HI6028 Taxation Law: Analysis of Capital Gains, Income & Case Law

This assignment solution addresses several questions related to Australian taxation law. The first question analyzes the capital gains tax consequences of Helen selling various assets, including an antique painting, a historical sculpture, an antique jewelry piece, and a picture, providing calculations ...Read More

Assessment task:
Question 1 (10 marks)
Your client Helen wants to fund her business as a fashion designer, therefore she has sold some
of the assets as follows: 1- An antique impressionism painting Helen’s father bought in February
1985 for $4,000. Helen sold the painting on 1 December 2018 for $12,000. (2.5 marks) 2- Helen
sold her historical sculpture on 1 January 2018 for $6,000. She has purchased the piece on
December 1993 for $5,500. (2.5 marks) 3- An antique jewellery piece purchased in October
1987 for $14,000. Helen sold the antique jewellery piece on 20 March 2018 for $13,000. (2.5
marks) 4- Helen sold a picture for $5,000 on 1 July 2018. Her mother purchased the picture in
March 1987 for $470. (2.5 marks) Advise the Capital Gain Tax consequences of the above
transactions.
Solution
Calculation of
Capital Gain and
its nature
Serial No. 1 2 3 4
Asset Name Historical
sculpture
Antique
Impressionism
painting
Picture Antique Jewelry
piece
Holding period
(more than 1 year
or not)
Yes Yes Yes Yes
Nature of Asset Long Term
Capital Asset
Long Term Capital
Asset
Long Term
Capital Asset
Long Term
Interest
Sale Price(A) 6000 12000 5000 13000
Purchase(B) 5500 4000 470 14000
Gain/(Loss)(A-B) 500 8000 4530 -1000

Nature of
Gain/(Loss)
Long Term
Capital Gain
Long Term Capital
Gain
Long Term
Capital Loss
Long Term
Capital Gain
Calculation of Tax on Net Capital Gain
Capital Gain
Historical Sculpture 5000
Antique Impression Painting 8000
Picture 4530
Antique Jewelry Piece -1000
Rate of Tax 15%
Estimated Capital Tax (12030*15%) 180
Net Long Term Capital Gain 12030
It is crucial to contemplate the tax consequences of capital gains on the sale of Hellen’s art
collection. There exists the discarding of CGT event and CGT assets A1 occurs: s 104-10 –(1) of
ITAA97. It is crucial to establish whether the assets are CGT assets, personal or collectable
assets. The assets are regarded as collectables as outlined in s 108-10(2). Dealing in turn with
every asset:
a.) Antique ceramic bowl: Although the bowl was obtained for more than five hundred
dollars (implying any gain on this collectable is assessable) it was obtained before
twentieth September 1985. Thus, the gain of eight thousand dollars is free of CGT: s 104-
10 (5).
b.) Sculpture. The purchase of the sculpture occurred on December 1993 and traded on 1
January of the present year. Since the sculpture was gotten for more than five hundred
dollars and obtained after twentieth September 1985, any benefit from the event of CGT
will be a capital gain that is taxable. Hellen can utilize the method of indentation to
establish the benefit or employ the fifty percent discount of CGT. If Hellen utilizes the
method of discount, her benefit on capital is five hundred dollars. The discount of fifty
percent can only be employed at a subsequent stage. If Hellen utilizes the method of
indexation , the benefit on capital is established as
Indexation figure for September 1999 = 68.7
Indexation figure for December 1993=61.2
This provides a factor for indexation of 1.123 (rounded to three decimal places)
The cost base that is indexed is 1.123* $5,500=$6,176
Since indexation cannot be utilized to establish a loss on capital, Hellen will have neither
a benefit of capital nor a loss of capital utilizing the method of indexation. Hellen can
utilize whatever approach provides her with the best outcome. Indexation will utilized in
this case.

Bronze figure: It was bought in the month of October 1987 and retailed in the month of
March of the present year. Hellen possesses a loss of capital of one thousand dollars on
the vending. Since the bronze figure was retailed at a deficit, the cost base cannot be
indexed for inflation to be taken into account.
Painting: The purchase of painting was done in March 1987 for four hundred and seventy
dollars. Thus, the one thousand dollars can be carried onward to be counterpoised against
any loss of capital from future year’s collectables.
According to the topic number four hundred and nine of topics on tax released by IRS,
majority capital gains tax rate is no greater than fifteen percent for majority of the tax
payers but the rates of tax differ with regard to the normal brackets of income tax.
Advice: During the selling of Historical Sculpture, Antique Impression painting and
Picture, there will be a capital benefit, which is long term. On the on the other hand on
selling of jewelry, there will be a capital loss that is long term that can be set off with the
capital gain that is long term to compute the net long term capital benefit for taxability.
Question 2 (5 marks)
Barbara is an economist researcher and commentator. The Eco Books Ltd offers her $13,000 for
writing a book about economics principles. Barbara has never written a book about economics
principles, but accepts the offer and writes the economics book called ‘Principles of Economics’.
She assigns the book’s copyright for $13,400 to The Eco Books Ltd. The book is published and
she is paid. She also sells the book’s manuscript to the Eco Books Ltd’s library for $4,350 plus
several interview manuscripts she has collected while writing the economics book for which she
receives $3,200. Discuss each of the above payments to Barbara separately and states if these are
income from Barbara’s personal exertion. (2.5 marks) Would your answer differ if Barbara wrote
the Principles of Economics’ book before signing a contract with The Eco Books Ltd in her spare
time and only decided to sell it later? (2.5 marks) Support your answer by referring to relevant
statutory and case law.
Solution
Through paying the $ 13400 Copyright, Barbara gives the Eco Books Company all the rights,
including, without limitation, patents, copyrights, other intellectual property rights and trade
secrets. The book, which she assigns a copyright and sells it for $13,400, this income, is the main
income. However, the income, which she gets by selling the book’s manuscripts to the library
(costing $4350), and several interview manuscripts (costing $3200), these are passive incomes.
The later income becomes the passive income, as she was not assigned to do this task, but still
she did it to earn more income.
Yes, these are incomes from Barbara's personal income exertion.
If Barbara had written the book by herself, and decided to sell it later in, then the selling price of
the book would not have remained a personal exertion income. This would have happened as the

selling of the book might not be her primary concern, as she later on would have decided to sell,
which shows selling books is not her primary income source. Therefore, this would be
considered as a passive income. Moreover, she has not been professionally assigned for this task,
which again shows this will not be her personal exertion if she decides to write a book and sell it
later on.
When a person writes a book as a part of the contract, he or she can accept payment for their
work. Thus, the payment of $13,000 is legal and binding.
2) In a book contract, usually the author retains the copyright of the book. However in this case,
the author has sold the copyright , manuscripts as well as the interview conducted by her .
3) Thus in the above case, she is giving up all right of claiming the work and she would be
unable to insist to publish her name as an author of the book.
B) Individual writing of the book without the contract:-
1) If the author had written the book before entering into any contract, she would have only sold
the publishing right to the book.
2).This means the publisher is bound to give due credit to the author for writing the book, by no
chance claim this work to be there and by no means copy her work and use it in other references
too.
3) An essential element of publishing right is the selling of book by authors name itself.
C) Relevant Case Law:-
Darla Yoos, Edwin Mc Call and Kerry Levine v. Publish America
1) In the above case three publishers filed an action lawsuit against print on demand book
company claiming that the publisher is presenting itself as a traditional publisher and claiming
that the book is full of errors and the publishing house is threatening them to pay from their
pockets else they will not correct the errors.
2) The Court upheld that the publishers were liable to correct the errors themselves and pay
compensation to the authors of the books for the inconvenience borne by them due to publishers
negligence.
Question 3
Patrick paid $52,000 to his son David to provide some assistance in his newly started business. They
agreed that David repay his father $58,000 at the end of five years. Patrick provided this loan to David
without any formal agreement or security deposit for the sum lent. Patrick told his son that he need not
pay interest. However, David repaid the full amount after two years through a cheque, which was
included an additional amount equal to 5% on the amount borrowed. By referring to relevant statutory
and case law, you need to discuss the effect of this arrangement on the assessable income of Patrick. (5
marks)

Solution
Given data
Patrick paid $ 52, 000, to his son David to provide some assistance in his newly started business
. Then David accepted to pay his father $ 58,000 at the end of the five years amount.
The amount of loan given to David by Patrick is 52,000
The amount that David paid at the end of two years= 1.05*52000*1.05=57330
The amount paid as interest therefore is
Interest paid = 57330 -52000 = 5330
Amount of loan $ 52,000
Interest paid 5%
Amount Repaid after the end
of the 2nd year
$ 57, 330 ($52,000*1.05*1.05)
Interest paid $ 57,330-$5200=$ 5,330
David pays an interest of
5,330 to Patrick, and it will
be taxable in the hand of
Patrick under the head
income from Other sources.
This amount of interest will be chargeable to the interest income of Patrick under the head
'income from other sources'. Assessable income is income that is to be taxed and it includes
Wages and salary, gratituities, tips, allowances, interest from bank accounts and other payments
for services offered. According to this scenario of David and Patrick, the interest is 5330, which
is to be taxed. According to the statutory law, Patrick is required to declare his income when he
lodges his tax return since he is getting payment by cheque from David. However, David action
of paying the loan will make his father, Patrick to pay more assessable income due to the interest
accrued. Patrick will therefore have to pay more assessable income to the government compared
to what he would have paid without lending David the loan. In case David would have paid the
loan at the end of the five years, this would mean that Patrick would have received more income
so the assessable income that could be taxed would increase. In case Patrick did not lend his son
David, he would have paid less tax since her taxable income would not be much. In conclusion,
the loan given to David increases the amount that is to be taxed due to the interest rate.