Taxation Law: Income Tax and CGT Assignment - HI6028

This Taxation Law assignment solution addresses two main questions. The first question examines the assessability of various income sources, including tips, employment income, gifts, and fringe benefits, under the Income Tax Assessment Act 1997 (ITAA 1997). It analyzes relevant case law, such as Calvert v Wainwright (1947) and Scott v CT (1935), to determine the tax treatment of different receipts. The second question focuses on Capital Gains Tax (CGT), exploring concepts like pre-CGT assets, personal use assets, small business concessions, and collectables. It applies CGT rules to specific scenarios, including the sale of a house, a car, business goodwill, furniture, and paintings. The solution references key sections of the ITAA 1997 and relevant tax rulings to provide a comprehensive analysis of each issue.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................6
Answer A:..............................................................................................................................6
Answer B:...............................................................................................................................6
Answer to C:..........................................................................................................................7
Answer to D:..........................................................................................................................8
Answer to E:...........................................................................................................................8
References:...............................................................................................................................10

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Answer to question 1:
Issues:
Will Emmi be held assessable for numerous receipt from her employment inside the
ordinary denotation of “sec 6-5 ITAA 1997”?
Rule:
According to the “sec 6-5 (1) ITAA 1997” it takes into the account the ordinary
earnings for tax purpose. Noting “sec 6-5 ITAA 1997” an individual taxpayer taxable
earnings involves the pay that is earned in agreement with the ordinary concepts. A “nexus”
with the receipt originating from the personal service of taxpayer amounts to ordinary income
(Miller & Oats, 2016). Unexpected or voluntary payments given to a taxpayer as the part of
service amounts to an ordinary earnings. As noted in “Calvert v Wainwright (1947)” the
receipt of tips by the taxi driver represents the occurrence of work and chargeable as ordinary
earnings.
The income producing actions of the taxpayer usually involves the income personal
exertion in the form of services, employment, one off services etc. Usually majority of the
earnings earned by a taxpayer is regarded as ordinary pay (Barkoczy, 2016). The law court in
“Scott v CT (1935)” the word income should not be treated as the word of art and requires
the use of necessary values to treat the earnings as income.
Gift received by taxpayer relating to private qualities is not an ordinary earnings.
While gift arising out of taxpayer’s capability to work or from the employment agreement is
regarded as ordinary income (Gashenko et al., 2019). As noted in “Hayes v FCT (1956)” the
receipt of shares in a company by an accountant from his previous boss or business owner
cannot be regarded as ordinary income and hence non-assessable for recipient.

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According to the reconciliation rule given in “sec 6-25 (2)”, if an amount represents
both the aspects of statutory earnings and ordinary earnings then in such a situation the rules
concerning to the statutory earnings prevails excepting when there are any contrary intentions
is given. Alternatively, if the employer provides any fringe benefit to the worker, then the
benefit would be treated as non-assessable pay for the employee under “sec 23L ITAA 1936”
and the employer in such circumstances will be held liable for FBT based on the value of
benefit given (Woellner et al., 2016). As held in “Essenboourne Pty Ltd v FCT (2002)” held
that a fringe benefit will only happen when the benefit is directly related to a particular
employee.
There are also certain types of receipts apart from the ordinary income or capital
which usually arise. Gifts and lottery winnings are not considered taxable earnings since the
requirements associated to assessment provision is not met. Purely personal gifts are not
treated as chargeable pay (Blakelock & King, 2017). As noted in “Scott v FCT (1966)”
receipt of 10,000 pounds gift from a client’s wife out of husband estate is not regarded as
income. The gift was simply unsolicited.
Application:
Emmi reports a receipt of tips from customer amounting to $335 from her part-time
work in restaurant. The receipt holds “nexus” from Emmi’s personal service and amounts to
ordinary pay under “sec 6-5 ITAA 1997”. Citing “Calvert v Wainwright (1947)” the receipt
of tips by the Emmi represents the event of occupation and will be assessable as ordinary
earnings (Taylor et al., 2017).
She further reports the receipt of $25,000 from her employment in Crown Melbourne
restaurants. The receipt is an income personal exertion. Bring up the case of “Scott v CT

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(1935)” the sum of $25,000 will be treated as ordinary pay under “sec 6-5 ITAA 1997” and
will be included in her assessable earnings.
Emmi during the year received an expensive perfume in the form of gift from a
customer that worth $250. Gifts received by Emmi relates to her personal qualities and
should not be treated as ordinary earnings. Citing the example of “Hayes v FCT (1956)” the
receipt of expensive perfume in the form of gift from a customer cannot be regarded as
ordinary income and hence it is non-assessable for Emmi.
A monthly entertainment expenses was paid by the employer to Emmi that included
meals of $380 and entertainment event. Referring to “Essenboourne Pty Ltd v FCT (2002)”
the meal and entertainment event amounts to fringe benefit which is directly related to
Emmi’s employment (Du Preez, 2016). The benefit would be treated as non-assessable
income for Emmi under “sec 23L ITAA 1936” and the employer of Crown Melbourne
restaurant in such circumstances will be held liable for FBT based on the worth of benefit
provided.
Emmi also reports the receipt of $15,000 in the form of Christmas gift from her
father. Citing “Scott v FCT (1966)” the sum of $15,000 is completely a personal gift. The
amount will not be considered as taxable earnings because the requirements associated to
assessment provision is not satisfied.

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Conclusion:
Conclusively, it should be noted that that tips and employment pay that that is
received by Emmi will be included in her taxable income in agreement with the ordinary
conception of “sec 6-5 ITAA 1997”. This is because the receipts hold adequate relation with
the income generating activities of Emmi. While the expensive perfume received by Emmi
from a customer during Christmas time is a mere gift and non-convertible into money. While
the entertainment event and meals provided to Emmi is a non-taxable fringe benefit and the
Christmas gift of $15,000 received by Emmi is purely a personal gift and hence non-taxable.

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Answer to question 2:
Answer A:
CGT is commonly relevant on the assets that is bought or dealings that takes place on
or following the 20 sept 1985. Consequently, the terms “pre-CGT” and “post-CGT” which is
very commonly used to state assets purchased or events that takes place before or succeeding
the aforementioned date (McCluskey & Franzsen, (2017). The legislation of capital gains tax
is applied on the assets that is purchased on or following the 20 sept 1985 date. While any
asset that is purchased before this date is exempted from CGT regime.
Liu an Australian resident is returning back to China and sells all her assets. During
the year Liu sold the house for $630,000 which she purchased in 1981 by paying an
acquisition cost of $55,000. The house here will be classified as “Pre-CGT asset” because it
was purchased by Liu in 1981 which is before the CGT introduction date of 20th September
1985. The capital gains that is made by Liu from sale of her main residence will be simply
exempted from tax.
Answer B:
CGT assets under “section 108-5 ITAA 1997” denotes assets which are subjected to
CGT. It includes any sort or belongings or lawful or equitable rights which cannot be
classified as property. A CGT event is usually applicable on the assets which is purchased
following the 19-9-1985. Under “sec 104-10 ITAA 1997” a “CGT event A1” involves the
disposal of CGT asset (O’Connell, 2017). As given under “sec 108-20 (2) ITAA 1997” a
personal use asset involves the non-collectable assets or those assets which a taxpayer keeps
for their private usage and enjoyment. The examples of this assets includes, boats, motor cars,
furniture, household items and electrical goods. As per “sec 108-20 (1) ITAA 1997” capital
loss that happens from the sale of PUA’s are simply disregarded.

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Liu reported the sale of car during the year for $8,000. The car was purchased by Liu
in 2011 for an acquisition cost of $37,000. The car owned by Liu must be characterized as
personal use asset in “sec 108-20 (2) ITAA 1997”. The sale of car has given rise to “CGT
event A1” under “sec 104-10 ITAA 1997” (Jones, 2016). When the car was sold for $8,000 a
capital loss was suffered. As a result, under “sec 108-20 (1) ITAA 1997” capital loss
happening from the sale of car are simply disregarded.
Answer to C:
As per the “Taxation Ruling of TR 1999/16”, in respect of Goodwill a “CGT event
C1” happens when the business is enduringly ended (McCluskey & Franzsen, 2017). When
the business is permanently ceased from operation, whether out of voluntary or involuntary
act, the ruling defines that a loss or destruction of business goodwill takes place.
Concessions are awarded to small business under the “division 152”. The basic
conditions to get the access of concessions is;
a. An entity will be treated as small business when their aggregate turnover in the
present or previous year is less than $2 million with net value of the assets is not
greater than $6 million (Freebairn, 2016).
b. The CGT asset is ought to be the active asset.
On meeting the above criteria, the small business is provided with four types of
concession. These are
a. “15-year Exemption” when the asset is owned for at least 15 years and the age of tax
payer is 55 years or more (Bentley, 2019).
b. “50% reduction” in capital gain following the application of general 50% discount.
c. “Retirement concession” lets a taxpayer to disregard the capital gain derived from
CGT asset of small business up to a limit of $500,000.

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d. “Roll-over relief” allows the deferral of capital gains when a taxpayer purchases a
replacement asset.
As obvious, Liu owned a small business enterprise which she sells for $125,000. She
fetched $53,000 for all her photography equipment and $50,000 for goodwill. With respect to
“Division 152” a small business concession can be accessed by Liu because the value of her
net asset is not more than $6 million (Mishra & Anwar 2017). As Liu is retiring from her
business, she can claim retirement concession where the capital proceeds from the sale of her
business can be used to fund her retirement. While for her business goodwill, Liu can obtain a
15-year exemption from the CGT asset because she meets the criteria of 55 years older or
more.
Answer to D:
The special rules say that capital gains from personal use asset is to ignored if the cost
base of asset is lower than $10,000 under “sec 118-10 ITAA 1997”. Liu during the year
reports the sale of furniture for a sum of $2,000. The furniture was actually bought by Liu for
an acquisition cost of $4,800. The furniture must be categorized as personal use asset under
“sec 108-20 (2) ITAA 1997” (Miller & Oats, 2016). As evident the sale of furniture has
given rise to “CGT event A1” under “sec 104-10 ITAA 1997”. The sale of furniture has
resulted in capital gains and under “sec 118-10 ITAA 1997” the capital gains from furniture
should be ignored by Liu because it cost is less than $10,000.
Answer to E:
As explained within the “sec 108-10 (2) ITAA 1997” a collectable involves items that
is held by an individual for their private usage (Barkoczy, 2016). The examples of the
collectables consist of antiques, works of art, jewellery, paintings, sculptures, stamps or coins
etc. The taxpayer should denote that under “sec 118-10 (1) and (2)” capital gains from

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collectables needs to be ignored when the assets is purchased for lower than $500 (Gashenko
et al., 2019). While the capital gains that is earned from the sale of collectables is included
into the assessable proceeds of the taxpayer under “section 102-5 ITAA 1997”.
As noticed Liu sold a painting for $28,000. She purchased the paintings from a second
hand shop and none of the painting were purchased for $500. The paintings will be classified
has collectable under “sec 108-10 (2) ITAA 1997” since Liu bought the painting for private
use purpose (Morgan & Castelyn, 2018). The sale of painting has resulted capital gains
however the cost base of each painting is not more than $500 therefore, the capital gains
made from selling the second hand painting should be ignored by Liu.
Apart from this Liu also sold one painting that she had directly purchased from an
artist for $1,000. The painting was sold for $8,000 and Liu derived capital gains from it. As
the painting’s cost base is greater than $500 the capital gains made from it will be contained
within in Liu’s assessable income under “section 102-5 ITAA 1997”.

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References:
Barkoczy, S., (2016). Foundations of taxation law 2016. OUP Catalogue.
Bentley, D., (2019). Does A Capital Gains Tax Work? The Australian Experience Eleven
Years On. Journal of Malaysian and Comparative Law, 23, pp.13-36.
Blakelock, S. & King, P., (2017). Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), p.18.
Du Preez, H., (2016). A construction of the fundamental principles of taxation (Doctoral
dissertation, University of Pretoria).
Freebairn, J., (2016). Taxation of housing. Australian Economic Review, 49(3), pp.307-316.
Gashenko, I.V., Zima, Y.S. & Davidyan, A.V., (2019). Principles and Methods of Taxation.
In Optimization of the Taxation System: Preconditions, Tendencies and
Perspectives (pp. 33-39). Springer, Cham.
Jones, D., (2016). Capital gains tax: The rise of market value?. Taxation in Australia, 51(2),
p.67.
McCluskey, W.J. & Franzsen, R.C., (2017). Land value taxation: An applied analysis.
Routledge.
Miller, A. & Oats, L., (2016). Principles of international taxation. Bloomsbury Publishing.
Mishra, A.V. & Anwar, S., (2017). Foreign portfolio equity holdings and capital gains
taxation. International Review of Financial Analysis, 51, pp.54-68.
Morgan, A. & Castelyn, D., (2018). Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, p.307.
O’Connell, A., (2017). Australia. In Capital Gains Taxation. Edward Elgar Publishing.

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Taylor, J., Walpole, M., Burton, M., Ciro, T. & Murray, I., (2017). Understanding Taxation
Law 2018. LexisNexis Butterworths.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. & Pinto, D., (2016). Australian Taxation
Law 2016. OUP Catalogue.