Taxation: Capital Gains and Personal Exertion Income

This document discusses the taxation implications of capital gains and personal exertion income. It covers the sale of assets, copyright income, and loan repayments. The document provides relevant laws and applications for each scenario.

TAXATION
STUDENT iD:
[Pick the date]

Question 1
The given case pertains to Helen (taxpayer) who has sold some assets in the given
tax year. Even though the proceeds from the sale of these assets would be capital
receipts and not taxable, but the capital gains tax (CGT) may be applicable on any
potential capital gains that are derived by the taxpayer on these assets sale.
1) Asset Antique Painting
All requisite information in relation to the asset has been summarised as exhibited
below.
 Purchase month is February 1985
 Sale date is 1st December 2018
 Purchase price for this asset is $ 4,000
 Sale price for this asset is $ 12,000
 Holding period : Greater than one year
It is noteworthy that the current CGT came into existence only on September 20,
1985. As a result, for assets which have been purchased before this date are termed
as pre-CGT asset and are exempt from the burden of CGT as per ss. 149-10 Income
Tax Assessment Act (ITAA) 1997(Austlii, 2019). Referring to the relevant data
summarised regarding this asset, it becomes evident that painting was bought the
CGT came into existence. As a result, the painting is termed as a pre-CGT asset and
would not attract any liability on account of CGT.
2) Asset: Sculpture
All requisite information in relation to the asset has been summarised as exhibited
below.
 Purchase month is December 1993
 Sale date is 1st January 2018
 Purchase price for this asset is $ 5,500
 Sale price for this asset is $ 6,000
 Holding period : Greater than one year
Sculpture as an asset would be subject to CGT and belongs to a wider class of
assets highlighted in ss. 108 -10 which is known as “collectibles”. The sale of the
sculpture would result in asset disposal which constitutes the capital event A1. In
accordance with ss. 104-10, the capital gains computation would involve subtraction
of cost base from the selling price of the asset (CCH, 2013).
The holding period exceeds an year and hence discount method can be applied in
order to further lower the above capital gains. Alternatively cost indexation method
may also apply for reduction of the above capital gains (Barkoczy, 2018).
3) Asset: Antique Jewellery Piece
All requisite information in relation to the asset has been summarised as exhibited
below.
 Purchase month is October 1987
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 Sale date is 29th March 2018
 Purchase price for this asset is $ 14,000
 Sale price for this asset is $ 13,000
 Holding period : Greater than one year
Antique as an asset would be subject to CGT and belongs to a wider class of assets
highlighted in ss. 108 -10 which is known as “collectibles”. The sale of the sculpture
would result in asset disposal which constitutes the capital event A1. In accordance
with ss. 104-10, the capital gains computation would involve subtraction of cost base
from the selling price of the asset (Gilders et. al., 2016).
It is noteworthy that the above capital losses cannot offset revenue receipts that
Helen would earn from her profession. Further, as per ss. 108-10(1), capital losses
arising from collectible asset class must be adjusted only against the capital gains
arising from collectible asset class. If the same is not available in requisite quantity in
the present tax year, these are carried forward to future year (Krever, 2017).
4) Asset: Picture
All requisite information in relation to the asset has been summarised as exhibited
below.
 Purchase month is March 1987
 Sale date is 1st July 2018
 Purchase price for this asset is $ 470
 Sale price for this asset is $ 5,000
 Holding period : Greater than one year
In line with the discussion of previous assets, picture is also a type of collectible
asset. In regards to capital gains of these assets, a key requirement outlined in ss.
118-10(1) is that the asset should have been bought for a price not lower than $ 500.
For a collectible which violates the above condition, no CGT would be levied
irrespective of the capital gains or losses (Reuters, 2017). The picture fails to meet
the minimum purchase price threshold of $500 and thereby would not attract any
CGT.
Net capital gains/(losses) for Helen
Picture and painting sale do not lead to any taxable capital gains or losses. Amongst
the remaining asset, the sculpture has resulted in capital gains to the tune of $ 500.
Further, the antique jewellery piece leads capital loss of $ 1,000. Thereby, in total a
capital loss of $ 500 is realised which would be carried forward to the next year to be
offset against possible capital gains available through collectible assets sale.
(Deutsch et. al., 2016).
Question 2
Facts & Issue:
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The taxpayer in the given case is Barbara who happens to be known for economic
research and has the underlying skills for the same. She got an offer to write a book
on economics which she accepted. Further, the copyright of this book was sold for $
13,400. Also, the book, manuscript was bought by the library for a consideration
amount of $ 4,350. Finally, during the completion of the book, some interviews
manuscripts were collected for which a consideration of $3,200 was derived. The
objective is to determine if any of the payments that Barbara has received can be
categorised as personal exertion based income.
Law & Application:
The concept of personal exertion based income has been dealt with as per s. 6 of
ITAA 1997. This is any income which the taxpayer derives on the basis of conducting
an activity which relates to the underlying skill result in production of product or
service with commercial worth. Mere indulgence in the activity without commercial
value creation would not lead to income from personal exertion (Krever, 2017). Also,
reference ought to be given of relevant cases such as Brent vs Federal
Commissioner of Taxation (1971) 125 CLR which highlight the source of commercial
value should be the end product of the indulgence in the activity. Further, there are
some activities which act as a mode of transfer for knowledge and the proceeds are
paid for knowledge. Hence, in such cases, the income is not from mode of transfer
but the intellectual asset and thus not attributed to personal exertion (Woellner,
2014).
In case of Barbara, few pivotal facts are vital namely the lack of experience with
regards to book writing. As a result, Barbara has no literary skills which are
commercially desirable. Despite this fact, she obtains offer for book writing which
indicates that her knowledge about economics along with reputation are the real
assets which are delivering monetary worth. Writing in this case as a activity is
worthless as if Barbara writes about any subject except economics, it will have zero
value. Further, the proceeds of copyright also have worth on account of economics
and thereby the proceeds are not personal exertion based (Deutsch et. al,, 2016).
If the manuscript dealt with any subject besides economics and was written by
Barbara, it would have been worthless. Thereby, it is evident that the worth of the
manuscript is derived on account of her knowledge about economics. Thus, the
manuscript related proceeds are not the result of effort of writing. In relation to
research interview related manuscript, these directly relate to the skills of Barbara
who is a researcher. As a result, the act of indulging in these interviews provides
commercial value of the manuscript. Thereby, the proceeds from the interview
manuscript sale would be personal exertion related income (Gilders et. al., 2016).
Discussion of Alternative Scenario
The given situation highlights that the book has been written by Barbara on the same
subject but without any offer from publisher. She writes the book on her own without
any intention to sell but later after completion decides to sell. This essentially
represents an alteration of the underlying motive of profit which is applicable in the
previous scenario. However, despite the change in motive and absence of any profit
driving the writing of book, the act of writing would still essentially be a medium to the
source of the value which is her knowledge about economics. Therefore, the
proceeds that are derived from the sale of book and related rights would not produce
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income based on personal exertion as her literary skills is not the source of
commercial value in this case (Barkoczy, 2018).
Question 3
Facts & Issue:
A sum of $52,000 has been lent by Patrick to his son David who needs it for
business purpose. They have mutually agreed that this amount would be paid at the
end of five years. Further, Patrick made it clear that he did not intend any interest on
the amount given. The complete principal lent was repaid along with 5% extra
amount through cheque after a period of two years. The issue is to determine if the
given arrangement between father and son would result in any assessable income
for Patrick or not.
Law & Application
With regards to the cheque that has been handed over to Patrick, it is imperative to
note that the receipts ought to be sub-divided into two major components namely the
principal repayment and incremental amount.
 Principal Repayment – This component would not be levied any tax since it is
capital receipt. This component was earlier lent to David and this is not
income for Patrick as only the outstanding loan has been cleared by his don
through this payment (Reuters, 2017).
 Incremental Amount – This amount results is economic benefit to Patrick and
based on the given facts, it can possibly also be assessable if it is driven by
profit or money lending business (Woellner, 2014).
The incremental amount given by Patrick could lead to assessable income under the
following two scenarios.
 First Scenario: The amount give over and above by David is interest income
which may be ordinary income if Patrick runs a money lending business
where such transactions as enacted with David are common (s. 6-5 ITAA
1997). However, this scenario is not supported by the outlined facts. The key
issue with this proposition is that the lending transaction is quite different from
commercial lending transaction. This is because collateral is missing, no
formal agreement and no intention for interest income. Clearly, the given
transaction does not amount to commercial lending (Coleman, 2016).
 Second Scenario: It is not essential that an activity ought to be regular as
taxpayer can also undertake a plan or activity for deriving profit as highlighted
in s. 15-15 and this would lead to assessable income generation (Nethercott,
Richardson and Devos, 2016). This is also not valid for the arrangement
between Patrick and David since profit intention is lacking on the part of the
lender (Patrick) who declared at the time of lending that interest payment is
not required. Hence the given incremental amount is not assessable under s.
15-15 ITAA 1997.
It is possible that the incremental amount is exempt from tax which is possible when
the amount is given as gift. In order to establish the same various conditions outlined
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in tax ruling TR 2005/13 have been referred to. Since the cheque has been given to
father by David, hence the extra amount has change of ownership. Also, this amount
has been given by David despite Patrick indicating that the same need not be given.
This indicates the voluntary nature of the payment. Also, for this 5% amount, David
does not have any expectations from his father Patrick with regards to future. Finally,
Patrick would be benefitted by the underlying payment of incremental amount. Thus,
the incremental amount would be classified as gift (Gilders et. al., 2016).
Conclusion:
It can be concluded that the current arrangement between David and Patrick would
not lead to any assessable income generation for Patrick as one component of the
payment is principal repayment (capital receipts) while the other component of the
payment is gift (exempt income).
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References
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 25, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications, pp 178, 231
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia, pp. 226
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters, pp. 243-244, 324
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths, pp. 231, 302-303
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press, pp.167
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company, pp. 167, 245
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS, pp. 234, 278-279
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
pp. 145, 267
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