HA3042 Taxation Law T1 2018: Income, Benefits & Capital Gains Tax

This case study delves into various aspects of Australian taxation law, addressing questions related to income from personal exertion, fringe benefits tax (FBT) on car benefits, assessable income, and capital gains tax (CGT). It analyzes whether payments received by an individual for their life story, manuscript, and photographs constitute income from personal exertion. The study calculates the taxable value of a car fringe benefit using the statutory formula method. It also examines the tax implications of a loan between a parent and child, focusing on the taxability of interest income. Furthermore, the case study explores CGT implications on the sale of a property, considering factors like major capital improvements and the potential impact of selling to a related party or if the asset is held by a company rather than an individual. The analysis incorporates relevant Australian tax practices and legislation, providing a comprehensive overview of the tax consequences in each scenario.

Taxation
Tax analysis

Table of Contents
ANSWER TO QUESTION NO- 1............................................................................................1
ANSWER TO QUESTION NO- 2............................................................................................1
CAR FRINGE BENEFIT...........................................................................................................1
ANSWER TO QUESTION NO- 3............................................................................................2
ASSESSABLE INCOME OF PARENT....................................................................................2
ANSWER TO QUESTION NO- 4............................................................................................2
CAPITAL GAIN TAX...............................................................................................................2
(a) Scott’s net capital gain or loss..............................................................................................3
(b) if property was sold to Scott’s daughter...............................................................................3
( c) if the tax implication was for a company and not an individual..........................................3

Introduction
This discussion is about income tax case study which describes that the disparity
between the hobby of person and his business cannot weaken the concepts of income. In
given report, we will discuss about various items such as tax computation, car fringe benefit
and the assessment of the income. The overall evaluation of such report defined the core
aspects of the taxation for the purpose of the tax computation in different circumstances.
ANSWER TO QUESTION NO- 1
The case studies under income tax show that difference between the person’s business
and hobby does not affect the ordinary conception of income. The activity when a person gets
benefits from his/her skills, talent or hobbies and in consideration of that he earns money or
income. It is not always mandatory that the person exploits his/her skills or talent
commercially to make profits from his/her business. There is a case of exception for the same
when the person receives voluntary consideration for his skills. For Example when an author
writes for his personal pleasure and receives voluntary consideration for that from external
sources or Government, without having an intention to sell his skills, is not considered as an
income. But where the person wants to sell his work with an intention to earn benefits then it
falls under the head of income. The concept works irrespective of the fact that the activities
are being carried on in a specific manner or by a proper system or not.
Thus, on the basis of above discussed concept, the income earned by Hilary in the
consideration of sale of copyright for $10000, pictures for $2000 and manuscript for $5000,
the entire received amount considered as an income from personal exertion and falls under
the taxable income. The fact doesn’t matter that earlier, she wrote the book for her own
pleasure and she decided to sell it later. In both cases the entire amount is liable to tax
imposition as per the Australia Tax Practices.
ANSWER TO QUESTION NO- 2
CAR FRINGE BENEFIT
This is a benefit provided by the employer to his employee in which the employer holds a car
and allow the employee to use the car for his personal use. In this arrangement the employer
either has purchased his own car or taken it on lease. At the same point, the employee uses

the car for his personal use instead of using it at employer’s place. A car parked in the
premises of the employee irrespective of the fact that he uses it or not, is also said to been
used by the employee (Arens, Elder, and Mark, 2012).
These are two methods to calculate the taxable value of fringe benefit:
1. Statutory Formula Method
2. Operating Cost Method
The current requirement asks to calculate the taxable value of fringe benefit using the
statutory formula (Tran-Nam, , et al. 2010).
The following information is given in the questions already.
The base value of the car : $50,000
The number of days in the FBT year when the car was used or available for private use of
employees : 183
The number of days in the FBT year : 365
The employee contribution : $1000
Car travelled (in kms) : 16,000 km
Formula does not require the travelled kilometres in consideration.
The statutory % rate is 20%. The formula is as follows:
= {(base value of car x the applicable statutory percentage x the number of days the car was
used for personal purpose) / the number of days in FBT year} – employees contribution
(Somers, and Eynaud, 2015).
= {(50000 x .20 x 183) / 365} – 1000
= {(1,830,000)/365} – 1000
= 5013.6986 – 1000
= 4013.6986

= $ 4014
ANSWER TO QUESTION NO- 3
ASSESSABLE INCOME OF PARENT
In the above mentioned case the mother lent a sum of $40,000 to his son as a loan which is
required to be paid after 5 years as a whole sum of $50,000. There was no formal agreement
and no requirement to pay any interest. Although, her son has repay the money back in a
period of 2 years only. He paid $44,000 as the capital repayment of $40,000 along with the
interest of $4000 for two years. The interest was calculated at the rate of 5% per annum for
two years (Peiros, and Smyth, 2017).
Out of the total cheque given for $44,000, the sum repaid as capital repayment which is
$40,000 will not be taxed and the interest amount of $4,000 shall be taxed on the hand of
mother.
On the other hand the capital repayment of $40,000 shall not be taxed on the side of son but
the amount of interest for $4,000 allowed to be deducted in computation of taxable income
for him.
If in the given case the child was a minor the provision of clubbing would have applied. If
child made any investment out of the borrowed money and earned any income from such
investment, the income generated from that investment would have added to the mother’s
income and got taxable in the hands of mother (Richardson, and Lanis, 2007).
ANSWER TO QUESTION NO- 4
CAPITAL GAIN TAX
Since 20 September 1985, the Capital Gain Tax (CGT) came into force. After that, any major
capital improvement made in a residence property purchased before that shall be taken into
account for capital gain tax. The arrangement has been taken place when the residence is not
the person’s main residence.
An improvement made to a residence is considered as major capital improvement where the
original cost (Indexed in case the contract under which the improvement is made is entered

before 11.45am on 21 September 1999) of the habitancy acquired before the date 20
September, 1985:-
 Exceeding the amount received on the disposal by 5% at a minimum.
 Exceeds the improvement threshold of the income year of asset disposal.
IT is analysed the lower of the following will be considered as capital gain.
o Indexation method : proceeds on sale of improvement – cost base of improvement (indexed)
o Discount method:{ proceeds of improvement – cost base of improvement ( without
indexation) } – 50% discount
The improvement for the year shows that the income in 1986-87 is $53,950 and for income
year 2016-17 is $145,401.
(a) Scott’s net capital gain or loss
First it is required to check if it’s a major capital improvement, as the dwelling is purchased
before 20 September 1985:
o The cost of the improvement amounted to $60000 that is more than 5% of $800,000 i.e.
$40000.
o The cost base of improvement after indexation is $161,706 (60000* 145401/53950) is more
than income threshold for 2016-17 being $145,401 (Ryan, 2016).
Hence, it amounts to a major capital improvement.
CALCULATION OF CAPITAL GAIN OR LOSS
o INDEXATION METHOD : proceeds on sale of improvement – cost base of improvement
(indexed) = 800,000 - 161,706 = $638,294
o DISCOUNT METHOD : {proceeds of improvement – cost base of improvement ( without
indexation) } – 50% discount = (800,000-60000)*.50 = $370,000 (Somers, and Eynaud,
2015).
HENCE, THE CAPITAL GAIN IS $370,000

(b) if property was sold to Scott’s daughter
In following cases, certain incomes will be kept exempted for the tax payer (Nelson,
Simshauser, and Kelley, 2011).
o When the property is purchased before 20 September 1985
o When it is the main residence (only single main residence is permitted)
o When the property is bought out of self-managed super fund (SMSF)
o Partial exemption is made where, the main residence is used as business or an investment
property is made main residence.
The tax implication in the given part would be $370,000
( c) if the tax implication was for a company and not an individual
The tax requirements for imposition are different for an individual and company. If the owner
of the capital asset is an entity instead of an individual then the requirement of tax changes
accordingly. Both companies and individuals pay different amount of tax on the same taxable
income because the tax rate applies on the basis of the nature of the tax payer. If the tax payer
is a company then it is liable to pay flat 30% tax on its income without availing any discount
or deduction on the income.
Although, the above discussed discount method is not allowed for the companies to include
in the calculations of its net capital gain or loss. Through the indexation method, the
companies can compute its long term capital gains i.e. the gain or loss from the assets which
has been held by the company for more than 12 months. Hence the above calculation applies
to companies and the available capital gain amount to as follows (Alles, Kogan, and
Vasarhelyi, 2018).
DISCOUNT METHOD: {proceeds of improvement – cost base of improvement (without
indexation)} – 50% discount = (800,000-60000)*.50 = $370,000
Conclusion
At the end, the overall analysis of the report reflects that the tax computation on the capital
gain or income earned is varies as per the nature of the tax payer. Different rules and
regulation of taxation applies on the different tax payers. To calculate the taxable income of a

person several rules and transactions needs to be complied. In above discussion all the given
questions have been answered by the methods of calculating taxes in various manners.

References
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