Taxation Questionnaire - Assignment Example

Taxation Questions Name Tutor HI5028 Date Question 1 The issue is to determine whether Fred qualifies to be treated as an Australian resident for tax purposes. This falls under individual tax treatment for individuals entering Australia. The legislation in Australia permits individuals of foreign countries entering Australia to be treated as Australian residents for tax purposes. According to the ATO1, a foreigner can be treated as a resident for tax purposes if they stay in Australia continuously for six months or more, does the same job and lives in the same place. Also, if one moves to Australia with an intention of living in the country permanently, they are treated as residents for tax purposes from the date when they arrive in the country (ATO2). Residency is also determined by how often, how regular, for how long, and the purpose for which the individuals visit their country of origin. The business and family ties also apply in determining residency3. If a foreigner is treated as an Australian resident for tax purposes, they will be taxed on the income they earn from all parts of the world just like ordinary residents (ATO4). On the other hand, the ATO5 indicates that non-residents are only taxed on the incomes they earn from within Australia. Besides, Australian residents are taxed at a lower rate compared to non-residents. Australian residents who earn below $80,000 are taxed at 30 per cent whereas non-residents earning below the same amount are taxed at 32.5 per cent (ATO6). Residency is also likely to change. An individual may begin a financial period as non-residents and turn to be residents in the course of that year. The tax treatment will be different for the period they are resident and the period of being non-resident7. The ATO8 also indicates that if ones leaves Australia intending to live outside the country for a period of two or more years, they qualify to be considered as non-residents for tax purposes from the day they depart from the country. Taxation ruling TR 98/17 relates to the determination of residency status of individuals entering Australia for taxation purposes. The ruling generally provides meaning to the word ‘resides’ (subsection 6(1) of the Income Tax Assessment Act 1936). The ruling indicates that ‘an individual’s tax liability is determined on a year-year basis’. In ordinary terms, ‘reside’ refers to an individual coming into Australia permanently or a person living in the country for quite a long period of time. Residency is also determined by an individual’s actions while in Australia. The main pointers to behaviour are: (1) purpose for residence, (2) assets location and maintenance, (3) family as well as business/employment, and (4) social and living arrangements. According to TR 98/17 the necessary considerable time to consider a person’s residency behaviour should be six months or more. Some people may decide establish their residency in Australia even if they stay for less than six months while others may decide not to establish residency in Australia even if they exceed the six months threshold. People entering in Australia with the intent of staying for less than six months, such as short-term contract workers, may well stay longer and will therefore be treated as Australian residents from the day they arrived in the country. Visitors on holiday are regarded to have demonstrated that they do not intent to reside in Australia. If they decide to migrate, they will be regarded as residents from the day their behaviour changes. Moreover, the ruling provides four tests to determine residency for tax purposes. These include residency based on ordinary meaning test, domicile and permanent place of abode test (applies to Australian residents not living in Australia during the income year), 183 day test (based on actual stay in Australia for over six months while deriving income to be assessed regardless of the persons nationality, domicile or citizenship), and commonwealth superannuation fund test. In the case of FC of T v. Miller9 the judges indicated that the courts may not interpret the word ‘reside’ out of its ordinary meaning. Some British ruling such as in the case of Levene in Miller. Dixon J in Gregory v. DFC of T10 have been applied in Australia, whereby key words in Australian income tax legislation ought to mean the same as the meaning referred to in England. In Reid v. The Commissioners of Inland Revenue11 the word ‘reside’ is interpreted to mean that quality of time and presence ought to be considered in establishing a person’s residency when they spend part of their lives in a place. Presence of family plays a key role in determining residency. In the case of Peel v. The Commissioners of Inland Revenue12 it was ruled that Peel was a resident of Scotland. He purchased a house that he kept for his residency and his family stayed there severally in the course of the year. Even though time is not a determinative feature of residency, it can be considered in determining a person’s residency. This is well illustrated in the 14 TBRD 346 case 3513. In Australia a minimum of six months is required for determining residency. If an individual stays for more than six months behavioural actions are considered as discussed above. The case of Fred is subject to the above facts. He resides in Australia for eleven months, which is well beyond the minimum six months (183 day test). Moreover, he runs a consultancy business in the country and stays in Australia with his wife apart from the boys who are out because of attending college. Also, Fred leads an ordinary life in the country. In conclusion, Fred qualifies to be treated as an Australian resident for tax purposes. His income generated from his consultancy business plus the rent income earned from renting his house in London and the interest income generated from his investments in France are to be assessed for income tax just like any other Australian resident. Question 2 The case of Egerton-Warburton & ORS v DFC14 entails an income two sons paid to their father during the year. The argument was that this amount ought not to have been included in the father’s assessable income given that it was a capital sum. This amount was paid in form of an annuity as agreed between the father and the sons. The father argued that the annuity did not fall within the definition of income as described in paragraph d, section 4 of the Income Tax Assessment Act 1922 – 1933. However, the court ruled that the amount paid ought to be as assessable income on the part of the father. The court pointed to three key reasons as to why the payment would be assessable since as per the agreement between the father and the sons, (1) there is no fixed sum of capital/price for the property (Secretary of State in Council for India v Scoble15; Walton J., Chadwick v Pearl Life Insurance Co.16), (2) there was no fixed time (the annuity was to paid over the life time of the father until his death and move on to the widow’s life time and finally to the daughters and children of the deceased daughter), and (3) there was no rate of interest agreed upon by the father and the sons to be used in calculating the payments. The judges stated that there an ascertainable sum is a mandatory condition that was required if paragraph d, section 4 of the Income Tax Assessment Act 1922 – 1933 was to apply. An annuity ought to entail change of capital into income that is payable every year over a number of years (Watson B., Foley v Fletcher17; Mathew L.J, Scoble v Secretary of State in Council for India18). The case of IRC v Ramsay19 involves the buying price for a dental practice that would be paid in annual instalments. The payments would be computed based on the net profits generated by the business. According to Barkoczy20 dental practice is valued based on the based on the previous year net collections. Therefore, the court indicated that since the amounts were specified, the payments could be treated as an annuity or capital amount. Question 3 a. Vacant land Vacant land is subject to CGT regardless of whether it is held for investment or for private reasons. In this case it is regarded as a capital asset. However, if it is held for business activity and for resale, it is treated as trading stock and income is subject to CGT. If the land is held for over 12 months, one is entitled to a 50 per cent CGT discount. Since Fred is an investor he will pay CGT on the sale of vacant land as a capital asset as indicated below; Selling price 320000 Cost of land 100000 Costs relating to the land 20000 Capital gain 200000 50% CGT discount 100000 Amount to be included in tax return 100000 b. Antique bed Since the antique bed is an asset, it constitutes a CGT event. The CGT on the bed is; Recovered amount 11000 Cost of bed 3500 Improvement expenses 1500 Capital gain 6000 50% CGT discount 3000 Amount to be included in tax return 3000 c. Painting According to the Australian Tax Office21, pre Sept 1985 assets are not subject to CGT, unless they have undergone substantial transformation from when they were acquired. Therefore, Fred will not pay CGT on the painting. Selling price 125000 Cost of painting 2000 Gain 123000 Capital gain 0 d. Shares CGT on shares involves the difference between the cost base (buying price plus expenses such as brokerage fees, advice costs, and stamp duty) and the selling price. Shares held for over 12 months attract a 50 per cent CGT discount. Below is Fred’s CGT calculation on shares; Commonwealth bank PHB iron ore ltd Young kids learning ltd Share build ltd Total Selling price 47000 35000 600 25000 Cost 15000 30000 6000 10000 Expenses (brokerage and stamp duty) 1250 2500 600 2000 Capital gain/loss 30750 2500 (6000) 13000 40250 50% CGT discount 15375 1250 - 6500 20125 Amount to be included in tax return 15375 1250 - 6500 20125 e. Violin Since the violin is an asset, it constitutes a CGT event. The CGT on the violin is; Selling price 12000 Cost of violin 5500 Capital gain 6500 50% CGT discount 3250 Amount to be included in tax return 3250 Net capital gain/loss Total capital gain 355750 Carried forward tax losses 8500 Net capital gain 347750 50% CGT discount 173875 Amount to be included in tax return 173875 Read More