Australian Taxation Law for Income Tax Legislation

1.

The taxation system along with taxation law of a country play important role in collecting necessary fund for the essential expenditure of the government.  The expenditure like infrastructure development, expenditure for national defense as well as expenditure for maintaining the law and order of the country is paid by the government fund. The income tax is one of the most important taxation, which impose on the residential of a country as per their annual income on yearly basis (Australian income tax legislation 2013, 2013). The income tax and its application have varied with the nature of the income. The given case study demonstrates that Hilary is a renowned mountain climber. The daily terror newspaper offer her a handsome amount of money $10,000 for her life story. The term and condition from the daily Terror was the mountaineer has to write the story without any help from the ghost writer. Hilary wrote the story as well as assigns the entire right, title and interest in the copyright for $10,000 to the Daily Terror. Her story has been published as well as she paid for her story (Deutsch, 2007). Before this life story, she never writes any story. She also sells the manuscript of her story to the Mitchell Library for $5,000 along with several photographs, which she took when she climb on the mountain and for this she has received a amount of $2,000.  Now question is that whether these three payments are income from personal exertion or not. As per the income tax Act 1936 and its amendment in 1997, personal exertion income means income including earning from salaries, wages, bonuses, commissions, fees, superannuation allowance, pension, retiring gratuities as well as retiring allowance. The allowances as well as gratuities collected in the capability of the employee, or connecting to any services provide the income from any business run by the tax payer. The business can be carried out by the tax payer alone or with a partner (Emmerton, Hodgson and Fisher, 2004). Here in this particular case, Hilary is not a full time writer. She is a renowned mountain climber.  She has written her story for Daily Terror and earned $10,000 for her story. In this case she writes the story for the Daily Terror news paper because the news paper offer her $10,000 for her story and she accept the offer from the news paper and has written the story of her life without any help from any ghost writer as per the term and condition from the Daily Terror authority. Here in this case as the news paper offer she, for writing her real life story and she accept the offer from the news paper for a predetermined amount of payment, thus, this is considered as a deal and after finalizing the deal she got her payment thus, this income is considered as a personal exertion income and for this income she has to pay income tax as per the income tax law of the country and it would be assessed as ordinary income (Haslett and Sarah, 2006). For her income from selling the manuscript of her story to the Mitchell library for the amount of $5,000, she does not have to pay income tax as per ordinary income taxation law. This amount she received from the Mitchell library for selling her manuscript of her life story is not assessable as income tax for the mountaineer. Besides this, the proceed from the selling of her mountaineering photographs she got $2,000 and this income is also not considered as assessable income and this should be considered as capital gain income. Now, if the case alters and she writes her story for her own satisfaction and she decides to sell her story to the news paper Daily Terror, after finishing her story. Moreover, the Daily terror offer her for the same amount of $10,000 for her story the amount, which she earned by selling of her story after writing the story must not be include in ordinary income tax as well as it should be treated as capital gain income(Jang Sungdoo, 2014). In first case, except the income from the selling of her story to the Daily Terror, means $10,000 all the proceeds, $ 5,000 for manuscript and & $2,000 for the photographs are considered as capital gain income and not ordinary income. In 2^nd case all the income should considered as capital gain income and should not be consider as assessable income.

2. Issue

The issue presented in here is that of a parent, a mother who had let her son borrow an amount of $40,000 in order to provide for a short term housing loan. According to the verbal agreement between the mother and her son, it was fixed that the son would pay an amount of $50,000 to his mother at the end of five years. It is to be remembered that the loan was given by the mother to her son without the presence of any written agreement or document and the son also did not provide any security to his mother for the sum of money that was being borrowed by him (Kim Jihyun, 2013). Moreover the mother had also made it clear to her son that there was no need of paying any interest to her on that amount. But it was within a time period of two years that the sun returned the entire mount to his mother and not only that, he also included an additional amount which was equal to that of the 5 percent interest per annum on the amount of money borrowed by him from his mother. The total amount of money was given by the son to his mother only in one single check. The question that arises in this case is that of the effect the amount given by the son will have on the income of the parent, which is the mother in this case.

Rule

According to the Australian Taxation Law, the assessable income of an individual is defined as that amount of income that can be taxed when the individual earns enough to exceed the tax-free threshold that has been granted by the constitution of Australia. The assessable income of an individual mainly comprises of salary and wages received against the work delivered to an individual or organization; interest received by an individual from the amount of money deposited in bank accounts; dividends and other incomes derived from any investment made by the individual; bonuses and overtime that are received from an organization that an employee works at; pensions; rent; winning an amount of money from a quiz show etc (Kim Joo-suk, 2012).

Application

In this particular scenario the amount given by the mother to his son as a loan cannot be looked upon as an investment since she did not expect or want any interest on that amount of money from her son.  This cannot be considered as a part of ordinary income because of the simple reason that it was not earned by the client that is the mother in this case in a normal or ordinary manner. The son had every right of not paying any interest to the mother as he was neither legally bound to pay the interest nor was there any presence of a written agreement that bound the son to pay any interest. But even then the son paid the interest to his mother and this can be seen as a sign of goodwill (KimSungKyun, 2007).  Now, 5 percent of $40,000 is $2,000. Therefore two years the amount of interest received by the client is of $4,000. The amount of $4,000 is the extra amount of interest that is received by the client, the mother of the son. This amount is much lower than the threshold of assessable income given by the Australian taxation Office. Following this rule, the amount received by the mother cannot be a part of assessable income.

Conclusion

The particular case study that has been taken into consideration suggests that the client had received an extra amount as interest on the loan that she had given to her son. Without the presence of any written document about the loan and the interest that needs to be paid on that loan, this cannot be seen as an investment from the perspective of the client. Therefore the extra money earned by the client from this investment would not form a part of ordinary income (Park Nosu and Hun Park, 2014). Secondly, the amount of interest that is the extra amount paid by the son to his mother is that of $4,000 and this does not cross the threshold income as per the Australian Taxation Law. Therefore the amount received by the parent would not have any effect on her assessable income. 

3. a)

As per the case study, it can be observed that an Accounting professional Scott had purchased a vacant block of land in Brisbane on October 1980, and the land was remained vacant until 1^st September 1986, while he built a house on that land. At that time the land is valued at $90,000as well as the cost of construction of the building was $ 60,000. After that he rented the property after the completion of the house (Plancich, 2003). On 1^st march of the current taxation year, Scot sold the property at auction for $800,000. On the basis of these information the net capital gain of Scott can be calculated as follows,

As Scott is an accountant by profession and he is not involved with a property development profession, thus the income generated from the selling of the property should not be considered ordinary income as per the taxation law of ATO 1936 and the further amendments, it should be considered as capital gain and the tax must be deducted as the rule of capital gain tax. As per rule s of ATO any income that is generated from selling of a capital asset is considered as capital gain (Poff, 2015). This income or profit use to be levied to tax in the particular year in which the transfer or selling of the capital asset takes places.     

As the property has been purchased by the buyer before three years it cannot be considered as short term capital gain, it should be considered long term capital gain.  As per the ATO capital tax has been introduced on 1985 thus before the years of 1980 the capital gain tax should not be applicable for nay capital gain. In this case it is observed that when at 1^st September 1986 Scott built houses on the vacant land which he bought on October 1980 the value of the land was $90,000 and the cost of construction was $60,000. Thus, the total value of the property was on completion of the building was ($90,000+$60,000) = $150,000. After the completion of the building the property has been rented. The income generated from the rent will be assessed as ordinary income for the assessable taxation year (Pope, 2005). On 1^st March of the current year Scott sold the property at auction for $800,000. Thus he earned ($800,00-150,000) = $650,00 from the property and these amount is considered as an assessable income  and under capital gain tax this income should be calculated. Moreover, the tax should be calculated on the capital gain, which is $650,000 by the current tax rate for the capital gain within the constituency.   

b)

 In this particular case, the person of interest is an accountant named Scott who bought a vacant block of land in Brisbane on 1 October of the year 1980. The value of the land in the year 1986 was $90,000 and the cost of building a house on that land was $60,000. Ultimately when the client, Scott sold the land with the house at $8,00,000 he had a capital gain on which tax is applicable. Capital gain is defined as any profit or gain that an individual derives through the sale of a capital asset (Prince, 2011). Capital asset comprises of items like that of land, building, trademarks, machinery, jewellery, patents, house property etc. In the situation where Scott decides to sell the property to his daughter at an amount of $2,00,000, there will be no calculation done on the capital gain tax. The reason behind this is that capital gains are not applicable in case of the situation when an asset is being inherited. The Australian Taxation Law states it clearly that assets that are received in the form of gifts will be exempted from the capital gains tax. Therefore since Scott had lowered the value of the asset as he intended to give to his daughter, it can be considered as a gift. Moreover, since the capital asset is getting transferred from one kin to the next kin there is no chance of it being considered as capital gains tax (Zhou, 2013). Thus in this case no tax will eb levied on the transaction of the capital asset made between Scott and his daughter.

c)

The answer would be a bit different if the owner of the property is a company instead of an individual and it would directly depend on the type of company that is being discussed about. In case of any ordinary company, the property would be looked upon as a capital asset and therefore the capital gains tax would be applied just the way it would be applied in case of an individual(Robertson, 2008). But on the other hand, if the company is a real estate company that constantly engages itself in the buying and selling of properties, houses and capital assets like that then it would not be considered as a capital gains tax. The reason behind this is that in case of a real estate company, the buying and selling off of the properties comprise a part of their ordinary income. Since this is a part of their ordinary income the tax applicable on the profit of those transactions would fall under normal income tax.

References

Australian income tax legislation 2013. (2013). North Ryde, N.S.W.: CCH Australia.

Deutsch, R. (2007). Fundamental tax legislation 2007. Sydney: Thomson.

Emmerton, K., Hodgson, H. and Fisher, R. (2004). Tax questions and answers. Sydney: Australian Tax Practice.

Haslett, T. and Sarah, R. (2006). Using the Viable Systems Model to Structure a System Dynamics Mapping and Modeling Project for the Australian Taxation Office. Systemic Practice and Action Research, 19(3), pp.273-290.

Jang Sungdoo, (2014). Review of 2013 “Income Tax Law” and “Inheritance and Gift Tax Law” Cases. Seoul Tax Law Review, 20(1), pp.325-373.

Kim Jihyun, (2013). Review of 2012 Corporate Tax Act Law and Income Tax Law Cases. Seoul Tax Law Review, 19(1), pp.423-466.

Kim Joo-suk, (2012). Review of 2011 Corporate Tax Law and Income Tax Law Cases. Seoul Tax Law Review, 18(1), pp.397-423.

KimSungKyun, (2007). Review of Inheritance Tax System―focused on unrealized capital gain―. Seoul Tax Law Review, 13(2), pp.375-413.

Park Nosu, and Hun Park, (2014). Research on Unified Application of Tax Laws related Contractual Rescindment on Capital Gain Tax, Gift Tax and Acquisition Tax. Seoul Tax Law Review, 20(1), pp.243-292.

Plancich, S. (2003). Mutual Fund Capital Gain Distributions and the Tax Reform Act of 1997. National Tax Journal, 56(1, Part 2), pp.271-296.

Poff, J. (2015). The Effect of Increases in the Capital Gain and Dividend Tax on the Effective Tax Rate for Investments in Stock. Journal of Business and Economics, 6(6), pp.1157-1164.

Pope, J. (2005). REFORM OF THE PERSONAL INCOME TAX SYSTEM IN AUSTRALIA. Economic Papers: A journal of applied economics and policy, 24(4), pp.316-331.

Prince, J. (2011). Tax for Australians for dummies. Richmond, Vic.: John Wiley & Sons Australia.

Robertson, P. (2008). Australian master tax guide 2008. Sydney: CCH Australia.

Zhou, M. (2013). The Tax Disadvantage Of Ordinary Income: An Event Study On The Legislative Process Of JGTRRA. JABR, 29(4), p.1003.

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