Taxation Law Assignment: CGT, Income from Personal Exertion, and Loans

This taxation law assignment solution analyzes three key scenarios. The first question examines the capital gains tax (CGT) implications for Helen, a fashion designer, focusing on the sale of various assets, including pre-CGT assets and collectibles like an antique painting, a sculpture, and antique jewellery. The analysis determines whether CGT applies based on purchase dates and sale proceeds, including the application of the discount method for long-term assets and the treatment of capital losses. The second question addresses whether payments received by Barbara, a commentator and economist, constitute income from personal exertion, considering proceeds from book copyright, manuscript sales, and interview transcripts. The analysis differentiates between capital and income based on the nature of her skills and the source of value. The final question evaluates the nature of payments received by Patrick from his son David, who took out a loan. The analysis determines whether an extra 5% payment on the loan is assessable income or a non-assessable gift, considering ordinary income, assessable income, and gift criteria outlined in tax rulings.

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Question 1
Helen is the concerned taxpayer who has sold some of her CGT assets in regards to
derive income to run her fashion designer business. It is essential to determine the
capital gains tax (CGT) implications on the account of the capital gains or losses
derived from the transactions involving disposal of the assets during the tax year.
The CGT implications will only be imposed on the capital gains/losses generated
through the transaction of sale of the capital assets when it does not classify as pre-
CGT asset under ss. 149(10) ITAA 1997. The assets that have bought before the
enforceability of the CGT i.e. September 20, 1985 are termed as pre-CGT
asset(Austlii, 2019a). The sale proceeds from disposal would be used and after
eliminating the cost base of the asset, the net capital gains/losses would be
determined as given in ss. 104 (5) ITAA 1997 under A1 event for the transaction of
sale. Antique objects such as painting, art work, books, sculptures and so forth are
categorised as “collectibles” as highlights in ss. 108 (10) ITAA 1997(Austlii, 2018b).
There is an essential condition for collectable which needs to be fulfilled for the
applicable of the CGT liability. It is essential that the collectible must be purchased
for more than $500 (Barkoczy, 2018).
Capital Asset 1: Antique Painting
Antique painting is a pre-CGT asset because Helen has purchased it in February
1985 and at that time, CGT was not applicable. It represents that capital gains/losses
from the disposal of the painting would not attract CGT liabilities irrespective of the
fact that it is collectible and results in capital gains from this long-term asset.
Capital Asset 2: Sculpture
Sculpture is an antique object which has been purchased on the part of Helen post
September 20, 1985, This indicates that it will not be considered as pre-CGT asset.
Further, this collectible has been purchased for more than $500 and hence, the
necessary condition for CGT liability enforceable for collectible is also satisfied.
Therefore, the cost base would be subtracted from the total sale proceeds of the
sculpture as represented in ss. 104(10) ITAA 1997 (Krever, 2017).
Sale proceeds from the disposal of sculpture = $6000
Cost base pertaining to sculpture = $5500
Capital gains or capital losses = Sale proceeds from the disposal of sculpture -Cost
base of the sculpture = ($6000) – ($5500) = $500
There is a net capital gains $500 from the sale of sculpture. According to the
provisions of ss. 115 (5) ITAA 1997, the discount method would be adopted from
CGT payable amount for the long-term assets. Any asset which has holding period
more than a year is categorised as long-term asset. Here also, the sculpture is a
long-term asset which means discount method will be used to determine the taxable
capital gains (Reuters, 2017).
Capital Asset 3:Antique Jewellery
Antique jewellery has been purchased on the part of Helen post September 20,
1985. Hence, it will not be considered as pre-CGT asset. Further, this collectible has
been purchased for more than $500 and hence, the necessary condition for CGT
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liability enforceable for collectible is also satisfied. Therefore, the cost base would be
eliminated from the sale proceeds of the antique jewellery as given in ss. 104(10)
ITAA 1997.
Sale proceeds resulted from disposal of jewellery = $13,000
Cost base pertaining to antique jewellery = $14,000
Capital losses = Sale proceeds resulted from disposal of jewellery -Cost base of the
antique jewellery = ($13000) – ($14000) = -$1000
These derived capital losses would be taken for adjustment against the capital gains
derived from the transaction of sale of the collectibles. Further, if Helen does not
have any capital gains from collectibles in the given tax year, then this capital losses
would be forwarded to the next year and would be adjusted from future capital gains
from disposal of collectibles (Coleman, 2016).
Capital Asset 4 – Picture
Helen’s mother has acquired a picture which is considered as collectible under ss.
108(10) ITAA 1997. The essential condition regarding the CGT implications for the
disposal of the collectibles needs to be checked which means whether the buying
price of collectible is higher than the threshold value i.e. $500. It is evident that
Helen’s mother purchased picture only for $470 which is lower than the required
threshold value of being $500 and therefore, the CGT liability will not be enforceable
on Helen on the account of the capital gains derived from transaction of sale.
Net Capital Gains/Losses for Helen for all the four capital assets = $500 (Sculpture) -
$1000 (Jewellery) = -$500
As evident from the above that Helen has net capital losses of tune $500 from the
disposal of her capital assets during the tax year. It is apparent that she does not
have any current capital gains and thus, this capital loss would be forwarded to the
next tax year and will be balanced through the future capital gains resulted from
disposal of the collectibles (Sadiq et. al., 2016).
Question 2
The given information indicates that Barbara is a commentator and also a known
economist researcher. Even though she has not written any book previously, a book
publisher enters into a contract for book writing regarding economics. Barbara
derives economic proceeds not only on account of copyright sale but also sale of
manuscript of book besides sale of manuscript of interviews which she conducted for
the book. The aim is to outline if any payment received by her could be classified as
income derived from personal exertion.
Income from personal exertion is derived on indulgence in any activity where
taxpayer skills are deployed in order to produce commercial value. Mere indulgence
in an activity would not lead to income from personal exertion. Further, it is possible
in certain circumstances that the activity per se acts a medium of transfer for
knowledge which was already present and is not produced on account of the activity
(Krever, 2017). A noteworthy case in this regards is Brent vs Federal Commissioner
of Taxation (1971) 125 CLR whereby the taxpayer indulged in series of interviews to
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transfer information about her husband. The proceeds were held to be capital as the
payment was made not for the interview but the information which was not created
through the interview (Barkoczy, 2018).
The proceeds from sale of book copyright would not lead to income from personal
exertion. This is because Barbara’s skill is not related to writing and hence the act is
writing is worthless intrinsically. Further, she has not written any book before and
hence the interest of the publisher lies in the information and knowledge she
possesses about the field of economies. Thus, the receipts would be capital
(Coleman, 2016).
The proceeds from sale of manuscript also would not lead to income from personal
exertion, This is because the activity of writing does not lead to creation of any
commercial value since Barbara is not renowned as a writer. The value assigned to
this asset is also on account of Barbara’s reputation and skills as a economist
(Reuters, 2017).
However, the proceeds from the interview manuscripts would be considered as
proceeds from personal exertion. This is because Barbara is an economics
researcher and thereby has the requisite skills to conduct research which provides
commercial value to the transcript (Sadiq et. al., 2016).
Book writing driven by satisfaction
Unlike previous scenario, Barbara not writes the book even when she has not
received any offer from any publisher. In the particular situation, Barbara is not
driven by profits while writing the book even though she might be aware that the
book would have commercial value owing to her profession as a economics
researcher. Even though the book is sold later and is written in the absence of profit
motive, but still the act of writing is not the source of value for the book. The
proceeds which are paid for the book would be again paid for the copyright to the
knowledge of Barbara and not on account of her fine literary skills. Hence, the
proceeds would not be recognised as income from personal exertion (Nethercott,
Richardson and Devos, 2016).
Question 3
Analysis needs to be carried out to indicate the nature of the payment received on
behalf of the taxpayer Patrick in relation to the loan amount extended to his son
(David) so as to support his business. Patrick has given a lump-sum amount of
$52,000 to David and also has not asked for any interest payment against the loan
amount. They have not enacted a legal contract for the loan amount. Patrick and
David agreed on a repayment period of 5 years for the loan. However, David
provided the loan amount as well as the extra 5% of the total loan through cheque at
the end of two years. The issues that arise here relate to determination whether the
two payment i.e. loan payment and extra 5% will become the part of the assessable
income of Patrick or not.
It is noteworthy that the principal amount (repayment of loan payment) is considered
as the capital receipts and no CGT implication would be applicable on the repayment
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of loan. The extra payment received on the loan amount needs to be analysed
because it would not be considered as capital receipts (Barkoczy, 2018). In context
of this payment, three potential statutory treatment may arise considering the fact
facts. These are discussed below.
Scenario 1:5% incremental payment regarded as ordinary income (s. 6(5)) –
Ordinary income is defined as that income which is derived in accordance with
ordinary concepts. One of the key components of ordinary income is business
income. As a result, if Patrick is operating a money lending business, then the
incremental amount paid by the son would be considered as interest income which is
earned through regular business activities. However, the possibility of this is not
supported by the given facts. If the lending to the son was indeed a commercial
transaction, then it should be akin to business transaction carried out in money
lending (Krever, 2017). The following three facts indicate that this was not a business
transaction.
 No collateral has been taken against the amount which is quite uncommon in
lending transactions.
 Even more surprising is that no agreement has been formed which practically
provided no evidence that a sum was sent to David.
 Patrick made it clear to David that he does not need to pay interest.
Scenario 2: 5% incremental payment regarded as assessable income (s. 15(15)) -
Assessable income under s.15(15) would arise when a certain isolated transaction
has been enacted by the taxpayer with profit motive (Reuters, 2017). In the given
context, if Patrick has lent money to David with the primary objective of earning
interest income, then the incremental amount would have been assessable under
the aegis of s. 15(15). But on the contrary , Patrick has clearly stated to David that
no interest payment is required which implies absence of profit motive. Thus, the
incremental amount paid by David is not assessable income under this scenario.
Scenario 3: 5% incremental payment is non-assessable since gift (TR 2005/13) – In
order to identify gifts, the courts have relied on the general characteristics of gift to
determine if the same are present in the underlying transaction. The four main
conditions in this regards have been highlighted in tax ruling TR 2005/13 and
indicated as follows (ATO, 2005).
 Voluntary transfer of gift (Patrick did not desire any interest but David paid the
same nevertheless)
 Actual ownership transfer in favour of beneficiary (The cheque amount
already included the 5% extra amount and has been given to Patrick).
 No reciprocal expectations (David does not have any incremental
expectations from his father owing to the extra amount paid).
 Recipient to be benefitted – (Patrick has been benefitted by receipt of extra
amount)
Considering the above, it is fair to conclude the incremental amount of 5% would be
non-assessable income since it is gift from son. Also, the principal repayment is
exempt on being capital receipts. Hence, no portion of the proceeds would contribute
to assessable income for Patrick in the year when the payment was received.
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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 24, 2019]
Austlii (2019a) , 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 May 24, 2019]
Austlii (2019b) , INCOME TAX ASSESSMENT ACT 1997 - SECT 118.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s118.10.html [Accessed May 24, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications, pp 171, 193, 217
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters
(Professional) Australia, pp. 161-162, 243
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study
Manual 2016, 4th ed., Sydney: Oxford University Press, pp. 189
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company, pp. 141, 198, 245
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS, pp. 201, 276-277
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. 155,
218-219
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