Taxation Report: Capital Gains, Personal Income, and Interest

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HI6028 – Taxation Theory, Practices and law
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Contents
Introduction..............................................................................................................................................3
Question 1................................................................................................................................................4
Question 2................................................................................................................................................7
Question 3................................................................................................................................................9
Conclusion.............................................................................................................................................10
References..............................................................................................................................................11
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Introduction
This report conduct examination of different aspects of taxation. Tax is charged over the
individual’s income. For taxation purpose, they put slab rate and charge as per the income.
The rise in income leads to an increase in the tax rate at which tax get imposed (ATO. 2019).
On the basis of assessable income, there are three different kinds of income considered such
as personal income like salary, business profits, and capital gain from the sale of any capital
asset (ATO. 2019). This report helps in understanding the aspects of capital gain tax, income
tax on personal service income and taxes on interest on loan as an income.
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Question 1
Australian Taxation introduces provisions for different aspects such as for capital gain they
introduce capital gain tax provision on 20th December 1985, as per this provision asset
purchased before it considered as Pre-CGT and not taxable (ATO. 2019). Assets purchased
after this date is eligible for capital gain tax. For collectibles, they introduce a provision in
16th December 1996, as per this provision any collectible purchased up-to $500 then it is
exempted from CGT. Secondly, it is also exempted from CGT if the amount of capital gain
with the disposal of collectible is up-to $500 (ATO. 2019).
As per the Norms of ATO collectibles are such assets that get purchased by the individual for
their personal usage. These can be used by the individual himself or their relatives. There are
various assets that get tagged as collectibles (ATO. 2019).
As per the ATO norms antique paintings, jewellery, etc. are tagged as collectible and they are
expensive in nature. Any modification or reproduction or restructuring occurred to these
items then also these are tagged as collectibles (ATO. 2019). Along with these, there are
some items such as first-day covers, rare stamps, rare books, and manuscripts, etc. acquired
by the individual also tagged as collectible. And with the disposal of these assets if an
individual gets any profit then it is treated as capital gain and assessable for capital gain tax
(ATO. 2019).
Australian taxation norms provide some exemptions for the betterment of the taxpayer over
the disposal of collectible includes: -
Exemption 1: - if the acquisition amount of collectible is exactly or less than 500 AUD.
Exemption 2: - if the amount of profit is exactly or less than 500 AUD
Exemption 3: - if the amount of interest received over collectible is exactly or less than 500
AUD (ATO. 2019).
Note: - As per the norms of ATO in context to capital gain/ capital loss, if individual get
capital loss with the disposal of the asset then that loss amount is allowed to set off with
capital gain amount. If that capital loss is attained by the disposal of collectible then it is
allowed to set off with capital gain from the disposal of collectible only.
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The case study states that a number of collectible items sold by Helen to raise funds. She
makes use of these funds to runs her business activities. With the sale of collectible assets,
she gets some funds. Her collectible items make the inclusion of antique impressionism
painting, picture, ancient sculpture, and antique jewellery piece. Below is the justification
made over the transaction of disposal of collectibles such as: -
Description of Antique impressionism painting: -
On February 1985, Father of Helen brought this painting. The amount paid for this
acquisition was AUD 4000. As per the capital gain provision when any asset gets purchased
before the date of 20th December 1985 then that asset gets tagged as Pre-CGT. Due to this
fact, this transaction is totally exempted from the calculation of CGT. All the income earned
from this transaction is enjoyed by the Helen as she need not pay tax over it.
Description of Historical Sculpture: -
On December 1993, this collectible item was purchased and the amount paid for this
acquisition was AUD 5500. As per the provision of collectible when an asset got disposed of
and realize a gain of $500 or less then it is exempted from the CGT. The asset was sold for
$6000 and it gives a profit of $500 only. It is also not included for CGT.
Capital gain/ capital loss = Amount attained with the sale – Acquisition price
= $6000 - $5500 = $500.
The amount raised with the sale of the historical sculpture is utilized by Helen without paying
any taxes over it as it is exempted from the CGT.
Description of Antique Jewellery Piece: -
On October 1987, jewellery was purchased and the amount which paid for this purpose was
$14000. The sale amount which she gets was only $13000. By simply looking at this it is
observed that there is a loss of $1000 by disposing of this asset. This transaction didn’t
provide taxable amount due to which it is automatically excluded from the calculation of
CGT. As per the ATO norms, she makes use of this amount for deducting from the capital
gain attained.
Description of Picture: -
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On March 1987, Mother of Helen pay $470 to purchase this picture. As per the exemptions of
collectible when an amount of purchase of collectible is lower than or exactly the same at
$500 then that amount is exempted and the amount of gain is excluded from the CGT. As per
this fact, this transaction is excluded from the CGT, and Helen gets benefitted with the sale of
Picture as she gets an adequately huge amount from it.
On the basis of the calculation and description made above it is clearly observed that there is
no such capital gain amount realized with the sale of any of the collectible. Even she got a
capital loss over the disposal of collectible (Antique Jewellery piece). One of them (Antique
impressionism painting got excluded from CGT as it got tagged as Pre-CGT, and two of them
are exempted on the basis of the exemptions criteria of collectibles.
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Question 2
As per the taxation rules of Income Tax, an individual is taxable over the income generated in
the form of salary or wage. Individual taxpayers are taxable as per the set slab rate (ATO.
2019). Slab shows progressive tax rates and this denotes tax as a progressive tax. As the
income of the individual increases, the tax rates also get increased. Individual pay taxes over
their assessable income (ATO. 2019).
Barbara attains expertise in Economics subject and performs her activities as a professional
economist researcher and commentator. Eco Books Ltd. present a contract of $13000
according to which she needs to write a book. The topic needed by Eco Books Ltd. for book
and its material is “Principle of Economics”. She gives her consent to the contract she got and
agree to write a book. Although she never writes any book before this contract. She makes
use of her skill, knowledge, experience, and capacity in the completion of the book. The
income earned from this contract is considered as Personal service income as she inputs all
her efforts, skills, knowledge, etc. personally to complete the book. She rendered her personal
services and as per the contract, they develop an employer-employee relationship.
ATO norms state that if 90% of the income earned consists of the personal skill set and effort
of the individual then it gets taxable as per the PSI provisions. She handover the book to Eco
Books Ltd. with its completion, along with this she also gives relevant and supportive
documents to their libraries such as manuscripts of book and personal interview manuscripts.
Both these transactions also generate some amount which gets considered for the assessable
income. Tax will be imposed over the total income she got through this transaction.
Below is the calculation made for the tax amount over the assessable income of Barbara: -
Particulars Amount in $
Revenue
From the sale of copyright of the book 13400
From the sale of the manuscript of the book 4350
From the sale of personal interview
manuscripts 3200
Total revenue received 20950
Deduction
Exemption limit provided by ATO 18200
Net Taxable amount 2750
Tax amount at 19% (2750 * 19%) 522.5
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Medicare levy of 2% (2750 * 2%) 55
Net tax amount 577.5
Under the Personal Service Income norms, the amount of tax that needs to be paid by the
Barbara is $577.5.
Alternative case scenario: -
Barbara writes down the book without any contract and follows her will to complete it on the
Principle of Economics. As she is serving professional services in the field of economics. She
attains an adequate amount of knowledge and information related to this field which helps in
completing the book. She got an offer to sell the book by Eco Books Ltd. As per the offer she
got from the company she sold the book to them and get an adequate amount in return. There
is no such agreement made by both of them in which personal service required for the
fulfillment of agreements terms and conditions. It doesn’t create any employer-employee
relationship due to which it didn’t fill the terms and conditions of Personal Service Income
and the income generated with this transaction termed as ordinary income only.
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Question 3
The income received other than salary or wages, fall under income from other sources. When
an individual gets income from any source it gets included in the assessable income and
taxable as per their slab rate (ATO. 2019). As per the ATO norms when an individual pay
interest over the loan taken, then he is eligible for getting deduction while calculating taxable
income. But when individual lent her savings as a loan to someone then he/she gets interested
over it. As per the case of Peter Lomax vs Pixon & Sons when an individual gets interested
on the loan then he is liable to pay tax over it, but he is not liable to pay tax over the lump-
sum amount which he received as loan repayment. It is because an individual already pays
taxes over the amount as income tax LOMAX (H.M. INSPECTOR OF TAXES) v PETER
DIXON & SON, LTD.(1) (1941-1943) 25 TC 353.
Patrick helps his son in running his business by providing loan amounting $52000. As per the
statement of Patrick, this loan is interest-free. This loan is not bound by any agreement nor
any security is provided. And the tenure of the loan is 5 years. But the repayment of a loan
made by David is with the completion of 2nd year. Patrick demands that while repaying the
loan his son needs to pay $58000 and his son agrees over it. While repaying his son pay 5%
more to his dad. 5% of the borrowed amount is $2600 which is paid an additional amount to
his dad. So, the total repayment made by David is of $60600. The description includes a loan
amount of $52000 plus an extra amount of $6000 plus additional payment made by David of
$2600.
There is a total of $8600 is received extra by the Patrick. David gets the deduction facility of
the $8600 in two years. Whereas Patrick needs to pay tax over the amount he received over
the loan of $52000.
Extra amount or interest received by Patrick is of $8600 and the applicable rate of interest is
$10%
Tax amount = Extra amount * 10% = $860
Patrick needs to pay the tax amount of $860 over the interest received by lending the amount
on loan to his son.
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Conclusion
The conclusion of the above report stated that capital gain is applied over the capital assets
only. As time passes the assets like land, bonds, etc. provide huge revenue on their disposal.
Some of the collectible items also considered for capital assets. Some assets provide capital
gain and some of them give capital loss. Over capital gain, ATO imposes taxes whereas over
capital losses ATO allowed to get a deduction from available capital gain. Individual pay
taxes over income earned from different sources. But if income is generated via personal
service then it is termed as Personal Service Income.
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References
ATO. 2019. Capital gains tax. [Online]. ATO. Available at:
https://www.ATO.gov.au/General/Capital-gains-tax/ [Accessed on 30th May 2019]
ATO. 2019. Collectables and personal use assets. [Online] ATO. Available at:
https://www.ATO.gov.au/Super/Self-managed-super-funds/Investing/Restrictions-on-
investments/Collectables-and-personal-use-assets/ [Accessed on: 30th May 2019]
ATO. 2019. Collectables. [Online] ATO. Available at:
https://www.ATO.gov.au/Forms/Guide-to-CGT-2003-04/?page=32 [Accessed on: 30th May
2019]
ATO. 2019. Personal services income. [Online] ATO. Available at:
https://www.ATO.gov.au/Business/Personal-services-income/ [Accessed on: 30th May 2019]
Cronor-i. 2019. LOMAX (H.M. INSPECTOR OF TAXES) v PETER DIXON & SON, LTD.
(1) (1941-1943) 25 TC 353. [Online] Cronor-i. Available at:
https://library.croneri.co.uk/cch_uk/btc/25-tc-353 [Accessed on: 29th May 2019]
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