MLC703 Principles of Income Tax Law: Detailed Legal Analysis

This assignment provides a detailed analysis of taxation law, focusing on income and capital gains. It addresses scenarios involving lump sum payments, restrictive contracts, and small business CGT concessions under the ITAA 1997. The first part examines whether certain payments received by an individual are taxable as ordinary income or considered capital receipts, referencing relevant case law. The second part explores the application of small business CGT concessions to the sale of a business, including assets like land, building, goodwill, and office desks. It also discusses the eligibility criteria for various concessions, such as the 15-year exemption, 50% reduction in CGT, retirement concessions, and roll-over relief, providing a comprehensive overview of how these provisions can be applied to minimize capital gains tax liabilities. The analysis includes consideration of CGT events, active asset reductions, and the small business roll-over, referencing specific sections of the ITAA 1997 and relevant case law to support the conclusions.

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
Part 1..........................................................................................................................................2
Answer to question 1 A-............................................................................................................2
Requirement A:......................................................................................................................2
Answer to B:..........................................................................................................................3
Answer to question 1 B:.............................................................................................................3
References:.................................................................................................................................7

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Part 1
Answer to question 1 A-
Requirement A:
“Section 15-2, ITAA 1997” states that receipts derived by the taxpayer in the form of
compensation, benefits and bonus that is received directly by the tax payer either directly or
through indirectly in regard to the employment (Morgan, Mortimer and Pinto 2018). Where a
taxpayer receives lump sum amount in return for the taxpayer promise of accepting the
restrictions on the right of earning income then it is treated as capital in nature and not liable
for tax. A similar outcome was achieved in the case of “Beak v Robson (1943)” where the
compensation received by the taxpayer was considered as capital in nature and not liable for
tax (Morgan and Castelyn 2018). The taxpayer in this case received a lump sum from his
employer after agreeing that when the employment of taxpayer comes to an end, he would
not be competing inside the range of 50 miles of the premises of employer for the period of
next five years. The amount was capital in nature and not liable for tax as ordinary earnings.
In the present situation, Deb is currently working as the tax specialist for the
supermarket chain. Deb entered in an agreement with his employer to surrender his right of
taking a paid day off every month in return for $20,000. Citing the decision made in “Beak v
Robson (1943)” the lump sum payment of $20,000 received in return for giving his right of
taking the paid day off will be regarded as the capital receipt and not taxable as ordinary
earnings (Robin and Barkoczy 2019). The payment received by Deb is in return for the
promise of the taxpayer to accept the restrictions relating to the right of earning income and
hence will be treated as capital in nature.

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Answer to B:
In the later instance it is found that Deb presently runs his own business of tax during
the weekends. On being concerned of his lower work efficiency or underperformance in job,
the employer decides to pay Deb a sum of $10,000 as an agreement of not carrying his tax
business. Payments received for agreeing not to do something is not held as income. The
court in “Pritchard v Arundale (1972)” inducement paid to accountant for leaving the
private practice and work for company was not held as income (Murray et al., 2018).
Similarly, the payment of $10,000 to Deb to leave his private tax business will not be held as
taxable ordinary income. Instead it amounts to payment for restricting rights.
Answer to question 1 B:
In order to help the small business and on meeting the basic eligibility criteria for
relief, the capital gains can be lowered with the help of numerous concessions under this
division. The basic conditions are listed under the “subdivision 152-A of the ITAA 1997”.
There are few concessions that carry additional specific eligibility criteria which should be
satisfied (Douglas and Pejoska 2017). There are four small business concessions are available
under the “subdivision 152-A”. These are as follows;
a. The 15-year exemption under “subdivision 152-B”
b. The 50% reduction in CGT under the “subdivision 152-C”
c. The concession relating to retirement under “subdivision 152-D”
d. The roll-over relief under “subdivision 152-E”
A capital gain which simply meets the eligibility criteria for 15-year exemption is ignored
completely and it is not considered under the method statement listed in the “subsection 102-
5 (1), ITAA 1997”. In contrast to this, the other concessions are only considered active till the
step 4 of the method statement (West and Lam 2016). This implies that an individual should

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look forward to the application of capital loss against their capital gains before they can lower
it by using the rest of the three concessions.
Land and Building: As Greg decides to sell his business, he sold the land and building for
$1,100,000 during February 2019. In this case no 15-year exemption is allowed to Greg in
this respect because the asset was not held under the ownership of Greg for a continuous
period of 15 years just before the CGT event (Pfitzner and McLaren 2018). The Greg can in
this situation can decided to apply the 50% small business CGT concession under
“subsection 102-5 (1)”. The land and building in this situation was held by Greg for more
than 12 months. As a result, a twelve-month ownership rule has been satisfied and as a result
under the “subdivision 152-A” is also met. Hence, a 50% CGT discount is available to Greg
for the land and building.
Goodwill: In respect of the business goodwill a CGT event C1 occurs when the business is
ceased on permanent basis. When it is noticed that a business has stopped its operation on the
permanent basis either voluntary or involuntary act, there could be a loss or destruction to the
business goodwill (Festa 2018). It must be noted that the business should be stopped or
ceased on the permanent basis for CGT event C1 to occur. Evidently, case facts obtained in
circumstance of Greg it is noticed that the business goodwill was sold for $150,000. The sale
of business goodwill should be regarded as the CGT event C1 since the business was ceased
on the permanent basis. Greg in the current situation can avail the 50% active asset reduction
“Sub-division 152-C”.
Office Desk: At the time of entering into the contract of selling his business, the office desk
was sold for $13,000. The asset is presumed to have been under the ownership of 12 months
and hence a 50% CGT discount will be available for reduction in capital gains (Pfitzner and
McLaren 2018). Greg as per the “subdivision 152-A” is allowed to obtain the 50% active

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asset reduction because the basic criteria has been met. Greg in this situation can also avail
the benefit of reducing the capital gains by implementing the small business rollover relief as
well from the capital gains.
Restrictive contract: Greg is seen to have entered into a contract with Racheal for three
years where he is paid a sum of $200,000 as the compensation for restricting his rights to do
business. A legal expense of $5,000 was occurred by Greg to pay his solicitor for preparing
the contract. Capital gains that arises from the particular CGT event is not held for
assessment and also excluded from capital gains discount. Under “sect 104-35, ITAA 1997”
a CGT event D1 happens when a taxpayer creates a contractual rights or other lawful rights in
another company (West and Lam 2016). The time of the event when the contract is created or
the taxpayer enters into the contract is considered important. The contract that is entered by
Greg for not competing with Racheal for a three years has resulted in the CGT event D1
under “sec 104-35, ITAA 1997”. A trade restrained has been formed between the Greg and
Racheal (Douglas and Pejoska 2017). Therefore, the sum of $200,000 that is received by
Greg is not allowed for CGT discount. In other words, no 50% CGT discount can be availed
by Greg in this context.
Subdivision 152-E Small business roll-over:
As per the subdivision 152-E the small business rollover permits the taxpayer in
deferring all or portion of their capital gains derived from the CGT events occurring to the
active asset. A taxpayer is only allowed to defer the assets if they purchase any replacement
assets. Denoting the explanation given under the “section 152-405” a taxpayer is permitted to
avail the benefits of the roll-over if the eligibility conditions of “subdivision 152-A” is
satisfied for the CGT purpose (Murray et al. 2018). A taxpayer can decide to implement the
small business rollover to as much amount of the capital gains they want to make. A taxpayer

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may choose to implement the small business rollover concessions only after using the small
business 50% active asset reduction and then 50% CGT discount. In order to get the small
business roll-over, the taxpayer should buy any replacement asset within the span of 12
months or before or prior to two years after the happening of the CGT event.
In the present situation it is understood that after the sale of Greg business he
purchased shares in another company named Asset Pty Ltd in May 2019. This includes office
for $300,000 and retail premises by paying $700,000 used by business for its clothing store.
Greg in this situation is allowed to avail the small business roll-over under subdivision 152-E
has he has satisfied the eligibility criteria (Douglas and Pejoska 2017). The replacement asset
includes the active asset such as the shares in Asset Pty Ltd. The company is linked with
Greg because he has the authority of implementing control. Greg under “subdivision 152-E”
is permitted to obtain the small business roll-over relief because the left over capital gains
beside the rollover does not exceeds the total of first and second element of replacement cost
base. The asset was actually bought by Greg inside the time period of one year following the
last CGT event during the income year.

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References:
Douglas, J. and Pejoska, A.L., 2017. Regulation and small business. Economic Round-up,
(2017), p.1.
Festa, D., 2018. CGT amendments: Unnecessary complications for small business. Taxation
in Australia, 53(1), p.18.
Morgan, A. and Castelyn, D., 2018. Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murray, I., Taylor, J., Walpole, M., Burton, M. and Ciro, T., 2018. Understanding Taxation
Law 2019.
Pfitzner, D.M. and McLaren, J., 2018. Microbusinesses in Australia: a robust
definition. Australasian Accounting Business & Finance Journal, 12(3), pp.4-18.
Robin and Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.), 2019. Australian
Taxation Law Select 2019: Legislation And Commentary. Oxford University Press.
West, M. and Lam, D., 2016. Small business restructure roll-over-Opportunities and
traps. Taxation in Australia, 50(9), p.521.