What Makes Australian Income Tax Law Different - Assignment Example

INCOME TAX LAW STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1 Suzette sold her farm purchased 25 years earlier in 2010 and then moved to NSW where she rented a house and purchased a hectare of land at the water front. The amount received for the disposal of her farm is considered a capital receipt and not subject to capital gains tax (CGT) since the farm was acquired after the 19th of September 1989. In classifying income, then one needs to define what one means by business. Section 995-1 of ITAA97 defines a business as ‘any profession, trade, employment, vocation calling that does not include occupation as an employee.’ In the case of Ferguson v FCT (1979) 37 FLR 310 the court considered common law examples in defining what a business is. The definition of a business was that the nature of the activities carried out must be with the intention of profit making and it does not matter whether the profit made is significant or small. This position was adopted in the case of White v FCT (1968) 120 CLR 191 whereby it was established that the motive of the taxpayer in engaging in the activities must be with the intention to make a profit. In establishing the nature of the enterprise or business activity, it is paramount to determine the characteristic of the business whether it is carried out in a particular way. In Tweddle v FCT (1942) 2 AITR 360 the court held ‘the regularity and the repetition of the activities is paramount and even isolated activities may be considered as business activities. In distinguishing between a hobby and a business activity, the court in Thomas v FCT (1972) 3 ATR 165 held that if a person engages in activities that is a hobby or for recreation, then this will not be considered as carrying on a business no matter how substantial the operations are. In the case of Hope v Bathurst City Council (1980) 144 CLR 1 the court held that hobbies or activities that a taxpayer declares as income is in activities where they spend more than they earn giving a potential for deduction rather than income. Suzette went ahead to develop the land by consequently building eight town houses on the waterfront land and consulted an accountant to provide interest of the rental return expected from leasing the units. Despite the fact that Suzette engaged in the activities, it was more than to avoid boredom but was rather engaging in business as held in Ferguson v FCT (1979). Further the activities are regular and repetitive in nature Tweddle v FCT (1942) because once Suzette disposed of the four units; she purchased an adjoining block of land with an intention of building more units. The amount received for sale of the four units is income within the meaning of section 6-5 of ITAA97 hence subject to income tax. The amount received as rent through a lease arrangement is income within the meaning of section 6-5 of ITAA97 hence subject to income tax. However, in regards to building of her own residence Suzette will be given allowable deductions for the building of her home residence. Question 2 The purchase of an investment property in February 2006 for $200,000 is no considered a Capital Gains Tax (CGT) event but rather the acquisition of a CGT asset. This means that there was no CGT event hence there will be no payment of CGT on the investment property. A taxpayer is considered to have made a capital gain when a CGT event occurs and the capital proceeds realised exceed the incidental costs arising from the creation of the asset (Maither & Comm, 2013) Thang terminated a lease agreement. The terms in which the lease was terminated were that $3, 000 will be paid as compensation for early termination of the lease. In Jarrod v Boustead (1964) 3 All ER 76 the court held that where a compensation is given for giving up an asset in the form of a restrictive covenant this attracts a CGT provision . Amounts received as compensation may constitute income within the concepts of section 6-5 of ITAA97. As a general rule, amounts received in connection to or with the variation of a commercial or trade contract made during the course of carrying on a business is income (C of T (NWS) V Meeks (1915_ 19 CLR 568) however it will be income of a capital nature. In Van den Berghs Ltd v Clark (1935) AC 431 the taxpayer had entered into an agreement with a Dutch company and after a disagreement, Van den Berghs received $45,000 for terminating the contract. The court held that the receipt was capital in nature. In this case the $3,000 received is considered a CGT event and hence CGT will apply because it was realised due to the termination of a contractual agreement. In June 2014, Thang received the settlement amount having sold his property for $700,000. The disposal of an asset that is acquired after 20th September 1985 triggers a CGT event under section 104-10 of ITAA97. Due to the fact that the property was disposed of after the 19th of September 1985 then CGT would apply to the sale of the property. The issue is whether there was a capital gain or a capital loss. Capital gain within the meaning of section 6-10 of ITAA97 constitutes income considered income for taxation purposes. Section 100-20 of ITAA97 states ‘CGT event occurs when there is a realisation of a capital arising from the disposal of a CGT asset’ (ITAA97 s. 100-20). Thang had purchased the property for $200000 plus stamp duty of $10,000 and later sold it at $700000, there was realisation of capital gain of about $490,000 due to the fact that this was an appreciating asset. Thus CGT will apply on $490,000 due to the fact that this is a capital gain arising out of a CGT event. In February 2014 Thang sold his shares in Hong Pty Ltd for $4,000,000 whereby the assets of Hong Pty Ltd were Pillow Manufacturing Plant and Factory $2,500,000 and $1,500,000 good will. In the case of FCT v Murry [1998] HCA 42 the court was to consider whether good will is subject to the small business CGT concessions. The court in their decision stated that there is no good will when it comes to the sale of a taxi licence, however good will may constitute a CGT asset when it is considered in terms of customer attraction and reputation. The shares had been initially purchased for the sum of $2million in 2006. The shares were acquired after the 20th of September 1985 and therefore the income realised is statutory income as per section 6-10 of ITAA97. There was a CGT event occurring as stated in the case of Heavy Minerals Pty Ltd v FC of T (1966) 115 CLR 512 because the sale of shares resulted in a capital gain. The capital gained in this case is $2,000,000 and is therefore subject to CGT since a CGT event had occurred resulting in a capital gain. Effective from the 30th of June 1988 Superannuation fund was considered as capital gain and therefore subject to CGT. The superannuation fund amount held by Tang is $1,450,000 and because a CGT event is concerned with capital receipt, then when this amount is paid it will be subject to CGT. Section 100-30 of ITAA97 exempts assets such as motor cars and motor cycles from being CGT assets. This means that the car valued at $50,000 used for his business is not a CGT asset and when it is disposed it does not attract GGT. Further under section 118-25 of ITAA97 exempts the family though in limited circumstances from CGT especially when it is the main residence. Therefore the property in Melbourne valued at $850,0000 where Thang lives is exempt from CGT. b) Would Thang qualify for the small business concession? In the case of FCT v Murry [1998] HCA 42 that CGT concessions under the small business provisions is considered an exemption to CGT. In the case of FCT v Murry the court was to consider whether good will is subject to the small business CGT concessions. The court in their decision stated that there is no good will when it comes to the sale of a taxi licence, however good will may constitute a CGT asset when it is considered in terms of customer attraction and reputation. In order for a person to qualify for CGT small business concessions, then the business must meet three main qualifications. First the CGT event must happen in relation to the asset owned by a person in carrying on a business. Secondly the CGT event should otherwise have resulted in a capital gain. Thirdly, the business ought to be a small business entity for the income year, meets the requirements of net asset values test. The last requirement being that the CGT asset disposed is an ‘active asset’ under sections 152-10 of ITAA 1997. Section 328 Of ITAA97 states that of the aggregate turnover of the business in the previous tax year exceeds 2million then the business will automatically not qualify for the next income tax year. In order to meet the requirements of the third provision, then one must meet the provisions of sections 152-15 of ITAA97. This means that the maximum net asset value sum should not exceed $6,000,000. In regard to whether Thang qualifies for the small business concessions provisions then one would state that he meets the criteria. Thang in his former business that is Hong Pty Ltd had made $2, 5000,000 consistently as the annual turnover hence these exceeds the 2million threshold for a business to automatically qualify for the next income year. However Thang meets the maximum net asset value test where the maximum net asset value sum does not exceed $6,000,000. This is because his former business was estimated at around $4million which is lower than the maximum net asset value and therefore would qualify for small business concessions after the purchase of Julian Pty Ltd for $350,000. Question 3 There are claims that in the recent past the cost of living of an average family has risen due to the changing consumption patterns caused by inequalities in the taxation systems in terms of income taxes (Head and Krever, 2009). The Australian taxation system is modelled on taxing individual income; however tax offsets are available when the tax burden is shared between the family members (Dwyer, 2004). According to Patricia Apps (2005) the division of parent with the higher private income under the old law was considered the private earner and this provision would apply to income from sources such as wages, salaries, superannuation and investment income. There was no differentiation between the amount a family would pat if there was only one sol income earner and this means that the taxation system applied unequally to families where there was only one sole income provider (Patricia, 2004). The introduction of Family Tax Benefits (FBT) in 2000 was an initiative by the state to reduce the tax levied on income by the state on families. However the impact of this reform was not forthcoming because there were still inequalities within the Australian taxation system. The family tax benefits reform targets families and single parents.1 The new provisions regarding the family tax benefit to families requiring assistance in creating a welfare system where the state introduces reforms when it comes to taxation by parents. Effective from 1st July 2015, FBT payable by a Part B primary earner income limit will reduce up from $150,000 p.a to $100,000 p.a. This will eventually reduce the income threshold and one will be titled to a Dependent Tax Offset of $100,000. Further reforms under FTB part B payments is that starting 1st July 2015 the payments will be limited to families where their youngest child is less than six years. In regards to the transitional position ensuring that families with children above the age of six may remain eligible for the family payment for a further two years after 30th June 2015. The new reform introduces an allowance of $750 for children between the age of six and twelve years starting the 1st of July 2015. One would become ineligible for the allowance once the child become 12 years and above and will only apply for single parents on the maximum rate of Part A of FBT. Limits under the reforms will be imposed on the FBT Large Family Supplement will only apply to families having more than four children and will only be paid in respect of the fourth and any other subsequent child in the family. The new bill seeks to introduce changes to HELP repayment thresholds, indexation and fees charged on loans. With effect from 1st July 2016, the income threshold for students commencing their repayment of HELP debts will be reduced2. In regards to the minimum repayment threshold, set at 90% of the minimum threshold with effect in the 2016/2017 financial year. The repayment rate of 2% 2 will apply to debtors who have an income below the minimum threshold3. Starting from 1st June 2016 the annual indexation applicable to HELP debts will be adjusted from the Consumer Price Index (CPI) to a rate equivalent to the yield on 10-year bonds issued by the Australian Government (capped at 6% per annum)4. The government in the new bill sought to scrap the 25% fee applied on FEE-HELP loans for undergraduate courses and the 20% loan fees that was applied to VET FEE-HELP loans. This will be affected starting on the 2015/2016 calendar year. The changes created under the reforms for education entry payment (EEP) is that starting from the 1st of January 2015, there will be no taxation imposed on EEP. This means that the amount received will be tax free. The intention for this provision was that education as a primary right in the bill of rights needs to be accessed by all (Human Rights Act, 2011). Taxation relief effective from January 2016/2017 will be available to undergraduate students and vocational students with a reduction in charges of 25% -20% respectively when it comes to the FEE-HELP loan available to students. The aim of this provision being to reduce taxation rates on loans making education more affordable.5 The minimum threshold payable for students applying for Held in the 2016/2017 financial year will only commence the repayment of their loan when their minimum income reaches $50,638. Lowering the minimum income threshold means that a student will only start repaying their loans once their income reaches this amount. ii) Desirability to implement the changes In determining whether the changes are desirable, one has to consider whether the previous taxation regime was desirable. One of the reasons the taxation of family system was undesirable was because it treated unfairly families considered low income earners and high income earners. (Apps, 2002) The new reforms seek to introduce the aspect of recognising the hardship of single families where the taxation failed to recognise the burden of raising a family as a single income earner. The tax burden system towards single parents was unfair since they were subject to pay tax similar to those with two parents working. In analysing the desirability of the reforms, then one must understand the redistributive effects of direct taxation and reduction in the inequality caused by taxation. In taxation, vertical equity is considered as being the redistributive effect of an ‘effective tax schedule’ whereby tax is allocated to each individual the average tax payable by a respective equal (Creedy, 2012) Horizontal inequity on the other hand relates to the unequal treatment of equals where one considers the rank of household with different pre-tax incomes and this is reversed due to the tax system. Horizontal inequity simply applies where persons with the same income pay different tax thresholds. The new reforms seeks to create tax equity both horizontally and vertically ensuring that the tax imposed is equal depending on the family, single families and income threshold levels. Creating equality within the tax system will lead to income distribution that may arise out of the need to enhance fairness and equity in terms of strengthening the citizen’s ability to consume. One would regard the reforms as aimed at meeting the stabilisation objective and revenue objective in order to address inequality in income distribution and maximise consumer’s satisfaction. REFERENCES Apps P F 2002, Why an Eerned Income Tax Credit program is a mistake for Australia’, Australian Journal of Labour Economics vol. 5, no. 4, pp. 549 Creedy J, 2012 Modeling Indirect Taxes and Tax Reform Edward Elgar Publishing Budget Paper No 2, p 77–78, 85; Minister for Education's press release “Building a world class higher education system”, 13 May 2014. Budget Paper No 2, pp 197–200; Minister for Social Services press release “Supporting parents through a sustainable, better targeted family payments system”, 13 May 2014. Dwyer T, ‘The taxation of shared family incomes’, Perspectives on tax reform (2004), no 2, Centre for Independent Studies Policy Monograph no 61, p 4. Head J G and Krever R E, 2009, Tax Reform in the 21st Century: A Volume in Memory of Richard Musgrave’ Kulwer Law International Patricia Apps, ‘The High Taxation of Working Families’ (2004) 5 (1) Australian Review of Public Affairs 1-24 Cases C of T (NWS) V Meeks (1915_ 19 CLR 568 FCT v Murry [1998] HCA 42 Ferguson v FCT (1979) 37 FLR 310 Heavy Minerals Pty Ltd v FC of T (1966) 115 CLR 512 Hope v Bathurst City Council (1980) 144 CLR 1 Jarrod v Boustead (1964) 3 All ER 76 Thomas v FCT (1972) 3 ATR 165 Tweddle v FCT (1942) 2 AITR 360 Van den Berghs Ltd v Clark (1935) AC 431 White v FCT (1968) 120 CLR 191 Read More