Taxation Law Assignment for HI6028: Analysis of Cases

This document provides a comprehensive solution to a taxation law assignment, addressing three key questions. The first question analyzes the capital gains tax (CGT) implications of selling various assets, including an impressionism painting, a sculpture, antique jewelry, and a painting, considering pre-CGT assets, collectible assets, and relevant tax calculations. The second question examines whether proceeds from writing a book, including copyright, manuscript, and interview transcripts, constitute income from personal exertion, considering the author's expertise and the nature of the income sources. The final question discusses the tax implications of a loan between a father and son, analyzing whether a voluntary payment made by the son constitutes ordinary income, profit from an isolated undertaking, or a gift, considering the absence of interest and the nature of the payment. The solution provides detailed analysis, calculations, and references to relevant legislation and case law to support the conclusions.

TAXATION LAW
STUDENT ID:
[Pick the date]

Question 1
The given situation relates to taxpayer Helen who has sold a host of assets during
the current financial year (2017-2018) in order to provide funds to her business. The
relevant implications in term of capital gains tax are as outlined below.
Capital Asset: Impressionism painting
In accordance with the given information, this asset was liquidated on December 1,
2018 for a sum of $ 12,000. This asset was acquired by Helen’s father in February,
1985.
The crucial aspect with regards to the current asset is the date of purchase. It is
noteworthy that CGT system was not always in place and before September 20,
1985, there was no tax on any capital gains derived by the various taxpayers. The
assets that were purchased during that time are referred to as pre-CGT assets. This
concept has been explained in s. 149-10 ITAA 1997. The significance of these
assets lies in the fact that no CGT would apply to any capital gains on disposal of
these assets (Gilders et. al., 2016). As a result, irrespective of the capital gains on
the impressionism painting sale, Helen would not have to pay any CGT on the same.
Capital Asset: Sculpture
In accordance with the given information, this asset was liquidated on January 1,
2018 for a sum of $ 6,000. This asset was acquired by Helen in December, 1993.
It is evident that the sculpture is not a pre-CGT asset as the purchase has been
made at a time when capital gains were taxed. It is noteworthy that as per s. 108
ITAA 1997, sculpture is classified under “collectible” asset. These assets are CGT
assets and thereby when any of these is liquidated, the CGT event A1 is triggered in
accordance to s. 104-5 ITAA 1997 (Barkoczy, 2018). The relevant formula for
calculation of resultant capital gains has been outlined in s. 104-10 1997 as per
which the proceeds from asset liquidation should be adjusted for asset cost base. In
wake of the given information, this is shown below (Reuters, 2017).
The above gains can be reduced using the discount method as the asset was held
for more than one year and also the taxpayer Helen is an individual taxpayer. As a
result, 50% discount on the capital gains would be applicable but the same woul
apply after all existing capital losses are adjusted (Krever, 2017).
Capital Asset: Antique jewellery piece
In accordance with the given information, this asset was liquidated on March 20,
2018 for a sum of $ 13,000. This asset was acquired by Helen in October, 1987.
It is evident that the antique jewellery is not a pre-CGT asset as the purchase has
been made at a time when capital gains were taxed. It is noteworthy that as per s.
108 ITAA 1997, antique jewellery is classified under “collectible” asset. These assets
are CGT assets and thereby when any of these is liquidated, the CGT event A1 is
triggered in accordance to s. 104-5 ITAA 1997. The relevant formula for calculation
2

of resultant capital gains has been outlined in s. 104-10 1997 as per which the
proceeds from asset liquidation should be adjusted for asset cost base. In wake of
the given information, this is shown below.
With regards to collectible ss. 108-10(1) highlights that any capital losses can only
be offset against collectible assets linked capital gains. If such gains are not
available to the required extent, then the pending capital losses to be offset would be
carried forward to future tax years (Deutsch et. al., 2015).
Capital Asset: Picture
In accordance with the given information, this asset was liquidated on July 1, 2018
for a sum of $ 5,000. This asset was acquired by Helen’s mother in March, 1987 for
$470.
It is evident that the painting is not a pre-CGT asset as the purchase has been made
at a time when capital gains were taxed. It is noteworthy that as per s. 108 ITAA
1997, painting is classified under “collectible” asset. Additional requirement in case
of collectible assets is referred to in ss. 118-10 ITAA 1997 as per which for levying of
CGT, the minimum purchase price ought to be $ 500 (Austlii, nd). While this
condition was being adhered by the previous assets discussed that belonging to this
asset class, this is not fulfilled for current asset. As a result, no CGT would apply on
any capital gains derived by Helen.
Based on the above discussion, only the two following two asset have some CGT
implication.
 Sculpture = $ 500 gain
 Antique jewellery = $ 1000 loss
 Net position for Helen (2017-2018) = 500 – 1000 = -$ 500 or $ 500 capital
loss
The implication of the above computation is that $ 500 capital losses would be
carried forward to the future tax years for offsetting. It is noteworthy that this cannot
be adjusted against assessable income derived from revenue receipts (Coleman,
2016).
Question 2
In line with the given case facts, it is evident that Barbara has written a book related
to economics after she received an offer from a book publisher. It is noteworthy that
she got the offer even though she has never written a book earlier. Further, she
received money in lieu of copyright sale related to book, sale of manuscript of book
along with interview transcripts which were conducted as part of the book writing. In
wake of the facts outlined, the issue is to determine if any of the proceeds underlined
may be attributed to personal exertion based income.
The discussion of the various proceeds obtained by Barbara and the suitable
treatment of the same is carried out below.
3

Writing and copyright based proceeds- The primary activity which Barbara has
engaged in is writing. The pivotal question to consider is whether any commercial
value was created in the process (Duetsch et. al, 2016). In order to answer this, it
needs to be indicated if her literary skills are valued are not. The clear answer is no
as she has no experience in writing. Also, the fact that she has been given a writing
contract is linked to her knowledge of economics owing to her profession. Hence, the
real asset which the publisher is actually chasing is knowledge and payment is made
for acquiring this intangible asset with writing being an enabling mechanism. This
situation is similar to the Brent vs Federal Commissioner of Taxation (1971) 125 CLR
and hence the proceeds would be capital (Barkoczy, 2018).
Manuscript based proceeds – The manuscript is the result of activity of writing
undertaken on behalf of Barbara. The key question is whether commercial proceeds
on account of manuscript is the result of writing. Clearly, this argument is not true as
if Barbara had written on an alternative topic not connected with her profession, she
would not have received any money for the manuscripts. Thus, the commercial value
of manuscript is her reputation and knowledge which existed before writing and
hence the proceeds are not income from personal exertion under s. 6 ITAA 1997
(Gilders et. al., 2016).
Interview transcript based proceeds – The proceeds that are derived from this sale
would be attributed to the direct skills of Barbara i.e. interviewing and conducting
economic research. As a result, it would be reasonable to expect that her skills as
interviewer would be superior than most people based on which the transcript has
commercial value (Krever, 2017). Thereby, the activity is the source of proceeds and
hence this is income from personal exertion.
In case the book is not written by Barbara after receiving the offer but instead in her
spare time, then the biggest change would be that no profit motive would have driven
her to write the book. However, this is not a valid consideration to determine if the
proceeds are income from personal exertion or not. This is because the decision to
allocate a particular income as being obtained from personal exertion is decided
based on whether the underlying activity of writing leads to commercial value
creation. This is untrue as if Barbara does not write about topic linked to her
profession, then the book has no worth. Hence, it is Barbara’s knowledge which is
the key source of value owing to which there is no change in stance as compared to
the original scenario (Reuters, 2017).
Question 3
In the scenario presented, a sum of $ 52,000 has been lent to David by Patrick as
the former needs the funds for business. As per the understanding between father
and son, this money would be paid back after 5 years. Further, the father made it
evident that the son does not need to pay any interest on the assumed loan. The son
in reality clears the outstanding loan liability in just two years when the full repayment
4

is made. Besides this, an additional 5% amount is also given to Patrick. The tax
implications for the receipt of this payment from David ought to be discussed.
The first aspect to be highlighted is that the principal repayment to the tune of $
52,000 would be capital proceeds since the same sum of money was initially lent by
Patrick to David which has been paid back. Thereby, no tax implications would arise
on the same (Nethercott, Richardson and Devos, 2016). The more interesting aspect
is to analyse the possibilities in relation to the amount (5% of principal) which David
has voluntarily paid. These possibilities are explored below.
 Treatment as ordinary income – This is possible under s. 6-5 ITAA 1997
whereby the proceeds constitute as income in accordance with ordinary
concepts. For this to happen, a necessary condition should be regular income
being derived by Patrick through lending transactions. In such scenario, the
lending to Patrick would be done in a commercial manner. However, this is
not true as Patrick did not even enact a formal agreement with David
regarding lending of money, did not ask for any collateral and further declared
that no interest is desirable. Thus, the incremental money given by David
would not be ordinary income (Coleman, 2016).
 Treatment as profit from isolated undertaking – This is possible under s.15-15
ITAA 1997 where the taxpayer is not regularly indulging in a given activity but
enters into a particular transaction with the prime motive of profit earning. With
regards to lending of money by Patrick to David, it is apparent that interest
income is not desired and hence profit motive is lacking. As a result, the
amount is not assessable as per s. 15-15 ITAA 1997 (Gilders et.al., 2017)
 Treatment as gift – This is also a possibility in which case the proceeds would
not lead to any assessable income and hence would not impose any tax
implication for Patrick. Based on similar cases in the past, the courts have
linked the concept of gift with the ordinary characteristics of the same which
have been captured under tax ruling TR 2005/13 (Barkoczy, 2018).
1) The recipient must not be harmed but benefitted from the gift.
2) The gift should be transferred voluntarily without any pressure or
insistence.
3) The gift should not result in any reciprocal expectations by the
transferor.
4) An actual ownership transfer must accompany the gift.
The above conditions are fulfilled in the given scenario as the extra payment
provides economic benefit to Patrick. Also, David had no compulsion to make any
incremental payment besides the principal repayment. Besides, in wake of this token
payment, David would not have any extra expectations from his father. By passing
the cheque to Patrick, David has effectively transferred the money to Patrick.
Thus, it would be fair to conclude that the resulting arrangement between father &
son would not lead to any assessable income for Patrick.
5

References
Austlii (n.d.) , INCOME TAX ASSESSMENT ACT 1997 - SECT 118.10, [online]
available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s108.15.html [Accessed May 28, 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,
,
6