Capital Gains Tax Consequences for Helen on Sale of Assets

This article discusses the Capital Gains Tax (CGT) consequences for Helen on the proceeds received from the sale of her assets. It covers the categorization of assets, pre-CGT assets, and the formula to determine capital gains or losses. It also provides a computation of net capital gains or losses.

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Question 1
In present case, the concerned taxpayer Helen requires some fund in order to run
her fashion designer business and hence, she has sold some assets. The aim is to
determine the Capital Gains Tax (CGT) consequences for Helen on the proceeds
received from the sale of the assets.
Asset 1: Sale of an antique impressionism painting
According to ss. 108 -10 ITAA 1997, antique items are categorised as collectibles
which are considered as CGT assets. The transaction regarding the sale of antique
painting is termed as Type A1 CGT event under ss. 104-5 ITAA 1997. The statutory
formula to determine the capital gains or capital losses from the sale of Type A1
CGT assets has been represented in ss. 104-10 ITAA 1997. Assets which the
taxpayer has purchased earlier than September 20, 1985 are categorised as pre-
CGT asset as indicated in ss. 149-10 ITAA 1997 (Sadiq et.al.,2016). It is imperative
to find whether the assets belong to pre-CGT assets or not. This is because no CGT
is applicable on the capital gains/losses derived from the sale of the pre-CGT assets
irrespective of the holding period of the assets. In present scenario, Helen’s father
purchased an antique painting in February 1985 which implies that painting is termed
as pre-CGT asset. Therefore, it can be said that no CGT implication would be
applied here because painting is a pre-CGT asset (Barkoczy,2017).
Asset 2: Sale of a historical sculpture
According to ss. 108 -10 ITAA 1997, antique items (such as sculpture) are
categorised as collectibles and CGT assets. The transaction regarding the sale of
antique item is termed as Type A1 CGT event under ss. 104-5 ITAA 1997. The
statutory formula to find the capital gains or capital losses from the sale of Type A1
CGT assets has represented in ss. 104-10 ITAA 1997. According to this formula, two
main elements i.e. cost base of the asset and proceeds received from the sale would
be taken into consideration to determine the net capital gains or losses from the sale
(CCH, 2013). Further, it is essential to note that the sculpture must not belong to pre-
CGT assets means must not purchase before September 20, 1985 under ss. 149-10
ITAA 1997. Here, sculpture has purchased after September 20, 1985 and thus, it
would not be termed as pre-CGT asset. Cost base of sculpture is $5500 and the
income from the sale is $6000. Therefore, the capital gains = $6000 - $5500 = $500.
Discount method would be used to determine the net taxable gains after adjustment
of any existing capital losses as the holding period of sculpture is more than 1 year
and thus, it would be termed as long-term asset (Gilders et. al., 2016).
Asset 3: Sale of an antique jewellery piece
Like painting and sculpture, antique jewelleries are also categorised under
collectibles and thus, termed as CGT assets under ss. 108-10 ITAA 1997. The
transaction for the sale of antique jewellery is considered as Type A1 CGT event as
indicated in ss. 104-5 ITAA 1997. The capital gains or capital losses from the sale of
antique jewellery would be determined through the formula stated in ss. 104-10 ITAA
1997. The formula requires cost base of the asset and income from the sale of the
antique jewellery (Deutsch et. al., 2016). Cost base of jewellery is $14,000 and the
income from the sale is $13,000. Therefore, the capital losses = $14000 - $13000 =
$1000. Discount method would be used for the CGT implication on the derived
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capital gains because the holding period of jewellery is more than 1 year and thus, it
is termed as long-term asset.
Asset 4: Sale of a picture
According to the highlights of ss. 108-10 ITAA 1997, pictures are also categorised as
collectible and thus, CGT assets. However, CGT would be applicable on the capital
gains or capital losses derived from the sale of the collectibles when the taxpayer
has purchased the asset for more than $500. It means when the collectible has
purchased for lower than $500 then no CGT implication would be imposed on
taxpayer on the derived capital gains/losses (Woellner, 2014). In present case,
Helen’s mother purchased the painting for $470 and therefore, the condition required
for the applicability of CGT implication is not met and hence, the derived capital
gains/losses would be discarded.
Computation of Net Capital Gains or Net Capital Losses
Capital gains (painting) = No CGT Implications
Capital gains (sculpture) = $500
Capital losses (jewellery) = $1000
Capital gains (painting) = No CGT Implications
Net Capital losses = $500 - $1000 = -$500
Helen has net capital losses of $500 which would be shifted to next year and then
would be adjusted against the derived capital gains from the sale of collectibles
(Barkocy, 2017).
Question 2
Issue
In the given scenario, Barbara has received money receipt from the sale of book
copyright, manuscript sale along with the interview manuscript sale. The issue is to
outline if these payments would be related to personal exertion on part of Barbara.
Further, it needs to be opined if the classification of the above proceeds would alter if
Barbara wrote the book not driven by profit but instead her satisfaction.
Rule
One of the components of ordinary income (as defined in ss. 6-5 ITAA 1997) is
income from personal exertion. As the name suggests, this would refer to income
being derived where personal skills or effort is involved in derivation of commercial
value. Any proceeds which are derived on the capital assets sale would be capital in
nature and thereby not taxable. Only potential capital gains can arise which would be
taxable but the same does not count as personal exertion income (Gilders et. al.,
2016).
A useful case for the scenario provided is Brent vs Federal Commissioner of
Taxation (1971) 125 CLR. In this case, a famous robber was caught and her wife
was approached by a newspaper so as to gain information about her relation with
her husband. This information was given to the journalists of the newpaper through
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multiple interviews which stretched for multiple days. The book was published by the
newspaper considering the information provided by the wife. The key issue arose
with regards to the nature of receipts. The honourable court termed these as capital
receipts as through interviews the real substance of commercial value i.e.
information was transmitted from wife to the newspaper. The act of interview did not
lead to creation anything that had commercial value. Thereby the proceeds drawn by
the wife pertained to the private information provided which existed before the
interviews (Nethercott, Richardson and Devos, 2016).
Application
The proceeds obtained by Barbara are analysed in wake of the relevant case law as
highlighted below
1) Book proceeds ($ 13,000) – It is known that Barbara has not written any book
before and hence payment is not on account of her literary skills. This is primarily
for the knowledge she has along with the underlying fame. Thereby, the book acts
as the medium through which there is content transfer from Barbara to the
publisher. Also, the act of writing does not have any commercial value which
implies that the proceeds are not income from personal exertion.
2) Book manuscript proceeds ($4,350) – The commercial worth of manuscript is not
derived from the skills related to writing that Barbara possesses. Also, she has no
reputation as a writer and thereby the manuscript is not appreciated as a literary
work. Instead the value of this manuscript is derived based on her reputation as a
economist.
3) Interview manuscript proceeds ($ 3,200) – The act of conducting interview and the
skills involved therein are not responsible for the commercial worth of the
interview manuscripts. The value is again derived on account of their association
with Barbara and thus the proceeds are not attributed to the act of conducting
interview.
Change of Motive
Unlike the above scenario when book writing commenced after publisher gave the
offer, here the book writing was done driven by self-satisfaction. This implies that the
act of writing the book is not profit driven. But the classification of income would not
alter as the act of writing or conducting interview is not the source of value. If it was
not for her fame, the book written by her, manuscripts and interview transcript would
not have any commercial worth. Therefore, none of the proceeds in this instance
would be referred to income from personal exertion (Barkoczy, 2018).
Conclusion
It is evident from above discussion that none of the receipts are revenue in nature
and these are not related to the personal exertion undertaken by Barbara as her
literary and interview skills lack commercial value.
Question 3
Issue
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The aim is to determine the effect of the amount received from David (son) on the
assessable income of Patrick in the year when this payment is received.
Rule
The principal portion of the repayment is categorised as capital receipts and it is
noteworthy that capital receipts would not attract any tax implication on the taxpayer.
However, any additional payment received in discharging of debt needs to be
analysed because this would not be termed as capital receipts. The additional
amount would be considered as assessable income of the taxpayer when it has
derived through ordinary concepts as highlighted in s.6-5 ITAA 1997 (Sadiq et. al.,
2016). It means the when the taxpayer runs a money lending business and hence,
as a result of this, received the additional amount then that amount would be
assessable income and would be taxed. The additional amount would also be
termed as part of the assessable income when the taxpayer has made an isolated
transaction of money lending with the intention to derive profit under s. 15-15 ITAA
1997 (Woellner, 2014).
No tax would be imposed on the taxpayer on the received additional amount when
the amount is categorised as gift. The relevant conditions are highlighted in TR
2005/13 which need to be fulfilled in order to categorise the additional amount as gift
which would be termed as non-assessable income (ATO, 2005).
 It is essential that there must be change in ownership in favour of the transferee.
 The amount must be paid in regards to show the personal gratitude.
 There must not any kind of futuristic expectation against the extended gift.
 The amount must be provided voluntary and also must not be issued due to the
insistence of the respective transferee.
Application
In present case, Patrick has provided an amount of tune $52,000 to his son David in
order to provide some assistance in his new business. Both have agreed with the
fact that David needs to repay the principal amount i.e. $52000 after five years. It is
noteworthy that they have not made any formal agreement or any kind of security
deposit on the lent amount. Further, David repaid the whole amount after two years
and also paid 5% additional amount through cheque. The principal amount of
$52,000 is capital receipts and hence, no tax implication is applied on the principal
amount. However, the additional 5% of the amount needs to be analysed so as to
find whether there is any tax implication is applicable or not.
Patrick does not run any money lending business which implies that issuing the
amount to David is not the part of business. This is apparent from the fact that there
are no contractual formalities that have taken place between them which imply that
the transaction is not business transaction. Hence, the additional amount would not
be termed as assessable income of Patrick under s. 6(5) ITAA 1997. Further, Patrick
does not have any profit intention behind making the transaction of providing money
to David as he has communicated that he does not desire any interest payment. This
means that the amount would not be classified as assessable income under s.
15(15) ITAA 1997 as profit intention is lacking.
The additional amount would be considered as gift because the required four
elements for being non-assessable income are satisfied.
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 David has provided the cheque for principal and additional amount which
indicates that there is change in the ownership of amount.
 David has willingly provided the additional amount even though Patrick does not
want the same.
 David does not have any futuristic expectation against the amount from his father
Patrick.
 The amount has provided in order to show the gratitude for the act of his father of
issuing loan.
Conclusion
Therefore, it can be concluded that the additional 5% is mere gift and hence, it would
not be taxed because it is considered as part of the non-assessable income of
Patrick.
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References
ATO (2005), Rulings: TR2005/13, [online] available at
https://www.ato.gov.au/law/view/document?DocID=TXR/TR200513/NAT/ATO/00001
[Accessed May 19, 2019]
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed.,NorthRyde: CCH
Publications, pp. 145, 213
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer,
pp. 189
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters, pp. 223, 271
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths, pp. 157, 189
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press, pp. 189
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. 176-
177
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
pp. 212
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