Capital Gains Tax Consequences for Helen on Sale of Assets

TAXATION LAW
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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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