Analysis of Taxation, Capital Gains, and Income Report

This report provides a comprehensive analysis of taxation, covering capital gains, personal exertion income, and their implications. It begins with an introduction to taxation and its importance, followed by an examination of capital gains tax, including tax rates and examples. The report analyzes how capital gains taxes apply to various assets like paintings, sculptures, and jewelry. It then delves into income from personal exertion, defining it and providing examples such as income from book publications, manuscripts, and interviews. The report concludes with a case study involving a loan between a father and son and how it impacts their taxable income, including a discussion of dividends. The report references various tax regulations and case laws to support its analysis.

Taxation

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Question 1....................................................................................................................................1
Question 2....................................................................................................................................3
Question 3....................................................................................................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Taxation is an amount which is required to be paid by individuals as well as corporation
on the incomes which is received by them from different sources. Governmental bodies
implement regulations related to tax and for all the tax payers it is very important to comply with
them. There are different types of taxes such as direct and indirect which are needed to be paid
by organisations and people. All the countries have their own taxation rules which is required to
be followed by individuals and organisations operating business in that nation.
MAIN BODY
Question 1
Capital gain tax: The tax which takes place when an asset is sold and the amount which
is being received is more than actual price of that asset is known as capital gain tax. Short term
capital gains are taxed at 37% and long term gains are taxed at up to 20% (Blunden, 2016). The
taxation slab for it is as follows:
Amount Taxation rate
0 – 51700 0% (tax free)
51707 – 452400 15%
452401 and more 20%
It is levied on various business assets such as bonds, securities, real estate, precious
metals etc. The tax which is calculated for all these instruments on positive variation between
cost and selling price or profit. All the taxes which are received by government are used for
various purposes such as development of economy (Types of CGT Event, 2019). In Australia, if a
company is earning any type of capital gain then it have to pay tax around 30% of the profits.
According to Capital gain tax event A1, any type of gain which is generated from disposal of an
assets is disregarded under this head. It is applied of different conditions which are as follows:
 Interest generated on asset when its market value is not more than $500.
 An asset which is being purchased on a cost which does not exceeds limit of $500.
 Interest generated on an asset which does not exceeds limit of $500 and acquired before
16 December 1995 (Burkhauser, Hahn and Wilkins, 2015).
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If any type of loss is generated by selling an asset is deducted from capital gain and if a
security which is bought after 16 December 1995 and its cost is less than $500 then the asset will
be exempted under the head. A client named Helen is willing to fund a business of fashion
designer. For this purpose various assets are being sold so that appropriate funding could be
acquired for the same. The assets which were sold are antique impressionism painting for
$12000 which was bought by Helen's father for $4000 in year 1985. A Historical sculpture is
sold by $6000 which was purchased by her in year 1993 for $5500. An antique jewellery worth
$14000 which was purchased in year 1987 for $13000 in 2018. A picture is also sold by her for
$5000 which was bought by her mother in year 1987 in $470 (Dixon and Nassios,
2016).Treatment of all the sales which was made by Helen will be as follows under capital gain
taxation head:
Serial
No.
Type of
Collectable
Purchase
Date
Sell Date Purchased
at ($)
Sold at
($)
Capital
Gain (or
Loss) ($)
Tax Treatment
1 Painting February
1985
December
2018
4000 12000 8000 Disregarded
2 Sculpture December
1993
January
2018
5500 6000 500 Disregarded
3 Jewellery October
1987
20 March
2018
14000 13000 (1000) Capital Loss
4 Picture March
1987
July 2018 470 5000 4530 Capital Gain
Total
capital
gain
3530
All the above mentioned transactions are made by Helen in order to fund the new
business of fashion designer. Two of the assets which were sold by Helen are declared as
disregarded because both of them were bought before 16 December 1995 and their cost is
exceeds limit of $500. These two assets are sculpture which was purchased in 1985 and antique
impression painting purchased in 1993. Values of both of them are $5500 and $4000
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respectively. Antique jewellery which was sold by Helen for $13000 acquired in year 1987 is
showing capital loss of $1000 as it was purchased for $14000. This $1000 which is a long term
capital gain will be reduced from total income of capital gain head (Richardson, Taylor and
Lanis, 2015). The picture which was bought in year 1987 and sold in 2018 is showing capital
gain of $4530 as it was sold for $5000 and acquired for $470. Total capital gain of Helen is
$3530 ($4530-$1000).
Question 2
Income from personal exertion refers to the gains which are acquired by individuals by
earning ordinary income directly with the help of their own skills or knowledge. Barbara is an
economist researcher and commentator. She has got an offer from Eco books Limited to write a
book regarding economic principles for $13000. It will be the first time when Barbara is going to
write a book in her career and she accepts the offer and writes a book on principles of
Economics. The copyrights of the books wrote by Barbara were assigned to Eco Books Limited
for $13400. The books were published and she is being paid by the book publisher. Manuscripts
of books are also sold by Barbara to the library of Eco Books Ltd. for $4350 and she has also
collected $3200 for the interviews which were related to writing of the book (Hockridge, 2018).
In order to calculate income generated from personal exertion following steps are going to be
undertaken:
 First of all appropriate transaction are identified which could be considered as the part of
income from personal exertion.
 Afterwards it is analysed that the income is actually related to the head or not.
Identification of transactions which were generated from personal exertion:
Transaction Amount ($) Personal Exertion
Income received from publication of
books
13400 Yes
Manuscripts which were sold in the
library
4530 Yes
Income generated from interviews
related to book publishing
3200 Yes
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Total income generated from
personal exertion
21130
The above table shows all the transaction which could be considered as the part of
income generated from self exerted sources. Detailed analysis of all of them are as follows:
Income received from publication of books: Amount of $13000 was offered by Eco
Books Limited to Barbara to write a book on Principles of Economics. The offer was accepted
by her and a book was wrote by her. Total amount which was provided by the publishing
company was around $13400. It is considered as income which is being acquired from personal
exertion. According to a case s6-5, Hochstrasser v Mayes [1960] of ITAA 1997, it is vital to if,
benefits from a contract are received, then it does not lave impact upon the time when the
activity is being completed. All the incomes which are received from such activities which were
conducted with the help of personal skills and knowledge then it will be treated as income
acquired from personal exertion. This law also states that income which is being generated by
Barbara by selling copyrights to Eco Books Limited (McGuire, Seib and Anderson, 2016).
Manuscripts which were sold in the library: This transaction is also considered as
Barbara's income which is being generated by her by selling manuscripts in library of Eco Books
Limited. Main reason behind taking this income under this head is that manuscripts are the drafts
of final published books so the income is also related to books. Barbara has received $4530 for
manuscripts which were considered as the part of her personal exertion income. Another reason
for considering it as personal income is that efforts which were made by writer while writing
manuscripts are part of the book writing activities. According to s6-5, Kelly v FCT [1985] of
ITAA 1997, if any type of benefit is received by a person for an activity which is related to main
task is considered as income generated from personal exertion whether it is received from third
party. In this case Barbara received $4530 from external parties by selling manuscripts to them
which was a part of final book so it is treated as income from personal exertion (Personal
Exertion, 2019).
Income generated from interviews related to book publishing: When Barbara was
writing the book named Principles of Economics various interviews conducted by her which
were related to the book publishing. From this activity Barbara received $3200. this amount is
also considered as the part of income from personal exertion as it was the part of the activity
which is being mentioned in offer which is provided by Eco Books Limited to her. According to
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s6-5 of ITAA 1997, if an interview is conducted which is related to launching of a new book in
the market will be considered as a part of income from personal exertion. Hence the amount of
$3200 is also treated as personal income of Barbara (Smith, 2015).
By considering all the incomes in personal exertion income of Barbara total income of
her will be around $21130.
Treatment of rewards if Barbara has written books otherwise: If the book was
written by Barbara otherwise then it could be considered as business income rather than personal
one. Reason behind treating it as business income is that books would have been wrote for the
purpose of selling them later. The income which will be received from writing them otherwise
will be taxable in that accounting year in which it will be generated.
Question 3
David who is son of Patrick received $52000 from his father on a condition that this
amount will be refunded after 5 years as $58000. This amount is considered as a loan which was
provided by Patrick without any formal agreement or security deposit. According to Patrick,
David is not required to pay any type of interest (Rimmer, Smith and Wende, 2014). David
repaid total amount with 5% addition after two years will be to Patrick. So the amount which was
be repaid by David is ($52000+5%) $54600. this income will leave impact upon total incomes of
Patrick because there will e no direct tax for Patrick due to no agreement between them. As the
business will grow in upcoming years and start to generated profits so Patrick will be considered
as main investor of David's business. According to this clause Patrick will be the shareholder of
the business. The additional amount which is being paid by David to Patrick will be considered
as dividend. The additional amount is $2600 (54600 – 52000). This dividend will be the part of
income from other sources for Patrick. Due to this taxable income will be increased and Patrick
have to pay additional tax on income from other sources (Wilkins, 2015).
CONCLUSION
From the above project report it has been concluded that all the individuals and
corporations are required to pay appropriate amount of taxation on their incomes according to
governmental rules and regulations. If they are not able to pay amount according to legal
requirements then it may result in strict action of legal authorities against them. There are various
types of taxations such as capital gain, personal exertion, other sources etc. Australian Tax
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authority have imposed different types of rules for all these incomes and individuals who are
generating all of them have to follow the legislation. It can help them to reduce possibilities of
interferences of government in this business or personal activities.
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