Holmes Institute HI6028 Taxation Assignment: Income, CGT, and Law

This assignment addresses two key areas of Australian taxation law: assessable income and capital gains tax (CGT). The first section analyzes the assessable income of an individual, Emmi, including income from employment (wages, tips, and allowances) and gifts, applying relevant sections of the ITAA 1936 and ITAA 1997, as well as case law. The second section focuses on the CGT implications for Liu, who is selling various assets, including a residential property, a car, a small business, furniture, and paintings. The analysis considers CGT events, exemptions for main residences, personal use assets, collectibles, and small business concessions, providing a comprehensive overview of the tax consequences of each transaction. The assignment demonstrates an understanding of relevant legislation, principles, and their application to real-world scenarios.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student
Name of the University
Author Note

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INTERNATIONAL FINANCE
Table of Contents
Question 1: Assessable Income........................................................................................2
Identification of Material Facts.......................................................................................2
Relevant Legal Issues....................................................................................................2
Application of the Taxation Principles............................................................................3
Total Assessable Income of Emmi.................................................................................5
Question 2: Capital Gains Tax...........................................................................................5
Identification of Material Facts.......................................................................................5
Relevant Legal Issues....................................................................................................6
Application of the Relevant Law.....................................................................................7
Capital Gains of Liu........................................................................................................9

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Question 1: Assessable Income
Identification of Material Facts
The situation is related to the computation of the assessable income of Emmi
under the provisions of ITAA 1936 and ITAA 1997. She has been studying accounting
at Holmes Institute and is also working part-time at a restaurant. As a part of her
employment, she has earned various amounts in the form of tips and allowances. It also
includes the annual income received from the job and gifts received from her parents
and employer. The relevant amounts to determine her assessable income are as
follows:
$335 cash received from customers in the form of tips;
$25000 received from her employment in the Crown Melbourne Restaurants;
$250 worth perfume received as a gift from a regular customer. However, this perfume
has been given to her mother;
$380 received from the employer as a part of the entertainment events paid by the
employer; and
A Christmas gift of $15000 received from her father.
Relevant Legal Issues
According to section 51.35 of ITAA 1997, payments made to a full-time student at
a school, college or university are not exempt from Income Tax under item 2.1A of the
table in section 51.10. These payments also include the payment made by an entity or
an authority on the condition that the student will continue to be an employee of the
entity when required. It also includes related to the labour of the student. The relevant
legislations for the payments received by Emmi are as follows:
As held in the case of Calvert v Wainwright, voluntary payments received by a person
constitutes an incidence of employment and is a part of the ordinary income of an
individual under section 6-5 of ITAA 1997 (Classic.austlii.edu.au. 2020). According to
the rules of the ATO, assessable income is the income of an individual on which tax can
be levied, if it is proved that the assesse has earned more than the tax threshold income
(Ato.gov.au 2020). Tips form a part of the assessable income suggested by the ATO;
The income received by an individual as a part of the services provided by them
constitutes the ordinary income of an individual;
As suggested by the rules of the ATO, gifts received by an individual as a part of a
special occasion do not form a part of the assessable income of an individual
(Ato.gov.au. 2020). As held in the case of Scott v FCT and Hayes v FCT, the gift cannot
be taxed if it is received by an individual from a personal relation out of love;
However, the ATO suggests that the gifts may be taxable if they are received as a part
of the business-like activity or related to the income-earning activities of the employee
or contractor; and
Similarly, gifts received from related people on a special occasion are not to be taxed in
the hands of the recipient.

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Application of the Taxation Principles
In the given situation, Emmi is employed on a part-time basis in Crown Melbourne
Restaurant. As suggested by section 51.35 of ITAA 1997, the amount received as a part
of the employment by Emmi is taxable in her hands as the ordinary income earned by
her in a given year. Hence, the $25000 earned by her is to be calculated as a part of her
assessable income;
The tips received by Emmi in the form of $335 cash are to be calculated as a part of her
annual assessable income. The rules of the ATO suggest that these amounts will be a
part of the assessable income whether received directly from the customers or from the
employer themselves;
The section 78A of ITAA 1936 suggests that the recipient of a gift does not need to
include the amount of ‘gift’ under their assessable income if some selected conditions
are satisfied. However, as suggested in In Federal Commissioner of Taxation v.
McPhail (1968) 117 CLR 111 (McPhail), there is no fixed definition of the term ‘gift’ in
the ITAA. It needs to be taken as a part of the ordinary meaning of the word. In the
given situation, Emmi received the gift on occasion of Christmas. It is not suggested that
the income is a part of her ordinary business activities. Hence, it should not be
considered as a part of her assessable income. Hence, the $250 is exempt as a part of
assessable income;
However, the $380 allowance received by her is a part of the payment received by her
for the services provided during the course of employment. Hence, this income should
be calculated as a part of her annual assessable income; and
The court ruling in Scott v FCT and Hayes v FCT suggests that the gifts received from a
personal relation should not be considered while computing the assessable income of
an individual. Hence, the $15000 should not be considered as a part of the assessable
income of the individual.
Total Assessable Income of Emmi
Question 2: Capital Gains Tax
Identification of Material Facts
Section 104.5 of ITAA 1997 recognises the events which can be constituted to be
categorised as CGT events. It also defines the method of calculating the Capital Gains

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and Capital Losses arising from a CGT event. Section 104.10 suggests that the
disposal of a CGT asset is a CGT event when the owner of the asset enters into a
disposal contract or stops be the owner of the asset. In this case, the advice on the
CGT consequences of sales is to be provided to Liu, an Australian resident born in
China. She is planning to sell off all her business assets and go back to China. The
CGT sales being undertaken by her are as follows:
The house which was purchased in 1981 for $55000 is now worth $630000. The house
has been her main residence since the time she first purchased it;
Her car which was purchased in 2011 for $37000 is now worth around $8000;
She is also the owner of a small business enterprise. In the present day, she is selling
the business for $125000. Included in this sale price is the purchase price of $53000 for
all of the photography equipment and the goodwill of $50000. The photography
equipment cost her $63000 at the time of acquisition;
She sold her furniture of $4800. The cost of acquisition of none of the furniture item
exceeded $2000;
Her collection of paintings have been sold for $28000. However, none of the paintings
have cost her more than $500, except for one painting which was acquired for $1000.
The sale price of this painting is $8000.
Relevant Legal Issues
As per the provisions of Section 102.20 of ITAA 1997, capital gains tax is applicable to
the events classified as CGT events under Section 104.5. In case of the residential
property, there are a few exemptions provided to the taxpayers by the ATO and the
provisions of ITAA 1997. As per section 108.100, there are a few exemptions available
to the residents of Australia. For house properties acquired before 20 September 1985,
the amount of capital gains arising from the sale of the same will be exempted from
CGT if the property is not used for any other business or money making activities
(Ato.gov.au. 2020). This is the case for the permanent place of residence for the
residents of Australia;
A car is defined as a motor vehicle which is designed to carry not more than 9
passengers or a load of 1 tonne at once by the section 995-1 of ITAA 1997. According
to the regulations of ATO, any capital gains arising on the sale of a car are to be ignored
in calculating the taxable Capital Gains of an individual;
In Australia, there are a variety of exemptions available to an individual at the time of
the sale of what constitutes a small business and its assets. These exemptions are
namely the 15 year exemption, the reduction in 50% of the assets, retirement exemption
and rollover of the capital gains earned from the sale of the assets (Ato.gov.au. 2020).
Under the retirement exemption, taxpayers who are selling off the business assets and
are below 55 years of age are required to contribute the amount to a recognised
superannuation fund. The capital gains arising from the sale of these assets on
retirement is exempt up to a lifetime limit of $500000;
A personal use asset is one that is kept solely for the purpose of the pleasure or the
usage of the owner of an asset. Section 108.20 of ITAA 1997 suggests that any capital
gains or losses arising from the sale of a person al use asset should not be taxed in the
hands of an individual if the cost of acquisition of that particular asset is less than
$10000;

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Section 108.10 defines a collectible under ITAA 1997. According to its provisions, a
collectible is a valuable item like an artwork, a jewellery, a medallion or an antique
which is mostly kept for the purpose of the enjoyment of the taxpayer (Ato.gov.au.
2020). The ATO guidelines suggest that the capital gains arising from the sale of these
collectibles are to be ignored if they were acquired for a cost of lower than $500.
Application of the Relevant Law
Liu is an Australian resident in this case. Hence, her tax on CGT would be charged
using the provisions of the ATO. The CGT would be charged only if the event comes
under the purview of the definition of a CGT event under ITAA 1997;
The primary sale is related to that of the residential property of Liu. As this property has
been her main residence since the time of acquisition and has not been used for any
money making activities, the capital gains arising from the sale of the house property
needs to be exempted. Hence, Liu does not need to pay CGT on this CGT event;
The rules of ATO suggest that no tax is charged on the sale of a car if it is mostly used
for personal use. In this case, the car that has been sold by Liu is a personal use asset.
Hence, it is exempt from CGT in her hands;
Another personal use asset sold by Liu is her furniture. This sale of furniture was worth
$4800 but the cost of acquisition of the furniture cost her less than $10000. The
acquisition of an individual piece of furniture did not cost her more than $2000. Hence,
the amount of CGT arising from this event is to be exempted from her hands for taxation
purposes;
The paintings owned by Liu come under the definition of a painting defined under
section 108.10 of ITAA 1997. As the cost of purchasing most of these paintings was
lower than $500, the CGT arising from the sale of these paintings is to be exempted
from tax in the hands of Liu. However, the painting which cost her $1000 and was sold
for $8000 should not be exempted from the CGT sale in her hands. Hence, Liu needs to
pay taxes on this amount of Capital Gains of $7000.

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Capital Gains of Liu

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References and Bibliography
Ato.gov.au. (2020). Amounts not included as income. [online] Available at:
https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/
Amounts-not-included-as-income/ [Accessed 5 Jan. 2020].
Ato.gov.au. (2020). Calculators and tools_Host. [online] Available at:
https://www.ato.gov.au/Calculators-and-tools/Host/?
anchor=CGTPET&anchor=CGTPET/questions#CGTPET/questions [Accessed 5 Jan.
2020].
Ato.gov.au. (2020). CGT assets and exemptions. [online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/
#Exemptions1 [Accessed 5 Jan. 2020].
Ato.gov.au. (2020). Small business CGT concessions. [online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/small-business-cgt-concessions/
[Accessed 5 Jan. 2020].
Ato.gov.au. (2020). Your main residence. [online] Available at:
https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/
Your-main-residence/ [Accessed 5 Jan. 2020].
Barkoczy, S. (n.d.). Foundations of taxation law 2019. 11th ed. Docklands, Victoria:
Oxford University Press.
Classic.austlii.edu.au. (2020). INCOME TAX ASSESSMENT ACT 1997 - SECT 6.5
Income according to ordinary concepts (ordinary income) . [online] Available at:
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html [Accessed 5
Jan. 2020].