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1. The three payments are considered as income from personal exertion.

S 6.5 of the Income Tax Assessment Act of 1997 provides that the accessible income

includes all ordinary income derived, directly or indirectly, from all sources. This means that as

long as there is a flow of wealth, other than a mere return of capital, such flow of wealth is

assessable. Unless there is a special law which expressly and explicitly declares an activity as

tax-exempt, any income from whatever source shall be assessable.

Under the personal exertion income rule, income may be received as a result of one’s

personal exertion or as a fruit of an investment. Thus, if an income is derived by an individual

who pursues a trade or professional activity, then such income is assessable. However, if the

income is received merely by performance of a hobby, or through chance, then it is excluded

from the assessable income. To be considered as income from personal exertion, the earner

should have performed the activity with the intent of a pecuniary benefit. Absent that intent of

gain, such as when income is derived purely by reason of one’s attributes or another’s

generosity, the income earned is not considered as income from personal exertion.

In the case of Stone vs FCT, the Court said that even payments derived from sources

outside an individual’s trade or occupation may be considered income if the activity that

produced it was particularly sought to result in the acquisition of money. Thus, when a hobby is

pursued to earn money, it is tantamount to doing business, even if such activity is merely

isolated. The determining factor is the intent that is concomitant with the income-earning

activity.

As discussed in the foregoing, the three payments are included in the assessable income

for they are derived through personal exertion. Hillary’s act of writing her story with the intent of

gaining from it clearly constitutes income from personal exertion. Her sale of the story, the
manuscript, and the photographs is the main activity which produces the flow of wealth. Such

sale is considered a personal exertion on her part, notwithstanding that the items sold were

connected to her hobby of mountain-climbing. It is her act of selling which is at issue and not her

mountain-climbing activities. In other words, if Hillary did not sell the items, she would have not

earned any money. There would be no income to speak of.

Anent the second question, my answer would be no different. The income earned under

this circumstance is still considered as derived from personal exertion. As mentioned earlier, the

activity which is at issue is not the mountain-climbing activities, nor the writing of the story, but

the eventual sale of the items. It is the sale that produces the income. Hillary’s positive act of

selling the items is what is considered as personal exertion.

However, if Hillary did not do any selling and was granted the money out of another’s

pure generosity and recognition of her skill and personal attributes, then it would be considered a

donation. It will now then be subject to different rules.

2. A Fringe Benefits Tax (FBT) is a tax paid by employers for certain benefits paid to their

employee/s which are different from salaries or wages. FBT is separate from income tax and is

computed using the taxable value of the fringe benefits provided.

S 9 of the Fringe Benefits Tax Assessment Act of 1986 provides for the statutory formula

in computing the taxable value of the fringe benefits. To illustrate,

TV = [SP x BV X (DU/DY)] – [EC + VR],

where

TV = taxable value of the fringe benefits;

SP = statutory percentage in relation with the distance travelled;


BV = base value of the car;

DU = number of days during that year of tax on which the car fringe benefits were provided by

the employer;

DY = number of days in that year of tax;

EC = employee’s contribution or any amount of the recipient’s payment;

VR = any value of reductions.

The taxable value is actually the gross taxable value of the benefits less the employee

contribution and the value of reduction. The gross taxable value consists of the first part of the

formula – the product of the statutory percentage, the base value of the car, and the ratio of the

days used over the total days in the taxable year.

The problem gives us the following values:

Days used during the FBT year = 183;

Travelled distance =16,000 km;

Amount the car was purchased at = 50,000;

Employee’s Contribution = 1,000;

Statutory percentage in relation with the distance traveled = 20%.

The distance travelled by the car is actually irrelevant in computing the taxable value of

the car fringe benefit.

Replacing the variables in the formula with the values in the problem gives us

TV = [20% x 50,000 x (183/365)] – [1000-0]

TV = 5013.70 – 1000
TV = 4013.70

Note that the statutory percentage is a flat 20%, except when there is a pre-existing

commitment in place on the terms provided by law.

To summarize in Table Form, we have

Number Gross Taxable Employee Value of Taxable Value of

Value Contribution Reductions Benefits

1 5013.70 1000 - 4013.70

The tax base of the car fringe benefit tax is 4013.70.

3. As discussed in the answer to Question 1, S 6.5 of the Income Tax Assessment Act of

1997 provides that assessable income includes the ordinary income received directly or indirectly

from all sources. Thus, even passive income derived from interests on loan payments should be

included in an individual’s assessable income.

Passive income includes interest amounts, dividends, rents, capital gains, and any amount

received other than a mere return of capital which does not constitute personal exertion income.

Thus, any payment received as an interest in the loan is considered passive income and should be

included in one’s assessable income.

In this case, the mother earned a 5% pa interest on the amount loaned which was paid to

her on the second year. Hence, the profit earned, which is the interest paid, should be included on
the assessable income and declared on the second year where the income was realized. Since

there was no gain or profit on the first year, the mother need not declare any interest income on

the first year.

Although there was an agreement that the son pay $50,000 at the end of five years which

would effectively give a $10,000 profit to the mother on the fifth year, such income is merely

presumptive. In fact, it never materialized. The mother only ought to declare income that is

actually realized. Accordingly, she need not report and declare any passive income on the first,

third, fourth or fifth year, but only on the second year where the income was actually paid and

realized.

It is also of no moment that there is no formal agreement on the loan or that no security was

provided. Additionally, even if the mother told her son that the latter need not pay interest, this

was of no consequence to the tax implications on the income derived from the loan. The law

clearly includes income from whatever source, whether the sum received was legally

demandable or not. Evidently, there was a flow of wealth. Ultimately, the profit earned by the

mother when the loan was paid should be included in the assessable income.

On the second year when the mother should declare the profit, the total assessable income

should be considered in determining the thresholds of the taxable income. Consequently, if the

taxable income for the second year exceeds $18,200, then the mother would be subject to income

tax at the rate provided for by law.


4.

a. Capital gains happen when you realized a gain for a capital asset you disposed. This

means you sold it at a price higher than what you paid to acquire it. Capital assets are those

assets which are not used or connected in one’s trade or business.

S 104.10 of the Income Tax Assessment Act of 1997 provides that a capital gain is

disregarded if you acquired the asset before 20 September 1985. In this case, since the land was

acquired in October 1980 (which is nearly five years before the CGT law took effect), it is a pre-

CGT asset which is exempt from the capital gains tax. The building, however, is subject to the

capital gains tax. Thus, any gain from the sale of the building should be included in the

determination of the capital gains tax, subject to a 50% deduction for individuals who holds the

asset for more than a year.

In this particular scenario, since the whole property was sold at an auction for $800,000,

the value of the land should be deducted from that amount since it is a separate pre-CGT asset

exempt from capital gains tax. Assuming the land is still valued at $90,000, that amount should

be deducted and the building, which is subject to capital gains tax, is deemed to have been sold at

$710,000 (thereby translating to a gain of $650,000). Applying the 50% discount for individuals

will give us a tax base of $325,000. This will be included in Scott’s assessable income when he

files his tax return.

b. The answer would not change if Scott sold the property to his daughter for $ 200,000. In

this case, it is not the selling price that would determine if there was a capital gain. The market

value of the property will be considered in computing capital gains/loss. In this case, since the

market value of the property is $800,000, there is a presumptive gain involved. Thus, even if
Scott sold the property for an insufficient consideration which is $200,000, this would not affect

the tax implications and the amount that would be added to his assessable income.

c. If the owner of the property was a company, then the answer would be different. Under

the law, a company does not enjoy a 50% capital gains discount. Consequently, the company will

be paying a 30% tax on any net capital gains. A company is subject to different rules from

individuals. The pre-CGT asset is still exempt from capital gains tax. The rules on valuation

discussed in (b) also apply. The main difference is the 50% discount provided by law.

Moreover if the company’s trade involves selling real estate, then the property may be

considered as an ordinary asset and not a capital asset. In such instance, the sale will not be a

CGT event, and will not be subject to capital gains tax.

References:

1. Income Tax Assessment Act of 1997

2. Fringe Benefit Assessment Act of 1986

3. Australian Taxation Office Website. www.ato.gov.au Accessed 30 May 2018

4. Income Tax Assessment Amendment Act (1986)

5. “Calculating and Paying Capital Gains Tax”.

https://www.nab.com.au/personal/learn/managing-your-debts/capital-gains-tax .

Accessed 30 May 2018