HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Question 1

Answer

 Capital Gain Tax regarding antique impressionism painting

When someone receive an asset from inheritance capital gain tax does not

apply on it unless the receiver of inherent asset sell it or dispose it otherwise.in

case of sale of inherent asset there are separate rules asset received as an

inherited property does not amount to any kind of CGT capital event. Helen

inherited the Painting (Capital Asset) from her father this activity is exempt from

CGT as this is not accounted as CGT event unless Helen disposes of the Asset

to the 3rd Party.

Capital Gain/Loss Calculation

Almost in all CGT events capital gain is calculated by deducting cost of the
asset from capital proceeds of the asset (where cost represents the amount
incurred at the time of purchase of asset in case of inherent asset cost
represents the amount incurred by the person at the time of purchase from
whom asset is inherited. whereas capital proceeds represent the amount
recovered from sale of assets. As per income tax assessment act 1997 there
are following three procedures in order to calculate capital gain/loss are:
1. Discount method.
2. Index method.
3. Other method.
(As per the assessment of the transaction the most suitable method is
discount method)

CGT discount method

Eligibility criteria: The only assets eligible for CGT calculation under
discount method are those which are held for more than 12 months, before
the CGT event.

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HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Discount rate
After the calculation of capital gain the following discounts are available
to following persons.
Persons/company Discount rate %

Companies Not Available

Non Resident individuals Less than 50%

Resident individuals 50%

Helen is Eligible to adopt discount method in calculating Capital Gain/Loss, As

Helen’s Father purchased the asset in 1985 and it is not specified when the

asset is transferred to Helen, anyhow Helen Sold the Capital Asset in 2018 so

as per exemption rules she is eligible to use discount method (ATO-b, n.d.)

Capital Gain/Loss (Discounted

Method)
Capital Proceeds $12,000
Less:
Cost base unindexed $(4,000)
Capital Gain/(Loss) $ 8,000

Under discount method Helen can avail discount on capital gain up to 50%
(ATO-b, n.d.).

Tax Consequences

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 HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Assets classified under CGT in respect of net capital gains shall be included in
assessable income and will be taxed at marginal rates if the assets are
acquired after 1985.
A CGT discount factor will be applied o above mention assets.

So ($8,000 * 50%= $4,000) will be the part of assessable income of hallen and
marginal rates will be applied for the tax purpose. (CGT-PWC, n.d.)
 Capital Gain Tax regarding historical sculpture
Almost in all CGT events capital gain is calculated by deducting cost of the
asset from capital proceeds of the asset (where cost represents the amount
incurred at the time of purchase of asset in case of inherent asset cost
represents the amount incurred by the person at the time of purchase from
whom asset is inherited. whereas capital proceeds represents the amount
recovered from sale of assets. As per income tax assessment act 1997 there
are following three procedures in order to calculate capital gain/loss are:
1. Discount method.
2. Index method.
3. Other method.
(As per the assessment of the transaction the most suitable method is
discount method)

CGT discount method

Eligibility criteria: The only assets eligible for CGT calculation under
discount method are those which are held for more than 12 months, before
the CGT event.

Discount rate
After the calculation of capital gain the following discounts are available
to following persons.
Persons/company Discount rate %

Companies Not Available

Non Resident individuals Less than 50%

Resident individuals 50%

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 HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Helen held the historical sculpture (Capital Asset) for more than1 year (1993-
2018), she is eligible to adopt discount method of calculating Capital gain.
(ATO-b, n.d.)

Capital Gain/Loss (Discounted

Method)
Capital Proceeds $6,000
Less:
Cost base unindexed $(5,500)
Capital Gain/(Loss) $ 500

Under discount method Helen can avail discount on capital gain up to 50%
(ATO-b, n.d.)
Tax Consequences

Net capital gains in respect of CGT assets acquired after 19 September 1985
are included in assessable income and taxed at marginal rates.

So ($500 * 50%= $250) will be included in the assessable income and taxed at
marginal rates (CGT-PWC, n.d.)
 Capital Gain Tax regarding antique jewellery piece
Helen held the jewellery piece (Capital Asset) for more than1 year (1987-
2018), she is eligible to adopt discount method of calculating Capital
gain/loss. (ATO-b, n.d.)

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 HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Calculation of Capital Gain and Tax consequences

Net capital gains in respect of CGT assets acquired after 19 September 1985
are included in assessable income and taxed at marginal rates.

Capital Gain (Discounted Method)

Capital Proceeds $13,000
Less:
Cost base unindexed $(14,000)
Capital Gain/(Loss) $(1,000)

Helen incurred capital loss of $1,000 in this CGT event, this loss will be not
deducted from taxable income, this loss is only adjustable against other capital
gains in current and later income years and also there is no limit of time for
carry forwarding the losses (ATO-c, n.d.)
 Capital Gain Tax regarding picture
Helen inherited the Picture (Capital Asset) from her mother this activity is
exempt from CGT as this is not accounted as CGT event unless Helen
disposes of the Asset to the 3rd Party. (ATO-a, n.d.).
Discounted Method
Generally capital gains tax (CGT) doesn't apply when you inherit an asset.

However, it may apply when you later sell or otherwise dispose of the asset. If

you sell an inherited dwelling, there are special rules – for example, the main

residence exemption may apply in part or full. Unless the asset you inherit is

fully exempt, you'll need to know the cost base of the asset to work out your

capital gain when you sell it. The cost base may be based on the value of the

asset when the deceased acquired it or the value when they died, depending

on the circumstances. (ATO-a, n.d.).

Helen inherited the Painting (Capital Asset) from her father this activity is

exempt from CGT as this is not accounted as CGT event unless Helen

disposes of the Asset to the 3rd Party.

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 HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

Helen is Eligible to adopt discount method in calculating Capital Gain/Loss, As

Helen’s mother purchased the asset in 1987 and it is not specified when the
asset is transferred to Helen, anyhow Helen Sold the Capital Asset in 2018 so
as per exemption rules she is eligible to use discount method (ATO-b, n.d.)
Calculation of Capital Gain and Tax consequences

Capital Gain/Loss (Discounted

Method)
Capital Proceeds $5,000
Less:
Cost base unindexed $(470)
Capital Gain/(Loss) $ 4,530
Under discount method
Helen can avail discount on capital gain up to 50% (ATO-b, n.d.).
So ($4,530 * 50%= $2,265) will be included in the assessable income and taxed
at marginal rates (CGT-PWC, n.d.)

Question 2
Answer

1. Barbara’s Income under the case scenario

 Payment 1 - Barbara received $13,000 for writing the Book

Meaning of personal services income (84.5, n.d.)

As per assessment act 1997 any income which will be earned by your
personal efforts or skills will fall under the head of Personal services income;
 This section only applies to the individuals which means that personal
services income can only be classified to the individuals.
 This section also applies on the income which is earned for doing work
or for producing result.
 This section also explain that any income which is payable under a
contract does not stop the income being mainly a reward of your
personal efforts or skills.

As Barbara being economist researcher and commentator working as

individual after getting this contract she is providing the professional

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 HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

services as an author for writing a book on Economics in her individual

capacity (84.5, n.d.),

 Payment 2 – Barbara received $13,400 against the sale of Copyrights of

the Book, This payment received from The Eco Books Limited in under the
Capital Gain, so this is not an income from Barbara’s personal exertion.
(84.5, n.d.)

 Payment 3 – The Eco Books Ltd Paid $4,350 against the book’s
manuscript for the Library, This payment received from The Eco Books
limited in under the Capital Gain, so this is not an income from Barbara’s
personal exertion. (84.5, n.d.)

 Payment 4 – She also collected a sum of $3,200 against interview

manuscripts which is not earned by her personal efforts.

The income against copyrights classified as income under Capital gain, so

this is not an income from Barbara’s personal exertion (84.5, n.d.)

2. Barbara ‘s income under the alternative scenario

In Current Scenario Barbara’s income will fall under the normal Income and
will be taxed on Marginal basis. If Barbara wrote a book for herself and decide
to sale it later than it will not fall under the PSI and therefore its treatment will
be different accordingly.
Furthermore, tax deduction will also be available for Barbara for the purpose
of assessable income under normal tax. Deductions which are available are
as follows:
 Home Office: electricity bills, gas bills, telephone bills, internet bills,
cleaning bills, furniture, staff members (that’s you), computers, mobile
phones bills, stationary. But for this purpose, it must be clear that
apportionment of all the expenses is vital which means only those
expenses will be admissible as deduction which are used solely for the
purpose of writing book.

 Professional Development: Meeting with different writers or

experienced person having same knowledge on which book is written

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HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

for the purpose of clarity on some topics, networking, professional

memberships (Australian Society of Authors, NSW Writer’s Centre
etc.), writing workshops, training courses, webinars. Anything that’s
increasing your skills and keeping your writing at a professional level.

 Tools of the Trade: Pens, journals, notebooks, computers and

books. Be careful with books though because (like every tax deduction
you claim) you’ll have to justify to the taxation office that they are for
the purpose of increasing knowledge.

Question 3

Patrick lend $52,000 to his son David to provide some assistance in his newly
started business as this on interest-free terms to help with her new business
venture. As they agreed on following terms: -
Patrick Paid to David: $52,000
Time: 5 years
Interest amount: Nill
David payment to Patrick after 5 years: $58,000
Security or Formal Agreement: Null
In the absence of Formal agreement David is not legally bound to pay back
the loan as per their informal agreement.
As David paid back $52,000 plus 5% of principle amount which is $2,600 after
2 years, It represents that Patrick earned an interest income of $1,300 for 2
years, But Patrick received the sum at the end of 2nd year, so the whole sum of
$2,600 will become the part of his assessable income and will be taxed on
Marginal rates as specified in Income Tax Assessment Act 1997. (Income, n.d.)

REFERENCES

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HI6028 Taxation Theory, Practice and Law Individual Assignment T1 2019

405.25 (Section 405.25) , n.d. Income Tax Assessment Act 1997. Meaning of
Special profession [Online] Available at:
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s405.25.html
[Accessed: 1997]

84.5, (Section 84.5)., n.d. Income Tax Assessment Act 1997. Meaning of
Personal Income [Online] Available at:
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s84.5.htm;
[Accessed: 1997]

ATO-a,2017. Austrailian Taxation Office.Inheritence of Capital Asset [Online]

Available at: https://www.ato.gov.au/general/capital-gains-tax/deceased-
estates-and-inheritances/;
[Accessed: July 17 ,2017]
ATO-b,2018. Australian Taxation Office. Discount Method for calculation of
CGT [Online]
Available at: https://www.ato.gov.au/general/capital-gains-tax/working-out-
your-capital-gain-or-loss/working-out-your-capital-gain/;
[Accessed: 09 August ,2018]
ATO c . L.,2018. Australian Taxation Office Working Out Capital Gain/Loss.
[Online]
Available at: https://www.ato.gov.au/General/Capital-gains-tax/Working-out-
your-capital-gain-or-loss/Working-out-your-net-capital-gain-or-
loss/#Netcapitalloss ;
[Accessed: 07 November,2018]
CGT-PWC,2019. PWC Taxtion Rules and Rates. [Online]
Available at: https://www.pwc.com.au/taxtalk/tax-rates.html
[Accessed: 30 June, 2019]
Income, I.,2015. Australian Taxation Office.Interest Income sources [Online]
Available at: https://www.ato.gov.au/individuals/tax-return/2015/tax-
return/income-questions-1-12/10-gross-interest/
[Accessed: 29 May , 2015]

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