Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.
Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later?
Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay
$50,000 at the end of five years.
Reconsider this question in light of the following facts. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.
Discuss the effect on the assessable income of the parent.
Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000.
a) Based on the information above, determine Scott's net capital gain or net capital loss for the year ended 30 June of the current tax year.
b) How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?
c) How would your answer to (a) differ if the owner of the property was a company instead of an individual?
The solution consists of 3 questions. The first question is on personal exertion case which has been assessed with relevant statutory provisions. The second part is on interest on loan which has been answered in accordance with the facts of the case. The third one has been answered keeping in mind relevant statutory provisions.
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As per Section 6 of ITAA income from personal exertion means any income which can consist of earnings, allowances, bonus, gratuities, superannuation funds etc. received in the capacity of any employee or for the services that have been rendered, the business proceeds received by a taxpayer where the business is being carried by him alone or as a partner.
Any subsidy that is received for carrying a business, any profit that is arising to a taxpayer by the sale of a property which was acquired with the intention of making profit or carrying out any profit-making scheme.
Any income that is derived from personal skill and expertise of the taxpayer is known as Personal Service Income (PSI). It can be received from any industry or profession. PSI would not be applicable for the receipt of salaries and wages. An income would be regarded as PSI if more than 50% of the amount received is attributable to the labour or expertise of the taxpayer.
If an amount is classified as PSI fewer deductions are admissible on such income and it has to be declared as the personal income of the taxpayer. If a taxpayer is running a personal service business provisions of PSI would not be applicable on him.