Australian Tax Law Market Valuation

Question: Discuss about the Australian Tax Law for Market Valuation. Answer: 1. Issue The information provided highlights the case about Hilary who receives offer from a particular newspaper so as to write her autobiography. Since she is a famous mountain climber, hence it was expected that this book would have commercial value and hence, the newspaper offered a total amount to the tune of $ 10,000 for the book and all rights associated with the same. Hilary accepts the offer and writes and book and realises $ 10,000 from the newspaper for the rights, $ 5,000 from Mitchell Library for the manuscript and $ 2,000 from the museum for the photographs of the expedition, In this light, the core issue is to determine whether the above sum of payments received by Hillary would be considered as income from personal exertion or not. Rule It is critical to distinguish capital receipts from revenue receipts to arrive at appropriate taxation treatment. While capital receipts arise from the liquidation or transfer of capital assets but revenue receipts typically arise from normal course of business or employment. The capital receipts are not taxable but any capital gains that are realised would be subject to Capital Gains Tax or CGT as per Section 10-5 (Woellner, 2013). However, the revenue receipts would be taxed as ordinary income under Section 6-5. In accordance for receipts to be recognised under income from personal exertion, it is pivotal that it should be either business activity or employment which is essentially repetitive in nature. It is noteworthy that isolated transactions with the intention of profit making also contribute to ordinary income (Barkoczy, 2015). In order to understand the classification of copyright as a capital asset or income from personal exertion, the discussion in the Brent v. Federal Commissioner of Taxation(1971) 125 CLR 418 is highly relevant. In the given case, there was an agreement between the appellant i.e. Mrs. Briggs with regards to narration of her stay with her husband who was involved in a famous robbery. She accepted one of such offers and thus narrated the story to a couple of journalists who then produced a story based on her account and gave her for modifications and suggestions if any. In lieu of the appellant indulging in story-telling to the journalists which spanned four five days, the appellant was made partial payments but the remaining instalments promised in the contract were never made (Krever Black, 2007). As a result, there was a dispute with the tax commissioner and hence the matter went to court where the central issue was to determine whether the proceeds would be capital or revenue in thi s case (Deutsch et. al., 2015). The court ruled that the given receipts were of capital nature. This is because the only contribution of appellant in the given case is with regards to the secret information in relation to her life spent with her husband, She disclosed these facts to the journalists and also authenticated the story by putting her signature on all pages is the relevant consideration for the newspaper to enter into a legal contract. The imperative aspect was giving of information with the remaining services that were offered in terms of any photographs, token etc. were incidental to the contract. Thus, due to the transfer of copyright and information, the income was earned and hence it was a capital transaction where an asset has been realised for cash. Thus, no income tax was levied on the payment received although the same was held subject to CGT (Sadiq et. al., 2015). Application In the given case, taking a cue from the decision in the Brent v. Federal Commissioner of Taxationcase, it is apparent that the local newspaper has approached Hilary not because of her superior writing skills as she has never written anything before. The real motive of the newspaper was to extract secret information about her personal life which except Hilary no one knew. Further, the copyright with regards to the book indicates that Hilary would not share this information with anyone else for the act of publishing. Thus, even though Hilary had indulged in writing the book, it is mere incidental and quite likely would have been modified by the newspaper before publishing. The real asset in the given case is the knowledge and secret information which Hilary had. Hence, by passing on the copyright to the newspaper, there is essentially a transfer of ownership of capital asset, The same can also be concluded about the income derived from photograph and manuscripts, Hilary is not engaged in the profession of writing or photography, hence the income is derived and not earned. Conclusion The total receipts of $ 17,000 would be termed as capital receipt which have effectively been derived and not earned and therefore would not be taxable as ordinary income. However, these would be subject of CGT in accordance with Section 10-5 of ITAA, 1997. (b) The answer in above case would not differ even if Hilary was driven by self-satisfaction instead of profit making intention. This is primarily because the commercial value of the writing, photograph and manuscript would not be derived on the basis of writing or photographic skills but on the basis of the copyrighted information she has about her personal life which she is sharing through the book and the photos (Barkoczy, 2015). 2. Issue The son approaches her mother for seeking financial help to the tune of $ 40,000 which he promised to repay after five years. The mothers intention while extending the financial help was only to help the son and hence she did not expect any interest payment in lieu and only required that principal be repaid. However, the son claimed that he would provide an interest of 5% pa. The total principal of $ 40,000 was repaid by the son before the scheduled five years. Repayment of principal happened after two years with an interest payment of $ 4,000 over and above the principal repayment of $ 40,000. $ 4,000 has been computed as 5% of the principal taken. The aim is to determine the tax treatment which would be extended to the payment received in reference to assessable income. Rule In accordance with Section 6(5) ITAA, 1997, interest payment is included in the taxable income and is assessable as it falls under the ambit of ordinary income. The following interest payments contribute to ordinary income (Woellner, 2013) Investment in any particular interest bearing security Operating a money lending business In order to distinguish a casual transaction with a full-fledged business, it is imperative to compare the character of the transaction and intent with the actual business transactions. If the isolated transaction is done in a business like manner, it can very well constitute a business. Additionally, it is imperative to note that the interest derived from a given transaction need not be paid directly but can also be paid on a lump sum basis to be included as part of the ordinary income (Sadiq et. al., 2015). Besides, as per TR 2005/13, the rules associated with classification of a payment as gift are enumerated below (Deutsch et. al., 2015). It is requisite that ownership must be transferred. The transfer made must be made voluntarily. Benefaction is the key driving force behind the transfer. There must not be expectation of any potential gains in return Application It is apparent in the given case, that the mother is not running a business of money lending. This is apparent from the non-commercial conduct while extending the loan which was extending without any collateral in the absence of any formal loan agreement and without any intention of earning interest income. Essentially, the incremental amount given as interest would amount to gift in this case because of the following reasons. The payment of $ 2000 has indeed been transferred to the mother. Even though the mother did not want any interest, but still the son voluntarily makes the payment. Clearly, the payment is driven by the mother son relation. By making the payment to the mother, the son has no expectations with regards to the future. Conclusion On the basis of the above discussion, it is apparent that the incremental amount over the loan repayment amounts to gift for the mother and would not contribute to assessable income of the mother. 3. Capital gain on a particular asset is the difference in value of the derived sales proceeds and the cost base of the given asset. For long term capital gains, there are two available methods available for deriving the net taxable capital gains namely discount method and indexation method (Barkoczy, 2015). In discount method, the long term capital gains are reduced by 50% and the remaining amount is subject to capital gains tax. This method can be availed only by taxpayers who are individuals. The indexation method is available to both individual taxpayers and companies. It relies on increasing the assets cost base using inflation figures and thus minimise the liability on account of capital gains (Woellner, 2013). Part a) It is known that property has been sold on March 1, 2015 for a consideration of $ 800,000 The total amount spent on construction is $ 60,000 while the valuation of land when house construction commenced was $ 90,000. The taxable component of capital gains in accordance with the two methods stated above is shown below. It is noteworthy that land was purchased in the pre-CGT era and hence no capital gains would be incurred on the sale of land (Sadiq et. al., 2015). Percentage share of value by house = (60000/(90000+60000))*100 = 40% Thus, sales proceeds from house which is subject to CGT = 40% of 800000 = $ 320,000 Capital gains = 320000 60000 = $ 240,000 Discount = (50/100)* 240,000 = $ 120,000 Hence, capital gains that would be levied CGT as per discount method = 240000 120000 = $ 120,000 Indexation Method CPI value in 1999 = 68.72 CPI value in 1986 = 43.2 Hence, indexation factor = 68.72/43.2 = 1.59 Hence, indexed construction cost of house = 60000*1.59 = $ 95,400 Taxable capital gains = 320000 95400 = $ 224,600 It is apparent from the calculation done by two methods that the discount method leads to a lower CGT liability and hence would be preferred by Scott. Part b) There has been a change in the customer who buys the property to Scotts daughter which hs resulted in the selling price being significantly lower at $ 200,000. As per Section 116-30(2), in cases where it is evident that the selling price is significantly lower than the existing market price, in such cases the capital gains would be computed by assuming the higher of these two prices as the sale price (ATO, 2015). As a result, the answer in this case would be the same as above. Part c) The owner of the property is a company and thus the only option available is indexed method (Deutsch et, al, 2015). As seen in part (a), the taxable capital gains in accordance with indexation method amount to $ 224,600. References ATO 2015, Why do you need a market valuation, Australian Taxation Office, Available online from https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Transferring-real-estate-to-family-or-friends/?page=3 (Accessed on August 22, 2016) Barkoczy, S. 2015. Australian tax casebook. 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