Applying of Income Tax Assessment Act - Case Study Example

Running header: Law Student’s name: Instructor’s name: Subject code: Date of submission Case 1: In this case, Hillary who is a well-known mountain climber is offered $10,000 by the Daily Terror Newspaper for her to write her life story. She writes the story and assigns all her right, tittle and interest in the copyright for $10,000 to the newspaper. She also sells the manuscript for $5,000 and the photographs that she has taken while mountain climbing for a total of $2,000. The issue is whether the three payments would be considered income from personal income and hence tax assessable or not in which case they would not be assessable. The Australian taxation law has sections that clearly define income from personal exertion. As such, this section uses the Australian taxation law as well as relevant decided cases in a bid to decide whether the payments could be described as income from personal exertion. In addition, the section will also consider whether the payments would still be considered income from personal exertion had she written the story for her own satisfaction and only decided to sell it later. Income tax assessment act (ITAA) 36 s6(1) defines income from personal exertion to include earnings, salaries, commissions, wages, bonuses, fees, superannuation allowances, pensions, retiring gratuities and allowances and income from labor1. Income from personal exertion also relates to income from services rendered, the proceeds of any business carried on by the tax payer either individually or in partnership, income from any property which would form part of any office emoluments or employment of profit that the tax payer holds. In addition, income from personal exertion would also include profits that would arise from the sale of any property acquired by the tax payer for the purpose of profit making through sale or from the carrying on or carrying out of any profit making scheme or undertaking. The above definitions of income from personal exertion has been held by the courts in various cases including the case in F.C. OF T. v. Gulland, Watson and Pincus v. C. of T. 85 ATC 476523. Based on the above legal analysis, the activities by Hilary and hence the three payments she receives could be described as personal exertion income. Although she is not a professional writer, it is clear that the interest by the newspaper to request her to write her story is directly related to her profession of mountain climbing. It is worth noting that it is the profit making motif that prompts her to write the story and also to sell the manuscript and the photographs. The fact that she only writes after the promise of $10,000 is evidence that she is writing for money. This is in line with ITAA 36 s6(1) definition of personal exertion income as including profits arising from sale or from the carrying on or carrying out of any profit making scheme or undertaking. In other words, she writes for profit in this case which also results in selling of the photographs and manuscripts. The three payments would however not be considered personal exertion income if she wrote the story for her own satisfaction and only decided to sell it later. This is because her writing would not have been prompted by a profit making motive but by her love of writing. In addition, the writing would not have been triggered by her being a professional mountain climber. Case 2 In this case, the parent lends her son $40,000 to be repaid ($50,000) after five years. However, there is no formal agreement and no security is provided for the amount lent. The mother also indicates that the son need not pay interest. The son however repays the full amount after two years including 5% p.a interest in a single check. The issue is whether the interest payment that the son pays to the mother can be considered income and hence assessable for tax purposes in which case it would affect her assessable income or not in which case it would not affect her assessable income. To decide this, one has to determine whether the action of lending money to her son could be regarded as business hence making the interest to be considered income and hence taxable. If not, the interest payment would have to be treated as a gift from her son and hence not taxable in which case it would not affect her taxable income. ITAA 97 s23-1604 regards business activities as those denoting derivation of assessable income while a hobby derives non-assessable income with ATO regarding income that is less than $20,000 p.a as hobby. In the case of Ferguson v FC of T5, the court identified four tests as defining a business. First, a business has to have a profit making motif. A business will also be determined from the regularity or repetition of activities while it also needs to have organized activities in a business-like manner including such activities as keeping records and books of account. In addition, the amount of capital invested may be considered. The same conditions were observed in the case in TR97/11 where the court indicated that for an activity to be considered a business, it has to be an activity that is generally known as a business rather than a hobby or a recreation. The need for business records as a determinant of a business was also emphasized in Brajkovich v FCT67. Arising from the above review of relevant law and cases, the interest payment by the son to the mother cannot be considered an income since the act of lending to the son did not amount to a business. First, the mother did not have a profit motif in lending to the son as she had indicated that the son needed not pay the interest. Secondly, there is no indication of regularity or repetition of the activity since the mother is not usually involved in the activity of lending money. The case also clearly indicates that no records were kept regarding the loan while no security was provided as would be the case in a lending business. As such, this activity cannot also be said to have been organized in a businesslike manner. Arising from this therefore, the interest payment cannot be regarded as income but rather a gift from the son to the mother probably in appreciation of the loan given. As such, the interest payment will not have any effect on the assessable income of the mother as it is not considered income for tax purposes. Furthermore, it would still be considered a hobby since the interest payment was below $20,000 p.a. Case 3 a) To determine capital gain, we use the discount method. In this case, The cost of acquiring land = $90,000 The cost of house = $60,000 Cost base =$150,000 But capital proceed = $800,000 Thus, profit therefrom = $650,000 But individuals are allowed to discount by 50%. Thus, discounted capital gain is given by; Profit * The discount rate For individuals, discount rate is 50%, thus, The capital gain for Scott = $650,000 * 50% = $325,000 Thus, the capital gain for Mr. Scott for the year ended 30th June of the current year is $325,000 b) Capital gain if land and house is sold to daughter at $200,000 The cost of acquiring land = $90,000 The cost of house = $60,000 Cost base =$150,000 But sale price is = $200,000 Thus, profit on sale is = $50,000 But individuals are allowed to discount by 50%. Thus, discounted capital gain is given by; Profit * The discount rate For individuals, discount rate is 50%, thus, The capital gain for Scott = $50,000 * 50% = $25,000 Thus, the capital gain for Mr. Scott for the year ended 30th June of the current year is $25,000 c) To determine capital gain/Loss, we use indexation method Value of land on 1st September 1986 = $90,000 Value of house on 1st September 1986 =60,000 Indexation factor = 1986 factor = 43.2 1999 factor =68.7 Indexation factor = 1986 factor/1999 factor = 43.2/68.7 = 0.623 Index cost base = Index factor * Cost base For land Index cost base = $90,000/0.623 = $143,125 For the house Index cost base = $60,000/0.623 =95,417 Index cost base = 238,542 Capital gain = Capital proceeds – Cost base Capital gain = $800,000- $238,542 Capital gain = $561,458 Net capital gain for the company for the year ended 30th June of the current tax year = $561,458 Read More