Taxation law Essay

First case relates to  transactions pertaining to an individual entity.Nicholas being a resident of Toowoomba, is categorized as an ‘Individual’ entity for the purpose of Income tax as per Income Tax Assessment Act, 1936 The above legislation first categorizes the ‘entity’ in its section 470 as follows:”entity” means any of the following:                     (a)  a company;                     (b)  a partnership;                     (c)  a person in the capacity of trustee;(d)    any other person.Income tax is assessable on the basis of entity and Nicholas as a person, coming under the above category (d) is assessable as an University Teacher, whose income in all probability will be above taxable level of income.(CCA,2009)He has done accounting work with Royal Hotel on part time basis and has received compensation of $28,000 for his work. This work was done  within Australia and it has no basis to be called an exempt income or non- assessable income.

Being an entity for Income tax, this figure becomes assessable income, because it comes under the category of ordinary income and statutory income as per Section 4-10 of Income Tax Assessment Act, 1997. (Peterhenderson, 2009)The next question is whether to include $2,700 being the value of holiday provided to him by Royal Hotel. This figure has to be taken notionally as a fringe benefit and will come under the category of external residual fringe benefit.

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The taxable value of external residual fringe benefit is equal to the arm’s length purchase price less the amount of any contribution made by the employee. This would be assessable income under ITAA, 1936 (Taxation Manual, 2009)Nicholas had earned an interest of $400 for his cash deposit of $ 5,000 kept with the bank and it is coming under the category of ordinary and statutory income. This figure is adjusted against his loan interests due to the bank. The loan interest is in respect of his loan for purchasing his residential accommodation; own home. This interest is deductible from his income.

The net result will be that his interest earnings are added to the income and the same is deducted from income, resulting in a null effect in respect of this transaction.(Realwealth Australia, 2009)His salary for the month of June, 2009, is his ordinary and statutory income. Just because, that $4,000 has been remitted in his wife’s account, it will not alter the nature of his income. That will be assessable and taxable income. Because under Section 6-5(4) of the ITAA, 1997 (please see footnote) , in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct ( ITAA, 1997)Nicholas got an opportunity to participate in a game show or contest conducted by the local television station. Immaterial of the fact that he got this by merit or by lottery, the contest gave prizes on the basis of performance.

For his good answers, he got a prize money of $240,000. Some of the questions would have earned prizes in kind. That way, he also earned a prize of a new boat, worth $ 32,000. The question is whether these figures are coming under assessable income for him for the year ended 30th June 2009.

Both these receipts can not be classified as assessable income, as they are not derived from business, but received from a hobby or sport. The Commissioner of Taxation, during his appeal to the High Court in the case of Ms Joanna had acknowledged that money and other benefits received from a hobby or pastime are not assessable under tax law. (Maharaj, 2003)Nicholas developed accounting software and gave it to small business unit on an annual fee of $100 to local business men. Subsequently, he gave the same software to another organization on a five year lease in consideration of $30,000. Both these receipts will form figures of assessable income as he has used his skill and ability with a purpose of doing business and not as a hobby or pastime. In the same case of Ms Joanna referred in the previous paragraph, the learned Commissioner has observed that earnings out of doing business with one’s skill and ability would come under the category of assessable income. (Maharaj, 2003)Nicholas purchased some old share certificates, of companies that have been de-registered as early as 1930.

He bought them out of his interest in artifacts. Since, they are not certificates not having any market value, they are just pieces of paper, but may have aesthetic or antique appeal. If they had been kept as they are, perhaps their worth as antique items would have been different and may have created some asset value. But, he would make use of this certificate for a different purpose.

He proposes to make a business deal out of it. He plans to do some value addition by framing them and adding an inscription and selling them in the market at a price of $1,000 each. This is clearly a business. Drawing inference from Ms. Joanna’s case referred above, as a business deal, the net earnings out of this purchase and sale, would become an assessable income. The calculation should be done as follows:Sale value realized for 500 pieces of artifact @ $1,000 per piece.

..   ..  $ 500,000Less:Purchase price of the item                                    $     500Making charges for 500 pcs @ $ 100 per pc         $ 50,000Sales Commission @ 10%                                     $ 50,000Net income from this business proposition                                           $399,500Nicholas must include $399,500 in his assessable income for the year, if the entire 500 items are sold in this year. Otherwise, he has to account for income arrived at through calculation made as above, where the figures of sales value and making charges plus sales commission will vary. (Maharaj, 2003)The second case relates to the scope of deductions in respect of transactions pertaining to an entity that is a corporate body.

  If one spends money on something to help one earn one’s income, one may be entitled to claim that cost as a tax deduction. Tax deductions reduce the amount of income one has to pay tax on. Because all earn money in different ways, it depends on one’s particular circumstances whether a cost is an allowable as deduction or not. (AG-ATO, 2009)Emerald Engineering Pty Ltd is a taxable entity according to Section 4-1 of the Act. They sold their engine products business in August 2005 and invested the proceeds in successful investments, which were properties and shares.  They earned dividends apart from profit out of sale of shares pertaining to those investments.

They incurred some expenses during the year ended 30 June 2009. They settled a claim against the damaged part which they sold along with the assets of the engine products business, to the tune of $ 850,000. This was an obligation on their part as per the terms of sale transaction. So, this is expenditure and permissible deduction. The above company created a contingency fund and set aside every year a sum of $100,000 towards payment of any such claims that may arise in the future. This is practically an allocation of funds. There comes neither expenditure nor an income. It goes to apportion some of the company’s reserves for contingency requirements and they will be applied in an year when the company may have to settle claims.

This adjustment will enable them to show as a deduction from the assessable income.Emerald Engineering Pty Ltd paid a sum of $ 120,000 to a consultant to explore the possibilities of launching a ceramic plant. This proposal was not carried out. However, the consulting fee would form a business expenditure entitled for deduction from the assessable income. This is possible because of the recent changes in law.

Section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction in equal proportions over five years for certain capital expenditure not dealt with elsewhere in the income tax laws. Examples of business related costs include capital expenditure related to:-          commencing a business (such as the cost of feasibility studies and setting up the business entity)-          business restructuring-          defending against a takeover, andPre-business expenses that may be deductible include:-          expenditure to investigate the viability of the business (for example, the costs of feasibility studies, due diligence or market research), and-          establishment costs (such as the costs of incorporating a company, creating a trust or forming a partnership through which the business will be carried on).-          the costs of ceasing business (AuG-ATO, 2009)Emerald renting the property would come under the business activity and the rental receipts would be business income, forming ordinary income. That income will naturally be assessable income. With regard to the expenditure on replacing the kitchen equipments and upgrading the kitchen cupboard would be eligible for deduction under Section 25-10 (1).  Repairs are deductible expenditure if incurred for repairs to premises (or part of premises) or a depreciating asset that one holds or uses solely for the purpose of producing assessable income. The rental property does earn assessable income and so this is an allowable deduction (ITAA, 2009)The repair of the staircase and the expenditure of $350 incurred for that, are coming under the category of repair and maintenance of the premises which earns an assessable income.

Therefore, they will also be eligible for deduction from the Assessable income. Then comes the legal expenses of $4,000 to defend the damages claim. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer’s assessable income (AuG-ATO, 2003).

  The property earns the company assessable income and these legal expenses are relevant to produce that assessable income.In respect of the Subsidiary company Diamond Pty Ltd, Emerald has invested $1 m. which would produce assessable income in the form of Dividends from that company. Whatever name it is called, the money invested is with the business purpose of getting returns through that venture. Therefore, the expenditure of $40,000 in the form of interest and $ 2,000 in the form of bank charges, both are eligible for deduction as they are incurred in gaining or producing assessable income for the tax paying company Emerald Pty Ltd. (AuG-ATO, 2003)The third set of cases relate to Capital Gains Tax.

1. Cathy’s land sale case.In the case of Cathy’s Land Sale, the following should be the method of taxable income under Capital gains.Details:01 Apr 1999 Purchase Price of Toowoomba property of 4 hectares                $ 300,000Legal fees and stamp duties $ 500011 Nov 2008 Sold two hectares                                                                       $ 200,000Legal fees and stamp duties $ 1200Value of balance property $ 200,000CalculationProrated purchase price of 2 hectares that was sold                                        $150,000Expenses incurred while buying and sellingi.                    Prorated legal fees and stamp duties  $ 2500ii.                  Legal fees and stamp duties              $ 1200Total cost of the part of the land that was sold                                                 $ 153,700Value realized on sale of 2 hectares                                                               $  200,000Amount to be taken as Capital Gains under CGT Act                                  $    46,300TA 2008/7 describes an arrangement called a “wash sale” where an asset is disposed of, but there is no substantial change in economic interest in the asset.

 The type of wash sale arrangement covered by the alert is where a taxpayer disposes of, or otherwise deals with, a CGT asset to generate a capital or revenue loss, but where, in substance, there is no significant change in the taxpayer’s economic exposure in the asset(CGT Handbook, 2009)Assets which may have been acquired before 20 September, 1985, are not usually taxable under the present capital gains tax law. Residents of Australia will be taxed on any worldwide assets to which the capital gains tax law may apply. Non-residents are only held accountable to this taxation if their assets have a particular tie to Australia, such as Australian land or businesses. A capital gains tax is implemented on the difference in the selling price and the base cost.

(Workingin, 2009)2. Marguerite’s sale of sharesIn the case of Marguerite’s sale of shares, the Capital Gains calculation should be done as below:Details22 Dec 1992   Purchased CSR shares 500 @ $6  per share15 Mar 1994   Purchased BHP shares 100 @ $ 15 per share.17 Oct 2008    Sold CSR @ 8 per share                        Sold BHP @ 10 per shareCalculationCost of purchase of shares     CSR    500 x 6  =   3,000                                               BHP    100 x 15=   1,500                   Total             $ 4,500Proceeds from Sale of Shares  CSR    500 x 8 =    4,000                                                BHP     100 x 10 =  1,000        Total            $ 5,000Net Capital Gain to be added to the Assessable income, therefore, will be $ 500.At present, the capital proceeds market value substitution rule (sec 116-30 ITAA 1997) will apply where (inter alia) a CGT event occurs and there are capital proceeds but either those proceeds cannot be valued or the proceeds are more or less than the market value and the CGT event is CGT event C2 (cancellation, surrender and similar endings).

  This is so regardless of whether the parties are dealing with each other at arm’s length.  This can result in a taxpayer being subject to CGT on an unrealized gain or being denied some or all of a capital loss, even though all parties are dealing with each other at arm’s length and there is no tax manipulation.(CGT Handbook,2009)3. David’s rental property saleThe following will be the basis of calculation of David’s rental property saleDetails:01 Jan 1990 Purchased the rental property   $ 225,000                    Stamp Duty                                $    6,00002 Jul 2008  Sold                                           $ 350,000                     Legal fees                                  $     2,750Extension of  building  in Sep 1994               $ 25,000CalculationCost of the property             Purchase price         $ 225,000                                            Extension cost              25,000                                             Stamp Duty                    6,000             Total cost  $ 256,000Sale proceeds of the property                $350,000Less: Legal fee paid                                     2,750             Net sales realization $ 347,250Net Capital Gain                                                                                                  $   91,750An individual may make a capital gain or capital loss when the individual sells a rental property that he individual acquired after 19 September 1985.One can also make a capital gain or capital loss from certain capital improvements made after 19 September 1985 when one sells or otherwise cease to own a property one acquired before that date. An individual  will make a capital gain from the sale of one’s rental property to the extent that the capital proceeds one receives are more than the cost base of the property.

One will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds.( AuG-ATO, 2009)4. Daniel’s sale of bequeathed landThe basis of calculation on the bequeathed land of Daniel will be as follows:DetailsAunt Gloria’s purchase price on 01 Oct 1999     $   120,000She also incurred costs associated with purchase $      1,500Daniel bequeathed the property on 01 Jan 2006Value of the property at that time                        $ 150,000The date of transfer was 4th January 2007 and the market value at that time was $ 160,000. The date of sale was 4th May 2009 and the sale value was $ 220,000.CalculationThe market value of the land when Daniel got the property transferred to his name $ 160,000The sale value of the property                                                                                              $ 220,000The earlier values and the expenses incurred need not be taken into account, since the market value at the time of transfer exceeds the aggregate of the costs involved.The net capital gain of $60,000 is to be taken for assessable income.If Daniel had  inherited  this  property from a person who dies after 20 September 1985 but who acquired the property before 20 September 1985, then he would get a full exemption if settlement of the contract to sell the property happens within two years of the person’s death.

(realestate.com.au, 2009)5. Gavin’s sale of gifted sharesThe basis of capital gains in the case of  Gavin’s sale of shares will be as follows:Details:01 Jun 2006  Kora gifted 1000 shares of Aussie  Limited valued @ $ 1 per share01 Jan 2009   Value of share                                                            $ 2.50 per share                       Sold for $ 2500 with a brokerage of  $ 50CalculationThe cost  of shares has to be taken as $ 1,000 although it was gifted to him by Kora.

The sale proceeds were $ 2, 500 and after adjusting the brokerage it becomes $ 2,450. The net gain therefore will  be $ 1,450.In Australia, short-term capital gains have always been taxed as income but gains on assets held for more than a year were first taxed in 1986 under the Hawke/Keating tax reforms, which also exempted pre-1986 assets and excluded housing. Gains on post-1986 assets were taxed in full but indexation applied.

The Howard/Costello Government abolished indexation when, following the 1999 Ralph Review of Business Taxation, it substituted a 50 per cent concession, allowing half of any capital gain to be tax free. Income derived from capital continued to be taxed in full.(ABC News, 2009)FootnoteSection 6-5 Income according to ordinary concepts (ordinary income)(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note: Some of the provisions about assessable income listed in  section 10-5 may affect the treatment of ordinary income.(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.(3) If you are a foreign resident, your assessable income includes:(a) the ordinary income you  derived directly or indirectly from all  Australian sources during the income year; and(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an  Australian source.(4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you directBibliography1.      ABC News(2009) Time to reform capital gains tax.

Viewed on 12-05-2009 (http://www.abc.net.au/news/stories/2009/04/30/2556583.htm)2.

      Australian Government-Australian Taxation Office (2009) What are deductions? Viewed on 13-05-2009 (http://www.ato.gov.au/individuals/content.asp?doc=/content/48180.htm)3.

      Australian Government-Australian Taxation Office (2009) Rental Properties: Claiming repairs and maintenance expenses, Viewed on 12-10-2009 (http://www.ato.gov.au/print.asp?doc=/Content/00183233.

htm)4.      Australian Government-Australian Taxation Office (2003) ATO ID2003/801 Viewed on 12-05-2009 (http://law.ato.gov.au/atolaw/view.htm?locid=’AID/AID2003801’&PiT=99991231235958)5.

      Australian Government-Australian Taxation Office (2009) Rental Properties 2006-2007, Viewed on 13-05-2009 (<http://www.ato.gov.au/individuals/content.

asp?doc=/content/00096828.htm&page=16)6.      Australian Government-Australian Taxation Office (2009) Blackhole expenditure: Business related expenses. Viewed on 13-05-2009 (http://www.ato.

gov.au/businesses/content.asp?doc=/Content/69055.

htm&page=5&H5)7.      CGT Handbook(2009) CGT Market value substitution rule. Vided on 13-05-2009 (http://cgt.

taxinstitute.com.au/index.cfm?objectid=27FCBCC8-BF49-7850-19243D6378AEB0648.      CGT Handbook(2009) Issue 2: Wash sale Viewed on 13-05-2009 (<http://cgt.

taxinstitute.com.au/index.

cfm?objectid=2800658D-EB47-5BE1-8A39406D0A7820C5)9.      Commonwealth Consolidated Acts (2009) Viewed on May 11, 2009 (http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s470.

html#entity)10.  Peterhenderson (2009) Viewed on May 11, 2009 (http://www.peterhenderson.com.au/tax/ta004000.htm#sec4_10)11.  Income Tax Assessment Act, 1997.

12.  Maharaj, A (2003) “Is Playing Sport A Business?” Taxation Institute of Australia, vol.38, no.3.

Viewed on 12-05-2009 (http://www.gf.com.

au/477_222.htm)13.  Realestate.com.

au.(2009) Can you avoid capital gains tax? Viewed on 12-05-2009 (http://www.realestate.com.au/doc/review/may08-1/capital-gains-tax.htm)14.

  Realwealth Australia (2009). Viewed on May 11, 2009 (http://www.realwealthaustralia.com.au/article_-_getting_the_max_out_of_tax_-_jun_07)15.

  Taxation Manual (2009) Viewed on May 11, 2009 (http://finance.curtin.edu.au/taxmanual/4.

9%20-%20FBT%20-%20Residual%20Benefits.pdf)16.  Workingin (2009) How Australian Capital Gains Tax affect you? Viewed on 12-05-2009 (http://www.workingin-australia.com/info/939) 

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