Taxation Law Name of the Student Name of the University Author

TAXATION LAW TAXATION LAW 5 Taxation Law Name of the Student Name of the University Author Note Question 1 3 Issue 3 Rule 3 Application 3 Conclusion 4 Question 2 4 Issue 4 Rule 4 Application 5 Conclusion 8 9 References Question 1 Issue The issue in this situation is to identify whether the payment received by AAPL worth $4 million by selling the trademarks to common bank would be regarded as assessable income Rule As provided by the rules of s.6-5(1), assessable income of a person includes all

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Author Note

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TAXATION LAW
Table of Contents
Question 1..................................................................................................................................3
Issue........................................................................................................................................3
Rule.........................................................................................................................................3
Application.............................................................................................................................3
Conclusion..............................................................................................................................4
Question 2..................................................................................................................................4
Issue........................................................................................................................................4
Rule.........................................................................................................................................4
Application.............................................................................................................................5
Conclusion..............................................................................................................................8
References..................................................................................................................................9

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Question 1
Issue
The issue in this situation is to identify whether the payment received by AAPL worth
$4 million by selling the trademarks to common bank would be regarded as assessable
income
Rule
As provided by the rules of s.6-5(1), assessable income of a person includes all
receipts in relation to ordinary concepts. As this definition is bread, case laws are used to
categorize assessable income1. In the case of Scott v C of T2 the court that ordinary income
would be receipts developing out of “ordinary usage and concepts of mankind”. Thus a
reasonable person test is applied to determine income. The test includes a question as to
whether a reasonable person would consider the receipt as ordinary income. Under the
provisions of s6-5 income from royalties are considered to be assessable income.
In Eisner v Macomber3 the court stated that income can be derived from capital. This
means that income always flows from capital. In the case of Jarrold v Boustead4 the court
stated that income which is received due to giving up of rights would be considered as capital
nature and not assessable income. In the case of Ruhamah Property Co Ltd v FC of T5 the
court stated that income which has been received due to the mere realization of a capital asset
is of a capital nature. In this case a property used for business was sold after being held for 9
years. This was not held by the court as a profit making scheme and thus was not assessable
income. Lump-sum payments are generally considered as capital receipts as per Kwikspan
Purlin System Pty Ltd v FC of T6.
Application
According to the facts highlighted in the scenario, AAPL wanted to sell its business to
AJPL. did not have sufficient funds to purchase the business outright and instead entered into
a licence agreement on 1 July 2018 with AJPL that allowed AJPL to use AAPL’s Sunrace
trademark for 10 years in consideration for payment of an annual royalty. As discussed above
1 Income Tax Assessment Act 1997 (Cth) s.6-5
2 (NSW) (1935) 35 SR (NSW) 215
3 (1920) 252 US 189
4 (1964) 41 TC 701
5 (1928) 41 CLR 148
6 84 ATC 4282

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in the Eisner v Macomber case, income has a flow concept. This means that the royalty
would be considered as ordinary income which results out of the rights. However, it has been
seen that in the same FY year, AAPL sold the rights under its licence agreement with AJPL
for $4 million to Common Bank, an unrelated Australian financial institution. As discussed
above in the case of Jarrold v Boustead income which is received due to giving up of rights
would be considered as capital nature and not assessable income. Further as per Ruhamah
Property Co Ltd v FC of T case income which has been received due to the mere realization
of a capital asset is of a capital nature. Thus the $4 million receipt would also be considered
as capital receipt as it is a mere realization of capital assets which is the contractual right.
Further, the payment has been provided in lump-sum. As per the rules of Kwikspan Purlin
System Pty Ltd v FC of T Lump-sum payments are generally considered as capital receipts.
Thus in this situation also as the payment has been made as a lump-sum, it is going to be
considered as a capital receipt and not assessable income.
Conclusion
The payment received by AAPL worth $4 million by selling the trademarks to common bank
would not be regarded as assessable income.
Question 2
Issue
The issue is to determine the taxation consequences of the transactions in which Jack was
involved
Rule
There are two types of income, ordinary income and statutory income. As per section 102.5
of ITAA97 any capital gain made by a person is considered to be a statutory income7. To
identify a CGT there has to be an asset and an event. As defined by s.108-5 any property
which is acquired by the TP before 20/09/1985 such as shares or house is a CGT asset8. The
disposal of a CGT asset results in a CGT event A1 as identified through s.104-10 ITAA9.
Timing of the disposal is the time when contract is created and not of final settlement as per
section 104.10(3)10. In this event the CG or CL is calculated by deducting Cost base from the
7 Income Tax Assessment Act 1997 (Cth) s.102.5
8 Income Tax Assessment Act 1997 (Cth) s.108-5
9 Income Tax Assessment Act 1997 (Cth) s.104-10
10 Income Tax Assessment Act 1997 (Cth) s.104-10(3)

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money received which is capital proceeds. CP is given under s.116.20 as amount which is
gained through the disposal of asset11. However, if there is an arms length transaction the CP
is modified by market value as per 116.3012. CB has five elements which extend from E1-E5
as under s.110-25 (2) to s.110-25(6)13. A TP can claim under div 115 a discount of 50% on
CG if the property is in possession for more than 12 months and the TP is a natural person14.
In the case of Scott v C of T (NSW)15 the court that ordinary income would be receipts
developing out of “ordinary usage and concepts of mankind”. Thus a reasonable person test is
applied to determine income. The test includes a question as to whether a reasonable person
would consider the receipt as ordinary income. Under the provisions of s6-5 income from
salary and wages are considered to be assessable income.
According to the cash method of accounting, any income which has been actually
derived in the FY and received by the TP in the same year will be taken into consideration.
As per the case of Arthur Murray (N.S.W.) Pty. Ltd. v. C. of T16. for individual earners, cash
method is the most appropriate method of accounting.
Application
FY – 2017/18
CAPITAL GAIN
Shares –
ABC LTD - On 15 August 2017
Cost base element 1 – 1400
Capital proceeds – 400 (CP is given under s.116.20 as amount which is gained through the
disposal of asset.)
Modified Capital Proceeds – 500 (if there is an arm’s length transaction the CP is modified
by market value as per 116.30.) In this case the shares were sold at a less price to a friend and
this is an arms length transaction. .
11 Income Tax Assessment Act 1997 (Cth) s.116.20
12 Income Tax Assessment Act 1997 (Cth) s.116-30
13 Income Tax Assessment Act 1997 (Cth) s.110-25
14 Income Tax Assessment Act 1997 (Cth) s.115.10
15 (1935) 35 SR (NSW) 215
16 (1965) 114 C.L.R. 314

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Total CL on these shares (1400-500) = 900
House
Cost base
Element 1 - $250,000 (Cost of acquisition) (s.110-25(2))
Element 3 - $50000 + 12000+ 30000 = 92000 (cost of ownership) As this is an investment
property, the cost may also be subjected to general deductions and if claimed for deductions
then it cannot be considered under this element (s.110-25(4)).
Total CB – (250000+92000) = 342000
Capital Proceeds – 420000 as per s.116.20
Modified Capital Proceeds – 418000 (less - he legal costs in relation to the sale of the
investment property were $2,000.)
Total CG - (418000 – 342000) = 76000
Discount under div 115= (76000-50%) = $38000
TOTAL CG =$38000
Sale of Boat
Cost Base – 12000
Capital Proceeds – 9000
CL – (CP-CB) = 3000 (Loss to be disregarded under Division 108C, as the boat is a personal
Sale of Main residence
In July 2017, Jack sold the house in which he and his wife lived in for $540,000. He had
originally bought the house in December 2013 for $590,000. In this situation any CGT
consequences for the sale of the main residence will be disregarded under the provisions of
s.118.20. this is because main residence is exempt from CGT
ORDINARY INCOME

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Rent from investment property worth $10000 on 30th June will be considered as assessable
income under s 6-5 and the scott case
The salary received by Jack in FY 2017/18 worth $120000 will be considered as assessable
income under s 6-5 and the scott case
Total assessable income for FY 2017/18
Particulars Amoun
t
CG on sale of house 38000
CL on sale of
shares
900
CL on sale of
Boat
0
NET CG 37100
Ordinary
income
Salary 120000
Rent 10000
Total Assessable Income 167100
FY 2018/19
Shares
XYZ Ltd – sold on 20 December 2018
Cost base element 1 – 20000
Capital Proceeds – 68000
CG – (68000-20000) = 48000
Discount under div 115 (48000-50%) = 24000

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Total CG = 24000
Ordinary Income
Jack’s income for year ended 30 June 2019 was a salary of $130,000. This will be considered
as assessable income under s 6-5 and the scott case
Total Assessable income for FY 2018/19
CG (24000) + Ordinary Income (130000) = 154000
Conclusion
Tax implications will be as discussed above. In relation to the FY 2017/18 the assessable
income is 167100 and in relation to the FY 2018/19 the assessable income is 154000.

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References
Arthur Murray (N.S.W.) Pty. Ltd. v. C. of T. (1965) 114 C.L.R. 314
Eisner v Macomber (1920) 252 US 189
Income Tax Assessment Act 1997 (Cth)
Jarrold v Boustead (1964) 41 TC 701
Kwikspan Purlin System Pty Ltd v FC of T 84 ATC 4282
Ruhamah Property Co Ltd v FC of T (1928) 41 CLR 148
Scott v C of T (NSW) (1935) 35 SR (NSW) 215