Appropriate Tax Treatement Federal Taxation

Question: Describe about the Appropriate Tax Treatement for Federal Taxation. Answer: 1. The case aims to discuss the appropriate tax treatment that needs to be extended to the payments received by Hilary who is a professional mountain climber. The payments to the tune of $ 10,000, $ 5000 and $ 2,000 have been paid to Hilary on account of story, manuscript and expedition related photos respectively. The relevant case for the analysis of the above payments is Brent vs Federal Commissioner of Taxation(1971) 125 CLR case. A contract was enacted whereby the newspaper was willing to make hefty payments to the appellant for revealing undisclosed information about her husbands personal life. The newspaper was interested in obtaining this information as her husband had committed a robbery which went on to become very famous and hence readers were inquisitive to know more about the robber (Coleman, 2011). There was concern with regards to the nature of payment derived by the appellant. The court taking cognisance of relevant situation factors concluded that capital receipts have been derived as the contract was regarding transfer of information from appellant from the newspaper. Due to the sale of information asset, no assessable income had been derived by appellant (Barkoczy, 2015). In case of Hilary also, her skills lie in mountain climbing. Also, she has never written any story before but still she obtains a lucrative offer from the newspaper as the real asset that the newspaper is aiming for is copyrighted information about Hilarys personal life which had commercial value as Hilary was famous. The act of story writing is just a way to ensure transfer of information and does not have any intrinsic worth. Similarly, in case of other items such as manuscript and photographs, the commercial worth is extracted not from their intrinsic qualities but rather from the association with Hilary and this makes them akin to collectibles. If Hilary is not driven by profit motive while writing the story but only her own satisfaction, then it would be a hobby of writing in which Hilary would be engaging in. Hence, on the sale of the story, the proceeds would not be taxable as ordinary income since neither in Hilary a professional writer nor she had engaged in an isolated writing venture with the intention of making money. Thus, the proceeds derived from sale of such a story would also be treated as capital receipts (CCH, 2015). 2. The situation given summarises a lending transaction whereby mother in the capacity of a lender lends $ 40,000 to her son in the capacity of the borrower. The son makes a promise to return this amount along with 5% interest after the elapsing of five years. However, the mother denies any desire for earning interest income and therefore asks the son only to return the principal in a timely manner. The son is able to discharge the liabilities only after two years and a cheque of $ 44,000 is handed to the mother. With regards to discussion of the appropriate tax implications, $ 40,000 is not a matter of concern as it would be regarded as capital receipts received on account of the capital lent to the son. The incremental $ 4,000 that the son has given to the mother could potentially have three viable means to be accounted for (Woellner, 2015). Section 6(5) Assessable It is essential for classification under this section that the interest income should arise from the routine money lending business which does not seem to be correct for the given situation as no information hints towards the possibility of mother engaged in such a business (Deutsch et. al., 2015). Section 15(15) Assessable It is essential for classification under this section that the interest income should be derived from an isolated transaction which the taxpayer has enacted with the prime motive of earning income in the form of interest payment. In order to ensure the same, the isolated transaction is enacted in a professional manner. However, this is not true as mother did not want interest income and also the transaction was casual since it lacked basic documentation and legal formalities (Sadiq et. al., 2015). Gift Non-Assessable The TR 2005/13 lists down some conditions that the underlying payment needs to satisfy for classification as gift (ATO, 2005). Change in ownership is mandatory In this case, the money has been transferred from the son to the mother. Transfer has to be voluntarily done In this case, son gave the interest amount despite mothers lack of drive to take any interest as stated at the time of agreement only. No expectation of favour in return In this case, son in return of $ 4,000 payment does not expect any favours from her mother. Driven by benefaction and personal relationship In this case, son would not have made the extra payment had it not been her mother but an outsider, hence personal affection is driving the transfer. On the basis of the arguments above, it is fair to conclude that the mothers assessable income is indifferent to the receipt of the $ 44,000 cheque by the son as explained above. 3. Part a) With regards to assets, capital gains are applicable if the asset has been bought on or after the cut-off date i.e. September 20, 1985. In case of Scotts property, land was purchased before this while house was constructed after this. Thus, it is required that the individual prices of each of these assets be determined so that the respective capital gains be computed (Barkoczy, 2015). Based on the case facts, value of property due to house at the time of construction = (60000/(60000 + 90000))*100 = 40% This percentage would be assumed to be constant event today and hence it is fair to assume that 40% of the proceeds from the property can be attributed to the house. Current valuation of house = (40/100)* 800000 = $ 320,000 Following methods may be used to calculate the taxable gains from property sale (CCH, 2015). Indexation Method Construction cost value after inflation adjustment which also forms the cost asset = 60000*(68.72/43.2) = $ 95,400 Where 68.72 is the inflation value (CPI) in 1999 And 43.2 is the inflation value (CPI) in 1986 CGT applicable capital gains = 360000 95400 = $224,600 Discount method Capital gains derived from property sale = Proceeds from house Cost base of house = 320000 60000 = $ 260,000 CGT applicable capital gains after availing 50% rebate in long term capital gains = 0.5*260,000 = $ 130,000 Apparently, Scott would choose the latter method or discount method to minimise CGT related liability arising from property sale. Part b) As per the case facts, Scott liquidates the property in favour of his daughter that too at a minimal price of $ 200,000 probably with the intention to save on CGT liability. However, Scott would not be successful in this endeavour as the CGT liability would still be equal to $ 130,000 as computed above. This is because of Section 116-30 which directs the taxpayer to take the maximum value from the actual selling price and the current market price of the asset. Further, capital gains are computed using the higher value which in the given situation would be $ 800,000 (Woellner, 2015). Part c) The ownership of property has changed and hence the method of computation of CGT would change from discount to indexation as companies cannot avail the former method (Deutsch et, al., 2015). Thus, in line with indexation method, the revised CGT applicable capital gains would be $224,600. References ATO 2005, TR 2005/13 Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200513/NAT/ATO/00001 (Accessed on September 5, 2016) Barkoczy,S 2015, Foundation of Taxation Law 2015,7th eds., CCH Publications, North Ryde CCH 2015, Australian Master Tax Guide 2015, 53rd eds., Wolters Kluwer, Sydney Coleman, C 2011, Australian Tax Analysis, 4th eds., Thomson Reuters, Sydney Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015 ,Principles of Taxation Law 2015, 8th eds., Thomson Reuters, Pymont Woellner, R 2015, Australian taxation law 2015, 7th eds., CCH Australia, North Ryde