with s. 9, FBTAA 1986 is illustrated as follows
(Woellner, 2014).
The respective values for the above input variables highlighted in the formula need to be
derived using the data provided in the question with the help of applicable statutory
provisions (Barkoczy, 2015).
 A – This would be equal to $ 50,000 which is the price at which the car has been
purchased by thee employer last year. It is noteworthy that no depreciation has been
charged on the vehicle which would typically reduce the vehicle base value.
 B – This would be equal to 20% since for all vehicles procured after 2011, this value
remains constant and is not linked with the distance travelled suing the car.
 C – This would be equal to 183 since this data has been already indicated in the
question and hence does not need to be computed.
 D – This would be equal to 365 since the days in the current assessment year amounts
to the same value.
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 E – In regards to the statutory formula indicated above, it is apparent that any
operating expense borne by the employee in relation to the vehicle extended by the
employer, deduction is permissible to that extent provided s. 10A is satisfied. The
section 10A states that employee expenses are deductible only under the condition
that the employee can provide documented proof for the expense incurred related to
the vehicle. Considering the given situation, the employee has documentary proof and
hence this value is $ 10,000.
Considering the value of the all the inputs obtained above, the substitution in the statutory
formula is made which would yield the following result.
Question 3
In this case, a parent has given financial help to the tune of $ 40,000 to her son. The parent
expected repayment of principal after five years and did not want any interest income from
her son which was clearly communicated when money was given. Additionally, the parent
did not engage in any collateral security and legal documentation when giving the money to
the son. The son in actuality takes two years only to return the money but also pays 5% p.a.
interest thus providing $ 4,000 incremental money. Hence, a cheque of $ 44,000 was handed
over to the parent to clear the outstanding debt on the son. In the light of these facts, it needs
to be ascertained if any tax would be need to be paid by the parent on the receipt of $ 44,000
under the described situation.
It makes sense to divide the $ 44,000 into the two constituents and discuss the relevant tax
implications of each part separately in accordance with relevant statutes.
1) Principal Repayment ($40,000)– From the facts stated above, it becomes evident that
the parent had given 4 40,000 capital to the son and hence when the son pays this
back, it would be capital only. No tax would be levied on this capital receipts (CCH,
2013).
2) Interest amounts ($4,000) - There are three possibilities which need to be explored
with regards to tax treatment of the incremental $ 4,000 paid as interest by the son.
 The given amount can potentially be taxable as ordinary income if it falls within
s. 6(5). But in the given case, this section would be satisfied only when the
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parent has association with business based on money lending. There is no
information in the case to indicate the same. Further, the manner in which money
is handed to the son is quite unlike business transactions. Hence, it seems unlikely
that parent does any business related to money lending and hence $ 4,000 cannot
be taxed within the realm of this section (Woellner, 2014).
 The given amount can potentially be taxable as assessable income if it falls within
s. 15(15). This deals with isolated transactions which are enacted so as to earn
money. Hence, if this has to apply in this case, then the parent should have lent
money to her son thinking it is an opportunity to earn some interest income. But
this is far from reality considering that the parent did not have any intend to take
interest from son. Hence $ 4,000 cannot be taxed within the realm of this section
(Gilders et. al., 2016).
 The given amount can potentially be non-taxable if the various conditions
mentioned in TR2005/13 are fulfilled since then the payment would be
recognised as gift (ATO, 2005). This is indicated below.
1) The money transfer in favour of mother has completed as indicated from the cheque
given
2) The parent never wanted the interest and hence voluntary nature of payment is
proved.
3) The son in lieu of small payment would not have any expectations as these would be
otherwise be also fulfilled owing to the personal relation.
4) The interest payment is driven by gratitude of son towards the parent.
In accordance with the discussion carried above, it would be correct to conclude that the
parent would not need to pay any tax since $ 40,000 is capital receipt and $ 4,000 is gift.
Question 4
a) The given information highlights the purchase of a vacant land block in Brisbane in 1980
by Scott. Later, a house was constructed on this land which got completed in 1986 at a
cost of $ 60,000. When the house construction was complete, the market value of the land
was $90,000. The current price of the property is $800,000 as determined through the
auction. It needs to be cleared that main residence exemption under Division 118-B would
not apply in this case as since construction the house has been rented and Scott has not
resided on the property (CCH, 2013).
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The first step is to bifurcate the property into two assets namely the land and the house. This
becomes necessary since the CGT would not apply to land since it was purchased at a time
when CGT did not exist. However, CGT would apply to house since when that asset came
into being, CGT was applicable. The house current price can be computed as shown below
(Sadiq et. al., 2016).
Based on the above value, the computation of the capital gains on the house can be carried
using the two methods as follows (Krever, 2016)
In accordance with discount method under Division 115, for long term gains, a 5% discount
is available. Since, in the given case this condition is satisfied, hence, CGT taxable capital
gains from sale of property = (50/100)*(320000-60000) which gives final answer as $
130,000
In accordance with indexation method, the indexed value of h0ouse is considered after
adjustment for inflation. Hence, CGT taxable capital gains from sale of property =320000 –
(68.72/43.2)*60000 which gives final answer as $224,600.
Scott would like to lower tha tax liability and hence CGT taxable capital gsins would be $
130,000.
b) The property is sold to Scott’s daughter but the price charged is lower than the estimated
market value. Section 116-30 will be useful here since where there is mismatch between
the current value and actual price derived for the asset, the price that is higher should be
deployed for capital gains computation (Austlii, nd). The market price of $ 800,000 would
be used
The CGT taxable capital gsins would be $ 130,000.
c) Here the property owner is no longer Scott but now is replaced by an entity which is a
company. This tends to have significant effect primarily because discount method is not
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available to use for companies (Coleman, 2011). Therefore, the capital gains on the
property sale would be calculated as per the indexation method discussed in part (a) above.
The CGT taxable capital gsins would be $ 224,600.
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References
ATO (2005), Tax Ruling TR 2005/13, [online] available at
http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001
Austlii (nd), INCOME TAX ASSESSMENT ACT 1997 - SECT 116.30, [online] Available at
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s116.30.html (Accessed on
May 30, 2018)
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University
Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Coleman, C. (2011) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax
handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation
law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia
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