Taxation Theory, Practice and Law: Capital Gain, Personal Exertion Income and Gift Taxation Law

This report discusses the provisions related to capital gain tax, income from personal exertion, and gift taxation law in Australia. It includes calculations of net capital loss or gain, personal exertion income, and taxable income. It also explains the rules and tests to find personal exertion income and the limits of gift tax liability.

Taxation theory, Practice
and Law
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Contents
Contents......................................................................................................................................2
INTRODUCTION.........................................................................................................................3
Question 1...............................................................................................................................3
Question 2...............................................................................................................................6
Question 3...............................................................................................................................7
CONCLUSION............................................................................................................................9
REFERENCES..........................................................................................................................10
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INTRODUCTION
Any income generated by an individual from the business or sales of capital goods is liable to
pay income tax to the taxation authority in the assessment year. This report is made upon the
taxation, theory and practice related provisions. It consists of three questions which are
related to capital gain tax, income from personal exertion, and income tax. In the first question
there are several transactions done by Helen, which shows capital gain or loss. While the
second question mention about income from personal exertion of Barbara. Third question
emphasis upon the treatment of assessable income of Mr Patrick.
Question 1
Calculation of net capital loss or gain of Helen for the assessment year
Capital gain tax is levied on the capital assets which are sold during the current assessment
year. Thus, capital gain will exist only if selling price is higher than the buying cost ( Goldin,
2015). Here in the given case, if Helen sold out its purchased asset in current year itself and
receive capital gain then Helen have to pay tax on the profit received by selling out its assets.
Similarly in case if Helen suffer from capital loss by selling out assets then such loss will be
moved forward and will be set off with future capital gain which Helen will receive. So
according to question it can be seen that Helen its assets in current year itself and which has
resulted in the form of capital gain to Helen (Woellner, et. al., 2014). Thus, in this case Helen
will be entitled to pay upon capital gain which she received from selling out assets in current
year itself. The main reason behind this is that separate provision in respect of capital gain is
being maintained as per ATA (Australian tax authority). Moreover, capital gain also leads in
shifting of tax burden upon assessee or a tax payer. According to Australian income tax
authority department after 20th September 1985 those assets which are acquired will be
considered under capital gain tax regime. Furthermore, specific rate is not being specified by
Australian income tax authority department upon capital gain (Brabazon, 2019). But side by
side in case if a tax payer retain assets for more than 12 months or for 12 months the
assessee will be lived to pay tax up to 23.5%. In addition to this if discount is being availed by
tax payer then also a tax payer will be liable to pay up to 23.5% tax. Whereas for those
assessee who retain assets before 21st September 1999 are not liable to for such type of 50%
discount facility upon taxable income. If an assessee purchase asset before aforementioned
date then in that case instead of discounted method indexation method is being applied. For
the purpose of calculating the capital gain/loss also both the discounted and indexation
method is being used and this take place only if an assessee will make purchase of an asset
before 21st September 1999. Similarly if an assessee hold out assets for a very long time
period (12 or more than 12 months) the none of the discounted and indexation will be applied
(Auerbach and Hassett, 2015). But here in this question an asset are being made purchased
before 21st September 1999, so in order to calculate capital gain/loss indexation method will
be used not the discounted method. Therefore elaboration of indexation method is being done
below:
Indexation method: Acquired assets value could be easily calculated by an assessee using
indexation method. Beside this, purchase cost value can also be easily examined with the
help of this method. In addition to this, only indexation method can be used if a CGT event
happened to an asset acquired by an assessee before 21st September 1999 and discount
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method cannot use (Evans, Minas, and Lim, 2015). Any asset purchased after 21st September
1999 and asset hold for 12 months or more then discount and indexation method both can
use and assessee can chose nay of them which render could help to impose low tax.
Therefore, by dividing the CPI for quarter in which expenditure are being incurred, indexation
factors can be easily calculated.
Each transaction of Helen is being briefly explained below:
1. Before the establishment of Australian income tax, Helen purchased of an asset on
February, 1985 It means that Helen purchased before 21st, September 1985, which
can be classified under pre capital gain tax assets and will further be classified as
those assets which are term to be exempted. Thus, in this case no tax rate will be
charged by Australian income tax authority on an asset (Edmonds, 2015).
2. Before 21st September, Helen brought of historical sculpture which was sold on 1
January 2018 for $6000. So as per this case, for calculating the buying price value
instead of discounted method, indexation method will be used because asset were
purchased before 21ste September 1999.
Particulars Amount $
Selling Price 6000
Purchased price 10120
Capital loss/gain (4120)
Working Note:
With the help of indexation method buying cost value were ascertain as well as cost of
acquisition were also easily calculated.
Cost of buying assets: 6/61.2= 1.838*5500=10120.
By using indexation method acquisition cost were measured for the asset purchased at $5500
on December 1993. As the acquisition cost of product were term to be $10120 which
specifies that acquisition cost is term to be more than selling price. Thus, it can be accounted
that an assessee had to suffer from $4120 of loss.
3. An assessee purchased Jewellery for $14000 on October 1987, for which indexation
method were used as the asset were made purchased before 21st September 1999.
Therefore capital gain calculation were done with the help indexation method and is
being explained below:
Particulars Amount $
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Selling Price 13000
Purchased price 33117
Capital loss/gain (20117)
Working Note:
Purchased price of an asset: 112.6 /47.6*13000=$33117.
Therefore, the transaction loss suffered by an assessee were of $ 20117.
4. For $470 on March, 1987 assessee made purchase of a picture and it was acquired
before 21st September 1999. So in this case as well, indexation method will be applied
to calculate capital gain/loss.
Particulars Amount $
Selling Price 5000
Purchased price 1177
Capital loss/gain 3822
Working Note:
Purchased price value of an asset: 113.5/45.3*470=1177
Acquired asset for $470 by an assessee has reached to $1177 and further sold out the asset
for $5000. This specifies that Helen has resulted to achieve a capital gain for $3822 by selling
out the purchased assets.
Thus, it can be concluded that from all the four transaction first three transaction shows that
an assessee suffers from loss, but in last fourth transaction assessee resulted in Capital gain
profit. Those losses which assesssee suffered on regular basis will be set off with current year
profit. Thus, remaining loss will be carried out forwards so that when again an assessee will
result in capital gain then whole loss will get set off (Evans, Minas, and Lim, 2015). Hence the
whole summary of all four transaction of an assessee are being given below:
Particular Amount $
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1 Exempted XX
2 Capital Loss (4120)
3. Capital Loss (20117)
4. Capital Gain 3822
Total capital loss (20415)
Question 2
Exchange of money or some equivalent between two individuals or group of people for
providing some goods or service is referred as income.
There are 3 major types of income which are:
 Taxable income
 Tax-Exempt and Tax-Reduced income
 Disposable and Discretionary Income
According to ITAA 1997 provision, personal exertion income referred as the income earned
by personal efforts, skills, knowledge and experiences.
Personal exertion income (PEI)
It doesn’t matter whether an individual is working for a company, in partnership or as a trust,
income will still be considered as personal exertion income as individual render services of
their own skills or experiences (Carney, Gedajlovic and Strike, 2014).
There are many rules given to find your personal exertion income with the help of which easily
PEI can be calculated.
 Results Test
 The 80% Rule
 Unrelated client test
 Employment test
 Business premise test
Every personal exertion income can be considered as income or earning, but the vice versa
for the same is not necessary.
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CASE 1
As per the case study of ‘Brent v FCT(1971) 125 CLR 418’ (Snape,2015) in which writer sold
copyright of his book named ‘Husband story of life’ to a newspaper agency. So the money
earned by the writer can be referred as personal exertion income because the book was
written by his own knowledge and experiences which does not involve any other individual or
group as a part of this book (Braunerhjelm and Eklund, 2014). So similarly the amount
earned i.e. $13,400 by writing books is definitely considered as personal exertion income.
Barbara writer of a book named as ‘Economics Principles’ sold his book to Eco Books Ltd
library for which she received $4350 from the publisher. Following this, Barbara had many
interviews for gathering multiple manuscripts while working for the book which in return gave
her a huge amount of $3200 which can also be considered as her personal exertion income.
All the above mentioned cases are the proof of the statement i.e. personal exertion income is
the income earned by personal skills, experiences (Pellegrinoa, Perbolib, and Squillerod,
2019).
CASE-2
Signing a contract does not play any role in personal exertion income as Barbara has its own
choice of writing the book whenever she wants.
Signing a contract is nothing but just buying patent for your book (doesn’t matter before or
after writing books) to avoid copyright issues which have nothing to relate with personal
exertion income. Barbara will get her PEI only after publishing the book, while signing of
contract can be done anytime as it depends on your matter of choice. She could have her
personal exertion income even if she did not sign the contract also, because the work she has
done was still considered as her own based on her skills and experiences ( Weber, 2014).
Wherever or whenever Barbara will sell her own skills and experiences her income will term
to be personal not the capital gain (Faccio and Xu, 2015).
Question 3
Gift Taxation Law has elaborated that if any asset transferred by parent to his son/ daughter,
will be taxable in the hand of parent itself. As this would not counted as transfer and does not
taxable in the hand of son/daughter. ‘Hayes v FCT (1956) CLR 47’, mentioned that if
assessee transfer shares to his associates without paying anything or no formal agreement
between them, in that case, transfer does not treated as transfer and taxable in the hand of
assesse (Smith, 2015).
According to The Australian Income Tax Authority, If the parents help their children financially
by rendering them cash in the form of loan. Then as per this case the money received by the
parents from their Daughters or Sons will be taxable income of their parents.
Similarly to start up a business, Patrick helps his Son by giving financial help i.e. ($52000) as
a loan. After five years, David (Son) returned the amount to Patrick of $6000 ($58,000-
$52,000) would be termed as taxable income. So the Patrick son gives a taxable amount to
Patrick because the amount which he gets from Patrick is a loan amount not a gift.
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However, with interest the whole amount which will be received by Patrick at the end of fifth
year will be will not be considered as accessible income but will be term to be an taxable
income for Patrick . Thus, as per Australian income tax authority department the excess
amount which Patrick will receive from his son over a loan which was rendered by Patrick to
his son will be charged under the heading of taxable income (Smithies and Uppal, 2019).
After re-assessment of above situation in case when Patrick render loan to his son without
any contract signing and without demanding for any kind of commission or security and
simply just do a verbal communication with son. Then in such type of case the excess
returned value by son to Patrick of $52000 will not be considered as taxable income and nor
that income will term to be gift tax liability income. But the repayment which will be done by
Patrick son to Patrick after 2 years along with interest of $2400 (S6, 000/5*2) will be
considered under the head of taxable income of Patrick account (Martin, 2019).
In order to be ensured off that income liability accessibility does not get affected then an
assessee must take cheque method into consideration. Beside this as per the view point of
Australian income tax authority intention of all parties matters a lot. In addition to this it can be
said that payment of pension can also get affected if the income will term to be under gift tax
liability and this can result an outcome of assessable income increment of Patrick. Certain
limit are being set by Australian income tax authority in respect of gift tax liability and such
limit is that an assessee can avail up to $10000 per month or $30000 per annum which ever
will be less. In case if gif tax liability limit get exceeded than in assessment year it would b
considered as assessable income for parent (Minas, Lim, and Evans, 2018).
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CONCLUSION
From the above mentioned cases, it can easily conclude that various detailed information on
Australian Income Tax authorities and their terms and conditions are discussed in this report.
Capital gain provisions are used in question one, while in the second question, provisions
related to personal exertion income is discussed. In third case, lastly it is being discussed that
how assessable income are being settled out in an appropriate manner as per Australian
income tax authority. Finally it is concluded that any income which covers under Australian
taxation law then the assesse is liable to pay tax on such income.
.
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REFERENCES
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American
Economic Review, 105(5), pp.38-42.
Brabazon, M., 2019. International Taxation of Trust Income: Principles, Planning and
Design.Cambridge University Press.
Braunerhjelm, P. and Eklund, J.E., 2014. Taxes, tax administrative burdens and new firm
formation. Kyklos, 67(1), pp.1-11.
Carney, M., Gedajlovic, E. and Strike, V.M., 2014. Dead money: Inheritance law and the
longevity of family firms. Entrepreneurship Theory and Practice, 38(6), pp.1261-1283.
Edmonds, R., 2015. Structural tax reform: What should be brought to the table. Austl. Tax
F., 30, p.393.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an
alternative way forward. Austl. Tax F., 30, p.735.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative
Analysis, 50(3), pp.277-300.
Goldin, J., 2015. Optimal tax salience. Journal of Public Economics, 131, pp.115-123.
Martin, F., 2019. Unincorporated associations: Legal and tax consequences. Taxation in
Australia, 53(8), p.420.
Minas, J., Lim, Y. and Evans, C., 2018, August. The impact of tax rate changes on capital
gains realisations: evidence from Australia. In Australian Tax Forum (Vol. 33, No. 4).
Pellegrinoa, S., Perbolib, G. and Squillerod, G., 2019. Balancing the Equity-efficiency Trade-
off in Personal Income Taxation: An Evolutionary Approach.
Smith, J.P., 2015. Australian state income taxation: A historical perspective. Austl. Tax
F., 30,p.679.
Smithies, J. and Uppal, S., 2019. Australia. In Cultural Governance in a Global
Context (pp.127-158). Palgrave Macmillan, Cham.
Weber, R., 2014. Tax increment financing in theory and practice. In Financing economic
development in the 21st century (pp. 297-315). Routledge.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Australian Taxation
Law 2014 (pp. 1-81).
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