Taxation: Capital Gains Tax Consequences, Income from Personal Exertion, Tax Implications for Lender

This article discusses the capital gains tax consequences for liquidating capital assets, income from personal exertion in relation to book writing and manuscript sale, and tax implications for a lender. It provides an analysis of the tax implications and relevant sections of the ITAA 1997.

TAXATION
STUDENT iD:
[Pick the date]

Question 1
For the scenario presented, Helen is the taxpayer. She has liquidated some of her
capital assets as she needed capital for her fashion designing business. Any capital
gains tax (CGT) consequences for these transactions have to be outlined.
Capital Asset - Antique Painting
It is known that the painting under consideration has been bought in February 1985
and liquidated on December 1, 2018. The cost price is $ 4,000 while the sale price is
$ 12,000.
The key concept to be indicated with regarded to the given asset is pre-CGT asset
which would refer to those capital assets which were purchased in an era when
capital gains were not subject of any CGT. This would refer to the time period before
September 20, 1985. The pre-CGT assets have been highlighted in ss. 149-10 (ITAA
1997) and their significance stems from the fact that any capital gains realised on the
liquidation of such assets would be exempt from CGT purview (Austlii, 2019). The
painting was bought by father of taxpayer in the time period when CGT was not
applicable and hence this is a pre-CGT asset which would be immune from CGT
application.
Capital Asset: Sculpture
It is known that the sculpture under consideration has been bought in December
1993 and liquidated on January1, 2018. The cost price is $ 5,500 while the sale price
is $ 6,000.
A class of asset is defined in ss. 108-10 which is named “collectibles” and contains
antique, painting, works of art, books, sculpture etc. The sale of the given asset
would lead to trigger for CGT computation in the form of A1 CGT event (s. 104-5)
and the suggestive approach to achieve the same is outlined in s. 104-10. This has
been implemented for the given asset as illustrated below (Nethercott, Richardson
and Devos, 2016).
The above capital gains would first be offset with any capital losses that may arise.
Afterwards, discount method under s. 115-25 ITAA 1997 may be applied to minimise
the taxable CGT gains (Barkoczy, 2018).
Capital Asset - Antique Jewellery
It is known that the jewellery under consideration has been bought in October 1987
and liquidated on March 29, 2018. The cost price is $ 14,000 while the sale price is $
13,000.
A class of asset is defined in ss. 108-10 which is named “collectibles” and contains
antique, painting, works of art, books, sculpture etc. The sale of the given asset
would lead to trigger for CGT computation in the form of A1 CGT event (s. 104-5)
and the suggestive approach to achieve the same is outlined in s. 104-10. This has
been implemented for the given asset as illustrated below All requisite information in
relation to the asset has been summarised as exhibited below (Gilders et. al., 2016).
2

The capital losses that have resulted for this asset would be adjusted against the
capital gains available on other collectible asset disposal such as sculpture. Only if
the current year capital gains do not suffice would the capital losses be shifted to the
next year. However, these would not be adjusted against revenue receipts for Helen
(Krever, 2017).
Capital Asset: Picture
It is known that the picture under consideration has been bought in March 1987 and
liquidated on July 1, 2018. The cost price is $ 470 while the sale price is $ 5,000.
Picture also belongs to the collectible asset type. A particular requirement for levying
of CGT on capital gains derived from liquidation of collectible asset is that the
underlying cost base must be higher than $ 500 in line with ss. 118-10(1). Thereby,
for a collectible asset with cost base lesser than $ 500 would not attract any CGT
(Woellner, 2014). This is the case with the underlying asset whose purchase price is
$ 470 and hence irrespective of the capital gains, these would be 100% exempted
from ambit of CGT.
Total capital gains/(losses)
Only two assets namely sculpture and jewellery have capital gains(/(losses) with
CGT consequences. While sculpture has a capital gain of $ 500, the capital losses
associated with disposal of jewellery would be $ 1,000, thereby leading to the capital
loss of $ 500. Assuming that there are no other collectible assets that were liquidated
during the year, this loss is forwarded to the next tax year to be offset (Deutsch et.
al., 2016).
Question 2
The current situation corresponds to Barbara who is a commentator besides being
an economic researcher. As per the facts, she has written a book titled “Principles of
Economics” after she got a writing offer from a publisher. Owing to acceptance of
this offer, she completed the book and has been able to obtain various proceeds.
One of these relates to proceeds in relation to writing along with copyright of the
content. Another payment received by Barbara relates to proceeds in regards to
manuscript sale. Finally, there is a payment received on account of the interview
manuscript sale. In wake of these payments, the key issue is to outline if any of
these would be categorised as income from personal exertion.
In reference to s. 6 ITAA 1997, personal exertion related proceeds can only be
derived if the taxpayer not only engages in a particular activity but the same leads to
commercial value being created in the process. Mere involvement in the activity in
the absence of value creation would not lead to proceeds being linked to personal
exertion (Coleman, 2016). Further, there are certain situations when a particular
activity is undertaken in order to facilitate the transfer of asset which existed even
3

before the activity. Thus, the proceeds derived in such transactions are not termed
as personal exertion related proceeds as in the absence of asset, the activity would
not have any value. A leading case law in this regards is Brent vs Federal
Commissioner of Taxation (1971) 125 CLR. The various payments received by
Barbara have been analysed in the wake of the above discussion (Krever, 2017).
Payment from book writing and associated sale of copyright – It is given that Barbara
has never written any book in her past and still the publisher approached her with the
offer for book. The offer was given not for literary skills but her profound knowledge
of economics which has been garnered over the span of her career. Thus, the writing
activity is only a facilitator in the transfer of this knowledge (intangible) in the form of
writing (tangible). The writing activity in isolation has no worth for Barbara and
thereby the underlying proceeds are not labelled as income from personal exertion
(Woellner, 2014).
Payment from book manuscript sale – The manuscript just like the book also
attributes the underlying commercial value to the key asset i.e. knowledge of
Barbara. It has no contribution from her literary skills. This can be demonstrated from
the fact if she had written on any subject which was unrelated to economics, the
manuscript would not have held any value. Hence, the key asset is economics
knowledge. Hence, the proceeds in this case cannot be attributed to personal
exertion of Barbara (Deutsch et. al,, 2016).
Payment from interview transcript sale – This payment is unlike the other payment
as this relates to the direct skills possessed by Barbara. It is known that she is a
researcher in economics and thereby the interviews which have been conducted as
part of the book writing would have standalone commercial skills since Barbara’s
skills in this regards would be superior than others. Hence, the proceeds from this
sale would be labelled as those arising from personal exertion (Gilders et. al., 2016).
Book writing before sale of publisher
Under the revised situation, Barbara does not obtain an offer but writes the book in
her spare time. While writing the book, she had no motive to earn profits from the
same. It was only later that she made a decision to sell the book. Thus, one key
difference between this scenario and the previous is that no profit motive is driving
the underlying activity of writing. However, a key similarity is that the primary activity
is writing which like previously does not act as a the source of commercial value. In
this case also, the publisher who would purchase the book later only because of the
real asset which still remains Barbara’s knowledge on the topic. Thus, there would
not be any alteration in the treatment of proceeds from the sale of book which would
fail to be labelled as personal exertion related proceeds (Barkoczy, 2018).
Question 3
The relevant facts describing the arrangement between father (Patrick) and
son(David) clearly highlights that Patrick is the lender of $ 52,000 to David with a
promise that the money would be returned within 5 year period. Further, the lender
(Patrick) has made it clear that there is no intention to draw any interest income on
the lent amount. The borrower (David) manages to return the complete amount
within a two year period. However, he also pays an additional amount to the tune of
4

5% of principal. In wake of these receipts, the tax implications for the lender (i.e.
Patrick) need to be discussed.
It is evident that the payment made by David essentially comprises of two types of
receipts. One of these is principal repayment which would not lead to any tax
implications considering that the same quantum of money was lent by Patrick which
is now being paid back by David. This would therefore be proceed of capital nature
which is not taxable as only revenue receipts are taxed under personal income tax.
However, the issue of concern is the extra amount (5% of principal) which has been
paid by David even though Patrick did not have any expectations for the same
(Nethercott, Richardson and Devos, 2016).
There are two possible outcomes with regards to this amount that David has paid on
a voluntary basis.
 Contribution to assessable income – There are two likely sections under
which the incremental proceeds may be classified as assessable income. One
of these pertains to s.6-5 where the proceeds correspond to ordinary income.
This situation would emerge wherein when the lender (Patrick) regularly
enacts such transactions which lead to receipt of such payments (Reuters,
2017). However, the scenario facts do not reflect on this possibility. Also, the
nature of lending is not commercial which is apparent from the mode of
transaction enactment. No collateral has been asked and even a formal
agreement for lending has not formed which imply the non-commercial nature
of transaction. Thus, the proceeds cannot be categorised as ordinary income.
The other option is for assessable income being derived as per s. 15-15
ITAA1997 which refers to the income derived from an isolated profit
undertaking plan. This would also not apply here as Patrick did not want to
earn any interest income which he made clear at the time of lending money
only (Krever, 2017).
 Contribution to non-assessable income – Another possibility that arises is that
the payment is merely a gift from a son to a father for helping him out in times
of need. For this to be valid, conditions outlined in TR 2005/13 need to be
satisfied by the current transaction (Coleman,2016).
1) Patrick specifically mentioned that he did not wanted any additional
payment over and above the principal repayment. Still, voluntary payment
of 5% was made by son David.
2) For the amount transferred to Patrick by David, there are no additional
reciprocal expectations of David from Patrick.
3) Owing to the transfer of 5% amount, financial benefit has been derived by
Patrick and thereby the gift has benefitted the recipient.
4) As David has given a single cheque containing all the amount and the
same has been given to Patrick, then change of ownership with regards to
gift has taken place.
Considering the above discussion, it would be appropriate to conclude that the
incremental payment Is gift and thereby would not attract any tax liability. Hence, it is
fair to conclude that no tax liability has arisen for Patrick on account of receipt of
payment from David.
References
5

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 31, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications,
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia,
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company
Reuters, T. (2017) Australian Tax Legislation 2017,4th ed. Sydney. THOMSON
REUTERS,
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
6