Overview of income derived from personal exertion and its taxability under Section 6-5 of the ITAA 1997
Is the amount received by the taxpayer for the selling the interest of book written by her to the newspaper would be taxable under “section 6-5 of the ITAA 1997”?
- “Brent v Federal Commissioner of Taxation ATC 4195 (1971)”
- “Housden (Inspector of Taxes) v Marshall (1958)”
- “Hobbs v Hussey (1942) 24 TC 153”
- “Scott v Commissioner of Taxation (1935)”
- “Section 6-5 of the ITAA 1997”
- “Section 6-1 of the ITAA 1997”
- “section 15-2 of the ITAA 1997”
According to the “section 6-1 of the ITAA 1997” income that is derived from the personal exertion includes the income derived from wages, salaries, fees, gratuities or proceeds from the business that are carried on by the taxpayer either alone or in partnership. As defined under the “section 6-5 of the ITAA 1997” commonly maximum of the income that is derived by the taxpayer is held as ordinary income. The court of in “Scott v Commissioner of Taxation (1935)” stated that the receipts are ought to be considered as income in agreement with the ordinary concept.
As stated under “section 6-1 of the ITAA 1936” an individual deriving amount from the personal exertion would be required include those income in the taxable return either as the ordinary income or in the form of ordinary income. According to the “section 15-2 of the ITAA 1997” an individual taxpayers taxable income comprises of the worth to the individual relating to gratuities, bonus, fees or benefits that is provided to the person in relation to any services or employment performed.
In the present situation of Hilary, it was known that she is well known mountain climber however on being approached by a local newspaper she agreed to write the book and sell all the title and interest to the newspaper for publication. The deal fetch Hilary with a sum of $10,000. An individual taxpayer obtaining money for media appearance to tell the story of life or selling publication rights to the media shall be held taxable under “section 6-5 of the ITAA 1997”. Payments that is received from the media rights depends on the circumstances of being held for assessment given that the taxpayers is required to perform the service so that they can get the payment. As held in “Brent v Federal Commissioner of Taxation ATC 4195 (1971)” the court of law held that the amount that was received by the wife of train robber for narrating the story of her life in a publication was regarded as taxable income according to ordinary concepts under “section 6-5 of the ITAA 1997”.
As evident in the circumstances of Hilary the receipt of $10,000 by the Daily Terror Newspaper is regarded as the benefit for the services performed and constitute income from personal exertion. The sum of $10,000 would be considered for assessment under “section 6-5 of the ITAA 1997 as income from ordinary concepts. Citing the reference of “Brent v Federal Commissioner of Taxation ATC 4195 (1971)” Hilary was motivated by the payment of $10,000 to provide the service which required her assigning the interest of the book to the media company. Therefore, the sum of $10,000 constituted income from personal exertion which will be held taxable under “section 6-5 of the ITAA 1997” as income from ordinary concepts.
Relevant case laws to support the taxability of income derived from personal exertion
Later it was observed that the manuscript and the photographs taken by Hilary while climbing mountain was sold to Mitchel Library. The court of law in “Housden (Inspector of Taxes) v Marshall (1958)” found that the amount received for making available the experience as Jockey along with the photographs and newsprint cuttings was regarded assessable based on the ordinary concepts of “section 6-5 of the ITAA 1997”. Therefore, the selling of photographs and manuscripts to the library amounts to income derive from personal exertion which would be held assessable under section 6-5 of the ITAA 1997.
On the other hand, if the alternative decision of writing the book on her own was undertaken by Hilary then the sale of such books would have amounted to royalties. Referring to the judgement of the law court in “Hobbs v Hussey (1942) 24 TC 153” where the taxpayer was infamous criminal and sold the rights of the autobiographies for publication in the newspaper. Therefore court of law held that the amount received was held as taxable income. Evidently in the situation of Hilary the selling of book written by her would have accounted as royalties income and such amount would attract tax liability.
The sum of $10,000, $5,000 and $2,000 derived by Hilary would be considered as income from personal exertion which will be considered assessable under the ordinary concepts of “section 6-5 of the ITAA 1997”. While the decision of writing the book herself would have amounted to royalties.
Is the receipt of interest from the loan made to son by the parents would be considered as assessable under “section 6-5 of the ITAA 1997”?
- “Section 6-5 of the ITAA 1997”
- “Hochstrasser v Mayes (1960)”
An element having the character of income must be determined in respect of its realisable value. An element that has the character of income should be determined in respect of the situations of derivation by an individual. To possess the nature of income the item must be hold the element of gain for the taxpayer. The court of law in “Hochstrasser v Mayes (1960)” stated that to possess the nature of income the element must be a gain for the person that obtains it.
In the present case it is noticed that the parents lend their son with a sum of $50,000 for short term housing finance. The son agreed to repay to full amount after a five years’ time. even though no interest was charged by the parents however the son return the principle amount with interest within two years of loan taken.
Tax treatment of interest income earned on loans under Australian taxation law
According to the “Section 6-5 of the ITAA 1997” most of the income that comes in to the taxpayer is held as income according to the ordinary concepts. The receipt of interest by the parents for the loan made to son will be considered taxable under section “Section 6-5 of the ITAA 1997”. Nevertheless, the receipt of loan principle cannot be regarded because it was regarded as the capital amount. Referring to the case of “Hochstrasser v Mayes (1960)” receipt of interest by the parents possess the character of income and it would be considered taxable under “section 6-5 of the ITAA 1997”.
Conclusion:
Based on the ordinary concepts of the “section 6-5 of the ITAA 1997” the interest income constituted gain for the parents since was returned three years earlier from agreed time. The amount possess the nature of income and would be considered assessable according to the ordinary concepts.
Answer to A:
Land and building is regarded as the distinct CGT Assets. This is because the taxpayer purchased the land on 1st October 1980 and during that the time the land was held as pre-CGT asset while constructing the building on the land in 1986 led to post CGT assets based on “section 105-55 (2) of the ITAA 1997”. The sale of land under “section 104-10(1) of the ITAA 1997” is held as the CGT event A1. The below listed table provides the summary of net capital gains made by Scott for 30th June is stated below;
Answer to B:
If an alternative decision of selling the property to daughter was undertaken then it would have resulted in capital gains of $50,000. The below stated calculations supports the statement;
Answer to C:
On the other given that the property owner was company instead of individual then the amortization and tax payment should be subtracted.
Reference List:
Bankman, Joseph, et al. Federal Income Taxation. Wolters Kluwer Law & Business, 2017.
Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Burke, Karen. Federal income taxation of partners and partnerships in a nutshell. West Academic, 2016.
Cao, Liangyue, et al. “Understanding the economy-wide efficiency and incidence of major Australian taxes.” Canberra: Treasury working paper 2001 (2015).
Long, Brendan, Jon Campbell, and Carolyn Kelshaw. “The justice lens on taxation policy in Australia.” St Mark’s Review235 (2016): 94.
McDaniel, Paul. Federal Income Taxation. Foundation Press, 2017.
Robin and Barkoczy woellner (stephen & murphy, shirley et al.). Australian taxation law 2018. Oxford University Press, 2018.
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Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue (2016).
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