Taxation: Capital Gains Tax Implications and Personal Exertion Income

This article provides an analysis of the capital gains tax implications for different assets, including antique impressionism painting, sculpture, antique jewellery, and picture. It also discusses the concept of personal exertion income in taxation and explores the tax treatment of proceeds from book writing and financial assistance received from a family member.

TAXATION
STUDENT iD:
[Pick the date]

Question 1
The current scenario pertains to the taxpayer Helen who during the given year has
disposed the following four assets whose capital gains tax implication ought to be
outlined considering the given case facts and reference to appropriate statutory law.
1) Asset 1: Antique Impressionism Painting
The relevant information pertaining to this asset is summarised below.
 Date of purchase = February 1985
 Price of purchase = $ 4,000
 Date of sale = December 1, 2018
 Sale price = $ 12,000
 Nature of asset = Long term (As holding period exceeds one year)
A key requirement with regards to levying capital gains tax has been outlined in
s.149(10) ITAA 1997 as per which no CGT would be levied on asset lying under the
category of pre-CGT assets. These are typically those assets which are outside the
ambit of CGT as they were purchased at a time when capital gains were not taxed.
The cut off data is September 20, 1985 and any asset purchased before this date
would be pre-CGT asset (Austlii, 2019). The given asset purchased by Helen’s father
is a pre-CGT asset and thereby would not result in any CGT related liability for
Helen.
2) Asset 2: Sculpture
The relevant information pertaining to this asset is summarised below.
 Date of purchase = December 1993
 Price of purchase = $ 5,500
 Date of sale = January1, 2018
 Sale price = $ 6,000
 Nature of asset = Long term (As holding period exceeds one year)
As outlined in ss. 108(10) ITAA 1997, sculpture would be classified as a collectible
asset which is a CGT asset. The trigger for computation of capital gains/(losses) is
provided by the sale of the asset which constitutes a A1 CGT event as mentioned in
ss. 104(5) ITAA 1997. The following formula would be used as per ss. 104(10) for
the computation of capital gains/(losses) on asset disposal (CCH, 2013).
Capital gains on sculpture = $6,000 - $5,500 = $ 500
Considering the asset is long term, Division 115 ITAA 1997 would allow lowering of
CGT liability by levying of discount method but the same would be applied at the edn
after adjustment of any capital losses (if present) (Barkoczy, 2018).
3) Asset 3: Antique Jewellery
The relevant information pertaining to this asset is summarised below.
 Date of purchase = October 1987
 Price of purchase = $ 14,000
 Date of sale = March 20, 2018
 Sale price = $ 13,000
 Nature of asset = Long term (As holding period exceeds one year)
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As outlined in ss. 108(10) ITAA 1997, antique would be classified as a collectible
asset which is a CGT asset. The trigger for computation of capital gains/(losses)
is provided by the sale of the asset which constitutes a A1 CGT event as
mentioned in ss. 104(5) ITAA 1997. The following formula would be used as per
ss. 104(10) for the computation of capital gains/(losses) on asset disposal
(Gilders et. al., 2016).
Capital losses on antique jewellery = $14,000 - $13,000 = $ 1,000
The capital losses on the above collectible asset cannot be adjusted the other
taxable income of Helen. It can only be used to offset the capital gains derived from
sale of collectible assets. If such gains are not available in the current year, then the
pending losses would be carried to the next year and this would continue till the
losses are not fully adjusted (Krever, 2017).
4) Asset 4: Picture
The relevant information pertaining to this asset is summarised below.
 Date of purchase = March 1987
 Price of purchase = $ 470
 Date of sale = July1, 2018
 Sale price = $ 5,000
 Nature of asset = Long term (As holding period exceeds one year)
As outlined in ss. 108(10) ITAA 1997, picture would be classified as a collectible
asset. An essential condition for capital gains to be taxable on collectible is
highlighted in s. 118(10-1 as per which the purchase price must be atleast $ 500.
This condition is not satisfied for the picture and thereby no capital gains tax would
apply (Reuters, 2017).
Net CGT position
Only two assets have capital gains/losses which would potentially lead to CGT
implication.
Capital gains on sculpture sale = $ 500
Capital losses on antique jewellery sale = $ 1,000
Hence, net capital losses for Helen = $ 500
As there is overall capital losses, hence no CGT implication arises. The losses would
be taken forward to future tax years to offset against future capital gains from
collectible asset disposal (Deutsch et. al., 2016).
Question 2
Case Facts: The given taxpayer is renowned as an economic researcher besides a
commentator. In the given case, she has been offered to write a book which is gladly
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accepted by her. On account of the account, the following three proceeds are
realised by her.
 $ 13,400 for copyright of book
 $4,350 for the book manuscript
 $3,200 for the interview manuscript collected during the book writing
In wake of the above payments, the aim is to highlight if all or any of these payments
are arising on personal exertion.
Analysis: As per s. 6 ITAA 1997, personal exertion income would be earned by the
taxpayer when he/she engages in any activity which on account of the underlying
skill of the taxpayer leads to enhancement or creation of value in commercial terms.
If the commercial value does not get created or enhanced during the underlying
activity which the taxpayer is indulging in, then no income from personal exertion is
derived (Krever, 2017). There are scenarios where indulgence in an activity by a
taxpayer may only act as a medium of transferring an asset which is sole source of
value in commercial terms. This has been highlighted in the verdict in Brent vs
Federal Commissioner of Taxation (1971) 125 CLR case. It was held that the activity
of engaging in interviews is not the source of commercial value as it is a way of
expression of information which existed before the interview. Thus, in this case the
proceeds were declared as capital and the activity of giving interview was considered
to be worthless (Wollner, 2014).
The understanding in the above case can be extrapolated to this scenario involving
Barbara. It is known that Barbara has no experience or reputation in writing books.
Despite the same, a publisher gave an offer regarding book writing. Clearly, the
publisher is not interested in the literary skills but the economics knowledge which
Barbara already has before the writing of book. Hence, writing is only a mechanism
for transfer of this knowledge and hence the proceeds for book and its copyright
would not be related to personal exertion (Deutsch et. al,, 2016).
With regards to manuscript related purchase by the library, it is noteworthy that the
act of writing is not the source of the money paid to purchase the same. The fact that
this is related to Barbara who is a famous economics researcher is the underlying
source of value and hence the proceeds would not be considered as those derived
from personal exertion (Coleman, 2016).
With regards to interview manuscript, there would be a change in stance as these
have been conducted during the book writing process. Further, considering Barbara
is a researcher, it would be expected that the commercial worth of the interview
manuscripts is on account of her skills a a researcher. As a result, the value for
these transcripts was created on account of personal exertion and thereby the
proceeds would be regarded as income from personal exertion (Gilders et. al.,
2016).
Alternative Scenario: There is a change in the scenario a Barbara writes the book on
economics on her own without any offer from any publisher. It is only later that she
decides to publish the same. One key difference between the two scenarios is that
the profit motive is not present in the current scenario which was present in the
precious scenario. However, one thing does not alter is that the value of book is not
derived from the writing since it is a medium of exchange of valuable information. In
this scenario, when the book is purchased later, the consideration for the buyer is the
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knowledge contained and not the writing skills. Hence, the proceeds would still not
be labelled as income from personal exertion (Barkoczy, 2018).
Question 3
Case Facts: David asks for financial help from his father Patrick to the tune of $
52,000 which was extended. However, this money had to be returned after five year
period. In actuality, the full amount along with 5% additional amount was given as
cheque by David to Patrick only after two years. The objective is to outline the
potential tax implications for Patrick on account of the above arrangement.
Analysis : For the cheque received by Patrick from David, it is advisable to divide the
proceeds into the following two categories.
1) Principal – David was given the principal amount and the same has now being
returned to Patrick, Clearly since in this transaction, lent capital has been
repaid back, thereby this proceed would be capital in nature without any
implications of tax as only revenue receipts are taxed (Woellner, 2014).
2) 5% Additional Amount – This is the key amount which requires analysis as it
could potentially be taxable as this payment is economic benefit which Patrick
has derived from the lending transaction. In order to opine on the correct tax
treatment of this, it would be imperative to consider the relevant facts related
to lending (Reuters, 2017).
For the extra amount to be assessable, there are the following two possibilities.
 Possibility 1: It is possible that Patrick may have a money lending business in
place. In this scenario, the incremental amount would be interest income
which would be assessable as per s. 6(5)-1 ITAA 1997. However, the given
facts do not lend support to this conclusion. This is because the manner in
which the lending has been done, it suggests that the commercial aspect is
lacking. There is no intention to derive profit, absence of collateral and
enactment of a formal agreement related to lending (Coleman, 2016).
 Possibility 2: There are instances where taxpayer enters into certain specific
transactions so as to derive profits (s. 15(15)). These are not regular but
isolated transaction(Nethercott, Richardson and Devos, 2016). Even if it is
assumed that lending to David was an isolated transaction, then also the
motive to profit is lacking as he has communicated his intention not to take
any interest to David. Thereby, the extra amount is not assessable under this
possibility also
A possibility where the extra proceeds would not be assessable income arises if it is
proved to be gift from son. This has been carried below as the conditions outlined for
recognition as gift in T2005/13 seem to have been fulfilled (Gilders et. al., 2016).
 Actual ownership change must accompany the transfer (The cheque has
been given to Patrick and thereby for the incremental amount, the transfer of
ownership has taken place).
 The voluntary nature of the transfer should be present (Patrick has made
myself clear regarding no intention of interest income but still David paid the
same)
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 Reciprocal expectation from transfer must not arise (The incremental payment
made by David to Patrick is not driven by any future expectations from father
on account of payment made).
 The transfer must benefit the transferee (The receipt of extra amount is
advantageous to Patrick)
Conclusion: On account of the above discussion, it would be fair to conclude that the
5% extra amount paid to Patrick by his son is in form of gift which does not lead to
any assessable income. Additionally, the principal repayment is also capital receipts
and hence it can be inferred that the existing arrangement of Patrick with David does
not result in any assessable income for father (Patrick).
References
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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 24, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications, pp 168, 209-210
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia, pp. 187, 212
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters, pp. 201-202, 298
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths, pp. 167, 231
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press, pp.145
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company, pp. 153, 230-231
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS, pp. 199, 256-257
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
pp. 176, 231
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