Australian Property Tax Law - Literature review Example

Australian Property Tax Law Name: Institution: Australian Property Tax Laws Rental income According to Tax Assessment Act (1997), rental and extra rental-related income refers to the complete sum offered and the allied payments that are incurred, or happen to be entitled to, when some property is rented; whether it is paid to the property developer or the negotiator. This must comprise the full amount of rent that is received. Allied payments may be in the form of goods and services. The monetary value of these goods and services need to be worked out. The total amount of rent that Eco land development collects from the leasing of the offices should be included in the rental income as at January 2004, for tax purposes. In regard to tax on rentals, Eco Developers will generally need to establish the assessable income for tax purposes, the expenses that consists of allowable expenses and the important considerations in the event that property ownership rights are sold (Coleman, 1997). Eco land development needs to include rental bond money as income after becoming entitled to retain it. Sometimes, an insurance payout needs to be included, for example when compensation is received for lost rent. When a leasing or booking fee is received, it must also be included as an element of the rental income (NAT, 1996). The Associated payments consist of all amounts that Eco land development receives, or happen to be entitled to, as part of the usual, habitual and recurrent activities through which it intends to make profit from the use of rental property. After the transfer of 60% of ownership from Eco developments property to West Mart, for tax purposes, the rental income is assessed proportionately among the co-owners. Eco land development and West Mart are co-owners of rental property who are in business. The manner in which rental income and expenses are shared amid co-owners varies depending on whether the co-owners are dual tenants or there exists a partnership in carrying on a rental property business. Division of income and expenses is carried out according to legal interest. Co-owners who are not carrying on a rental property business must divide the revenue and operating cost for the rental property according to their legal interest in the property. Eco land development and west mart own hold unequal interest in the property and thus they are tenants in common. Rental income and operating expense must be accredited to every co-owner according to their legal interest in the property. This is regardless of any oral or written agreement between the co-owners stating otherwise Land tax The land under which the buildings are lying or any vacant land is liable for land tax. This is especially so because it is held for commercial purposes. When west mart joined Eco land developers, the land tax assessment was to be conducted separately, with each party carrying a proportion equivalent to its ownership rights. Since the land is used for residential purposes, the developers would wish to know how much they will be excepted because land developed for residential purposes is partially exempt. Under the valuation of land act 1971, the value of land is determined by Valuer-General, for the land tax purposes. The amount of tax to be levied is determined on 30 June immediately prior to the financial year under which the tax is being levied. The site value is the market value of the land without considering any improvements or structure elected there upon. To qualify for partial exemption, the developers must prove that a space of between 25 percent and 75 percent of the total floor space is used for business or for commercial purposes (Smith, 1999). Determination of capital improvement thresholds for CGT property Eco Land Development West Mart Developers should be aware of the provisions of capital improvement tax, because they are dealing with a CGT asset. The law provides that any improvement on CGT asset which was acquired prior to 20 September 1985 is treated as a distinct asset which is subject to CGT. For this provision to hold the cost base of the capital improvements should exceed the improvement threshold as provided by the Act; and more than 5% of profits must have been received from that particular improvement. Assuming that ECO Land developers had as well acquired the vacant land which was adjacent to the building; then the developers will be required to pay tax for any improvements on that land. The improvements on high-rise office building is however not liable for tax assessment since it was acquired after the qualifying period (Wenzel & Taylor, 2010). The cost base in regard to CGT is the cost of the asset when it was bought. In our case, the land was first bought at $0.5 million in 1985, while the building was first bought for $1 million in 2004. There are several costs that are associated with acquisition, disposing and holding of the land; which are considered in determination of the cost base. Eco Land needs to accurately determine the cost base, so as to establish whether they have made capital gains or not. If the developers have actually incurred a capital loss, then they will need to reduce the cost base of the land while calculating the tax. However, they will only be able to claim these cost if they have never been claimed before. Importantly, the developers should note that only the cost of the property that was acquired after 21 August 1991 in included in the cost base. Also, any property that was acquired before 20th September 1985 will not qualify for CGT. Some of the cost base developments for the property could include stamp duty and any legal fees (Freebairn, 2005). In accordance with the taxation administration Act 1953, this case can be considered from the perspectives of Capital Gains Tax (CGT)1 as well. This Act provides that the time of settlement marks the transfer of ownership of land. It is at this time that the seller is supposed to deliver the documents of title, over to the purchaser. Under cash contact, the purchaser obtains possession of the land at this point. Apparently, if the contact between the property developers and the purchasers reaches completion, the time of acquisition and disposal is established in accordance with the provisions of subsection 160(3) of the Capital Gain Tax Act. These provisions assume that the time of acquisition and disposal ought to have taken place by the time the contract is affected. This means that the date of contract is the time when acquisition and disposal took place, given that the actual change of ownership of the lands takes place when the contract is made (McGraw & Scholz, 1991). In this case, the capital gain is considered to have accrued during the time when the contact was made; which is the year of income in consideration. This capital gain treatment is drawn from the provisions of subsection 160U (3) coupled with the provisions of subsection 160Z (1). Before subsections 160U (3) and 160(1) can be put into application, completion of the contract must have occurred. In this case, since the sale of the property occurred on February 2011, accrual of capital gains will occur during the tax year under which February 2011 falls. Invocation of the combined effects of subsections 160Z (1) and 160U (3) requires the assessment of the gain to be done during the year when the property was actually sold. Section 170AA requires the tax payer to pay interest if the period of making and settling the contract extends for more than one income year. This happens when the taxpayer is not obliged to declare the capital gain until the contract is settled. Notably, however, each case is tackled on its own merits and the discretion of subsection 170AA (11) would be invoked to pay the interests in full, in case the developers requests for adjustment within sensible time after the date of settlement. In this case, a period of one month after date settlement can be a reasonable time (Warburton & Hendy, 2006). The relevant ruling declares that a terms contract is the one where the buyer of the property takes over the possession of the property or any other interest attached to it such as the rental income before actually paying the balance and receiving the documents of title. In that regard and for the purpose of CGT assessment, where a contract comprises of change of ownership ­- disposal and acquisition is assumed to have taken place when the purchaser starts to receive profits. Paragraph(3)(d) declares that the change of ownership as a result of the transaction which gives the purchaser the rights to enjoy the land or the rights attached to that land.2 As stated, entitlement of the purchaser to receipt rental income can occur immediately when the contract is made or later on. If the developers transferred the right to receive rentals to the purchaser when the contract was first made, then for the purpose of CGT, the acquisition and disposal is assumed to have occurred at that particular time (Warburton & Hendy, 2006). Incidentally, the purchaser will not take over the title of the land in the event that the contract falls through before completion of the contract, because the purchaser is not entitled to conveyance of the property. In this regard, CGT provision will not have any basis since the title has not changed hands-hence it will not be applied. Nonetheless, the property developers have the freedom to amend their assessment in case the contract fall through, courtesy of subsection 160M (4) and section 170 (Schwartz & Orleans, 1967). The treatment of CGT which fall on the installment payments will greatly depend on whether the law regards forfeiture of installments as penalties or basically on the terms of the contract. Even though the law or equity requires that a defaulting purchaser return such monies, the developers can, in some circumstances, satisfy the damages resulting from the breach of contract by use of such monies. The transfer of lands Act in some states gives the contracting parties the mandate to apply the respective schedules as set out in those Acts. For example, the conditions of 6(3)(b) of Table A up to the Seventh Schedule of the Transfer of Land Act,3 obliges the sellers of land to retain such money as the outcome of the damage claim is awaited-and can as well use such monies, partly or fully, for the satisfaction of the damages. The developers will in this case have no reason to fear because any installment that is retained pending the determination of damages is not subject to CGT. It is however important to note that any money that is lawfully applied for satisfaction of damages by the developers will automatically qualify for capital gain tax. Any other money that may be received in payment of damages which is occasioned by breach of contract is also eligible for capital gain tax.   The contrary view that disposal takes place during the time of contract applies with the equitable interests due to their nature. As already noted, equitable interests are recognized as assets for the purpose of CGT. They are given the same consideration with legal rights or objects as seen in the joint judgment of Deane and Dawson JJ.4 This case shows that the seller retains most of the rights till the purchaser surrenders all the installments. The developers are in this case entitled to all the rental income which might accrue prior to payment of the purchase price by the buyer. Indeed, the developers are subject to lien on the land as security in case of any outstanding amounts. The purchaser acquires the rights over the land together with its interests on payment of purchase price (Asprey, Lloyd, Parsons & Wood, 1975).   References Asprey, K., Lloyd, J, Parsons, R & Wood, K (1975) Taxation Review Committee, Full Report, Australian Government Publishing Service, Canberra. Coleman, S. (1997). Income tax compliance: A unique experiment in Minnesota. Government Finance Review, 13, 11-15. Freebairn, J. (2005).A comparison of alternative tax bases’, Melbourne Institute Working Paper, No. 11/05. McGraw, K. M., & Scholz, J. T. (1991). Appeals to civic virtue versus attention to self-interest: Effects on tax compliance. Law and Society Review, 25, 471-498. Schwartz, R. D., &Orleans, S. (1967). On legal sanctions. University of Chicago Law Review, 34, 274-300. Smith, J. (1999) Is the only good tax and old tax? A historical perspective on the GST Debate , Discussion Paper No. 398, Research School of Social Sciences, ANU, Canberra. Warburton, R F E & Hendy, P W (2006). International Comparison of Australia’s Taxes, Commonwealth of Australia, Canberra. Wenzel, M., & Taylor, N. (2010). Toward evidence-based tax administration. Australian Journal of Social Issues Read More