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

This taxation assignment solution addresses three key questions related to Australian tax law. The first question focuses on capital gains tax (CGT) implications for Helen, examining the CGT treatment of various assets, including an antique painting (pre-CGT asset), sculpture, antique jewelry, and a picture, considering concepts like collectibles and the discount method. The second question analyzes whether proceeds from Barbara's book writing and related activities (copyright, manuscript, and interview transcripts) constitute personal exertion income. The third question explores the tax treatment of financial assistance provided by Patrick to his son David, examining whether an additional payment constitutes ordinary income, income from an isolated profit undertaking, or a gift, considering the absence of a formal agreement and interest payments. The assignment covers relevant legislation and case law, providing a detailed analysis of each scenario.

TAXATION
STUDENT iD:
[Pick the date]

Question 1
The prime objective in wake of the extended facts is to outline the capital gains tax
which would be levied on taxpayer (Helen). This may arise since during the given tax
year, a host of CGT assets have been liquidated by taxpayer in order to arrange
funds for the business. For each of these assets the CGT treatment has been
discussed separately and at the end a cumulative picture would be presented.
Liquidation of Antique Painting
The given asset has been purchased in the month of February 1985. This is vital
considering the fact that the current taxing of capital gains was not always the norm.
The CGT was introduced on September 20, 1985. As a result, any assets which the
taxpayers have bought before this date belong to an era when there was no tax
levied on the capital gains realised by the taxpayer on the sale of assets. These
assets are classified as pre-CGT assets as highlighted in ss. 149-10. The
classification of these assets assumes significance since no CGT is levied on any
capital gains realised from liquidation of these assets (Austlii, 2019). The antique
painting is also labelled a pre-CGT asset as it was purchased before the threshold
data (i.e.20th September, 1985) and hence the capital gains realised on the painting
would not be considered for application of capital gains tax.
Liquidation of Sculpture
The date of purchase for this asset falls in December 1993 and thereby the asset is
not pre-CGT asset. This implies that any capital gains derived on this asset can be
subject to CGT.
A particular asset class described in ss. 108-10 is called “collectibles” and includes
various art forms (like painting), picture, antique, sculpture, rare books. The capital
gain or loss calculation is required when a particular CGT event presents itself as a
trigger. The sale of a collectible would lead to an A1 CGT event which would require
determination of capital gains. For this type of CGT event, the correct formula would
be as hinted in s. 104-10 ITAA 1997. Considering the input information available
about the underlying asset and deploying the requisite formula, the capital
gains/(losses) are shown as follows
In wake of the above computation, it is noteworthy that the above capital gains would
be adjusted as per cost indexation or discount method. In the given case, discount
method has been chosen over the former and hence the taxable capital gains would
be halved after offsetting any capital losses that may be available (Barkoczy, 2018).
Liquidation of Antique Jewellery
The date of purchase for this asset falls in October 1987 and thereby the asset is
not pre-CGT asset. This implies that any capital gains derived on this asset can be
subject to CGT.
A particular asset class described in ss. 108-10 is called “collectibles” and includes
various art forms (like painting), picture, antique, sculpture, rare books. The capital
gain or loss calculation is required when a particular CGT event presents itself as a
trigger. The sale of a collectible would lead to an A1 CGT event which would require
determination of capital gains. For this type of CGT event, the correct formula would
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be as hinted in s. 104-10 ITAA 1997. Considering the input information available
about the underlying asset and deploying the requisite formula, the capital
gains/(losses) are shown as follows (Gilders et. al., 2016).
The key aspect to note in the wake of above capital loss is that it cannot be used to
offset any revenue receipt that the taxpayer receives during the year. The capital
losses on collectible asset class can be adjusted/offset only against the capital gains
which are obtained by the taxpayer on the sale of the collectible asset class asset
only (Krever, 2017).
Liquidation of Picture
The date of purchase for this asset falls in March1987 and thereby the asset is not
pre-CGT asset. This implies that any capital gains derived on this asset can be
subject to CGT.
Pursuing to discussion in previous section, painting would be also categorised as a
collectible asset. In accordance with ss. 118-10(!), it is essential that the underlying
cost base should be higher than $ 500 for capital gains on collectible asset to be
subject to CGT (Woellner, 2014). The information provided about the liquidated
asset highlights that the buying price was $ 470 (which is < $500). As a result,
despite the capital gains made on the painting, none of these gains would attract any
CGT.
Conclusion
Considering the above discussion, it becomes clear that the CGT consequences
would arise only for the sculpture and jewellery while the remaining assets are CGT
exempt. In sculpture, capital gains to the tune of $ 500 is realised while the capital
gains to the tune of $ 1,000 is realised in case of jewellery. As a result, for the given
asset sale, the net capital loss of $ 500 would arise which Helen can carry forward
and offset against the collectible related capital gains (Deutsch et. al., 2016).
Question 2
The scenario presented implies that an offer for writing a book has been given to
Barbara so as to write a book which relates to economics. The profession of Barbara
relates to research in economics. It is given that various proceeds have been
obtained by taxpayer (Barbara) with regards to writing, copyrights sale, book
manuscript sale along with the interview transcript sale. In wake of these proceeds,
the aim is to outline if from the various proceeds, any proceeds would be identified
as personal exertion.
For any proceed to be treated as personal exertion based income, it is pivotal as per
s. 6 ITAA 1997 that the engagement of taxpayer in the underlying activity must
produce commercial value. If the taxpayer does an activity without commercial value,
then the personal exertion does not lead to assessable income (Coleman, 2016).
Further, certain activities are such that they are used for asset transfer and the
proceeds are meant for the asset. In such cases, the personal exertion on the
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underlying activity is not the source of commercial value and hence proceeds are for
sale of asset as has been exhibited in Brent vs Federal Commissioner of
Taxation (1971) 125 CLR case (Krever, 2017).
Book & copyright based proceeds – The given facts outline that Barbara has no
experience in writing. It is strange that still she is able to receive an unsolicited offer
from a reputed publisher. The explanation for this lies in the knowledge and
expertise regarding economics which Barbara has. This is of value and can be given
tangible form through writing. Here, the writing activity is only allowing for transfer of
knowledge which is the key asset of commercial value. The writing of Barbara has
no value on its own and hence the proceeds would not qualify as personal exertion
related proceeds (Woellner, 2014).
Book manuscript based proceeds – The commercial value of the manuscript is also
not derived from writing but the knowledge of economics which through writing has
assumed a tangible form. If the writing did not correspond to economics, then the
manuscript would not have any commercial value. Thus, the key for commercial
value is taxpayer’s knowledge rather than the writing skills. Hence, the proceeds
would not qualify as personal exertion related proceeds (Deutsch et. al,, 2016).
Interview transcript sale based proceeds – This requires the use of Barbara’s
professional skills of research for which she is known. Owing to possession of these
skills, she is superior than others and hence worthy of commercial value being
assigned. Clearly, engagement in interview has led to generation of the transcript
and thereby the proceeds from the sale of the same are directly linked to the activity
of conducting interview by Barbara. Therefore, the given proceeds would qualify as
personal exertion related proceeds (Gilders et. al., 2016).
Alternative circumstances prompting writing of book
In the above situation, Barbara wrote the book driven by the money on offer by the
publisher. However, in the new scenario, she writes the book in her spare time
without any intention to get it published. Only after the book is finished does she
decide that she wants to get the same published. In the given case while writing of
book was not driven by profit but the writing activity is not the source of any
commercial value in this case also. After the completion of book, the economic value
that any publisher would put on the book is not linked to literary skills of Barbara but
her knowledge contained in the book. As a result, any payment that Barbara would
derive from book sale in the changed circumstance also would not qualify as
proceeds resulting from personal exertion (Barkoczy, 2018).
Question 3
As per the relevant facts related to the arrangement, it is evident that a sum of $
52,000 has been extended as financial assistance by Patrick (father) to David (son).
This assistance has not been accompanied by any collateral nor any formal
agreement. Further, the father has made it evident to David that there is no
requirement of any interest payment on the loan amount. The only requirement is
that the principal needs to be repaid back after five years. The son (David) is able to
clear the outstanding debt after two years by presenting his father with a cheque
which not only makes payment equivalent to principal but also 5% additional over the
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principal. The tax treatment on part of Patrick for these proceeds needs to be
highlighted through the following discussion.
The cheque that has presented to Patrick contains the following two payments.
1) Principal
2) Additional Amount (5% of principal)
It is noteworthy that the principal amount was originally lent by Patrick and hence the
payment in this regards by David would not cause any economic benefit to the
father. As a result, the nature of these proceeds would not be revenue but capital.
For the purpose of income tax, capital proceeds are non-taxable even though any
capital gains may be subject to CGT (Reuters, 2017).
In wake of the additional amount, there are alternative propositions that need to be
explored in the wake of the given arrangement. These are discussed as follows.
 Proposition 1: Additional amount is ordinary income – The ordinary income
has been defined in s. 6-5 ITAA 1997. In order for proceeds to be termed as
ordinary income, a vital condition is that the taxpayer must indulge in the
underlying activity in a regular manner. Thereby, the additional amount would
be ordinary income only when Patrick regularly engages in money lending.
The facts related to the given transaction clearly indicate that the commercial
nature is lacking. This may be demonstrated from the collateral and formal
agreement being absent. Hence, the given proposition is not applicable
(Nethercott, Richardson and Devos, 2016).
 Proposition 2: Income from isolated profit undertaking- This has been
discussed in s. 15-15 ITAA 1997 where it is possible for assessable income to
be derived on account of isolated activities driven by the prime motive of
profits. This proposition would not apply to the given arrangement as financial
assistance to David was not extended driven by motive to profit (Krever,
2017). This is evident from the fact that Patrick highlighted that no interest
ought to be paid on the assistance provided.
 Proposition 3: Additional amount is gift – If the extra amount provided by son
to father is indeed gift (tax exempt), then the same should comply with the
four conditions in relation to gift hinted by TR 2005/13 (Coleman,2016).
Condition 1: A change in ownership must take place. The cheque for the
complete amount has been given to Patrick which implies change of hands.
Condition 2: The nature of transfer must be voluntary without any pressure.
Patrick had no expectations of any interest receipts and desired repayment of
principal. However, David has still made the additional payment.
Condition 3: The transfer must not be driven by any expectations from
recipient. There are no associated expectations that David has from Patrick in
relation to the additional amount.
Condition 4: The transfer should not be damaging and instead provide benefit.
This also is fulfilled as Patrick is economically benefitted by receiving the
additional amount.
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On account of the discussion carried out above, it may be concluded that Patrick
would not be levied any tax on receipt of the payment from David. This is because a
significant portion of this is capital receipt while the additional payment over and
above the principal is gift from David.
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References
Austlii (2019) , INCOME TAX ASSESSMENT ACT 1997 - SECT 149.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s149.10.html [Accessed June 3, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications,
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia,
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian
tax handbook 8th ed., Pymont: Thomson Reuters
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding
taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company
Reuters, T. (2017) Australian Tax Legislation 2017,4th ed. Sydney. THOMSON
REUTERS,
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
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