Impact of CGT on Asset Liquidation in Taxation Law

This document discusses the impact of CGT on asset liquidation in taxation law. It explains the tax liability for different assets and provides insights into the computation of capital gains and losses. The document also covers the taxation of proceeds from book writing and loan transactions.

TAXATION LAW
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Question 1
The given case relates to Helen whose primary profession is fashion designer and
needs some incremental money for her business. As a result, in the current tax year,
she has liquidated some assets which she held. In context of these transactions, the
key aim is to outline the impact of these transactions in terms of any CGT liability
that would be payable by the taxpayer Helen.
1) Liquidation of antique painting
A key condition to be fulfilled for levying of CGT is that the asset should not be
purchased in the pre-CGT era. It is noteworthy that CGT system was introduced as
on September 20, 1985. Further, ss. 149-10 highlights that any capital asset which is
purchased before the cut off date (i.e. September 20, 1985) would not attract any
CGT. This is independent of the duration for which the asset is held and the
underlying capital gains or losses derived (Austlii, 2019). The antique painting would
be a CGT asset in accordance with s. 108-10 ITAA 1997. However, the disposal of
this asset would not lead to any CGT implication since the date of purchase
(February 1985) lies in the pre-CGT era or before September 20, 1985 owing to
which no CGT would be levied on this asset disposal.
2) Liquidation of historical sculpture
The first imperative aspect to highlight is that as per s. 108-10 (ITAA 1997), sculpture
is a CGT asset which falls under the asset class known as collectible The sale of a
CGT asset would require capital gains/(loss) computation to be performed since A!
CGT event would arise as per s.104-5. The formula for capital gains calculation is
driven by the underlying CGT event. For the current event, the formula has been
highlighted in s. 104-10. Considering the relevant formula and the input data
provided in context of the asset, the capital gain computation is shown below
(Barkoczy, 2017).
In accordance with s. 115-25 (ITAA 1997), the above gains can further be reduced
through the discount method owing to the holding period of asset exceeding one
year but same would be done after accounting for any outstanding capital losses
(Sadiq et. al., 2016).
3) Liquidation of antique jewellery piece
The first imperative aspect to highlight is that as per s. 108-10 (ITAA 1997), sculpture
is a CGT asset which falls under the asset class known as collectible The sale of a
CGT asset would require capital gains/(loss) computation to be performed since A!
CGT event would arise as per s.104-5. The formula for capital gains calculation is
driven by the underlying CGT event. For the current event, the formula has been
highlighted in s. 104-10. Considering the relevant formula and the input data
provided in context of the asset, the capital gain computation is shown below
(Deutsch et. al., 2016).
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The above capital loss cannot be neutralised against revenue receipts or capital
gains from other asset classes as per s. 108-10(1). Thereby, the endeavour would
be to offset these losses in the present tax year or if adequate capital gains from
collectible asset disposal are not available, then any pending capital losses would
move forward to the next year (Krever, 2017).
4) Liquidation of picture
Like the other assets which Helen has disposed, this asset is also a collectible item.
There is a specific rule highlighted in s. 118-10(1) as per which CGT would be
applicable on the capital gains from such assets only under the condition that the
price of purchase is at a minimum of $ 500 (Reuters, 2017). This element is not
satisfied for the current asset under consideration as Helen’s mother bought this for
less than $ 500 ($470). As a result, the computations for capital gains have not been
performed since these would anyways be disregarded only.
Net Position
The summary of the four assets CGT implication is presented in the tabular manner
below.
Based on the above computation, it is evident that Helen would carry forward this
loss to the future years until offsetting against capital gains is performed based on
collectible assets disposed (Coleman, 2016).
Question 2
Case Facts
The taxpayer (Barbara) wrote a book “Principles of Economics” as she received an
offer regarding the same which she accepted. She got compensation for writing the
book along with compensation related to copyright, manuscript sale along with the
proceeds related to interview transcript sale. In wake of these proceeds, it needs to
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be outlined if any of the proceeds collected by Barbara would be termed as personal
exertion based income.
Analysis & Conclusion
Any taxpayer would derive personal exertion income in accordance with s. 6 (ITAA
1997) when he/she indulges in any work which would lead to creation of commercial
value and hence the proceeds are directly attributed to the physical effort and the
underlying skill involved. In order for commercial value to be created through any
activity, of essence is that the concerned person should have skill in that activity
(Barkocy, 2017). A crucial point is that there are instances where engagement of the
taxpayer in an activity is essentially a transfer mechanism for knowledge or
intellectual property wherein the proceeds of this activity do not categorise as income
from personal exertion in line with the judgment in Brent vs Federal Commissioner of
Taxation (1971) 125 CLR case (Gilders et. al.,2016).
Payment from writing along with copyright – It is crucial to note that Barbara has no
history of being engaged in any book writing. She is not famous for her literary skills
or works. However, still the publisher pays her a sizable amount of money primarily
because economics is her field and she has acquired knowledge over the years
which can be expressed through the book. Thereby, the knowledge is the real asset
which is bought through this payment and act of writing is a mere transfer
mechanism. Hence, the payment is not income from personal exertion (Nethercott,
Richardson and Devos, 2016).
Payment from manuscript sale – The commercial value of the manuscript is related
to her knowledge and profession but not the activity of writing itself. If this book was
written by anyone who did not have economics knowledge, then the act of writing
itself would not create any commercial value. Also, the knowledge about the subject
was not possessed by her during the book writing but she previously had the same.
Hence, the payment is not income from personal exertion (Gilders et. al., 2016).
Payments from interview transcript sale – The interviews were conducted during the
writing to the book and these did not exist previously. Also, Barbara has skills of
research in economics owing to which her interviewing and data collection skills
would be superior to others who lack the necessary skill. Thus, this payment is skill
based and created through the activity of interviewing leading to income from
personal exertion (Deutsch et. al., 2016).
Alternative fact
There is another scenario where the publisher has not given any offer but Barbara
for her own satisfaction writes the book and only later decides to sell the same. One
of the major ways in which the given scenario differs from the previous scenario is
that there is no apparent profit motive as there is no offer when writing the book.
However, one similarity which is crucial in the given case is that the act of writing in
this case would have not produce commercial value which would be only derived
through the knowledge. As a result, the publisher would be willing to pay for the
book only because of the knowledge that Barbara had already acquired where was
shared though the book. Hence, the payment is not income from personal exertion
(Coleman, 2016).
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Question 3
Case Facts
Loan has been extended to David by father (Patrick) to the tune of $ 52,000 which is
for business purpose. At the time of extending loan, father clear to the son that he
had no intention to earn any interest on the amount. As a result, it was agreed that
the principal amount would be returned after a period of 5 years. However, the son
(David) was able to return the principal amount after 2 years only and additionally
provided the father a 5% extra amount. One cheque was provided to Patrick in this
regard.
Analysis
The cheque which has been given to the father primarily comprises of two
components namely the principal repayment along with additional amount. In relation
to principal repayment, no tax liability would arise for Patrick as this sum was earlier
given to his son David and now has been paid back (Gilders et. al., 2016). However,
from the tax perspective, the concerning aspect is the incremental amount that has
been given by David. This may be considered as interest income for the principal
extended at the rate of 2.5% per year. As a result, to determine the appropriate tax
treatment would be dependent on the underlying scenarios that may arise as a result
of the payment (Sadiq et. al., 2016).
First Scenario
As per this scenario, it is assumed that the taxpayer (Patrick) is conducting a
business which involves engaging in money lending transactions on a regular basis.
As a result, the given transaction was commercial and the proceeds would be
interest income and assessable as per s. 6-5 ITAA 1997 (Reuters, 2017)p.
However, this assumption would not be realistic for the following reasons.
 There has been no formal agreement between David and Patrick and also no
collateral being kept. This does not indicate any commercial transaction.
 Also, Patrick has expressed his desire of not wanting any interest payment.
Thereby, it is unlikely that the extra payment is assessable under s. 6-5.
Second Scenario
As per this, while Patrick is not linked to the business of lending commercially but
has initiated one isolated transaction with his son whereby he would derive income.
In such transactions which are covered under s. 15-15 ITAA 1997, a key requirement
is that the profit motive should be the primary driver and present from the beginning.
This is clearly absent here since Patrick himself communicated to David that there is
no need to pay interest on the borrowed amount. Hence, Patrick did not lend the
money driven by profit or interest income. Thereby, it is unlikely that the extra
payment is assessable under s.15-15 (Krever, 2017).
Third Scenario
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As per this, David has given the extra payment as gift to is father in wake of gratitude
related to helping him. The key conditions related to gift have been fulfilled for the
given transaction as indicated in line with TR 2005/13 (ATO, 2005).
 The transfer should provide benefit to the transferee which is true as extra
money is beneficial for father.
 The transfer must be accompanied by actual ownership change which is true
as the cheque in his name has been handed over to Patrick by son David.
 The transfer ought to be voluntary which is true as David was clearly told by
Patrick that he did not lend for interest income.
 The transfer must not involve reciprocal expectations. This is also true as in
lieu of the transfer of 5% amount, David would not have any extra
expectations from his father.
Conclusion
No tax implications would arise on the arrangement between father and son as the
principal repayment is tax free and incremental amount is exempt from tax owing to
this being gift from son to father.
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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 26, 2019]
Austlii (2019) , 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 26, 2019]
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed.,NorthRyde: CCH
Publications, pp. 189, 254
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia, pp. 187
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters, pp. 233, 287
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths, pp. 255, 387
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company, pp. 192, 301-302
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press, pp. 235
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS, pp. 201, 334
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. 223,
347
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