Taxation Law

This document provides answers to questions related to Taxation Law. It covers topics such as capital gains tax, collectables, personal use assets, earnings from personal efforts, and interest on loans. The document includes explanations, rules, applications, and conclusions for each question.

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:..................................................................................................................3
Answer to question 2:...................................................................................................4
Issues:.......................................................................................................................4
Rule:..........................................................................................................................4
Application:................................................................................................................5
Conclusion:...............................................................................................................7
Answer to question 3:...................................................................................................7
Issues:.......................................................................................................................7
Rule:..........................................................................................................................7
Application:................................................................................................................8
Conclusion:...............................................................................................................9
References:................................................................................................................10

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Answer to question 1:
Answer A:
A gain that is characterised as the capital will not be the subject to income tax
under the ordinary concepts. The regime of capital gains tax states that it began on
September 20, 1985 and all the capital receipts are bought into the tax base. The
income tax liability of the taxpayer includes the net capital gains (Devereux and
Sørensen 2016). When it is noticed that the taxpayer purchases the assets before
the introduction of the CGT regime then the asset is considered as the pre-CGT
asset. On the other hand, the assets that are purchased following the introduction of
the CGT regime then it is known as post-CGT asset.
As understood in the situation of Antique the father of Halen bought the
antique impression of painting on February 1985. Therefore, it can be stated that the
asset is the pre-CGT asset and the sale of the painting by Helen should be
considered as the exempted asset and no tax is applied on the gains that is made
from antique impression.
Answer B:
As stated in the “section 108-10 ITAA 1997” collectables are defined as
asset that is mainly kept for their own use usage or the taxpayers associate. Most
notably under “section 108-10 (2), ITAA 1997” where the list of collectables has
been provided (Lev and Nissim 2014). This usually involves the antiques and
jewellery, art works, coins and rare stamps. The taxpayer should include the net
capital gains for the income year under the “section 102-5, ITAA 1997” as the
assessable income.

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As explained in the case of Helen, she has bought the historical sculpture on
the December 2018. However, it should be denoted that the historical sculpture was
sold by Helen 1st January 2018 for the sales price of $6,000. A capital gain is made
in this case by Helen from the sale of collectables. As she has made the capital gain
from the collectable, Helen under the “section 102-5, ITAA 1997” will be required to
include the gain in her assessable income for the income year.
Answer C:
Collectables are subjected to special rules. The capital loss that is sustained
from the collectables are required to be separated and the loss is only permitted to
be offsets against the gains that the taxpayers makes from the collectables under the
“section 108-10 (1), ITAA 1997” (Dhaliwal et al. 2017). Most notably the “section
108-10 (4) of the ITAA 1997” explains that the unused amount of the capital loss
that is sustained from the collectables must be carried forward by the taxpayer in the
future year.
In the year of 1987 in October, Helen had purchased the antique jewellery
that had the purchase value of $14,000. The antique jewellery piece was sold by
Helen during the month of March 2018 for a sales value of the $13,000. As a result,
a capital loss $1000 is incurred from the sale of collectables. The capital loss that is
suffered by Helen from the jewellery will be considered for offset against capital
gains that is made from the sale of the sculpture. Consequently, the used amount of
loss from the collectables should be carried by Helen to the future based on the
legislative provision of “sec 108-10 (4), ITAA 1997”.

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Answer D:
Mentioning the “sec 108-20”, it can be stated that the CGT asset that a
taxpayer has primarily kept for his personal enjoyment or use will be treated as the
personal use assets (Auerbach and Hassett 2015). The personal use assets are also
subjected to some special rules for the purpose of CGT. This includes under the
“section 118-10 (3), ITAA 1997” that the capital gains made from the personal use
assets that is purchased for lower than the cost of $10,000 will be simply ignored for
capital gains tax.
In the month of March in 1987 Helen has bought the picture that has the cost
of $470. In the month the month of July in 2018 the picture that was bought in 1987
was subsequently sold. The sales value obtained from the sale of picture is $5000.
By applying the special rules that is given in the “section 118-10 (3)”, for the
personal use assets the capital gains that is derived from selling the picture will be
exempted from the capital gains tax because the cost base of picture is lower than
the eligibility criteria of $10,000 (Oishi, Kushlev and Schimmack 2018).
Answer to question 2:
Issues:
The case will be considering the example of earnings that is earned by the
taxpayer from the personal efforts are held taxable under the “sec 6-5, ITAA 1997”
as the ordinary income.
Rule:
Where a taxpayer derives an amount is regarded as the income from the
personal exertion if the amount is earned from the employment of an individual or the
amount is the reward for giving services by an individual. The private effort income

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generally comprises of the wages, salary, allowances and contract payments (Mellon
2016). There are situations where the income earned from the personal exertion are
regarded taxable as the ordinary income under “sec 6-5, ITAA 1997”.
According to the “sec 6-5, ITAA 1997” the taxable earnings generally
includes the income that is made from the ordinary concepts. Income usually
comprises of the portion of periodic receipts of payments (Schön 2016). It also
includes the reward for the provision of personal services and income from the
services that were provided as the reasons of receiving payment.
In order to consider the payment as the payment reference to court’s verdict
has been considered for “Brent v FCT (1971)”. As per the verdict that was given in
this case, the taxation commissioner assessed the taxpayer for the income that was
derived when the money that was paid to her was for the mainly for the publication
(Tuomala 2016).
Similarly, in the case of “Hobbs v Hussy (1942)” the taxpayer was the
criminal and received an amount of £1,500 for selling the right of his autobiography
for the purpose publication in the twelve newspaper article (Boadway and Tremblay
2016). The amount was considered taxable under the ordinary meaning of “section
6-5, ITAA 1997” because the amount was received by way of rendering personal
services.
It is noteworthy to denote that to treat the payment as income the services
should be rendered by the taxpayer. The decision given in “Housden v Marshall
(1958)” where the taxpayer was held taxable upon agreeing to make the supply of
the experience as the jockey which also included the photographs and newspaper
cuttings.

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Application:
To apply the above stated rules it is necessary to understand that Barbara is
an economist researcher. There was an instance when a publishing company named
Eco Books Ltd offers the sum of $13,000 to Barbara for writing books. Barbara
immediately accepted the offer to write the book. The book that was written by
Barbara was named as Principle of Economics. It can be stated that amount of
$13,000 that Eco Books Ltd gave to Barbara was entirely for her personal efforts to
write the book. The amount that is earned by Barbara will be considered as income
derived from the individual exertion. The amount should be considered as the reward
for rendering her personal services.
Mentioning the example of “Brent v FCT (1971)” the taxpayer here will be
considered taxable under the ordinary meaning of “section 6-5, ITAA 1997”. The
taxpayer here Barbara is motivated to offer the service on receiving the payment
(Ábrahám, Koehne and Pavoni 2016). Furthermore, the money that was provided to
taxpayer is mainly upon rendering services. The substantial of payment that is
received by Barbara cannot simply be considered as the nominal amount to make up
for the inconvenience or cost.
Later, the copyright that was vested in the book was ultimately sold by
Barbara to Eco Books Ltd and in exchange she was paid a sum of $13,400. By
denoting judgement made in “Hobbs v Hussey (1942)” the money that is received
by Barbara for selling the serial rights of her books for the purpose of publication will
be considered as the taxable income under the ordinary meaning of “section 6-5,
ITAA 1997” (Kay 2016).

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Later Barbara also disposed the manuscripts and the interview scripts to the
library in exchange of $4,350 and $3,200. With reference to “Housden v Marshall
(1958)” the amount will be considered income for making her experience available.
With respect to “sec 6-5, ITAA 1997” the amount will be held as ordinary earnings
for Barbara.
Conclusion:
In view of the above explanation, the taxpayer here Barbara will be
considered taxable for the earnings within the ordinary sense of “section 6-5, ITAA
1997” because the amount was received by her in discharge of personal services.
Answer to question 3:
Issues:
Is the money in the form of interest on loan received given or lent under the
loan agreement will be considered as the assessable earnings for the taxpayer
under “sec 6-5, ITAA 1997”?
Rule:
To determine whether the receipt is assessable as ordinary income it is
necessary distinguish the ordinary earnings and capital amount. As explained in
“section 6-5 (1), ITAA 1997” the assessable earnings of the taxpayer include the
earnings that are in terms of the ordinary concepts that is known as ordinary income
(Jones 2019). There are certain characteristics of income. The income should be
money or should be easily convertible in money. Another characteristics of income is
that it involves the periodicity, recurrence and regularity. It necessary requires that
the receipts derived from the income generating activities will be treated as ordinary

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earnings. The court in “FCT v Harris (1980)” held that there should be a required
nexus among the receipt and the ordinary income producing activity.
Most importantly, a receipt cannot be held as the ordinary earnings except it
meets both the prerequisites. The receipts that is received must be the real gain for
the taxpayer in order to be held as the perquisite of the ordinary earnings (Sikka
2017). On satisfying both the prerequisite of the ordinary earnings, a gain would be
characterised as the ordinary earnings provided it represents the adequate
characteristics of income.
Where a gain that is received by the taxpayer is in the form of regular or
periodic is more likely to be treated as the ordinary earnings than the gain that are
paid as the lump sum (Morini and Pellegrino 2018). There may be instances where
the lump sum gain may be characterised as the ordinary income. This includes the
one-off receipts of interest that is received under the loan agreement.
Application:
The case study highlights that a long-term loan agreement was formed
between the Patrick and David with former being the father and latter being the son
in the current case study. The father agreed to pay the son $52,000 as the loan for
starting new business which is to be paid in five years’ time with interest on loan of
$6,000. The loan was however paid by son within the span of two years which also
accompanied a five percent additional money for the borrowed amount.
With regard to above rules, it can be stated that the interest on loan is the real
gain for Patrick. Citing “FCT v Harris (1980)” the interest on loan that is received by
Patrick from his son is an assessable income from the one-off receipt of interest
under the loan agreement (Swank 2016). The interest on loan satisfies both the

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prerequisite of ordinary income as the amount is easily convertible to cash and a real
gain for Patrick. Furthermore, it holds sufficient characteristics with the income
earning source. Therefore, the amount will be considered taxable for Patrick within
the ordinary meaning of “section 6-5, ITAA 1997”.
The case study also provides that the mode of payment does not creates an
effect on the tax liability of the payment (Carey et al. 2015). The single mode of
payment by cheque will attract the same tax liability as the one-off receipt of interest.
Conclusion:
The interest that is earned by Patrick clearly satisfies nexus with the income.
The interest is a real gain for taxpayer and it will be taxable under ordinary meaning
of “sec 6-5, ITAA 1997”.

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References:
Ábrahám, Á., Koehne, S. and Pavoni, N., 2016. Optimal income taxation when asset
taxation is limited. Journal of Public Economics, 136, pp.14-29.
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first
century. American Economic Review, 105(5), pp.38-42.
Boadway, R. and Tremblay, J.F., 2016. Modernizing Business Taxation. CD Howe
Institute Commentary, 452.
Carey, S., Creedy, J., Gemmell, N. and Teng, J., 2015. Estimating the elasticity of
taxable income in Australia. Economic Record, 91(292), pp.54-78.
Devereux, M.P. and Sørensen, P.B., 2016. The corporate income tax: international
trends and options for fundamental reform. Brussels: European Commission,
Directorate-General for Economic and Financial Affairs.
Dhaliwal, D.S., Lee, H.S., Pincus, M. and Steele, L.B., 2017. Taxable income and
firm risk. The Journal of the American Taxation Association, 39(1), pp.1-24.
Jones, C.I., 2019. Taxing Top Incomes in a World of Ideas(No. w25725). National
Bureau of Economic Research.
Kay, J., 2016. Consumption Taxation. The New Palgrave Dictionary of Economics,
pp.1-3.
Lev, B. and Nissim, D., 2014. Taxable income, future earnings, and equity
values. The Accounting Review, 79(4), pp.1039-1074.
Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.

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Morini, M. and Pellegrino, S., 2018. Personal income tax reforms: A genetic
algorithm approach. European Journal of Operational Research, 264(3), pp.994-
1004.
Oishi, S., Kushlev, K. and Schimmack, U., 2018. Progressive taxation, income
inequality, and happiness. American Psychologist, 73(2), p.157.
Schön, W., 2016. Destination-Based Income Taxation and WTO Law: A Note.
Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate
siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Taylor & Francis.
Swank, D., 2016. The new political economy of taxation in the developing
world. Review of international political economy, 23(2), pp.185-207.
Tuomala, M., 2016. Optimal redistributive taxation. Oxford University Press.