Taxation Law 200187 Autumn 2018: Income, CGT & Tax Liability Analysis

This assignment provides a detailed analysis of assessable income and tax liability for Jack for the years ending June 30, 2017, and June 30, 2018, under Australian Taxation Law. It identifies ordinary income and statutory income, including capital gains tax (CGT) events, with reference to relevant sections of the ITAA 1997 and case law. The assignment computes capital gains from the sale of shares and investment property, applying the CGT discount where applicable. It also addresses whether a payment received for trademark usage constitutes assessable income, contrasting it with capital receipts, referencing the FC of T v. The Myer Emporium Ltd case. The document concludes with calculated assessable income and tax liabilities for both years, determining the tax treatment of the trademark payment.

TAXATION LAW
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Question 1
Issue
The objective is to ascertain the assessable income for Jack along with underlying tax liability
for years ending on June 30, 2017 and June 30, 2018.
Relevant Rule
It is imperative to note that assessable income could arise primarily on account of either
ordinary income or statutory income.
 Ordinary Income – This is the income that is derived in accordance with ordinary
concepts as highlighted in s. 6(5) ITAA 19971. Based on the relevant case laws, it is
apparent under s.6(5) income derived from employment, business, personal exertion
along with investment income (interest, rent , dividend) is included2.
 Statutory Income – This is the income which is defined in s. 6(10) ITAA 1997. As the
name suggests, for this income source, a particular statute would exist to deal with the
appropriate taxation treatment. One of the important sources of statutory income is in
the form of capital gains tax which can arise due to CGT events defined under s.
108(5) ITAA 19973.
With regards to computation of capital gains, a key consideration is computing the cost base
which is done in accordance with s. 110 (25) ITAA 1997. The key elements included in the
cost base are highlighted below4.
1) The first element is the purchase price paid along with the market value of any other item
given in exchange of the capital asset acquired (s. 110-25(2)).
2) The second element comprises of the incidental costs that are related to buying or selling
of the capital asset (s. 110-25(3)).
3) The third element comprises of owing costs such as interest costs related to financial
assistance obtained for acquiring the asset, costs of insurance, maintenance and repair of
the asset along with land tax. However, these would be added only if the asset under
consideration has been acquired post August 20, 1991 (s. 110-25(4)).
1 Income Tax Assessment Act, 1997 (Cth)
2 Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)
3 Deutsch, Robert, et. al., Australian tax handbook. (Pymont, Thomson Reuters, 2015)
4 Austlii (n.d.) < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html>

4) The fourth element refers to any capital expenditure that the taxpayer has incurred with the
intention of increasing the value of the asset (s. 110-25(5).
5) The fifth element refers to any capital expenditure that the taxpayer has incurred in
relation to title preservation in regards to any dispute arising (s. 110-25(6).
Also, in accordance with Division 115 ITAA 1997, for long term capital gains, individual
taxpayers can avail a discount a 50% and therefore only the remaining amount of capital
gains would be subject to CGT (Capital Gains Tax)5.
Application
The given situation needs to be analysed in the light of the above applicable regulations.
Year ending on June 30, 2017
Shares of ABC
The disposal of share would be considered as a CGT event under s. 112-45 ITAA 1997.
Further, it is apparent that since the shares were bought for investment purpose, hence the
profit/(loss) cannot be considered ordinary income. The taxable component in this case would
be any capital gains that are derived. Also, it is noteworthy that since the asset has been
purchased after September 20, 1985, hence it is not CGT exemp6t.
Total investment in ABC shares = 1000*1.4 = $ 1,400
Sale proceeds of ABC shares (August 15, 2016) = 1000*0.7 = $ 700
Capital losses = 1400 – 700 = $ 700
This capital loss cannot be used to lower the taxable income but can be adjusted against the
capital gains made7.
Sale of Investment Property
5 Division 115 (n.d.) < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.1.html>
6 Ibid. 2
7 Ibid. 3

The sale of investment property would constitute a CGT event and hence would have
implications involving capital gains. In order to compute the net capital gains, it is imperative
that the cost base of the property is determined.
Purchase Price of investment property = $ 250,000
The cost of owning asset such as interest, depreciation and insurance cost would not be
considered as part of cost base since the property was acquired before August 20, 1991 when
these provisions were not applicable.
Sales proceeds from investment property (August 15, 2016) = $ 650,000
Capital gains made on property = $ 650000 - $ 250000 = $ 400,000
Sale of Boat
In accordance with s. 108-20, boat would be considered as a asset for personal use. Also, it is
apparent that selling price of boat is lesser than the cost price and hence a capital loss would
be made which would be ignored8.
Total Capital Gains
Gross capital gains after adjusting the share ABC capital loss = 400000-700 = $ 399,300
Net taxable capital gains post application of Division 115 discount = 0.5*(399300) =
$199,650
Ordinary Income
Salary and rent income would be covered under the ambit of s. 6(5) and hence constitute
ordinary income.
Total ordinary income = 120000 + 3000 = $123,000
8 ATO, CGT Assets and Exemptions, (n.d.) < https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-
exemptions/>

Assessable Income
Total assessable income =123000 + 199650 = $ 322,650
Tax liability
Total tax liability for Jack= (0.3*199650) + 19822 + 0.37*(123000-87000) = $ 93,037
Year ending on June 30, 2018
Shares of XYZ
Total investment in XYZ shares = 10000*2 = $ 20,000
Brokerage fee incurred for the sale of shares = $4,000
Sale proceeds of XYZ shares (December 20, 2017) = 10000*6.5= $ 65,000
Capital gains from the sale of shares = 65000 – (20000 + 4000) = $ 41,000
Considering Jack is an individual, hence Division 115 discount would be applicable.
Thus, taxable capital gains = 0.5*41000 = $ 20,500
Ordinary Income
Salary = $ 130,000
Assessable Income
Total assessable income =130000 + 20500 = $ 150,500
Tax liability
Total tax liability for Jack= (0.3*20500) + 19822 + 0.37*(130000-87000) = $ 41,882
Conclusion

Based on the above discussion, it can be concluded that the assessable income for the year
ending on June 30, 2017 and June 30, 2018 amount to $322,650 and $159,500. Further, the
tax liability for tax year 2016/2017 and 2017/2018 amount to $93,037 and $41,882
respectively.
Question 2
Issue
The key concern is to ascertain if the payment of $ 4 million that has been received would
constitute as assessable income or not.
Relevant Rule
It is imperative to note that assessable income could arise primarily on account of either
ordinary income or statutory income.
 Ordinary Income – This is the income that is derived in accordance with ordinary
concepts as highlighted in s. 6(5) ITAA 1997. Based on the relevant case laws, it is
apparent under s.6(5) income derived from employment, business, personal exertion
along with investment income (interest, rent , dividend) is included9.
 Statutory Income – This is the income which is defined in s. 6(10) ITAA 1997. As the
name suggests, for this income source, a particular statute would exist to deal with the
appropriate taxation treatmen10t.
It is imperative to note that assessable income can also be produced under s15(15) which
related to isolated transactions with the intention of making profits. A relevant case which
merits discussion in the given scenario is FC of T v. The Myer Emporium Ltd11case. In this
particular case, loan was extended to a subsidiary company by the parent company. After few
days, the right to earn interest was assigned to a third party for a lump sum amount. The key
issue was whether the taxpayer that received the lump sum payment would classify this as
9 Ibid. 2
10 Ibid.3
11 FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199

assessable income or capital receipts. However, the court decided that the lump sum
payments would be categorised as assessable income owing to the following factors12.
1) The given amount was termed as profit which was realised on the basis of transaction
which was entered so as to earn profits and also was related to the business of the
taxpayer.
2) The act of receiving a lump sum payment merely converted the future interest income
over the future periods into a lump sum present value.
Application
In the given case, Ardmono Pty Ltd entered into an agreement whereby Huyndai was sold the
right to use the Sunrace brand trademark for a lump sum of $ 7 million. The verdict of Myer
case would be applied to the given situation. It is apparent that the company has a right to use
trademark and could possibly allow other parties to use it for nominal income. However,
there is not fixed income that would be generated from the same unlike the right to earn
interest in the Myer case. Also, the creation of the trademark is not done with the profit
motive since it is an essential business asset which is required for the business and not aimed
at generating direct income. Hence, the right to use this intangible asset being sold is
essentially the sale of an asset and the receipts would be considered capital in nature and thus
exempt from tax implications.
Conclusion
On the basis of the above discussion, it can be concluded that the payment of $ 400,000
would not be considered assessable income.
12 ATO, TR92/3 (1992) < https://www.ato.gov.au/law/view/document?DocID=TXR/TR923/NAT/ATO/00001>