Hilary’s Income Tax Implications
1.Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.
Requirement:
- Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?
2.Eric provides his employee with the use of a car for 183 days during the FBT year. During this period the car travelled 16,000 km. Eric purchased the car last year for $50,000. The employee contributed $1,000 towards the cost of running the car and has provided Eric with relevant documentation.
Requirement:
- Calculate the taxable value of the car fringe benefit using the statutory formula.
3.Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.
Requirement:
- Discuss the effect on the assessable income of the parent.
4.Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000.
Requirement:
- a) Based on the information above, determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
- b) How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?
- c) How would your answer to (a) differ if the owner of the property was a company instead of an individual?
Hilary was a well – known peak climber and was the best in her sport . She was too passionate about the climbing of mountains and due to her such passionate and professional nature she was able to make a huge fan following for her who wanted to know her life story from the begining so that the young youth can get movitation and inspiration through the hard work she had done to reach such a great level in life. Hence, the daily terror newspaper offered her an amount if $10000 to write the story about herself and transfer all the related rights, interest, title and copyright of the story to the newspaper who can later publish the same and make them available to the nation . Further, she was also engaged in selling manuscripts of her achivements to the library . She was able to fetch $5000 from selling the manuscripts to the Mitchell Library. She was also interested in photography and used to take snaps of her climbing and sport which she managed to sell for $2000. Thus, through her popularity she was able to earn money from various different sources .
Fringe benefit tax on employee use of car
According to Sec 6 of ITAA Act, 1936, any income earned from an individual effort is considered as salary involving commission, pay, profits, rewards or commission in regard to any work performed. Each of the items shall be considered as an individual pay as per the Australian Income Tax Act.
From the above given scenario it is observed that the payment received for writing the life story from the daily terror newspaper is not the work she is regualarly engaged in . However, the income earned from other two sources is something Hilary is usually engaged in . Thus, the amount received from the newspaper cannot be considered as an income received under the individual pay unlike the receipt of other two incomes (Acts 2015)
Conclusion
With the above provisions of the case it is concluded that the income of $2000 and $5000 respectively earned from selling of photographs and manuscripts shall be taxed under the provisions of individual pay whereas the income of $10000 received from the Daily Terror newspaper shall be specifically excluded from the provisions of Individual pay and shall be treated separately.
As per the question asked if Hilary was engaged in full time story writing and would write the story on her own without being asked by the newspaper agencies and companies , and later sell it , would contribute such income under the concept of Individual pay along with the other income earned from two different sources rather than treating it seperately as treated above.
As per the Australian Income Tax provisions frienge benefit tax is levied on the employer on providing non monetary perquisites to his employees whether given directly or indirectly . In the given scenario, the employer has provided a car to his empployee for his use who in turn has used the car for 183 days during the year and has paid $1000 towrads the cost of running the car to his employer along with the necessary relevant documents . The employee has covered a total distance of 16000 kilometres with the car within 183 days of his possession. The car was purchased by Eric (the employer) at a cost of $50000 in the last year.
The car fringe benefit tax is levied in case the employee is received a car from his employer for his personal purpose. However, if it is used for both the personal and official purpose, then the tax is levied on proportionate basis on the employer for the part being used for private purpose. Thus, fringe benefit tax is levied on the non-monetory perquisites provided by the employer to his employees in the course of the employment. The tax on such perquisites can be calculated either by the statutory formula method or by operating cost method. However, we have been asked to calculate the tax as per the statutory method and so the same is discussed. The statutory formula method allows the deduction of any amount paid by the employee in this context to the employer. Further, if the asset is purchased or leased for four or more years, then the base price of the asset shall be reduced to two third of its value along with a flat rate of 20 percent is applied for calculating the taxable value of the non monetary perquisites.
Capital gains tax on short-term housing loan
The base value of the car shall remain equal to its cost price since four years had not elapsed as the car is being in the last year itself. Further it has travelled a distance of 16000 kilometres . Thus, the taxable value shall be calculated as 20% of [(50000-1000)*183/365] amounting to $ 4914 approximately (Givernment 2015)
Conclusion
As per the above provisions and calculations it is concluded that the employer is liable to pay tax on the non monetory perquisites provided to the employee and similarly Eric shall pay applicable rates of tax on the taxable value of $4914 as a car fringe benefit tax in respect of the car given to employee for its use.
The capital gains tax shall be taxed as per the Australian Income Tax Act. The given scenario deals with the relationship between the mother and son. The mother has provided a housing loan of $40000 to her son which the latter has to repay by the end of five years a consolidated amount of $50000. The mother has given the loan without any security against it and has also not demanded any interest for the loan. All the terms and conditions regarding the loan was agreed by both the parties and the same was not on legal papers but merely over an oral conversation between the two. Thus, it clearly establishes the affection of the two towards each other for the transaction to occur. However, in the given case, the son repaid the loan within two years along with a five percent additional amount to his mother and the repayment was made through one single cheque
Since the arrangement was not between the unrelated parties on a legal basis but was a result of pure love and affection between a mother and son that too on oral basis without any formal agreement,so there is no specific provisons relating to such transactions. However, we can refer to case laws regarding such arrangements to arrive at a conclusion.
It was held in the case of Riches vs Westminster Bank Limited (1947), AC 390, that the commission charged shall not be treated as interest. Here, in this case as per the circumstances stated it can be said that the arrangement was fully out of pure love and affection and didn’t had any legal obligation on the son to pay interest to his mother on the loan taken. Thus the same shall be treated as gift in the hands of the mother from his son (Halstead 2015)
Capital gains tax on sale of property
Hence with regard to above circumstances and case law it is concluded that the above arrangement betweeen the mother and son shall be treated as gift rather than income in the hands of the mother because the transaction being entered into is not due to any legal obligation but out of the love and gesture between the mother and the son (conversation 2015)
4.Capital Gains is tax levied on transfer of capital assets at a value more than its cost of acquisition to other person whether or not in the course or furtherence of business and where the asset is transferred at a price less than its cost then capital loss may occur to the assessee which can be set off or carried forward for a prescribed time period against any other capital gains. Where the asset is being hold for more than a year then the cost of such asset shall be increased by way of indexation method and the income as per capital gains shall be reduced to fifty percent of the total income. As per the Australian Income Tax Act, any asset acquired prior to 20.09.1985 is not liable to capital gains tax irrespective of the amount of sale or transfer . The asset may be held either by an individual or by any non-individual person as well. However, an individual holding capital asset has an option to calculate the capital gains tax either by discounting procedure method or by the refund procedure methodology.
Part A
The given scenario states that an individual resident of Australia named Scott who is an accountant by profession had acquired a vacant land therein on 01.10.1980 and constructed a flat upon the land on 01.09.1986 which cost around $6000 and the fair market value of land on the sate of construction was $90000. The constructed flat was given on rent by scott to fetch some income therefrom. After some time it was witnessed that scott had sold the land cum constructed flat for the total consideration of $800000 on March 1. This sale of property is subject to capital gains tax and being an individual scott has an option to compute the capital Gains either by opting the discounting procedure or the indexation method whichever is more beneficial to him. Hence, both the methods are being tested to acknowledge the lower capital gains in the hand of scott on account of such transfer.
Indexation Method –
This method involves increment in the cost of acquisition of the asset on the basis of the inflation rate prevailing in the country as compared to that time when the asset was actually acquired.
Indexation for the year of sale on 1999 was 68.7
Indexation for the year of construction of building was 43.2
Indexation for the year of purchase of land is not considered since as per the provisons of the Australian Act any asset purchased or acquired before 20.09.1985 is exempt from the capital Gains Tax. Thus, the transfer of land is not subject to Capital Gains.
Therefore, indexed cost of Building amounts to ($60000*68.7/43.2) = $95400/-
Proportionate Sale value of the building amounts to [$800000*60000/(90000+60000)] = $320000/-
Income under Capital Gains = (320000-95400) = $224600/ (Burman 2015)
Discounting Procedure Method –
Since the land was acquired before 20.09.1985, the same is exempt under the Australian Income Tax Act. The total cost of land and building was $150000 out of which the cost of building is $60000 comprising 40 percent of the total cost. Hence, the sale price would also contribute towards 40 percent of the total sale amounting to (800000*40%) = $320000 and so only the proportionate amount would be taxable in the hands of Scott.
Capital Gains = $(320000-60000) = $260000/-
Being an individual, the 50 percent of such amount would contribute as an capital gains income of the assessee. Hence the capital gains shall reduce to fifty percent of $260000 amounting to $130000 (Clark 2015)
Thus after considering both the methods it is concluded that the capital gains income under the discounting procedure method is much less as compared to Indexation Method. Thus the assessee should opt for the Discounting method in respect of such transfer.
The sale value of the property as per the Australian Income Tax Act, shall be higher of the actual sale value or the stamp duty value . In given scenario the property is being sold to his Daughter for $200000 but the same does not affect the taxability since the market price shall be considered which is $800000. Thus, the sale value shall remain same as that in Part A , the capital gains income would also remain same ie- $130000.
The discounting procedure is only applicable to individuals. Thus, in the given circumstance the owner of the property is a Company, so it have only an option of Calculating its income by indexation method. Thus, the capital gains income under the indexation method as calculated above amounts to $224600 in the hand of the company.
Acts, CC 2015, INCOME TAX ASSESSMENT ACT 1936, <https://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1936240/>.
Burman, L 2015, Taxing Capital Gains in Australia:, <https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/411857-Taxing-Capital-Gains-in-Australia-Assessment-and-Recommendations.PDF>.
Clark, A 2015, Capital gains tax:, <https://static.treasury.gov.au/uploads/sites/1/2017/06/03Clark.pdf>.
conversation, T 2015, Articles on Capital gains tax, <https://theconversation.com/au/topics/capital-gains-tax-2813>.
Givernment, A 2015, Car fringe benefits, <https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Car-fringe-benefits/>.
Halstead 2015, RICHES V WESTMINSTER BANK LTD: 1947, <https://swarb.co.uk/riches-v-westminster-bank-ltd-1947/>
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