Taxation Law: Payments from personal exertion, car fringe benefit, financial assistance, and CGT computation

This article discusses payments from personal exertion, car fringe benefit, financial assistance, and CGT computation in Taxation Law. It includes relevant case laws and sections of the ITAA 1997. The article also provides a formula for calculating the taxable value of the car fringe benefit and explains the tax implications of financial assistance. Additionally, it discusses the computation of taxable capital gains using the discount and indexation methods.

TAXATION LAW
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Question 1
The key issue is to outline if the payments that Hilary (a famous mountaineer) can be termed
as receipts derived from personal exertion or not considering s.6(5) ITAA 1997 along with
relevant case law
Payment from Autobiography
The given facts clearly highlight that the newspaper approaches Hilary and offers $ 10,000 to
write her autobiography despite knowing that she has not written anything in the past.
Considering the hefty amount, it is imperative to note that the interest of the newspaper does
not lie in gaining access to writing of Hilary but rather to gain access to her story and private
information which then can be copyrighted by the newspaper and sold. It is apparent that this
has commercial value since Hilary is a famous mountaineer and hence people would like to
read about her (CCH, 2013). Further a key concept to be noted here is that the act of writing
does not produce anything which can be sold for money, instead it is acting as the medium of
transfer for the asset which already exists before Hilary starts writing. This understanding has
also been forwarded in the Brent vs Federal Commissioner of Taxation (1971) 125 CLR case
which has a similar background (Barkoczy, 2015). Considering that payments are not
derived from the physical activity of writing, hence these receipts cannot be considered as
income from personal exertion.
Payment from Manuscript
The underlying rationale which has been forwarded above can be made applicable in this case
also. The intrinsic value of the manuscript is not on account of how good Hilary has written
but rather it contains information about a famous mountaineer. Further, this information
which is the source of value has not been created through writing and therefore receipts
cannot be considered as income from personal exertion (Gilders et. a., 2016).
Payment from Photograph
The intrinsic value of the photographs is derived not because Hilary is a prolific photographer
but because the pictures pertain to the famous expeditions done by Hilary. Hence, the pictures
have commercial value because of the subject matter they represent and not because Hilary
has clicked them or she has some exceptional photography skills. Since the value of the
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photos is based on the subject matter, hence receipts cannot be considered as income from
personal exertion (Sadiq et. al., 2016).
Intention Change
Intention change is a useful parameter only when the underlying act tends to produce
commercial value and hence leads to assessable income production. In the given case,
however, it is evident based on the discussion carried out above that the act of writing does
not have commercial worth since it is not responsible for any proceeds which are derived. It
is only acting as a means. Thus, the underlying intention would not change the conclusion
that receipts are considered as income from personal exertion (Deustch et. al., 2016).
Question 2
The objective is to ascertain the taxable value related to the car fringe benefit in accordance
with the s.9 of Fringe Benefit Tax Assessment Act, 1986. As per this section, the relevant
formula is illustrated below (Woellner, 2014).
The key inputs for the formula stated above are highlighted as follows (Sadiq et. al., 2016).
 A – The cost of the car would be used to represent the base value considering that the
purchase has been enacted by the employer last year only. Hence, as per s.9, car base
value would be $50,000.
 B – This does not change with the distance travelled and hence is pegged at 20%.
 C – The question states this as 183 and hence the same is assumed
 D – Considering the respective year under assessment, the number of days would be
365.
 E – Any expenses which during the assessment year if borne by the employee are
reimbursed and hence deducted as highlighted in s.9.However, for the employee to
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claim the same, s. 10A puts the condition of relevant documentation being available.
This is fulfilled and hence $ 1,000 would be deducted.
Considering the above input which have been highlighted, the same can be substituted in the
formula in the applicable formula and therefore the taxable value of the benefit is computed
as highlighted below.
Question 3
The given situation highlights a financial assistance being extended to a son from a parent.
The extent of this assistance was $ 40,000 and there was a promise on the part of the son that
the principal would be repaid after a period of five years. However, he was able to arrange
for the money earlier and hence paid back all the money with interest by giving a $ 44,000
cheque to the parent. The parent now needs to be advised on the potential tax implications
arising from this transfer.
It is essential to segment the given money received by the parent in the following two
segments to facilitate more prudent analysis.
1) Principal Repayment – There would not be any tax levied on this payment of $ 40,000
since this was initially lent and hence this is not income but capital proceeds. Thus, no
tax implication would arise for this amount (Barkoczy, 2015).
2) Interest payment – This is the $ 4,000 amount which is transferred over and above the
principal borrowed by the son. The said amount does not fall within the purview of s.
6(5) ITAA 97 owing to non-involvement of the parent into lending related business.
This becomes evident from the conduct displayed when money is extended to the son.
There are no safeguards and it is extended purely on trust with no mechanism to
recoup money in case of default (Gilders et. al., 2016). Further, the profit under
isolated transaction permissible under s.15(15) ITAA 97 does not work here as the
basis necessity of being driven by the profit motive is lacking. This is apparent from
the statement made by the parent where it is made clear that no interest is desired.
(Woellner, 2014).
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But the given amount of $ 4,000 would be considered as gift owing to satisfaction of
the necessary conditions that were outlined in relevant tax ruling i.e. TR2005/13
(ATO, 2005).
 Through the medium of cheque, the transfer does take place in reality.
 The interest amount is voluntary payment considering parent’s stance made clear at
the time of lending the money.
 By giving this nominal amount, the son would not have future expectations
considering that he does not need to give this money for fulfilment of those.
 Personal gratitude is the reason behind the transfer.
Considering that both capital receipts and gifts are non-taxable, hence on account of the
receipt of $ 44,000 cheque, there would not be any tax implications for the parent.
Question 4
a) Considering the different dates of land purchase and house construction, the situation is
arising here where the land is exempt from application of CGT since purchased before
September 20, 1985 and also the house would have CGT applicable since it has come into
existence after the cut-off date. Thus, the given asset (property) would be considered as
the sum total of the two assets mentioned below (Barkoczy, 2015).
1) Land – CGT not applicable
2) House = CGT applicable
For the house, the cost base under s. 110-25 would serve as the construction cost which is
given as $ 60,000. The current market value of the complete property is given and based
on this along with the input value, the current price of the house is estimated in the manner
given below.
Post the determination of the market value of house, one of the following two methods would
be chosen by the taxpayer for computation of taxable capital gains (Gilders et. al., 2016).
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Discount Method (Division 115)
Gross capital gains on house = Selling price – Construction cost = 320000 – 60000 = $
260,000
Considering long term capital gains, net taxable gains = (1/2)*260000 = $ 130,000
Indexation Method
In this case, the construction cost of the house would be inflation adjusted and then this
would serve as the cost base.
Inflation adjusted cost = (68.72/43.2) * 60000 = $95,400
Taxable capital gains = 320000 – 95400 = $ 224,600
The discount method would be chosen and hence taxable capital gains = $ 130,000.
b) Scott liquidates the property to his daughter as a significant discount to the market price.
However, the taxable capital gains do not alter and remain at $ 130,000. Section 116-30,
ITAA 97 is the reason since for capital gains computation, it prescribes that between the
market value and sale value, the maximum value should be chosen (Sadiq et. al., 2016). In
the given case, this value is market value or $ 800,000 which leads to the same
computations as in part (a).
c) The ownership of the property is now with company and hence Division 115 does not
apply (CCH, 2013). For a company business structure, capital gains computation is only
carried through the use of indexation method which as per computations done in part (a)
lead to the taxable capital gains as $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
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
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.
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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