Income Tax Assessment Act Taxation Treatment

Question: Describe about the Income Tax Assessment Act for Taxation Treatment . Answer: 1. Issue There are three payments that Hilary is getting on account of engaging in writing her ownr story. The details of the payments are given below. $ 10,000 payment is contributed by The Daily Terror as a compensation for transfer of interest and copyright of Hilarys personal life story. $ 5,000 payment is contributed by Mitchell Library as a compensation for the manuscript. $ 2,000 payment is contributed by Mitchell Library as a compensation for the photographs clicked by Hilary on her expeditions. In view of the above, the taxation treatment of these payments that Hilary obtains needs to be ascertained. Rule The segregation of payments into revenue and capital is a key requirement for computation of tax liability. The revenue receipts are levied income tax and contribute to ordinary income of the taxpayer. The capital receipts are non-assessable and may attract liability in the form of capital gains tax but it would be levied only on capital gains made. In the given case also, a key issue is to classify the payments by identification of their nature (Barkoczy, 2014). A relevant case worth discussion in this regard is the Brent vs Federal Commissioner of Taxation(1971) 125 CLR case. The core issue in this case was regarding the classification of the payment derived from a newspaper company for sharing information by the appellant about her personal life with husband. The court held the receipts as capital and hence there was no taxation burden (CCH, 2011). The central reasoning by the court is explained below. The newspaper approached the appellant as her husband was part of a much famed robbery and thereby people would like to know more about the personal life of the individual involved. Hence, the main asset which formed the premises of the contract was not the appellants narration but her information about her personal relation. Other acts were incidental and did not add much value (Sadiq et. al., 2014). The transfer of copyright about this information essentially involved transfer of capital asset from the appellant to the newspaper (Deutsch et, al., 2015). Application The reasoning of the court would now be applied to the given case involving Hilary. The pivotal arguments are summarised below. The offer given to Hilary was not extended due to interest in her writing skills but because of the information she processed about her personal life which was the real asset that the newspaper wanted access to through the book. The writing activity does not lead to creation of any valuable asset as it was always present in the form of her personal life details and book is a sharing medium. Similarly, the income derived from photography and manuscript should be seen in the light of Hilarys fame which is the key factor that provides these value or else these have no intrinsic value. Conclusion Based on above arguments, it is evident that sale of book rights, manuscript and photographs are all essentially capital asset transfer and hence the derived payments would be of capital nature and therefore non-assessable. (b) The fact that Hilary is now driven by self-satisfaction as the motivating factor does not alter the tax recognition of these payments. This is because the act of writing is not pivotal in this case and therefore the intent with which she indulges in this activity is also not significant. Either ways, at the end, through sale there would be transfer of capital asset only resulting in capital receipts. 2. Issue The son obtains housing loan from mother without any documentation and collateral. He intends to return it after five years but in actuality returns after two years, While the total amount borrowed was $ 40,000, the amount returned was $ 44,000. The incremental payment was made as interest though the mother had denied any expectation regarding the same at the beginning only. The issue is to discuss the contribution of this lending transaction on the assessable income of the parent. Rule While ordinary income is taxed as per ITAA 1997, however gifts do not attract any taxation burden. But for labelling any payment as gifts, the ATO has prescribed some conditions that need to be satisfied which are mentioned below (ATO, nd). With the transfer of gift, the ownership must be changed in favour of the party acting as the transferee. The voluntary nature of the transfer being made in paramount. The expectations from the transferor to extract any gains in return of the gift must not be present. The core intent driving the transfer should be benefaction between transferor and transferee. Payments received as interest would contribute to ordinary income (Section 6-5), in case it is derived from business activity such as money lending business or from any investment which makes interest payment to the investor (Barkoczy, 2014). It is noteworthy that interest received may be in cumulative form for recognition as ordinary income and need not be necessarily regular in nature (Coleman, 2011). Application The given facts about the manner in which transaction was enacted i.e. without adequate documentation and collateral indicate towards the transaction being a casual one, Further, the explicit communication by mother with regards to not wanting any interest payments on the extended loan also establish that it was not a business transaction. The mother at the end of two years receives a cheque of $ 44,000. While there is no dispute with regards to capital nature of $ 40,000 which were initially lent, the recognition of $ 4,000 given as interest need discussion. This amount will be considered as it satisfies all conditions listed by ATO. Since son has given the cheque to mother which has been drawn in her favour, hence ownership has changed The mother did not want any interest payment but still the son makes it. For the payment of $ 4,000 the son has no present or future expectation for favours. The amount has been given to the lender as a token of appreciation and gratitude. Conclusion The given transaction would not have any impact on the assessable income of the parent. 3. Part a) For all assets acquired before September 20, 1985, the liability on account of any capital gains realised on asset liquidation would be zero. As per the given case facts, Scott purchased land before the cut-off date and therefore land would be CG T exempt asset. However, the house was constructed later only in 1986, therefore CGT would be applicable only on capital gains made by the house. Due to the differential treatment, it is considered that the given property contains two assets namely land and house (Sadiq et. al., 2014). Land When the house was being constructed, the market value of land was 90,000 while the expense on construction of house was $ 60,000 Thus, total value of the property in 1986 = 90000 + 60000 = $ 150,000 Lands share in total property valuation = (90000/150000)*100 = 60% Thus, 60% of the propertys market price in the current market would be on account of land and free from any CGT liability. Hence, CGT exempt portion of proceeds due to land = 60% of 800000 = $ 480,000 House Current market value of the house = (40/100)*800,000 = $ 320,000 Component of property which would be subject to CGT = 0.4*800000 = $ 320,000 There are two methods for computation of taxable capital gains which are implemented below. Discount method Contribution of house to capital gains = Sales proceeds Cost of construction = 320000 60000 = $ 240,000 Rebate in capital gains on property sale = 50% of 240000 = $ 120,000 Net taxable capital gains = 240000 120000 = $ 120,000 Indexation Method The CPI figures for 1986 and 1999 are 43.2 and 68.72 respectively. Hence, the adjustment index = (68.72/43.2) = 1.79 Adjusted cost for house construction = 1,79* 60000 = $ 95,400 Net taxable capital gains = 320000 95400 = $ 224,600 Since the discount method leads to lesser capital gains being subject to CGT, thus it would be chosen and therefore taxable capital gains are $ 120,000 from the liquidation of property. Part b) Scott sells the property to her daughter but the selling price accepted (i.e. $ 200,000) is a significant discount to the market price (i.e. $ 800,000). For computation of CGT liability, Section 116-30(2 would be deployed. This section advocates that the capital gains should be derived on the larger cost between the prevailing market price and the actual sales proceeds (Austlii, nd). Based on the given data, this works out as $ 800,000 and hence no change would be made. The answer would remain the same. Part c) Due to change of ownership, the method for CGT calculation would need to be changed to indexation method as companies cannot avail discount method (Coleman, 2011). Hence, the taxable capital gains would get altered to $ 224,600.as per indexation method. 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