HI6028 Taxation Theory, Practice & Law Assignment - T1 2019

This assignment solution addresses three key taxation issues. The first question analyzes the Capital Gains Tax (CGT) implications for a fashion designer selling various assets, including an antique painting, sculpture, antique jewelry, and a picture, considering pre-CGT assets and the $500 threshold for collectibles. The second question examines whether proceeds from writing a book, selling a manuscript, and interview manuscripts constitute assessable income for an economist, considering relevant case law and whether the book was written for personal satisfaction. The third question explores the tax implications of a loan from a father to his son, including the repayment of the principal and an additional 5% interest payment, considering whether the interest constitutes ordinary income, assessable income from an isolated transaction, or a gift.

TAXATION
STUDENT ID:
[Pick the date]

Question 1
The critical issue in the given situation is to determine the CGT (Capital Gains Tax)
implications for the various assets that have been sold by Helen who is a fashion
designer by profession.
1) Sale of Antique Painting
In accordance with ss. 108-10 ITAA 1997, antique is a type of CGT asset which is
included under the category of “collectibles”. It is known that this painting has been sold
which would trigger CGT event A1 as highlighted in ss. 104-5 ITAA 1997. The relevant
formula for computation of capital gains or losses for this CGT event has been indicated
in ss. 104-10 ITAA 1997(Barkoczy, 2017). A particular type of asset defined in ss. 149-
10 ITAA 1997 is pre-CGT asset. This refers to an asset which was purchased before
September 20, 1985. The pre-CGT assets are exempt from CGT irrespective of the
holding period and the extent of capital gains or losses (Gilders et.al., 2016). It is known
that the underlying painting was purchased by Helen’s father in February 1985. As a
result, it would be considered as pre-CGT asset and would be exempt from any CGT
obligations.
2) Sale of Sculpture
Just like antique, sculpture also belongs to the category of CGT assets named
“collectibles” in accordance with ss. 108-10 ITAA 1997. The sale of sculpture would
trigger CGT event A1 as highlighted in ss. 104-5 ITAA 1997. The relevant formula for
computation of capital gains or losses for this CGT event has been indicated in ss. 104-
10 ITAA 1997. As per this formula, the capital gains or losses on sale would be the
sales proceeds minus the cost base of the asset (Sadiq et. al., 2016). Considering that
the sculpture was not purchased before September 20, 1985, hence it would not be
categorized as pre-CGT asset.
Cost price of sculpture = $ 5,500
Sale price of sculpture = $ 6,000
Capital gains realized on sale of sculpture = $6,000 - $5,500 = $500
It is noteworthy that the holding period of this asset exceeds one year owing to which
the capital gains would be long term.
3) Sale of antique jewellery
Antique jewellery is a CGT asset which would also fall under “collectibles” in
accordance with ss. 108-10 ITAA 1997. The sale of antique jewellery would trigger CGT
event A1 as highlighted in ss. 104-5 ITAA 1997. The relevant formula for computation of
capital gains or losses for this CGT event has been indicated in ss. 104-10 ITAA 1997.
As per this formula, the capital gains or losses on sale would be the sales proceeds
minus the cost base of the asset (Woellner, 2014). Considering that the antique

jewellery was not purchased before September 20, 1985, hence it would not be
categorized as pre-CGT asset.
Cost price of jewellery = $ 14,000
Sale price of jewellery = $ 13,000
Capital losses realized on sale of jewellery= $14,000 - $13,000 = $1,000
It is noteworthy that the holding period of this asset exceeds one year owing to which
the capital losses would be long term.
4) Sale of Picture
In accordance with ss. 108-10 ITAA 1997, it is apparent that picture would also fall
within the ambit of the “collectible” asset class. With regards to collectible assets,
ss.118-10(1) ITAA 1997 highlights that if the purchase price is lower than $ 500, then
the underlying capital gains or losses on the asset sale would be disregarded (CCH,
2013). Based on the information provided, it is apparent that the picture was purchased
by Helen’s mother for a consideration of $ 470. Since the buying price of the underlying
painting is less than $ 500, hence any capital gains or losses on the picture would be
disregarded. Hence, no CGT implications would arise for Helen based on this sale.
Net Capital Gains/(Losses)
Total capital gains arising for Helen based on the above transactions = 500 -1,000 = -$
500
Hence, it can be inferred that for the given transactions, Helen would realize a capital
loss of $ 500 which would be carried forward to future years where it would be adjusted
against capital gains against collectibles (Deutsch et. al., 2016).
Question 2
Issue
The central issue is to determine if the proceeds for the book, sale of manuscript and
various interview manuscripts would contribute to assessable income on account of
personal exertion for Barbara or not. Also, the scenario where the book was written for
her own satisfaction needs to also considered in regards to assessable income.
Rule
Ordinary income may be derived by the taxpayer as per the following sections
(Woellner, 2014).
1) Section 6(5) – This would include income which is obtained from regular activities
such as business, employment besides including dividend, rent and interest income.

2) Section 15(15) – This would include profits that are derived on account of isolated
transactions which have been enacted with the primary motive of profit.
It is noteworthy that the transactions involving sale of capital assets would not involve
any income on account of personal exertion (Gilders et. al., 2016).A relevant case which
merits discussion for the situation at hand is Brent vsFederal Commissioner of
Taxation (1971) 125 CLR case. As per the case facts, the wife of a famous robber
entered into a contract with a newspaper so as to share the details about her
relationship. She gave all relevant information through the medium of interviews that
extended for a week. Based on these interviews, the newspaper published a book. In
this case, the key question was whether the proceeds of the contract would be income
on account of personal exertion or not. The court held was that the payments made to
the wife was primarily was privileged information which already existed at the time of
enacting the contract. The action of interviews was a mode to transfer that information
and thereby held the proceeds as capital (Nethercott, Richardson and Devos, 2016).
Application
The payments received by Barbara need to be critically analysed in wake of the case
law discussed and the applicable statutes.
1) Proceeds from writing the book ($ 13,000) – It is apparent that the payment made to
Barbara is not on account of her superior writing skills but on account of his
knowledge and reputation as a economist researcher. Hence, the objective of the
book is to obtain the content rather than the writing skills. Thereby, the compensation
is not the result of personal exertion incurred in writing. Rather, writing is only a
means to transfer the useful information which Barbara has accrued over her
profession. Thereby, the proceeds would be capital in nature.
2) Proceeds from sale of manuscript ($4,350) – The value of the manuscript is not
derived on account of Barbara’s literary skills or her reputation as a writer since she
has never written a book before. Thereby, the amount paid for the manuscript is
primarily because of Barbara’s reputation as a economist researcher. Therefore, the
act of writing did not give rise to this income.
3) Proceeds from sale of interview manuscript ($ 3,200) – These proceeds have also
been offered on account of her reputation rather than the interview per se. If a similar
interview was conducted was some other person, that manuscript would not have
commercial value. Hence, the act of conducting interview is not the source of any
income in this case.
Book written for self-satisfaction
As per this scenario, the book was written before being approached by the publisher.
The only difference this makes is the underlying motive which would be self satisfaction
instead of profit. However, this would alter the tax related treatment. In the given case,
based on the above discussion, it is apparent that the source of income is the
knowledge and reputation that Barbara has. Her literary skills are not the source of
commercial worth and thereby the underlying motive does not alter the tax treatment.
Thereby, in this scenario also, the proceeds from the copyright of book would be capital
in nature only (Barkoczy, 2018).

Conclusion
The discussion above clearly indicates that the various proceeds derived by Barbara
are not attributable to her actions and hence are capital proceeds. This implies that
these proceeds would not be termed as receipts on account of personal exertion.
Further, no change in the tax treatment would be observed in the scenario where the
book is written not by profit motive but driven self-satisfaction.
Question 3
Issue
Based on the given scenario, it is apparent Patrick lent $ 52,000 to his son David.
Patrick did not expect any interest payment but expected that the principal would be
repaid completely within a period of five years. However, David repaid the complete
amount of $ 52,000 after two years and also provided an additional amount to the tune
of 5% as interest. In wake of the above facts, the key issue to is to outline the tax
implications for David on account of the payment received from his son David.
Rule
In relation to repayment of money, it is imperative to note that the principal component
for the recipient would not attract any tax considering that these would be capital
receipts. The potential source of assessable income for taxation purposes would refer to
any incremental amount over the principal which is received as the same may amount
of interest income. The following three options exist in order to account the incremental
amount received.
1) Amount is ordinary income as per s.6-5 ITAA 1997 – This would be applicable when
the taxpayer under consideration has a money lending business in place from which
interest income is derived. Considering that this would fall within the purview of
business income, hence, it would be assessable income and thereby taxable (Gilders
et. al., 2016).
2) Amount is assessable income as per s. 15-15 ITAA 1997 - It may happen that lured
by the interest income, the taxpayer enters into an isolated lending transaction. The
interest income received from such a transaction would be considered as assessable
and thereby taxable as per this section (Deutsch et. al., 2016).
3) Amount is exempt from tax as it is gift – In accordance with tax ruling TR 2005/13,
the following conditions ought to be satisfied so that the underlying payment may be
considered as gift (ATO, 2005).
 There needs to be actual change in ownership in the favor of transferee.
 This transfer should be voluntary in nature and must not be carried out at the
insistence of the transferee.
 The transferor must not have any present or future expectations for any returns
on account of gift.
 The transfer should be driven by personal gratitude and benefaction.

Application
In the present scenario, the payment made by David not only involved the principal
repayment but also additional 5% amount which is incremental. In wake of the three
options indicated above, the appropriate tax treatment of this payment has been
analysed as shown below.
 Assessable income (s. 6(5)) – The given information does not indicate that
Patrick is involved in a money lending business. This may be a reasonable
conclusion to draw considering that the loan extended to David does not even
involve a formal agreement and also lacks any security. In case of a business
like transaction, these features would be present so that lender can recover
money lent and outstanding interest in case of default. Thereby the payment is
not assessable under this section.
 Assessable income (s.15(15)) – With regards to assessable income from isolated
transaction, a key requirement is that this transaction should be driven by
intention to derive profit. However, for the given transaction, Patrick has
communicated to David that he does not desire any interest on the loan amount.
This clearly implies lack of profit motive and hence incremental receipt would not
be assessable under this section.
 Non assessable income (Gift) – The amount received would be considered as
gift on account of the following characteristics.
 There is change of ownership as David has given cheque to Patrick.
 Patrick did not want interest income but David still provided it.
 For the amount paid as interest, David has no incremental present or future
expectations from Patrick.
 The incremental payment is a way to express gratitude towards his father.
Conclusion
It can be concluded that no tax would be paid by Patrick in relation to the amount paid
by David as the incremental amount is gift and hence non-assessable.

References
ATO (2005), Rulings: TR2005/13, [online] available at
https://www.ato.gov.au/law/view/document?DocID=TXR/TR200513/NAT/ATO/00001
[Accessed May 15, 2019]
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed.,NorthRyde: CCH
Publications, pp. 145-146
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer, pp.
223
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax
handbook 8th ed., Pymont: Thomson Reuters, pp. 249-251
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths, pp. 143, 178
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press, pp. 198
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters, pp. 211-
213
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
pp. 257