Taxation Law: Capital Gains Tax and Income from Personal Exertion

This document provides legal advice on Capital Gains Tax implications and Income from Personal Exertion in Taxation Law. It discusses the rules and application of CGT and personal exertion income. It also includes a case study on lending money without interest expectations and its tax implications.

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Question 1
Issue
The issue is to offer legal advice to Helen regarding the Capital Gains Tax of the
transactions incurred for the sale of the capital assets during the tax year 2017-18 for
deriving funds for the business.
Law
Pre-CGT Asset
The time of acquisition of the assets is an imperative factor in CGT implications. All
the assets purchased earlier than September 20, 1985 would be termed as pre-CGT
asset under ss. 149 (10) ITAA 1997. The assets belonging to pre-CGT asset
category would not result in any CGT implication on the taxpayer as the derived
capital gains/losses from the disposal of pre-CGT asset would be ignored. Hence, it
is a pre-requisite step to determine whether the asset is a pre-CGT asset or not
(Coleman, 2016).
Collectibles
Antique items like jewellery, book, art work, painting, sculpture and pictures fall in the
class of assets termed as collectibles under ss. 108-10 ITAA 1997 (Austlii, 2019).
For levying CGT on collectible disposal, it is essential condition that the value of
purchase of asset must be higher than the benchmark amount that is $500 (Deutsch
et. al., 2016).
Capital gains/loss
The disposal of collectibles is termed as A1 CGT event under ss. 104-5 ITAA 1997.
The approach to find the capital gains/losses from the disposal of the capital asset
under A1 CGT event is highlighted in ss. 104-10 ITAA 1997. It indicates the formula
that capital gains/losses would be computed by removing the cost base of the asset
from the total income received from the disposal of asset (Gilders et. al., 2016).
Capital Gains Tax (CGT)
The long-term capital assets which the taxpayer has possessed for atleast 1 year is
considered for 50% rebate on the net CGT liability under the discount method
indicated in s.115-25 ITAA 1997. Another method for rebate on taxable capital gains
is indexation method which involves adjustment of cost base as per inflation
(Barkoczy,2018).
Application
Helen is the taxpayer who has sold painting, sculpture, jewellery and picture so as to
derive the income for her new jewellery design business.
Antique painting
It has been purchased by Helen’s father in February 1985 for a sum of $4000.
Clearly, the time of purchase is before September 20, 1985 and thereby, it will be
termed as pre-CGT asset. As it is a pre-CGT asset hence, CGT liability will not be
applicable on this asset.
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Sculpture
It has been purchased by Helen on December 1993 for a sum of $5500. Clearly, the
time of purchase is after September 20, 1985 and thereby, it will not be counted
under pre-CGT asset. Sculpture is a CGT asset of A1 type classified under
collectibles in accordance with the relevant provisions of ss. 108-10 ITAA 1997. The
purchase has been done for more than $500 and hence, the condition needed for
CGT implication applicability is satisfied. Therefore, CGT liability will be applicable on
this asset. The sale proceeds received from the sale of sculpture is $6000. The
capital gain/loss is computed from the formula defined in ss. 104-10 ITAA 1997 and
is shown below.
Capital gains or losses = sale proceeds ($6000) – cost base ($5500) = $500 (Capital
Gains)
The capital gains will be named as long-term considering that the holding period of
the sculpture is higher than 1 year. Thus, 50% rebate will be applicable on the net
capital gains remaining after offsetting capital losses (Krever, 2017).
Antique Jewellery
It has been purchased by Helen in October 1987 for a $14,000. Clearly, the time of
purchase is after September 20, 1985 and thereby, it will not be counted under pre-
CGT asset of Helen. Antique jewellery is also a CGT asset of A1 type classified
under collectibles in accordance with ss. 108-10 ITAA 1997. The purchase has been
done for higher than $500 and hence, the condition required for CGT implication is
satisfied. Therefore, CGT liability will be applicable on the capital gains/losses
generated from the disposal of asset. The sale proceeds received from the sale of
antique jewellery is $13,000. The capital gain/loss is computed from the formula
defined in ss. 104-10 ITAA 1997 and is shown below.
Capital gains or losses = sale proceeds ($13000) – cost base ($14000) = -$1000
(Capital Loss)
The capital losses would be adjusted against the capital gains derived from the
disposal of collectibles. Further, if there are no capital gains incurred from disposal of
collectibles, then these losses will be forwarded to next financial year and will be
adjusted against capital gains from collectibles (Reuters, 2017).
Picture
It has been purchased by Helen’s mother for a sum of $470. Pictures fall in the class
of collectibles under ss. 108-10 ITAA 1997. It is essential for collectible’s disposal
that the value of purchase of asset must be higher than the benchmark amount that
is $500. Here, the cost of purchase is not higher than $500 and therefore, the CGT
liability will not be applicable on this asset.
Net Capital Gains or Losses
Conclusion
Helen has a net capital loss of -$500 from the various transactions incurred for the
disposal of the capital assets. This cannot be offset against receipt that are revenue
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in nature and hence would be adjusted against capital gains obtained from disposal
of collectibles which may occur in the current year or future.
Question 2
Issue
In wake of the book “Principles of Economics” written by Barbara and the associated
proceeds derived from sale of copyright, manuscript and transcripts of interviews, the
objective is to ascertain if the cash derived by Barbara on account of any of these
above aspects would be classified as income from personal exertion. Also, it needs
to be considered if the conclusion would change if Barbara wrote the book in her
spare time without any offer from publisher.
Law
In accordance with section 6, ITAA 1997, income from personal exertion would be
earned by the taxpayer when he/she indulges in any activity which leads to
commercial value being created on account of skill and effort taken by the taxpayer.
It is imperative that if commercial value is not derived, then mere activity would not
lead to proceeds under this category (Barkoczy, 2018). Also, in certain instances, it
does happen that the activity is not the source of commercial value but a means to
facilitate transfer of asset. A relevant case in regards to this scenario is Brent vs
Federal Commissioner of Taxation (1971) 125 CLR. In this case, the commercial
value belonged to the information which was communicated through interview. The
activity of interview was not the source of value and hence the proceeds were not
declared as income from personal exertion (Woellner, 2014).
Application
The given proceeds obtained by Barbara need to be analysed in wake of the fact
that she has never written any book but still managed to earn an offer from publisher.
This offer is not related to her superior writing skills but her knowledge of the subject
on which the book is based. The act of writing merely would act as a tool to express
this knowledge and thereby is not the source of commercial value. Thereby the
proceeds for writing and copyright is related to this knowledge which existed before
the contract was enacted. Hence, these payments are not personal exertion based
income.
This is also true for the sale proceeds of manuscript whose value is not related to the
act of writing carried out by Barbara. The manuscript has commercial value as it
contains the knowledge base that Barbara has acquired over the years. Thus the
proceeds are not personal exertion based income. In case of interview related
transcripts, it is noteworthy that these did not exist before the contract with the
publisher. These have been enacted during the book writing and also Barbara is a
researcher in economies and thus these relate to his core skills. As a result, the
proceeds derived from these activity would lead to personal exertion income.
Book written beforehand
If the book was written beforehand in the spare time, then it is evident that there is
absence of profit motive. While this might be useful for determining if the proceeds
from the book would be assessable income or not. However, with regards to
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determine if the proceeds relate to personal exertion income, the consideration ought
to be placed on whether the activity is such which leads to commercial value. If
Barbara had written about any other topic except economics, then the intrinsic worth
would be zero, Hence, the value is derived on account of knowledge which Barbara
did not necessarily acquire during writing of book and existed before on account of
her profession. As a result, there would not be any change in the stance and no
personal exertion based proceeds would be derived on the book sale (Nethercott,
Richardson and Devos, 2016).
Question 3
Issue
Taking the given facts into cognisance, the objective is to highlight the potential tax
implications for Patrick who has lent a sum of $ 52,000 to his son David without
interest expectations but has received 5% incremental amount at the time of
repayment by his son.
Rule
In relation to the repayment of debt, it is key to note that this usually consists of two
primary components. One of these is the principal amount which is repaid back
which does not have any tax implications as it is a capital receipt (Deutsch et. al.,
2016). However, the same cannot be said about the incremental amount over and
above the principal. With regards to these receipts two possibilities would arise as
indicated below.
1) Incremental amount is assessable income – This could happen as per two
sections namely s. 6-5 and s. 15-15 ITAA 1997. The former deals with
ordinary income and would be applicable if the taxpayer on a regular basis
engages in transactions where money is lent and interest is earned. The latter
would be applicable if this was a isolated transaction where driven with the
primary motive of making money or profit, the lending was carried out (Gilders
et. al., 2016).
2) Incremental amount is non-assessable income – This could happen when the
amount has been given as gift. With regards ot gift, the courts typically rely on
the basic features of gift. These are summarised in the form of four conditions
in TR 2005/13 that are briefed below (Coleman, 2016).
 It has to be made voluntary without the transferee insisting on the same.
 It should result in actual change of ownership.
 The transfer should provide some benefit to the transferee.
 The transfer should be made without any reciprocal expectations from
transferor.
Application
The principal amount from the total payment made by David in favour of Patrick
would be considered as capital receipts and would not be taxable. However, the key
component which would attract discussion is the 5% extra payment made.
This would not be assessable under s. 6-5 as the facts relating to the transaction
clearly indicate that the lending transaction was not commercial. This is because
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Patrick did not ask for any collateral and no documentation was done pertaining to
the loan amount which leaves Patrick with limited options in case of default by David.
Also, he did not ant any interest on the lent amount. Clearly, neither of these features
relate to commercial lending. Also, the amount would not be assessable under s. 15-
15 as the key driver for the transaction has to be profit. However, profit motive is
absent as Patrick has vocally expressed that no interest is expected on the principal
amount.
The given extra amount is a gift from David to Patrick and thereby non-taxable. This
can be established on the back of the following observations.
1) Patrick only wanted the repayment of principal. The extra payment is
voluntary.
2) The cheque already given to Patrick does not pertain to the principal amount
but includes the incremental component to and hence ownership change has
occurred.
3) Patrick would derive benefit on account of the receipt of incremental amount.
4) By paying this amount, David would not expect anything which previously he
did not expect from his father Patrick.
Conclusion
Based on the above discussion, the appropriate conclusion is that there is no tax
implication for the repayment made by David to Patrick as the incremental amount is
gift and principal repayment is capital receipt.
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References
Austlii (2019) , INCOME TAX ASSESSMENT ACT 1997 - SECT 108.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s105.10.html [Accessed May 27, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications,
Coleman, C. (2016) 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,
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press,
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company,
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS,
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
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