Taxation Law: CGT, Personal Exertion Income, and Interest on Loan

This document discusses the concepts of Capital Gains Tax (CGT), personal exertion income, and interest on loan under taxation law. It includes answers to questions related to these concepts and their tax treatment. The document also cites relevant case laws and legislative provisions.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:...................................................................................................2
Answer A:..................................................................................................................2
Answer B:..................................................................................................................2
Answer C:..................................................................................................................3
Answer D:..................................................................................................................4
Answer to question 2:...................................................................................................4
Answer to question 3:...................................................................................................7
References:................................................................................................................10

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Answer to question 1:
Answer A:
The broader concept of CGT comprises of the comparison among the capital
proceeds and the cost price of the asset. Capital gains tax is applied commonly to
the assets or the events that takes place on or after the 20th September 1985. So, it
should be understood that the pre-CGT and the post-CGT is regarded as the
regularly used word for referring the assets that is purchased or the events that are
occurring prior to or after the date (Graetz et al. 2015). The taxpayer should denote
that the concept of CGT is entirely based on the capital gains or capital loss
originating from the sale of the assets or from the other specified events.
The case facts suggest that Helen is the fashion designer and she is
considering to fund her business. As a result, in December 2018 an antique painting
which the father of Helen purchased in February 1985. As a result, the asset was
eventually sold for $12,000 with the original purchase price being $4,000. Therefore,
the painting should be classified as the pre-CGT asset because Helen’s father
purchased the painting before CGT regimes was introduced. Consequently, the
capital gains that is made from the painting is exempted in this case.
Answer B:
As per the CGT regime, the net amount of the capital gain which has accrued
to the taxpayer in the particular income year, represents the gain that is included into
the taxpayer assessable income for that year. A capital gain or the capital loss is
ascertained upon subtracting the right cost base associated to the asset or the other
event to derive the sales proceeds from the assets that are sold. Accordingly, a CGT
event A1 happens under “s-104-10 (1)) of the ITAA 1997” when the CGT asset is

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disposed. Under the legislation of “s-108-10 ITAA 1997” collectables include the
assets that the taxpayer has kept for their personal use. The items that generally
under this definition is the antiques, art work such as sculptures or the rare stamps
(Lang et al. 2018). “Section 102-5, ITAA 1997” includes the net amount of capital
gain for the income year in the taxpayer assessable income.
The case study suggests that the sculpture that was purchased for $5,500 in
the 1993 has been finally sold in 2018 for $6,000. The sale of collectable under the
“s-104-10 (1)) of the ITAA 1997” has given rise to CGT event A1. Upon selling the
collectables she has made capital gains of $500. Therefore, under “section 102-5,
ITAA 1997” Helen needs to include the net amount of capital gain for the income
year in her assessable income.
Answer C:
Helen in the year also stated that she had sold the antique jewellery piece for
$13,000. The purchase price of the jewellery was $14,000 and it was purchase on
1987. Therefore, upon selling the jewellery she incurred a capital loss. The taxpayers
should denote that the capital loss is not permitted for deduction from the taxable
income, rather it is allowed for off-set from the capital gains that is made in the year
or from the future years so that the net amount of capital gains is ascertained. The
special rules of collectables explain that capital loss should be separated and should
be deducted only from the capital gains from other collectables under “s-108-10
(1)”. Helen can off-set the capital loss of antique jewellery from the gains made from
historical sculpture (Sakurai and Braithwaite 2019). However, the remaining amount
of loss should be carried for by Helen to be offset from gains in future years.

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Answer D:
As per “sec 108-20, ITAA 1997” a personal use asset is regarded as
taxpayer’s private enjoyment asset. The personal use asset should not be mistaken
as collectables (Hickman 2017). “Sec 118-10 (3)” explains that capital gains must
be omitted if the purchase price of personal use asset is below $10,000. Helen here
sold the picture at a sales value of $5,000 in July 2018. The picture had the original
cost of $450. Therefore, under “sec 118-10 (3)” the capital gains that is made from
the personal use asset must be ignored because the asset has failed to satisfy
eligibility criteria of $10,000 value or more.
Answer to question 2:
Issues:
Is the amount that is earned from the personal exertion is characterised as the
taxable earnings under the ordinary meaning of “S-6-5, ITAA 1997”?
Rules:
It must be denoted that as per “sec 6-5, ITAA 1997” the taxable earnings of
the taxpayer normally involve the income based on the ordinary perceptions
(Mumford 2017). The legislation fails to define the expression of income under the
ordinary meaning. Though there have been several common indicators of income
under the case law. This normally involves that whether the payment that is made is
the part of periodical receipt of payment. It further involves whether the reward is a
provision of personal services and services which is rendered by virtue of providing
service. The existence or the absence of any given single indicator is not regarded
as the necessarily determinative as to whether or not the particular receipt is the
income.

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“Section 6 (1), ITAA 1936” involves the earnings from the personal exertion
or the income that is earned from the salaries or wages, bonus, superannuation,
gratuities etc received in capacity of the employee. For a receipt to be classified as
income from personal exertion there should be adequate relation among the benefit
that is received and the private effort exercised by the person (Hoynes and Rothstein
2016). The amount that is received is regarded as the reward or the product of
personal exertion. However, it does not need any kind of personal employment
relation or business relation.
To support the payment as income from private exertion reference to “Brent
v FCT (1971)” is made. In this case the wife of the train robber was provided with
the media right of publishing her story (Dyreng, Hanlon and Maydew 2018). The
court of law treated the amount taxable that was received by the taxpayer because
the amount was the income obtained through the personal exertion.
The essential characteristics of treating the payment taxable is that the
amount is not paid simply to cover the cost or the inconvenience of the taxpayer. To
support this, in “Hobbs v Hussey (1942)” where the taxpayer was provided with the
sum of £1500 for granting the right of publishing his autobiography in the articles of
newspaper was held to be income from the personal exertion (Mertens and Montiel
Olea 2018).
Similarly, payment is characterised as income exertion payment when the
taxpayer is motived to offer the service by receiving the payment in exchange. In
“Housden (Inspector of Taxes) v Marshall (1958)” where the taxpayer agreed to
the make the personal experience available by selling the newspaper cuttings and
photographs as the income from personal exertion (Cvrlje 2015).

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Application:
The facts obtained from the case suggest that Barbara was given $13,000 by
Eco Books Ltd to write down the books on economics. As a result, the amount that
was offered to Barbara was accepted by her. She ultimately wrote the book and
received in exchange $13,000. Bringing up the case of “Brent v FCT (1971)” in the
situation of Barbara it is noted that the amount constitutes earnings through personal
efforts under “sec 6 (1), ITAA 1936”. The amount shows the required nexus with
Barbara’s personal effort (Riedel 2018). Therefore, the amount must be perceived as
the reward of the product of personal exertion and will be chargeable as income
under “s-6-5, ITAA 1997”.
Barbara then sells the copyright of the book to the publisher for its exclusive
publication. Stating the decision in “Hobbs v Hussy (1942)” selling the book’s
copyright and then deriving the amount of $13,400 will be treated as assessable
personal exertion (Brydges and Yuen 2018). This is because the amount was
received by Barbara in exchange of the services performed. The amount will be
taxable as ordinary income in “sec 6-5, ITAA 1997”.
She then sells the manuscripts of the book and the manuscript of the
interview to the library which in return paid money to Barbara. By considering the
example of “Housden (Inspector of Taxes) v Marshall (1958)” the agreement of
selling the manuscripts was entirely out of Barbara’s motivation of receiving the
payment (Merz and Overesch 2016). So the amount will be considered taxable
income under “sec 6-5, ITAA 1997”.
In the another situation, if the book was written by Barbara during her free
time and selling the book in the later stages then the amount will be treated as

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income from private exertion of Barbara. The amount will be taxable under “sec 6-5,
ITAA 1997”.
Conclusion:
The receipts that is earned by Barbara is having suitable relation with the
personal exertion and the award is the benefit received for the product personal
efforts.
Answer to question 3:
Issues:
The issue that is considered in this case is the tax treatment of the interest
that is received for the one-off lump sum under the loan arrangement.
Rule:
Amount is treated as the ordinary income if it possesses adequate nexus with
the income generating activities. In addition to this, the amount should be money or
has the capability of turning into the money. If the amount is the ordinary earnings
then it has the characteristics of the repetition, orderliness and periodicity. The court
of law in “Hochstrasser v FCT (1960)” clarified that if the amount received by the
taxpayer constitute ordinary income then it should be the gain to the taxpayer.
It is must be noted that there cannot be any gain if the item is earned by the
taxpayer from himself. Income should come into the taxpayer from the outside
sources. In other words, the taxpayer cannot derive the income from their own
dealings (Schenk, Thuronyi and Cui 2015). The assessable income is considered for
tax purpose when it is included into the taxpayer’s assessable earnings. It is
necessary to satisfy the pre-requisite of the ordinary income which includes that the

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amount must be a real gain for the taxpayer. There is situation where the one-off
receipts do not hold the character of ordinary income. However, the lump sum gain
might be treated as the ordinary income such as the receipt of interest from the one-
off loan agreement.
Application:
The case proofs explain that a loan agreement was formed among the father
and son where the father agreed to give loan to his son to fund his new start up. The
father here Patrick gave his son $52,000. The loan was re-payable upon the fifth
year of the agreement with the loan amount of $52,000 and additional $6,000 as the
interest on loan. The son repaid the loan to his father inside two years with an
additional five percent of the borrowing amount as payment of interest on loan.
The interest that is received in the case of Patrick should be dealt with the
ordinary concept of income. Denoting “Hochstrasser v FCT (1960)” this implies
that the interest on loan is a real gain for the father here who received the payment
as the one-off receipt inside the agreement of loan that was formed with the son
(Goldin 2015). As the loan interest has met the prerequisite of ordinary earnings, it
will be considered taxable under legislative provision of “sec 6-5, ITAA 1997”.
Taking into the account the payment mode that was adopted by his son, the
one-payment of interest as well as the loan amount hardly impacts the tax liability for
the father in this case (Jones 2017). This is because the interest received from loan
agreement is a real gain and taxable under “s-6-5, ITAA 1997”.
Conclusion:
The case study can be reached at conclusion by stating that the interest is the
real gain for the father that is received as one-payment under the loan arrangement.

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The amount will be included into the assessable income of Patrick and would attract
tax liability.

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Brydges, N. and Yuen, K., 2018. A matter of trusts: Trusts, income tax, CGT and
foreign residents. Taxation in Australia, 53(2), p.80.
Choudhary, P., Koester, A. and Shevlin, T., 2016. Measuring income tax accrual
quality. Review of Accounting Studies, 21(1), pp.89-139.
Cvrlje, D., 2015. Tax literacy as an instrument of combating and overcoming tax
system complexity, low tax morale and tax non-compliance. The Macrotheme
Review, 4(3), pp.156-167.
Dyreng, S.D., Hanlon, M. and Maydew, E.L., 2018. When does tax avoidance result
in tax uncertainty?. The Accounting Review.
Goldin, J., 2015. Optimal tax salience. Journal of Public Economics, 131, pp.115-
123.
Graetz, M., Schenk, D., Freeland, J., Lathrope, D., Lind, S., Stephens, R., Burke, K.,
Brealey, R., Myers, S., Allen, F. and Keyes, K., 2015. Federal Income Taxation,
Principles and Policies (University Casebook Series). Foundation Press/West
Academic.
Hickman, K., 2017. Thoughts on Statutory Interpretation-For Tax Specialists,
Too. Jotwell: J. Things We Like, p.14.
Hoynes, H. and Rothstein, J., 2016. Tax policy toward low-income families (No.
w22080). National Bureau of Economic Research.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in
Australia, 52(1), p.14.

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Lang, M., Pistone, P., Schuch, J. and Staringer, C. eds., 2018. Introduction to
European tax law on direct taxation. Linde Verlag GmbH.
Mertens, K. and Montiel Olea, J.L., 2018. Marginal tax rates and income: New time
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Merz, J. and Overesch, M., 2016. Profit shifting and tax response of multinational
banks. Journal of Banking & Finance, 68, pp.57-68.
Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge.
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literature. Review of Economics, 69(2), pp.169-181.
Sakurai, Y. and Braithwaite, V., 2019. Taxpayers' perceptions of the ideal tax
adviser: Playing safe or saving dollars?. Centre for Tax System Integrity (CTSI),
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