HI6028 Taxation Theory: Capital Gains Tax, Income and Legislation

This assignment solution delves into various aspects of Australian taxation law, addressing capital gains tax (CGT) implications on different assets like antique paintings, historical sculptures, and jewellery, referencing relevant sections of the ITAA 1997. It further examines whether income earned from writing and selling a book constitutes income from personal exertion under ITAA 1936, analyzing relevant case laws. Finally, the assignment explores whether a one-off interest receipt from a loan can be considered taxable income under ITAA 1997. The document provides detailed analysis and conclusions based on the application of relevant legislation and case precedents, offering a comprehensive overview of the taxation principles involved. Desklib provides a platform to explore more such documents.

Running head: TAXATION THEORY AND PRACTICE
Taxation Theory and Practice
Name of the Student:
Name of the University:
Author’s Note

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TAXATION THEORY AND PRACTICE
Table of Contents
Requirement of Question 1................................................................................................2
Requirement of Question 2................................................................................................4
Issues.............................................................................................................................4
Rulings...........................................................................................................................4
Application......................................................................................................................5
Conclusion......................................................................................................................5
Requirement of Question 3................................................................................................5
Issues.............................................................................................................................5
Rulings...........................................................................................................................5
Application......................................................................................................................6
Conclusion......................................................................................................................6
Reference..........................................................................................................................7

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Requirement of Question 1
Applicability of Capital Gain Taxation on Antique Impressionism Painting
The provisions which are stated under the provisions of capital gains are to be
applied for assessing tax liability which is associated with capital gain taxes of an
individual. One of the fundamental principle which is stated in “section 100-25 (1),
ITAA 1997” deals with the applicability of capital gains provisions on assets. The
section makes it clear that capital gain tax would be applied to assets which are
acquired on or after 20th September 1985. Therefore, assets which were purchased by a
taxpayer before the above prescribed date would not be liable to capital gain taxation
for the period. In case the assets are purchased after 20th September 1985 and if the
same is kept in the possession of the taxpayer for more than 12 months than the same
would not only attract capital gains taxes but also would be subjected to indexation.
In the case which is shown, Helen a proprietor purchases a painting before 20th
September 1985 and therefore the same would not come under the purview of Capital
Gain taxes regime. This is because the cases do not satisfy the applicability criteria
which is stated under “section 100-25 (1), ITAA 1997”. The case further shows that
Helen had purchased the painting at a value of $ 4,000 while the same was sold at $
12,000 thereby making profits (Keyzer, Goff and Fisher 2017). Therefore, the profits
which is made from sales of painting would not attract capital gain taxes as the asset is
exempted from taxation.
Applicability of Capital Gain Taxation on historical sculpture
The provisions which is stated under the rulings of Capital gain taxes is
applicable for actual or realised gains. The capital gain taxes are also applicable for
statutory income and the same also includes statutory earnings of the taxpayer and the
same is stated under “section 102-5 (1)”. Further it is to be noted that the provisions of
Capital gains states that in case of Disposal of assets a CGT event A1 takes place. In
case of collectibles such as antiques, sculptures, rare books, jewellery which are listed
“section 108-10 (2), ITAA 1997”.
The case shows that Helen is in possession of an art work which she sold off in
2108 for a value of $ 6,000. The art work which was sold by Helen was initially
purchased for $ 5,500 in 1993 and thereby made profits for the same. The historical
sculpture which is also a form of art work is covered under “section 108-10 (2), ITAA
1997”. The sale of art work resulted in CGT event A1 which is covered under “section
104-10, ITAA 1997”. The capital gain which is attracted in the case above would be
included in the taxable income of Helen and the same would be considered under
“section 102-5 (1)”.
Applicability of Capital Gain Taxation on antique jewellery piece
The sale of capital assets not always results in gains but in certain
circumstances, taxpayers also incur losses which are known as capital losses. The
provisions of “section 108-10 (1), ITAA 1997” covers capital losses which is made by
taxpayers on collectibles (Burns, Le Leuch and Sunley 2016). The capital losses which

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is made by taxpayers can be offset with capital gains made on collectibles. In addition to
this, if any balance remains after the offset would be carried forward next until the same
is also set off as per the provisions of “section 108-10 (4)”.
The case shows that Jewellery which is brought by Helen was sold in March
2018 for a loss of $ 1,000 in comparison to the actual price of the jewellery. The loss
which is incurred by Helen can be offset with the capital gains which is made on
sculpture under the “section 108-10 (1), ITAA 1997”. After the offset, the remaining
amount of $ 500 under “section 108-10 (4), ITAA 1997” would be carried forward to
future year.
Applicability of Capital Gain Taxation on picture
The provisions of “Section 108-20 to 108-30” includes assets which are
available to the taxpayer for personal use and it is further clarified that the same should
not be mistaken with collectables. The assets which are considered under such
category are boats, racehorses, equipment, electronic items and household items.
Further the provisions which are stated provides that personal use of assets would not
be considered if the value is less than $ 10,000 as per the provisions of “section 118-
10 (3)”.
The case shows that Helen sold a picture for $ 5,000 which was sold on July
2018. The case fulfils the applicability criteria under “section 100-25 (1), ITAA 1997”
as the picture was bought on 1987. The asset should be categorized as personal use of
asset “section 108-20, ITAA 1997”. The case would not be attracting any capital gains
as the case does not fulfil the criteria of “section 118-10 (3)” as the cost price is lower
than the required amount of $ 10,000.
Figure 1: Computation of Capital Gain/Loss
Source: (Created by author)

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TAXATION THEORY AND PRACTICE
The above table shows computation of capital gain or loss for Helen for the
assessable year and the results show that she has incurred capital loss of $ 500 after
setting off the capital gains (Barkoczy 2016). The amount $ 500 is to be carried
forwards until the same is setoff.
Requirement of Question 2
Issues
Will the earnings of the Taxpayer for rendering the services of writing a book and selling
the same to the publisher would be considered a product of personal effect?
Rulings
The earnings which is generated by a taxpayer through wages, salaries or any
other retirement benefits during the course of employment or for the services which is
provided would be considered as income from personal exertion under the provisions of
“Section 6 (1), ITAA 1936”. The definition which is provided under the provisions of
“Section 6 (1), ITAA 1936” and therefore proper examples in relation to the case laws
needs to be adhere in order to understand the definition. The cases laws of “Hayes v
FC of T (1956)” the amount which is recognisable as personal exertions is the rewards
and payments which a taxpayer may receive for rendered services (Woellner et al.
2014). The case laws show that there exists a relation between the income which is
generated normally and the amount which is received from personal exertion (He et al.
2019).
In general terms, the earnings which are generated by a taxpayer are considered
to be his ordinary income under the provisions of “section 6-5, ITAA 1997”. In order to
get more clarity in this respect, the case laws of “Brent v FCT (1971)” can be
considered where the taxpayer received money for telling her life story to a local
newspaper for the purpose of printing the same in newspaper. The money was
considered to be ordinary earnings for the taxpayer in this case.
One other example which can be provided is of “Marshall v Housden
(1958)” where the taxpayer was charged taxes when he sold the experience of Jockey
which also consisted of photos and cuttings of newspaper. The amount received as
compensation was held taxable under the provisions of “section 6-5, ITAA 1997” and
the same was considered to be an ordinary income.
Application
The case which is shown reflects a situation of Barbara who is a research
commentator and is also an economist. Due to her vast knowledge in economics, a
book publisher approached her to write a book on economics for a compensation of $
13,000. The offer was accepted by Barbara and therefore she wrote the book and
received the compensation (Evans, Lignier and Tran-Nam 2013). The income which is
generated is in provision of service which is provided by her. Applying the case law of
“Brent v FCT (1971)” the payment received by Barbara is quite close to her profession.
Moreover, Barbara assigned the copyright to the publisher so that the book can be
launched in the market (Harding and Marten 2018). Plus, another example of “Hobbs v

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Hussey (1942)” suggest that selling the copyright to a publisher for a book would be
considered to be an ordinary income under the provisions of “section 6-5, ITAA 1997”.
The case shows that Barbara accepted the offer to write a book which is similar to
providing services for which she received payments.
In addition to this, manuscript of the book was sold to the library along with
interview interview manuscripts which also generated some money for her. Refering to
the case of “Marshall v Housden (1958)” the money which is received from sale of
manuscript would be considered as ordinary income under “section 6-5, ITAA 1997”.
However, in alternative situation, if Barbara writes a book for her own pleasure
and then decides to sell off the copyright associated with the book then the income
received from such a source would be considered as income from the personal service
exertion and will also be taxable under “section 6-5, ITAA 1997”.
Conclusion
The money which is received by Barbara is of the nature of Personal exertion
and the amount which is received by her would be held taxable under judicial concept of
“section 6-5, ITAA 1997” considering the same as ordinary income.
Requirement of Question 3
Issues
Will a one-off receipt of interest be considered as taxable income if the same is
earned by providing loan under the meaning of “sec 6-5, ITAA 1997”?
Rulings
In consideration of taxable income, such incomes are made of ordinary income
and statutory incomes. The ordinary income is ascertained by the court by applying
ordinary concepts. The provisions of Section 6-5 (1)” covers the ordinary incomes for
the purpose of taxation. While assessing the income of a taxpayer, it is important to
recognise the characteristics of the income which is generated by the taxpayers (Tran-
Nam 2015). Further it is to be noted that the income is regular in nature and also
periodical. It is generally considered that income generating activities produces ordinary
income.
The ordinary income which are considered have two prerequisites. One of the
prerequisites is whether the income generated is in cash or not and the second is
whether the receipts is a real gain for the taxpayer. The verdict which was provided in
the case of “Mayes v Hochstrasser (1960)” showed that if the nature of the receipt
cannot be determined and if the same does not account for gain than the receipt cannot
be considered as ordinary income. The receipt would only be considered as ordinary
income if the two prerequisites are satisfied. Most notably, the one-off receipts are not
held as the ordinary income (Devos and Zackrisson 2015). A lumpsum payment can be
held as ordinary income if the one-off receipt of interest as per the loan agreement is
held as ordinary income.

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Application
The case shows that an amount of loan was provided by Patrick to David who is
the son of Patrick for a period of five years. The interest which was estimated to be paid
by David amounted to $ 6,000. David settled the account by paying the loan amount by
cheque and also a 5% interest on the borrowings.
The interest received by Patrick can be considered as a real gain and the same
also has the features of an income (Samiec and Bale 2016). The receipt of interest
fulfills the prerequisites effectively on both aspects. Referring to the case of “Mayes v
Hochstrasser (1960)” one-off receipt of interest of loan is in agreement and therefore
the same is ordinary income under “section 6-5, ITAA 1997”.
The mode of payment which has been chosen by the son would not have any
effect on the taxable situation and Patrick would be assessed for the interest amount
and not for the entire loan amount as the same is considered to be of capital nature.
Conclusion
The discussion above shows that the interest on loan that Patrick received from
David would be considered as taxable income under “section 6-5, ITAA 1997” as the
same is a real gain for Patrick.

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Reference
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Burns, L., Le Leuch, H. and Sunley, E.M., 2016. Taxing gains on transfer of interest.
In International Taxation and the Extractive Industries (pp. 176-205). Routledge.
Devos, K. and Zackrisson, M., 2015. Tax compliance and the public disclosure of tax
information: An Australia/Norway comparison. eJTR, 13, p.108.
Evans, C., Lignier, P. and Tran-Nam, B., 2013. Tax compliance costs for the small and
medium enterprise business sector: Recent evidence from Australia. Tax Administration
Research Centre University of EXETER Discussion Paper, pp.003-13.
Harding, M. and Marten, M., 2018. Statutory tax rates on dividends, interest and capital
gains.
He, E., Jacob, M., Vashishtha, R. and Venkatachalam, M., 2019. The effect of capital
gains tax policy changes on long-term investments. Available at SSRN 3383649.
Keyzer, P., Goff, C. and Fisher, A., 2017. Principles of Australian constitutional law.
LexisNexis Butterworths.
Samiec, J. and Bale, S., 2016. Australian practice in international law 2015. Australian
Yearbook of International Law, 34, pp.297–475.
Tran-Nam, B., 2015. Tax compliance as a red tape to businesses: Conceptual issues
and empirical evidence from Australia. Journal of Business & Economic Policy, 2(4),
pp.76-87.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Australian
Taxation Law 2014 (pp. 1-81).