Taxation Law Assignment: Australian Income Tax and Case Studies

This assignment explores Australian taxation law, focusing on personal income tax, capital gains tax, and royalty income. It examines the tax implications of various scenarios, including the sale of assets like paintings and sculptures, and the tax treatment of royalty income from intellectual property and business income. The assignment delves into case studies such as Stanton vs. FCT and McCauley vs. FCT to illustrate key concepts. Additionally, it covers the tax implications of loans to family members, referencing the Barry and Lorraine vs. his son case, emphasizing the importance of formal agreements. The assignment provides a comprehensive overview of Australian tax law, including deductions, capital gains tax, and the taxability of different income sources.

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TAXATION, THEORY, PRACTICE AND LAW

Table of Contents
Abstract............................................................................................................................................................3
Introduction......................................................................................................................................................4
Body of Assignment..........................................................................................................................................4
Answer 1.......................................................................................................................................................5
Sale of Impressionism Paintings...................................................................................................................5
Sale of Historical Sculpture...........................................................................................................................5
Sale of Jewellery...........................................................................................................................................6
Sale of Picture...............................................................................................................................................6
Answer 2...........................................................................................................................................................6
Tax implication when Income is from Barbara’s Self Exertion......................................................................6
Stanton vs. FCT.........................................................................................................................................7
Tax Implication when Barbara sells its copyright to Eco Book......................................................................7
McCauley vs. FCT......................................................................................................................................7
Answer 3.......................................................................................................................................................8
Barry and Lorraine Vs his son (Murry Berghan)........................................................................................8
References........................................................................................................................................................9

Abstract
In this paper, we are going to discuss the effect of different provision of taxation on
different types of income as per the Australian law for personal income. Generally, there
are three types of income, which includes Business income, Personal income and capital
gain income. Income tax is payable on the income. The tax rate on the income is
depending on the type of income and also in case of personal income, the tax rate is
depending on your income. Generally, Income tax rate would be higher on higher income
and lower on lower income. Here, we are going to discuss the provisions relating to Capital
gain, taxability of Royalty income and Loan to family members. We are also going to
discuss case study relating to royalty income and loan to family member.

Introduction
Income tax is tax levied on the income earned. It is the main source of revenue for any
government. It is the tax on income, whether it is personal income or business income or
capital gain. Business income is the income earn by business. All the business shall pay
tax on its earning (Earning for any business is Income minus expenses). The entire
individual shall pay tax on their personal earnings like Wages, Rent etc. Tax is also to be
paid on sale of capital assets, which is called Capital gain tax. The tax rate on capital gain
is same as your normal income tax rate, but you will be able to get the discount of 50% on
your capital gain after deducting capital loss, if any. But if you are company then, the
capital gain tax rate is 30%, Company will not be able to get the 50% discount. If you are
SMSF, Capital gain tax rate would be 15% and it is eligible for 33.33% discount instead of
50% in case of individual. Income tax rate is depending on earning of individual.
Individuals who are earning higher income will fall into higher tax rate and vice versa.
Body of Assignment
 Income tax is tax on income earned. It is imposed by the federal government. On
individuals, income tax is levied on progressive basis. Individual having higher
income will pay more income and individual having lower income will pay lower tax.
 FBT is the Fringe benefit tax, which payable by the organisation on the benefits
they are paying to its employee.
 GST is the tax payable on supply of goods and services by the business. Business
liable to pay GST shall have to lodge quarterly and monthly based on their
Turnover.
 Generally all the business having turnover more than the limit specified shall have
to get the register and shall have to lodge the BAS.
 Individual having income above the specified limit need to file annual return of tax to
the federal government.
 Capital gain tax is tax on gain on sale of capital assets.
 Below assets are exempted from capital gain tax
- Main Residence
- Car or motor cycle
- Depreciable assets solely use for taxable purpose like business equipment.
- Any asset acquired before September 20,1985.
- Collectibles including art, jewellery, stamps, antiques or collectible vehicles
acquired for upto $500

Answer 1
Sale of Impressionism Paintings
 Any Assets acquired on or before 20 September,1985 is known as Pre CGT assets
and it is exempted from capital gain tax.
 Collectibles acquired having cost of acquisition of less than $500, including art,
jewellery, stamps etc held for personal enjoyment.
 Hence, Capital gain on the sale of Antique impressionism paintings is exempted
from capital gain tax.
Sale of Historical Sculpture
 Historical Sculpture: Any collectibles acquired after September 20, 1985 and having
value of more than $500, the gain on sale of those assets is taxable under the head
capital gain.
 Hence, here Historical sculpture was purchased by Helen in December 1993 of
$5500, which is again more than $500.
 Here, Helen can use Indexation method or she can use Discount method, if she use
discount method, capital gain tax would be $500 (Sale price $6000- cost $5500)
 The discount of 50% will apply after taking any loss if any, into account.
 If she uses indexation method, the capital gain would be as follows
Indexation for Dec 1993 61.2
Indexation for Jan 2018 112.6
Hence, Indexation factor 112.6/61.2
= 1.84
5500*1.84 = 10120
Indexation cannot be used to create capital loss. Helen will not have capital
gain or capital loss on this transaction as she can choose any method
beneficial to her. So she will go for Indexation method.
Sale of Jewellery
 Collectibles includes jewellery, acquired having value more than $500 is taxable.
 Here, Helen acquired jewellery in Oct 1987 at $14000 and sold this on March 2018
for $13,000. Here, Helen shall calculate reduced cost. In the absence of any other
information i believe the reduced cost is $14,000.
 Hence, the capital loss would be $1,000.
Sale of Picture

 Any collectible having purchase value of $500, is exempted from capital gain tax.
 Here, the picture sold by the Helen was acquired for $470, is exempted from capital
gain.
Answer 2
 Royalty is an amount paid to owner of property for the right to use it or take from it.
Stanton V FCT (1995) 92 CLR 630, 6 ATR 2016.
 Royalties are assessable under 6-5 of the ITAA 97 and sums received as or by
way of royalty are assessable – even if the sums are of capital nature. McCauley Vs
FCT (1994) 69 CLR 235.
 Any payments made towards Intellectual property right, then withholding of 30%
applicable to it
Tax implication when Income is from Barbara’s Self Exertion
.
 If Barbara goes for writing books and publishing it later, then she need to get its
business register, needs to file the annual tax return and may need to lodge
Quarterly BAS statement
 In this case Barbara will get the deduction of certain expenses related to her writing
business. Such as
- Home office expenses which includes Gas, Electricity, Cleaning , internet,
Mobile phone, stationery (In case of electricity, you need to consider the area
you are using for your business and in that proportion you can claim deduction
in your business,
- Professional development: into this Barbara can claim deduction for Writer’s
meet up, Networking, professional membership, Writing workshop, training
courses, webinar and anything that increasing your writing skill.
- Tools of the trade: Pen, Paper, Journal, notebook etc.
 In this case Barbara’s income would be $20,350 chargeable as business income
instead of royalty income.
Stanton vs. FCT
 In this case, Stanton filed appeal against the Commissioner of income tax.
 Commissioner viewed that Agreement to sell Standing timber at lump sum amount
considered as Royalty income.
 Here the lump sum amount decided on the basis of the standing timen on the land.
Amount is payable in quarterly instalments whether or not timber cut or removed
from the land.
 Hence it is independent of removing timber from the land.
 Commissioner claimed that amount received is to be assessed as Royalty income
as it gives right to cut the timber.

 Hence, against the commissioner, Royal Douglas Stanton appealed in the high
court.
 High court contended that the payment is due even though purchaser does not
exercise his right of Cutting the timber. Purchaser needs to pay even though he
does cut even a single tree.
 Royalty is payment for exercising any right. The payment is made under royalty only
if the right is exercised otherwise no payment is made under royalty.
 Hence, court said that this is not the royalty payment.
Tax Implication when Barbara sells its copyright to Eco Book
 Here, Income from The Eco book limited would be taxable as Royalty income
$13,400 for Book’s copyright to Eco book
$4,350 for selling book’s manuscript to Eco book library
$3200 for selling Interview manuscript to Eco book library
Hence, total taxable royalty income is 20,350.
McCauley vs. FCT
 In this case, McCauley sold the right to cut the timbers from the standing tree on the
land and payment would be 3Shillings per 100 superficial feet of timber cut.
 Commissioner contended that this should be taxable as Royalty income.
 Then, McCauley appealed against the commissioner order.
 High court contented that it is the payment for right to cut the tree from the land
hence it is taxable.
 This is because payment will be made only if trees would be cut by the payer,
otherwise he is not going to pay. So it is the payment to for right to cut the tree.
Answer 3
 Deductions available for the expenditure incurred for borrowing money to the extent
that the money is used for the purpose of producing assessable income.
 Expenditure in generally deductible over the period of loan(or five years is this is
shorter)
 Amount of $100 or less are usually fully deductible in the relevant year.
 Money can be borrowed to for funding requirement and expense incurred to borrow
the money is deducible expense and it is deducted over the repayment period and if
the repayment period is more than 5 years then it is to be deducted in five year
equally.
 When there is prepayment before its term then remaining interest shall be deducted
in the year of prepayment.

Barry and Lorraine Vs his son (Murry Berghan)
 As per the case law of Barry and Lorraine Vs his son (Murry Berghan), in this case
Murry Berghan has taken loan from his parents.
 He has taken loan 13times totalling of $280,000 between 2009-2013. Some of the
money son has taken for personal reason and some of the money has taken for
running the business.
 Now, when parents demanded the money from son he said that he believes it is gift
and not loan and also there were no written paper that proves that it is loan and not
gift.
 So had also argued that even though he email his parents that he will give back
money, still it does not create legal obligation to pay, it is just moral obligation to
pay.
 Brisbane court said that it is not legal obligation on the part of son to pay the money
as there is no to written evidence that can prove it is loan and not gift and create
legal obligation on the part of the son to repay the money.
 After that Berghan’s parents appealed and judge Everson’s decision has been keep
aside and court of appeal ordered berghan to repay his parents with an interest
$286,471.in Oct 2017.
 Every one shall learn from this case, before giving any loan to family member, they
shall make written agreement.
 Here in the case given patric has paid money to his son david as loan.
 Here, it is advisable for patric to make formal agreement in written showing this
loan.
 Here, David has repaid this loan after two years and repaid it with the interst after
two years. Here, david can deduct this interest from his business income.
 The interest would be table in the hands of patric.
 It is to be shown as loan given in the hands of patric and interest would be taxable
in the hands of patric.
References
Pope J, Fayle,R and Duncan M (1986/87) The compliance cost of personal income
taxation in Australia, Austalian tax research foundation.
Graeme S Cooper et al., Income taxation:Commentary and materials (2nd edition law book
co.) ISBN:950-537-182-9.

Geoffery Lehmann and Cynthia Coleman(1994), Taxation law in Australia (3rd edition,
Butterwords) ISBN: 0-409-30866-8.
Robin Woelner et al., (1997) Australian taxation law (8th Edition ,CCH Australia) ISBN:1-
86264-918-9.
Stanton V FCT(1995) 92 CLR 630, 6 ATR 2016. (Case law)
Federal Commissioner of Taxation v Sherritt Gordon Mines Ltd [1977] HCA 48; (1977) 137
CLR 612
McCauley v Federal Commissioner of Taxation 1944 HCA 18; (1994) 69 CLR 235
MINERALOGY PTY LTD -v- SINO IRON PTY LTD [No 16] 2017 WASC 340