Taxation Law: Capital Gains, Book Proceeds, Loan Treatment

This article discusses the tax implications of capital gains from the disposal of CGT assets, book proceeds as income from personal exertion, and the tax treatment of a loan repayment with an additional amount. It provides analysis and references to relevant tax laws.

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Question 1
The aim is to find the net capital gains/ capital losses of Helen derived from the
disposal of the CGT assets during the tax year.
CGT would be applicable on the capital gains or capital losses which are derived
from the selling of the CGT assets. Hence, it becomes imperative to find whether the
disposed asset is categorised as CGT asset of taxpayer or not. Capital assets which
are purchased on behalf of the taxpayer before September 20, 1985 would be
categorised as pre-CGT asset and hence, no CGT liability would be applicable on
the capital gains derived from the disposal of such assets as highlighted in ss. 149-
10 ITAA 1997 (Austlii, 2019a). Further, it is noteworthy that the antique items such
as painting, sculptures, jewellery are categorised as collectibles and all the
collectibles are termed as CGT asset under ss. 108-10 ITAA 1997 (Austlii, 2019b).
The determination of the capital gains /losses from the disposal of CGT asset is
done based on the treatment of A1 CGT event. The formula includes cost base of
the asset and the sale proceeds received from selling (Barkocy, 2018).
In given case, Helen has sold an antique painting, sculpture, antique jewellery and a
picture which would be analysed as shown below.
Antique Painting
It is apparent from the information provided that Helen has bought the antique
painting before September 20, 1985. This implies that antique painting belongs to
the pre-CGT asset category. As a result of this, the CGT implications will not be
applied on the capital gains received from the disposal of painting.
Sculpture
Helen has bought the sculpture after the CGT commencement date i.e. September
20, 1985 which shows that the asset does not belong to Pre-CGT asset. This implies
that the capital gains/losses received from the disposal of the sculpture will be held
liable for CGT implication. It is noteworthy that sculpture is classified under antique
items and thus is a CGT asset as specified in ss. 108-10 ITAA 1997. The disposal of
antique item considered as CGT event of A1 type under ss. 104-5 ITAA 1997. The
net capital gain or losses will be determined by using the cost base and sale
proceeds of the CGT asset under ss. 104-10 ITAA 1997 (Krever, 2017).
The sculpture is a long-term asset of Helen which means the discount method would
be used under s. 115-5 ITAA 1997.which would lower the amount over which CGT
would be paid (Reuters, 2017).
Antique Jewellery
Helen has bought the antique jewellery after September 20, 1985 which shows that
the asset does not belong to Pre-CGT asset category. This implies that the capital
gains/losses received from the disposal of the antique jewellery will be liable for CGT
liabilities. It is noteworthy that antique jewellery is classified under antique items and
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thus, is a CGT asset as specified in ss. 108-10 ITAA 1997. The disposal of antique
item considered as CGT event of A1 type under ss. 104-5 ITAA 1997. The net
capital gain or losses will be determined by using the cost base and sale proceeds
under ss. 104-10 ITAA 1997.
The capital losses from the disposal of the antique jewellery would be adjusted
against the current capital gains derived from the disposal of the antique item and if
the same is not available or sufficient, then it is carried forward (CCH, 2013).
Picture
Helen’s mother has bought the picture after September 20, 1985 which shows that
the asset does not belong to Pre-CGT asset.It is noteworthy that picture belongs to
the CGT asset categories collectibles as evident from the provisions of ss. 108-10
ITAA 1997. The imperative condition for collectables for CGT implication is that the
collectable must be purchased for more than $500 as specified in s. 118-10(1) ITAA
1997 (CCH, 2019). In this scenario, Helen’s mother has bought the picture for $470
and thus, the condition required for CGT implication has not been met which means
that the capital gains/losses received from the disposal of the picture would not be
considered for CGT consequences.
Net Capital Gains/Losses
It can be concluded based on the above analysis capital gains/losses from the
disposal of antique painting and picture would not be taken into account for CGT
implications. However, Helen has capital gains from the disposal of sculpture ($500)
and capital losses from the disposal of the antique jewellery ($1000). It means Helen
has net capital losses of -$500 which would be shifted to the next year in order to get
offset from the future capital gains derived from the disposal of collectable (Sadiq et.
al., 2016).
Question 2
Barbara is known as a economist researcher and commentator. She has received an
offer to write the book named “Principles of Economics”. For this, she gets a
compensation of $ 13,400. It is also stated that she has never ever written a book
before. Additionally, she is able to sell the manuscript to a library for a consideration
of $4,350. Finally, she also receives a payment of $ 3,200 for the various manuscript
interviews that she collected for writing the book. The objective is to highlight
whether any of the payments would be considered as income personal exertion.
Income from personal exertion
This refers to income which the taxpayer tends to derive on account of skills and
effort as outlined in s.6 ITAA 1997. It is essential that based on these, the taxpayer
should be able to produce something of value which can lead to realisation of
income. A key aspect to be noted is that the underlying activity must not act as a
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medium for transfer of an asset in which case the proceeds derived would be
attributed to the asset and not the activity. This has been indicated in Brent vs
Federal Commissioner of Taxation (1971) 125 CLR (Coleman, 2016).
 Book related proceeds – Barbara has got an unsolicited offer for book writing.
Considering her lack of experience in writing any book, it is evident that the
commercial worth of the book is not based on the literary skills of Barbara.
The real asset here is the knowledge as a economist that she possesses
which would enable her to share key insights. The act of writing is just the
mechanism for transfer of this knowledge. Hence, the proceeds cannot be
attributed to the action of writing (Barkoczy, 2018).
 Manuscript related proceeds – Again the worth of the manuscript is not based
on her skills as a writer. Rather, the value of the manuscript is related to her
fame as a economist along with her knowledge on the subject. The
commercial value of the manuscript is attributed to the same. Hence, the
proceeds cannot be categorised as income from personal exertion (Krever,
2017).
 Interview manuscript related proceeds – It is given that Barbara is a
economics researcher and thereby conducting interview and related research
is a skill set which she possesses. Thereby, the commercial worth of the
interview manuscripts is derived from the research skills possessed by
Barbara. Hence, the underlying proceeds would be categorised as income
from personal exertion (Reuters, 2017).
Change of Motive
As per the information provided, the book has been written by Barbara without any
offer and only after it is completed, she decides to sell the same. This case is
different from the above scenario only in the sense that the intention to profit is
absent. This would be relevant if the proceeds for personal exertion are determined
under s. 15-15 ITAA 1997. However, this is not true. A necessary condition for
income from personal exertion is that the underlying activity has resulted in a product
or service which has commercial value. While the book written by Barbara would
have commercial value, it would not be related to writing skills. Thus, the act of
writing does not add any value and hence the proceeds from book would not be
considered as personal exertion related income (Saidq et. al., 2016).
Question 3
David is the son of Patrick who has received a loan of sum $52,000 in order to run
his new business. Patrick has not specified any intention of taking interest payment
for the loan and also does not make any formal agreement with David for the loan
amount. Both the parties have agreed for the fact that David needs to pay the loan
amount after 5 year. However, David has repaid the loan amount along with the 5%
additional amount via bank cheque to Patrick. As a result of this, the question raised
regarding the tax treatment on the principal amount along with the 5% additional
amount in relation to the assessable income of Patrick.
The tax treatment on the payment mainly depends on the fact that whether the
income is considered as assessable income of taxpayer or not. Here, Patrick has
received two type of payment i.e. loan principal amount ($52,000) and 5% additional
amount on loan. It is noteworthy that the received principal amount of the loan would
not create any economic benefit to the taxpayer and thereby, the amount would
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reflect as the capital receipts which would not contribute to the assessable income of
taxpayer. However, it is essential to find the nature of the interest payment/additional
amount in relation to the assessable income of taxpayer (CCH, 2013).
Assessable income:
Ordinary Income (s. 6-5 ITAA 1997)- When the additional amount has been received
which is part of the money lending business of the taxpayer, then it would be termed
as assessable income from ordinary concepts (Coleman, 2016). Patrick has not
provided loan to David under business transaction which is also evident from the fact
that Patrick has not done any contractual formalities for loan. Also, he has not asked
for any collateral and thus has no means to recoup the principal in case of default
from David. Thus, the incremental amount would not be ordinary income.
Assessable Income (s. 15-15 ITAA 1997)- Transaction of taxpayer in relation to the
money lending action with profit generation motive would result in assessable
income of taxpayer even though the transaction may be isolated (Krever, 2017)..
Clearly, Patrick has not made any special transaction with profit motive by issuing
the loan to David which means the incremental amount will not be assessable
income of taxpayer. This is established from his stated intention of not desiring any
interest income.
Nonassessable income:
Income received in the form of a gift would not contribute in the assessable income
of the taxpayer and hence, is categorised as non-assessable income. Any amount
which has been provided to the other party without any expectation of return
benefits, involves change of ownership, and is voluntary will be termed as gift as
highlighted in TR 2005/13. Also, the gift must be provided which should provide an
overall benefit to the recipient party (ATO, 2005).
In present case, David has issued the extra 5% to Patrick in regards to thank him for
the loan. Also, he has issued the cheque which clearly represents the transfer of the
ownership. Further, there is not future expectation of benefits in the exchange of the
additional payment. Thereby, it can be concluded that all the pre-requisite conditions
needed for the amount to being as gift are satisfied. Thus, the amount 5% of loan
would be termed as gift. This indicates that the amount would contribute in the non-
assessable income of Patrick which would not be taxed under personal income tax.
References
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ATO (2005), Rulings: TR2005/13, [online] available at
https://www.ato.gov.au/law/view/document?DocID=TXR/TR200513/NAT/ATO/00001
[Accessed May 22, 2019]
Austlii (2019a) , INCOME TAX ASSESSMENT ACT 1997 - SECT 149.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s149.10.html [Accessed May 22, 2019]
Austlii (2019b) , INCOME TAX ASSESSMENT ACT 1997 - SECT 118.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s118.10.html [Accessed May 22, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications, pp.161-162, 203
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer,
pp. 223-224
CCH (2019), INCOME TAX ASSESSMENT ACT 1997, SECTION 108-10, [online]
available at https://iknow.cch.com.au/document/atagUio695914sl24365956/income-
tax-assessment-act-1997-section-108-10-losses-from-collectables-to-be-offset-only-
against-gains-from-collectables [Accessed May 22, 2019]
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia, pp. 191-192,245
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company, pp. 156-157
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS, pp. 234,269
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, pp. 178-
179, 240
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