Net Capital Gain/Loss: Property Sale Scenario
Hilary, the famous mountaineer has received certain payments which need to be analysed in light of s. 6(5) to ascertain if they can be termed as personal exertion related income or not.
The newspaper has approached Hilary despite knowing that she lacks skills related to writing. Also, a $ 10,000 hefty payment was offered as an incentive to Hillary so that she would write her story. The key questions emerges is why a newspaper would give so much money to an individual without writing skills. The answer lies in the subject matter. Since story of Hilary would contain vital information with regards to Hilary which is valuable owing to her fame due to which people would be interested in knowing about her. management, the action of writing does not lead to assessable income production but it only acts a the medium which enables the example of information from Hilary to the newspaper. (Barkoczy, 2015).
This position is validated from the verdict in a similar case i.e. Brent vs Federal Commissioner of Taxation (1971) 125. Here also, through interview vital information was extracted about the martial life of a famous robber from her wife. Even though the interview lasted for more than a week but the court pointed that the act of interview was only a means to express the information that was already available to plaintiff. (Woellner, 2014). Thus, the given payment of $ 10,000 would not be termed as income related to personal exertion.
Taking a cue from the above discussion, it would be appropriate to establish that the manuscript does not have any intrinsic value on the fact that Hilary has written the same. Hilary does not have writing skills for which the people would consider the books as commercially useful and hence the value is derived on the basis of the underlying content which relates to Hilary’s life and something in which people would be interested (Gilders et. al., 2016).
The similar logic is extended for the pictures of the expedition which do not have any intrinsic worth on the basis of Hilary clicking the photographs. Thus, no value has been created on the basis of these photos clicked by Hilary because she is not famous for her photography. The underlying value of the photography is derived on the basis of the subject matter which is expedition of Hilary which is something of interest to people since Hilary’s name is associated with mountaineering. As a result, the proceeds cannot be termed as income derived on account of personal exertion in either of the cases (Gilders et. a., 2016).
Personal Exertion Related Income and Tax Treatment
In this case, it needs to be addressed if the change of motive would alter the tax treatment. The tax treatment would not change even if the story is written by Hilary driven by only self –satisfaction. This is because the act of writing is itself does not produce anything valuable. The key asset is the information which already exists and writing is the medium of communication. Thus, the underlying intent would not make any difference and the proceeds would still be not recognised as personal exertion based income (Sadiq et. al., 2016).
The requisite formula in accordance with s. 9, FBTAA 1986 is illustrated as follows (Woellner, 2014).
The respective values for the above input variables highlighted in the formula need to be derived using the data provided in the question with the help of applicable statutory provisions (Barkoczy, 2015).
- A – This would be equal to $ 50,000 which is the price at which the car has been purchased by thee employer last year. It is noteworthy that no depreciation has been charged on the vehicle which would typically reduce the vehicle base value.
- B – This would be equal to 20% since for all vehicles procured after 2011, this value remains constant and is not linked with the distance travelled suing the car.
- C – This would be equal to 183 since this data has been already indicated in the question and hence does not need to be computed.
- D – This would be equal to 365 since the days in the current assessment year amounts to the same value.
- E – In regards to the statutory formula indicated above, it is apparent that any operating expense borne by the employee in relation to the vehicle extended by the employer, deduction is permissible to that extent provided s. 10A is satisfied. The section 10A states that employee expenses are deductible only under the condition that the employee can provide documented proof for the expense incurred related to the vehicle. Considering the given situation, the employee has documentary proof and hence this value is $ 10,000.
Considering the value of the all the inputs obtained above, the substitution in the statutory formula is made which would yield the following result.
In this case, a parent has given financial help to the tune of $ 40,000 to her son. The parent expected repayment of principal after five years and did not want any interest income from her son which was clearly communicated when money was given. Accounting, the parent did not engage in any collateral security and legal documentation when giving the money to the son. The son in actuality takes two years only to return the money but also pays 5% p.a. interest thus providing $ 4,000 incremental money. Hence, a cheque of $ 44,000 was handed over to the parent to clear the outstanding debt on the son. In the light of these facts, it needs to be ascertained if any tax would be need to be paid by the parent on the receipt of $ 44,000 under the described situation.
It makes sense to divide the $ 44,000 into the two constituents and discuss the relevant tax implications of each part separately in accordance with relevant statutes.
- Principal Repayment ($40,000)– From the facts stated above, it becomes evident that the parent had given 4 40,000 capital to the son and hence when the son pays this back, it would be capital only. No tax would be levied on this capital receipts (CCH, 2013).
- Interest amounts ($4,000) – There are three possibilities which need to be explored with regards to tax treatment of the incremental $ 4,000 paid as interest by the son.
- The given amount can potentially be taxable as ordinary income if it falls within s. 6(5). But in the given case, this section would be satisfied only when the parent has association with business based on money lending. There is no information in the case to indicate the same. Further, the manner in which money is handed to the son is quite unlike business transactions. Hence, it seems unlikely that parent does any business related to money lending and hence $ 4,000 cannot be taxed within the realm of this section (Woellner, 2014).
- The given amount can potentially be taxable as assessable income if it falls within s. 15(15). This deals with isolated transactions which are enacted so as to earn money. Hence, if this has to apply in this case, then the parent should have lent money to her son thinking it is an opportunity to earn some interest income. But this is far from reality considering that the parent did not have any intend to take interest from son. Hence $ 4,000 cannot be taxed within the realm of this section (Gilders et. al., 2016).
- The given amount can potentially be non-taxable if the various conditions mentioned in TR2005/13 are fulfilled since then the payment would be recognised as gift (ATO, 2005). This is indicated below.
- The money transfer in favour of mother has completed as indicated from the cheque given
- The parent never wanted the interest and hence voluntary nature of payment is proved.
- The son in lieu of small payment would not have any expectations as these would be otherwise be also fulfilled owing to the personal relation.
- The interest payment is driven by gratitude of son towards the parent.
In accordance with the discussion carried above, it would be correct to conclude that the parent would not need to pay any tax since $ 40,000 is capital receipt and $ 4,000 is gift.
The given information highlights the purchase of a vacant land block in Brisbane in 1980 by Scott. Later, a house was constructed on this land which got completed in 1986 at a cost of $ 60,000. When the house construction was complete, the market value of the land was $90,000. The current price of the property is $800,000 as determined through the auction. It needs to be cleared that main residence exemption under Division 118-B would not apply in this case as since construction the house has been rented and Scott has not resided on the property (CCH, 2013).
Exemptions under Capital Gains Tax: Financial Help from Parents
The first step is to bifurcate the property into two assets namely the land and the house. This becomes necessary since the CGT would not apply to land since it was purchased at a time when CGT did not exist. However, CGT would apply to house since when that asset came into being, CGT was applicable. The house current price can be computed as shown below (Sadiq et. al., 2016).
Based on the above value, the computation of the capital gains on the house can be carried using the two methods as follows (Krever, 2016)
In accordance with discount method under Division 115, for long term gains, a 5% discount is available. Since, in the given case this condition is satisfied, hence, CGT taxable capital gains from sale of property = (50/100)*(320000-60000) which gives final answer as $ 130,000
In accordance with indexation method, the indexed value of h0ouse is considered after adjustment for inflation. Hence, CGT taxable capital gains from sale of property =320000 – (68.72/43.2)*60000 which gives final answer as $224,600.
Scott would like to lower tha tax liability and hence CGT taxable capital gsins would be $ 130,000.
The property is sold to Scott’s daughter but the price charged is lower than the estimated market value. Section 116-30 will be useful here since where there is mismatch between the current value and actual price derived for the asset, the price that is higher should be deployed for capital gains computation (Austlii, nd). The market price of $ 800,000 would be used.
Here the property owner is no longer Scott but now is replaced by an entity which is a company. This tends to have significant effect primarily because discount method is not available to use for companies (Coleman, 2011). Therefore, the capital gains on the property sale would be calculated as per the indexation method discussed in part (a) above.
References
ATO (2005), Tax Ruling TR 2005/13, [online] available at https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001
Austlii (nd), INCOME TAX ASSESSMENT ACT 1997 – SECT 116.30, [online] Available at https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s116.30.html (Accessed on May 30, 2018)
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Coleman, C. (2011) Australian taxation-law Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia
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