Taxation Income from Commission

Question: Describe about the Taxation for Income from Commission. Answer: 1. Discussing the case, it involved Hilary, who was always interested in climbing mountains because of which she had become quite famous in the country. For this purpose, a local newspaper (Daily Terror)had actually offered an amount of $10,000 to publish her story, which would inspire people in the long run. As she was not an author and never really had experience in writing. Hence, she gave her story and also gave the newspaper the right to the story and the title. Not only this, she had two other sources of income as well consisting of; $5,000 from Mitchell Library, for selling her own manuscripts Also an amount of $2,000 for a photograph, which was clicked while climbing the mountains This case is almost equal to that of Godecke v Glamorgan County Council (1925).Section 393-10 of the Australian Income Tax Act states that income from commission, wages, earnings, allowances, and gratuities, etc. would be considered as an income of an employee. But in this case, the income as received by her was not her ordinary income. It is the income as earned by her from the sale of her story, which is not her usual business. Her main business is not to sell articles. If that would have been the case, it would have be clubbed under the head income from ordinary course of business. Other than that, this income of $10,000 would be clubbed under the head capital gains. The other two income as earned by her would be taxable as it would be considered from her person exertion. Hence, the other two amount of $5,000 and $2,000 would be taxable. 2. In the second case, it should notice that it related to a relationship between a parent and a son. The whole case is related to the $40,000 as given to the son by the father, for which no interest was being charged by him. It was decided between both the parties that the loan would be repaid at the end of five years. It was decided that no interest would be charged upon by the parent, yet the son had given a cheque which included the principal amount along with the amount of interest at the rate of 5%. Hence, the whole case lies on the fact that whether to determine the income of the parent would include the interest amount or not. The whole case belongs to this scenario under the Australian Income Tax Act. Also, it should observed that no payment was made to the parent before the final payment. For this purpose too, it was necessary to determine the head at which the income was to be clubbed. The case revolves around this aspect where it is important to determine the nature of the income and how it should be taxed. When coming to the taxation part, it should be known that any income, which a person is basically earning from its ordinary course of business, would be considered as his normal income and would be charged under the heads of income. On the other hand, it should be noticed that there was no official agreement between both the parties and for this reason, this income as earned by the parent should not be considered as the normal income of the parent. It was just an informal agreement between a parent and a son. Apart from this, as there was no contract as well between both the parties. So as there was no legal between both the parties, the income as earned from the interest of the amount given as the loan, would not be taxable under the normal income of the company. The total interest amount as received from the son, the taxable amount would be clubbed under the head capital gains or income from other sources. Hyde v Wrench (1840) has been one of the similar cases where the matter rela ted to loan between the parents and the child. The whole scenario over here is directly an informal or oral communication between the parties and there was not any contract as such. 3. Capital gain has been one of the most important aspects Under the Income Tax Act of Australia. Indexation, being the one of the most important aspects under the capital gains. This is the process where the all the assets, which are being held by a person for more than a year, will be eligible Indexation. But later, this process was aborted and the process of discount is applied on the capital assets. The rate of discount is 50%. Section 45 (1) of the capital gains states that any profit arising from the transfer of an asset, will be chargeable under the financial year. Cost of acquisition is basically the cost of purchasing the asset and also all the installation charges as paid by the individual or a company. To calculate the taxable amount from the sale or transfer of an asset, it should be calculated by reducing the total amount of money paid or consideration paid for the asset to be purchased along with the cost of improvement on the asset, by the total consideration received for the asset. Hence, in the following scenario, the calculation would be done on the basis of the method mentioned above. Therefore, it can be said that capital gain as one of the major heads to actually be used for tax purposes. Part a) As per Australian Taxation Law capital gain tax, will not be applied, if the capital asset is bought before 20th September 1985. In the given scenario, Scott is an accountant, who purchased a vacant block of land in Australia on 1st October 1980. On 1st September 1986, he also had built a house for which construction costs $60,000. At the time of construction value of the land was $90,000. After the construction was completed the whole property was given on rent. Then on 1st March Scott sold the entire property for auction for $800,000. Now since Scott has sold his property it would attract capital gain tax. Scott is an individual who has let out his property on rent and then in March he had sold his property for $800,000. After the construction, of the property Scot did not stay there, instead he rented out his property. In this case, any capital gain arising from such situations would be exempted under the rule of Temporary Absence. But such case would only apply, when the property is sold within six years. But in Scotts case property is not sold within the span of six years. But still he would be exempted from paying the capital gain tax, since his property was purchased before September 1985. Hence in the first instance no capital gain tax is required to be paid. Part b) In this case Scott has sold his property to his daughter for $200,000. In this case capital gain tax would be attracted since property is sold to the relative. Amount on which tax needs to be charged would be ($200,000 - $150,000) = $50,000. Capital gain tax would be 50% of $50,000 = $25,000. The case is very similar to the case of Masters v Cameron (1954). Part c) In this case the company instead of Scott owned property. Exemption provision was only applicable on individuals and not on company. Company needs to pay capital gain tax on it. 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