The issues here are whether annual receipts of $25,000 are ordinary income or capital receipts and do the $25000 annuity paid to Jack’s assessable income.
Whether the annual receipts of $25,000 are ordinary income or capital receipts depends on the characteristics of each. Usually, income is periodicity, recurrence or regularity and capital receipts are the proceeds from the disposal of CGT assets. Egerton-Warburton Case (1934) indicates that in the absence of a fixed gross sum (no selling price), the annuity was (ordinary) income of the recipient, not an instalment of the selling price of land.
In the present case, Sophie could not afford to pay the lump sum of $300,000 and they made an agreement that Jack transferred the ownership of the taxi licence and car to Sophie and Sophie paying Jack an annuity of $25,000 for the rest of Jack’s life. It seems like a capital receipts because Jack sold his business assets to Sophie and Sophie pay by instalments to Jack. However, it is not a capital receipts. First, the annuity of $25,000 is income in nature (Egerton-Warburton (1984)). It is impossible to identify a fixed selling price based on the current terms of agreement. The lump sum of $300,000 is not a selling price because the years of Jack’s rest of life is uncertain. Second, Jack earned $30,000 of profit per year, which is much lower than the earnings of a young person. And Sophie pay $25,000 per year. It does not like an activity to gain profits, it is more likely an ordinary income to ensure every year’s cost of living. Third, the $25,000 per annum is paid periodically and regularly.
For the second issue, assessable income consists of ordinary income and statutory income is the income subject to tax (s. 6-1(1), ITAA 1997). If the receipts are capital in nature and earn net capital gain, the net capital gain is statutory income under s.102-5(1), ITAA 1997. Moreover, any of the annual receipts are exempt income if it is made exempt from income tax by provision of ITAA (s.6-20(1), ITAA 1997), it is not assessable income under s.6-15(2), ITAA 1997.
In the present case, $25,000 is ordinary income that is the subject of tax. There is no net capital gain for Jack and the ordinary income is not from a checklist of entities like charities, not-for-profit organizations. Thus, no part of annual receipts of $25,000 can be excluded from assessable income.
In conclusion, $25,000 is ordinary income to Jack and all part of $25,000 should be assessable income.
The issues here are whether Jack will have CGT and whether Jack can have any capital allowance from his transferring ownership of the taxi licence and the car to Sophie.
For CGT, the CGT event A1 happens if a person disposes of a CGT asset, a change of ownership for instance (s. 104-10, ITAA 1997) and people can make a capital gain or loss if and only if a CGT event happens (s.102.20, ITAA 1997). A capital gain or capital loss from car, motor cycle or similar vehicle is...