The effect on the assessable income of the parent Essay

ISSUE -The effect on the assessable income of the parent. if your client is a parent who lent $40,000 to her son to provide a short -term housing loan. In agreement son will repay $50,000 at the end of the years. But in following facts. the loan was made without any formal agreement and without any security provided for the sum lent. son will repay the full amount after two years and included in his payment an additional amount which was equal to 5% on the amount borrowed with only one cheque presented for the total amount. It's time to consider the effect of assessable income.
RULE -According to the s6-5 "interest is usually ordinary income as it flows from the lending / investment of capital. Receipts of interest provide a clear example of income from property which is therefore ordinary income and assessable under s6-5 of ITAA 1997 (Pinto, Dale, Kendall, Keith, & Sadiq, Kerrie 2015, p.261)." In reference with Hayes v FCT. On the other hand, it can be a personal gift or personal service. "The character of personal gift found in Scott v FCT (1966) 117 CLR 514 put more effort on the importance of the personal relationship of the parties' in distinguishing between receipts that are a product of personal services or a personal gift. If the payment is voluntary payment is ordinary income or not will depend on it has sufficient nexus to the service provided. If there is an enough nexus it will be an ordinary income, but there is not, then the voluntary payment will be a personal gift (Pinto, Dale, Kendall, Keith, & Sadiq, Kerrie 2015, p.136)."
APPLICATION- In first scenario of the case the agreement is that the son will repay $50,000 at the end of the five years. Will be charged under s6-5 because there is a legal agreement between mother and son.it is an ordinary income. In second scenario there is no legal agreement between mother and son no security provided for the sum lent. Son repaid full amount after two years and extra amount which was equal to 5% pa on the amount borrowed. Only one cheque was deposited for the total amount. Mother told son that he no need to pay interest for money. In the reference of the case Scott v FCT (1966) and Hayes v FCT (1956). They both have personal relationship, is sufficient for that the value of money she paid to her son was gift and personal service not ordinary income.
CONCLUSION In conclusion the assessable income of the parent will not be affected. because it is a product of personal friendship or other personal service, then is a personal gift. 5% additional amount which son paid to her cannot be counted as income, which need to be assessable for parent under any section. Because the personal relationship between mother and son enough to prove that the 5%additional amount was a personal gift not ordinary income or statutory income under s26(e) of ITAA 1936.