Question 1
Hilary was a popular sports person. She was famous for climbing mountains. Everyone wishes to know about the life of a sports person. Hilary was no different. Her profession as a mountain climber made people inquisitive about her life. People wish to live the life of sports person. Thus, a leading newspaper wished to make a story on the life of Hilary. The news of an article on Hilary made a lot of excitement amongst her fans and also the general public. Everyone wanted to know about Hilary and her career in mountain climbing. The newspaper gave her $10,000 for covering her story, on the condition that she would be giving up all the copy rights to the newspaper, the Daily Terror. The story was published and Hilary got paid for the story published on her. Hilary liked clicking photographs. Hilary sold the photographs that she had taken while climbing the mountains for around $2,000. She also sold her manuscript to Mitchell library for $5,000.
The Australian Law states that all income earned from commission, allowances, gratuities, earnings and wages that employees earn when he renders services is to be included as income from personal exertion. According to the Section 393(10) of the Australian Income Tax Act, income consists of all the incomes that have been mentioned above.
On analysing the given case we see that in accordance with the Australian Taxation Law the income that Hilary had received from the Daily Terror for covering her story shall not be taken as personal income. The reasons behind the said statement are given below.
Hilary by profession was not a story writer. She was a popular mountain climber. If her job consisted of selling articles to newspapers then her income from the Daily Terror would have been included as her personal income. In the given case as she was a popular mountain climber thus the newspaper wanted to cover a story for her. Thus the money Hilary earned from newspaper was not to be considered as income from personal exertion. However, the money she earned from selling photographs and manuscripts were because of her profession as a mountain climber. So both the incomes were due to her profession. The incomes were thus from her profession of mountain climbing. Thus the incomes from selling photographs and manuscripts shall fall under income from personal exertion (Jade, 2016).
So of all three incomes earned by Hilary, only two incomes are to be considered as income from personal exertion. However, if Hilary had written the story on her own and not being written by the Daily Terror then the case would have been entirely different. If the story was written by Hilary on her own for her satisfaction and later on she sold the story to Daily Terror the sale proceeds in this case would be considered as income from personal exertion. Here she would have sold her story to the newspaper just because she was a professional mountain climber with a lot of fan following.
Question 2
The given question revolves around a son and his mother. A housing loan of around $40,000 was given to the son by his mother. An agreement was signed by them that the son shall give $50,000 to his mother at the end of five years. Later we come to know that the agreement between both of them was not formal in nature. The son had given no security for the amount of money lent by him. This shows that due to their relationship the terms of the agreement had been affected. Mother had asked her son not to pay any interest on the loan amount borrowed by him. The son did not pay any amount in the said five years mentioned in the agreement. At the end of five years, the son paid the entire loan amount along with an interest of 5% p.a. The son however had presented a single cheque (i-know.cch.com., 2016).
In the given case between mother and son, the mother had given a loan of amount $40,000 to her son. After a period of five years the son was to give to his mother a sum of $50,000. Later it is revealed that the agreement between both of them was not formal. The son had not given any security for the loan given to him and the son did not pay any amount for five years. However he repaid the entire amount at the end of five years along with 5% interest on it in a single cheque.
As stated in Riches v Westminster Bank Limited (1947) AC 390 it is given that interest is a payment that becomes due when the creditor when there is no money with him on the due date. As under Subsection 128A (1AB) of the Income Tax Assessment Act 1936 the court gave the judgement that commission fee is not to be considered as an interest because it was not in form or substance. Similarly we can see in the given case that no interest is to be paid by the son here. Even after having entered into an agreement, the son still pays his mother an interest of 5% p.a. This interest amount paid by the son to his mother is to be considered as a gift from his side. Since the son gave his mother the interest in the form of a gift it is not to be considered as an assessable income of the mother. The agreement between the mother and son has no terms considering the interest that the son paid to his mother. The interest rate as according to the market should have been 10%. However, the son gave his mother interest of only 5%. Thus it is to be taken as a gift and not as an income of the mother.
This is similar to the case of Glasbrook v Glamorgan County Council (1925) AC 270.
PROVISIONS
This case deals with understanding the provisions of Capital Gain Tax in Australia. Capital asset on being sold at a price more than the actual cost, the profit earned is termed as capital gain. However, if the asset is sold at a price which is less as compared to the actual cost, the loss is known as capital loss. This capital gain is to be adjusted against the capital loss for the particular year. This loss can be carried forward for a term of 10 years. There are different methods to calculate Capital Gain, one being indexation method. Indexation method is to be used only when assets are to be held for more than a year. The Discount Method is to be used if an individual is the owner of the asset. Capital Gain shall be reduced by 50% under the Discount Method. If the asset is to be owned by the company then Discount Method is not applicable. Asset that was bought before 20th September, 1985 then it will not be subjected to capital gain tax.
Question 3
In the given case we see that Scott who is an accountant bought a plot of land that was vacant. After a few years Scott built a house of the land purchased by him. After the construction of the house was done, the property had been given on rent. Further, Scott sold the land at an auction in the present tax year. We need to determine the net capital gain or net capital loss of Scott in for the year ended 30th of June of the present tax year. Also determine the net capital loss or capital gain if the property had been sold by a company and not an individual, or the net capital loss or capital gain of Scott if he had sold his property to his daughter instead.
PART A
This case revolves around an accountant Scott who bought a land on 1st of October 1980. On 1st of September 1986 Scott made a construction on a property. During that time the value of land was $90,000 and it was $60,000 for value of property. Scott did not use the property for his own use; instead he had given it on rent to a tenant. On 1st of March Scott sold the property for $800,000 in an auction. Capital Gain Tax is attracted in this case as a capital asset is being sold. Scott can avail either Discount Method or Indexation Method as he is an individual. Calculations for both the methods are given below:-
Discount Method
We need to go step by step in this method. Scott constructed a property on the land purchased by him. Valuation of the property was $60,000 + $90,000 = $150,000. Out of the above 40% is contributed to property and the rest 60% is contributed to land. Since land was purchased on 1st of September, 1980 as under Australian Taxation Law it gets exempted from Capital Gain Tax. Calculation is given below:
Selling Price of property: 40% of $800,000 = $320,000.
Actual cost of property: $60,000.
Capital Gain: Selling Price – Actual Cost
=$(320,000 – 60,000)
=$260,000.
Scott is an individual. He has held the property for more than 12 months, 50% discount is applicable.
Capital Gain of the property= 50% of $260,000
=$130,000.
Indexation Method
Indexation method is to be used to calculate capital gain if the asset has been acquired before 21st of September 1999 and the person owns the asset for a period of 12 months or more. In indexation method there is need to inflation of the cost for the construction and asset. We need to know the cost inflation index for the years in which assets were constructed and purchased.
Indexation for the year 1999 = 68.7
Indexation for the year 1986 = 43.2
Net indexation = 68.7/43.2
=1.59
Indexed Cost of Acquisition will be 1.59 of $60,000
= $95,400
Selling Price of the property = $320,000.
Capital Gain on the property = $(320,000 – 95,400)
=$224,600.
Capital Gain is found to be lower in Discount Method. Scott shall opt for Discount Method.
PART B
In the given case Scott sold his property for an amount of $200,000 to his daughter. Section 116- 30(2) states that sale value of a capital asset should be either at the value at which the asset is sold or the market value of the asset, whichever is higher. Here, the market value of the asset is $800,000 and the selling value is $200,000. Thus, the sale value of the asset shall be its market value.
Thus, in this case the Capital Gain will be $130,000 same as that of the first question.
PART C
In this case the company cannot opt for Discount Method. Thus, Indexation Method is to be used in this case for calculating capital gain. Capital Gain in this case would come to $224,600.
The cases mentioned above are similar to the case Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1989) 2 NSWLR 309. In the above mentioned case we see that the parties to the agreement enter into a sale of airline business. In the case we see that Air Great Lakes alleged that Easter (Holdings) Pty Ltd repudiated the agreement. Air Great Lakes claimed damages from Easter Pty Ltd. On the other hand, Easter (Holdings) Pty Ltd argued that the document to be signed by both the parties to the contract was not needed to be legally binding by nature. They had succeeded at the first instance itself.
References
- Aussie Home Loans | Mortgages | Loan | Personal Loans Australia’ (Aussie.com.au, 2017) https://www.aussie.com.au/accessed 30 April 2017
- Barnet Jade – Find Recent Australian Legal Decisions, Judgments, Case Summaries for Legal Professionals (Judgments and Decisions Enhanced)’ (Jade.io, 2016) https://jade.io/j/?a=outline&id=66285accessed 30 April 2017
- Exemptions | Australian Taxation Office’ (Ato.gov.au, 2017) https://www.ato.gov.au/General/Capital-gains-tax/CGT-exemptions,-rollovers-and-concessions/Exemptions/accessed 30 April 2017
- Guide G, ‘Taxes Are High In Australia’ (Global Property Guide, 2016) https://www.globalpropertyguide.com/Pacific/Australia/Taxes-and-Costsaccessed 30 April 2017
- INCOME TAX ASSESSMENT ACT 1936 – SECT 6 Interpretation . 2016. INCOME TAX ASSESSMENT ACT 1936 – SECT 6 Interpretation . [ONLINE] Available at:https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html. [Accessed 30 April 2017].
- Capital gains tax | Australian Taxation Office . 2017. Capital gains tax | Australian Taxation Office . [ONLINE] Available at: https://www.ato.gov.au/General/Capital-gains-tax/. [Accessed 30 April 2017].
- Personal services income | Australian Taxation Office . 2017. Personal services income | Australian Taxation Office . [ONLINE] Available at: https://www.ato.gov.au/Business/Personal-services-income/. [Accessed 30April 2017].
- Australian Tax & Accounting | CCH iKnow. 2017. Australian Tax & Accounting | CCH iKnow. [ONLINE] Available at: https://www.iknow.cch.com.au/#!/topic/tlp1041/overview/assessable-income. [Accessed 30 April 2017].
- Help and guidance. 2017. Calculating and paying capital gains tax – CGT Taxation Calculator. [ONLINE] Available at: https://learn.nab.com.au/calculating-and-paying-capital-gains-tax/. [Accessed 30 April 2017].
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