HI6028 Assignment Sample 2020
Helen is intended to arrange finance to her business as a fashion designer so some assets have been sold by her. In this situation, it is necessary to know that whether she will need to pay capital gains tax or not on selling antique painting which was purchased on February 1985.
A capital gains tax (CGT) was applied Australia on 20 September 1985. As per this CGT rule, this tax was applicable only to assets, which were purchased or acquired on or after that date. If the assets with gains (or losses) were purchased before this date called as pre-CGT assets then they were the CGT free. So, assets purchased before 21 September 1985 are CGT-free (Keuschnigg & Nielsen, 2004).
Buying cost: $4,000 (purchased on February 1985)
Selling price: $12000 (1 December 2018)
Profit = selling price –buying cost
So in this context, Helen does not need to pay capital gains tax on selling this painting as it will not be considered under CGT rule due to its purchasing before21 September 1985 as it is CGT free.
Net capital gain = capital gains – CGT
A historical sculpture was sold by Helen on 1 January 2018 for $6,000. It was purchased on December 1993 for $5,500. So, it is the issue to decide this good is CGT taxable or not.
Till 20th September, 1985, the historical sculpture, art, painting purchased for personal pleasure were considered as they were not considered under capital assets. So, these were not subject to capital gain tax.
But after 20th September, 1985, these assets are regarded as the capital assets, so gains on selling these assets can be taxed as capital gains tax if the individual pays more than $500 for their purchasing (Poterba and Weisbenner, 2001).
The gain on this will no longer tax free as the capital assets consider paintings, sculptures, drawings, archaeological collections or any work of art.
20th September, 1985. Though this only applies to assets that you paid more than $500 for.
In the given case, capital gain tax will be applicable on gains made by Helen on selling historical sculpture as capital gain as below:
Buying cost: $5500
Selling price: $6000
Profit = selling price –buying cost
Capital gains= $500
Capital gain tax will be: $500*20%
Net capital gain = capital gains- CGT
The capital gains on antique jewellery are also liable to pay the capital gains tax if they were purchased after 20th September, 1985 but having value more than $500. On selling this asset, the liability for CGT will arise.
In the given case, Helen purchased the antique jewellery piece in October 1987 for $14,000 and sold it on 20 March 2018 for $13,000. So, it is liable for paying CGT on capital gains (Poterba and Weisbenner, 2001).
Purchasing cost: $14,000 in October 1987
Selling cost: $13,000 on 20 March 2018
Capital gains= $13,000-$14,000
So, there will be no capital gain as Helen faced a capital loss on selling this capital asset.
The capital gains on picture are also liable to pay the capital gains tax on purchasing after 20th September, 1985 but having value more than $500. In the given case, Helen’s mother purchased the picture in March 1987 for $470 and sold it for $5,000 on 1 July 2018.
So, it is not liable for paying CGT on capital gains because the value paid for this asset was less than $500 (Keuschnigg & Nielsen, 2004).
Purchasing cost: $470 in March 1987
Selling cost: $5,000 on 1 July 2018
Capital gains= $5,000-$470
CGT = 0
Net capital gain = $4530-0
Personal services income (PSI) is the income that is generated through personal skills or efforts as an individual. PSI can be received in any industry, trade or profession.
Income will be categorized as PSI when more than 50% of the amount is received for a contract is based on the skills, expertise or labor of an individual. So, first it is necessary to decide whether income generated is under PSI rules or not (Lawrence, and Bennett, 2017).
If it is under the PSI rules, then the person is liable for paying special taxes otherwise there are no tax obligations.
The income is categorized under PSI if the individual is not a sole trader and is generating PSI through a company, partnership or trust. In such situation, the income will be treated as the personal income for tax purposes (Woellner et al., 2011).
Under the case scenario, Barbara is paid $13,400 as copyright by The Eco Books Ltd. In this situation; the income generated by Barbara can be categorized under PSI because it has generated income through a company not as a sole trader.
At the same time, the 80% rule is also applicable in this situation. If 80% or more of PSI is generated from the same client then it can be categorized into PSI rules.
Income generated from the same client i.e. The Eco Books Ltd: $13400+$4350
Total income: $13400+$4350+$3200
80% rule application: $17750/$20950
Here, 80% rule is applicable in this case scenario means Barbara‘s income under the case scenario will be tax deductable.
If the income generated from the same client is under 80% of total PSI income, then it will be income from personal exertion. In the given scenario,
Barbara sells the book’s manuscript to the Eco Books Ltd’s library for $4,350 as it is the part of PSI and will be income from Barbara’s personal exertion due to making 80% of total PSI from the same client (Lawrence, and Bennett, 2017).
But at the same time, she also sells several interview manuscripts at $3,200 while writing the economics book. In this scenario, to become PSI, it is necessary to generate income from two or more clients who are not connected and get the work through offer making to the public.
In this context, this income cannot be said PSI because Barbara generated this income from connected clients so it will not be income from personal exertion.
Under the alternative scenario, if Barbara wrote the Principles of Economics’ book before signing a contract with The Eco Books Ltd in her spare time and only decided to sell it later, then the business premises test will be performed to decide the applicability of PSI.
for being PSI, income should be garnered from owned or leased by business and used for personal services more than 50% of the time, and used exclusively by the business. In relation to this, this alternative scenario shows that the income will not be considered under PSI because this will not be generated from the owned or leased by Barbara’s business (Cooper, Krever, and Vann, 2002).
In addition, it will be done in spare time so it cannot be said that it will be used for personal services more than 50% of the time.
It is a matter to determine the income aspects on lending someone as individual. If someone is lending as an individual, it is necessary for him to declare any interest and gains.
As per the tax law, it will be required for the person who earns any interest on the loanable amount, to pay the tax on this income. In the given case, Patrick lent $52000 to his son David with promise of repaying with $58000 at the end of the five years.
There was no formal agreement or security deposit for the sum lent without any interest payment on disbursement.
If someone provides loan to a family member and don’t charge any interest, then there are unfavourable and complicated tax rule (Lee and Persson, 2016).
Lending money to family members is common nowadays as it is possible through no paperwork and in an unsecured way. In the given case, there was no interest arrangement for lending money to the family member, but Patrick got the additional amount than the principle amount along with a repayment of extra amount. It was interest free arrangement for lending but overall,
Patrick earned incomes from this arrangement showing the tax liability for him on generating income through lending. However, interest free loans are non-taxable for both lender as well as borrower.
If Patrick only got the principle amount then it could be considered as the non-taxable amount after five years. If a provision of interest is considered by the lender, then the lender will pay tax on interest earned.
In this case, there was no provision made by Patrick for interest but he demanded extra amount than principle amount after five year from his son.
This extra amount will not be considered under the income because this loan was given on interest free rate to his son as it will be considered as the gift that will be not be taxable.
However, David repaid this full amount after two years through a cheque with addition 5% of total amount borrowed. But this extra amount of 5% on the principle amount will be considered under taxable income.
In this situation the taxable income will be for Patrick as below:
So, it can be stated that the taxable income for Patrick will be $2600 that will be generated on getting 5% on the actual amount borrowed by his son.
If the loan amount is more than $100,000 to friend or family member without any interest then IRS will impose the imputed interest on the lender based on the market rate interest.
Even Patrick is not receiving any interest but he will have to pay imputed interest due to lending more than $100,000 to his son without interest.
Cooper, G., Krever, R. and Vann, R., 2002. Income taxation commentary and materials. Australian Tax Practice (ATP).
Keuschnigg, C., & Nielsen, S. B. 2004. Start-ups, venture capitalists, and the capital gains tax. Journal of Public Economics, 88(5), pp.1011-1042.
Lawrence, S. and Bennett, M., 2017. Image rights in Australia: Fair game or foul ball?. Taxation in Australia, 51(9), p.487.
Lee, S. and Persson, P., 2016. Financing from family and friends. The Review of Financial Studies, 29(9), pp.2341-2386.
Poterba, J.M. and Weisbenner, S.J., 2001. Capital gains tax rules, tax‐loss trading, and turn‐of‐the‐year returns. The Journal of Finance, 56(1), pp.353-368.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. 2011. Australian Taxation Law Select: legislation and commentary. Australia: CCH Australia.