Taxation Law 200187 Assignment: Spring 2019 Take-Home Exam Solution

This assignment solution addresses two key taxation law issues. The first issue concerns whether payments made for the sale of trademarks should be included as taxable income, analyzing the application of ordinary income concepts, capital gains, and relevant case law such as Scott & Ors v FC of T and Kwikspan Purlin System Pty Ltd v FC of T. The second issue examines the taxation implications of transactions made by an individual, Jack, including capital gains tax (CGT) on the sale of shares, a house, and a boat, as well as ordinary income from rent and salary. It applies the Income Tax Assessment Act 1997 (Cth), including sections on capital assets, cost base, capital proceeds, and CGT discounts, to calculate assessable income for the years 2017-18 and 2018-19. The analysis considers relevant provisions and precedents like Eisner v Macomber and Pritchard v Arundale to determine the tax liabilities and implications for both scenarios, ultimately providing detailed calculations of capital gains and total assessable income.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Author Note

1TAXATION
Answer 1
Issue
Whether the payments made to the common Bank amounting to 4 million dollars for the sale of
trademarks by AAPL would be included as taxable income.
Rule
The assessable income pertaining to an individual taxpayer as per the provisions of s 6.5, ITAA 97,
covers although receives that have been incurred on the ordinary concept. The meaning of the expression
income accrued from ordinary concept is required to be construed as per the meaning assigned by the
courts in different judgements. The concept of ordinary income demarcates the earnings that has been
accrued as per the concept of ordinary income earning endeavours. This can be illustrated the case of
Scott & Ors v FC of T 2002 ATC 2158. This needs to be determined by the test of the conscience of a
reasonable person. The determination of the consideration of the income as ordinary income by a
reasonable individual would also be considered under this test. Under this section, income accrued from
royalty is also taxable under this concept.
Income can also be accrued from capital as per the provisions established in Eisner v Macomber (1920)
252 US 189. The implication of the same is that earnings always flow from the capital. Any income
accrued by virtue of surrendering rights would assume the capital nature and would not be included as
income of assessable nature as can be conceived with the case of Pritchard v Arundale [1972] Ch 229.
All the earnings received owing to the realisation of asset of capital nature would accrue to capital
income. This can be illustrated with the case of Scottish Australian Mining Co Ltd v FC of T (1950) 81
CLR 188. Lump sum amount paid, would not be included within capital receipts by virtue of the principal
established in Kwikspan Purlin System Pty Ltd v FC of T 84 ATC 4282.
Application

2TAXATION
In the instant situation, AAPL has been wishing to sale the business to AJPL. AJPL has not been able to
gather enough funds for the purpose of affecting the purchase and entered into an agreement under a
licence on 01.07.2018 with AAPL. This allowed the usage of Sunrace trademark belonging to AAPL
towards AJPL for a period of 10 years as a consideration towards annual royalty. Royalty is required to be
considered in the form of ordinary income resulting from rights as can be inferred with the case of Eisner
v Macomber (1920) 252 US 189. Again, an amount of 4 million dollars has been received by AAPL from
the Common Bank which is an on related financial institution of Australia for the sale of its rights as
created under the licence agreement entered into with AJPL. Any income accrued by virtue of
surrendering rights would assume the capital nature and would not be included as income of assessable
nature as can be conceived with the case of Pritchard v Arundale [1972] Ch 229. All the earnings
received owing to the realisation of asset of capital nature would accrue to capital income. This can be
illustrated with the case of Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188. In this
context, it can be construed that the receipt of 4 million dollars as to be viewed as a receipt of capital
nature from realisation of assets of capital nature depicting towards contractual right. Again the payment
made was in the form of a lump sum. Lump sum amount paid, would not be included within capital
receipts by virtue of the principal established in Kwikspan Purlin System Pty Ltd v FC of T 84 ATC 4282.
Hence, the payment made in the form of lump sum is required to be given a treatment as capital receipt
and will not be included within taxable income.
Conclusion
The payments made to the common Bank amounting to 4 million dollars for the sale of trademarks by
AAPL would not be included as taxable income.
Answer 2
Issue
Whether there are any taxation implications arising from the transactions made by Jack.

3TAXATION
Rule
Income can be earned either in the form of ordinary income or in form of statutory income. Income
earned as a CGT gain as in 102.5, ITAA 97 would be included as statutory income. In determining capital
gain the presence of an event of capital nature along with a capital asset is required. The assets purchased
subsequent to the date of 20.09.1985, is required to be given a treatment as capital asset as in s 108.5,
ITAA 97. The capital asset disposed off by the owner leads to the A1 category of capital event as in
104.10, ITAA 97. The point of time when such a disposal is effected is the time of change of ownership
or the contract formation as in s 104.10(3), ITAA 97. Ab capital gain or capital loss is computed by
reducing the capital proceeds by the cost base. Capital proceed is the receipt made by disposing of the
property as in 116.20 ITAA 97. In the event of availing property in exchange of another, the market value
of the property received its to be considered as in s 116.30, ITAA 97. On the other hand, as per s
110.25(2) to s 110.25(6), the cost base of an asset comprises of five elements. There will be a discount
available upon an asset held for a period exceeding 12 months as under div 115.
The concept of ordinary income demarcates the earnings that has been accrued as per the concept of
ordinary income earning endeavours. This can be illustrated the case of Scott & Ors v FC of T 2002 ATC
2158. This needs to be determined by the test of the conscience of a reasonable person. The determination
of the consideration of the income as ordinary income by a reasonable individual would also be
considered under this test. Under s 6-5, ITAA 97, income accrued from salary or wages is also taxable
under this concept.
As for the method of cash accounting, the earning accrued in a financial year when received in the same
financial year by the taxpayer is required to be treated while computing assessable income.
Application
For the year 2017-18,
CGT consequences,

4TAXATION
For shares –
ABC Ltd (15.08.2017)
Cost Base
E 1 - $1400
Cost Proceed - $400
Modified Capital Proceed - $500
Capital Loss – $(1400 – 500) = $900
For house –
Cost Base
E 1 - $(50000 + 12000+ 30000) = $92000
Net Cost Base = $(250000+92000) = $342000
Capital Proceeds = $420000
Modified Capital Proceed = $418000
Capital Gain = $(418000 – 342000) = 76000
Capital Gain after discount = $(76000-50%) = $38000
Net Capital Gain $38000.
For Boat,
Cost Base = $12000
Capital Proceeds = $9000

5TAXATION
Capital Gain = $3000 ( disregarded under div 108C)
For Main Residence,
The house has been sold by Jack for a price of $540000, which has been bought for $590000. As it has
been used by him as a residence where he lived along with his wife, it needs to be construed as exempt
from being subjected to taxation as in s 118.20, ITAA 97.
Ordinary Income
Rent received on investment property costing $10000 on June 30th – Assessable Income
Salary accrued to Jack = $120000 - Assessable Income
Total Assessable Income
Items Amount ($) Amount ($) Amount ($)
Capital gain 37100
Capital gain on house 38000
Capital loss on shares 900
Capital loss on boat 0
Ordinary Income 130000
Salary 120000
Rent 10000
Total Assessable Income 167100
For the year 2018-19,
Shares
XYZ Ltd

6TAXATION
Cost Base
E 1 = $20000
Capital Proceed = $68000
Capital Gain = $(68000-20000) = $48000
Capital gain after discount = (48000-50% of 48000) = $24000
Total capital gain = $24000
Income from salary amounting to $130000 for year ending on June 30th – assessable income
Net Assessable income for 2018/19,
Capital Gain ($24000) + Ordinary Income ($130000) = $154000
Conclusion
The taxation implications arising from the transactions made by Jack are as above.

7TAXATION
Reference
Eisner v Macomber (1920) 252 US 189
Kwikspan Purlin System Pty Ltd v FC of T 84 ATC 4282
Pritchard v Arundale [1972] Ch 229
Scott & Ors v FC of T 2002 ATC 2158
Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188
The Income Tax Assessment Act 1997 (Cth)