Assessable Income for Cut and Chop for Tax Purposes - Assignment Example

Australian Taxation Law Name Tutor Unit Code Date a) The issue is to determine the assessable income for Cut and Chop for tax purposes. Sale of business premises is expected to result in either a capital gain or capital loss. CGT is charged on the net capital gain made in an income year. A capital loss is carried forward and is deducted in the capital gain in the subsequent years. The capital gain or capital loss constitutes the difference in an asset’s cost base (cost of purchase plus other costs incurred on the asset) and the capital proceeds/selling price. The cost base involves various costs associated with acquiring the asset. Also, the sale of commercial residential premises is subject to GST (Barkoczy, 20151). Capital gain on sale of business premises Cost base of business premises 1st element $1,950,000 Legal fees and agent fees 2nd element $55,000 Total cost base = $1,950,000 + $55,000 $2,005,000 Capital proceeds $2,650,000 Capital gain $2,650,000 – $2,005,000 $645,000 Capital gain on sale of residential premises Cost base of residential premises 1st element $510,000 Legal fees and agent fees 2nd element $15,000 Total cost base = $1,950,000 + $15,000 Capital proceeds $710,000 Capital gain $710,000 – $525,000 $185,000 Amount to be included in assessable income for tax purposes Total capital gain $645,000 + $185,000 $830,000 Carried forward capital losses $120,000 Amount to be included in assessable income for tax purposes $710,000 Therefore, Cut and Chop will include $710,000 in the assessable income for tax purposes. b) The issue is to find the most appropriate valuation method Cut and Chop can adopt for taxation purposes so as to minimise taxable income. The part also covers an explanation on whether Cut and Chop has correctly included in stock on hand the knives ordered from the UK. According to section 70-10 of the ITAA (1997)2, trading stock refers to “whatever is produced, factory-made or acquired and is held for purposes of manufacture, sale or exchange in the ordinary course of a business including livestock”. Under section 28 of the ITAA (1936)3 trading stock has to be considered in determining a taxpayer’s taxable income. Section 70-45 of the ITAA (1997)4 gives the taxpayer the freedom to elect the value of trading stock on hand using either the cost, market selling value or replacement value. According to section 28 of the ITAA (1936)5 regardless of whether the goods are not within the taxpayer’s premises/outlet, they still amount to trading stock on hand if the taxpayer can dispose the goods. In the case of All States Frozen Foods Pty Ltd v. F.C. of T.6 it was held that goods in transit at sea should certainly be treated as a taxpayer’s trading stock in hand. In conclusion, Cut and Chop should use cost method ($350,000) since it is high and therefore minimises the taxable income. Also, given that Cut and Chop possess the ‘bill of landing’ for the goods, they have dispositive power over the goods (Farnsworth v. F.C. of T.7). Therefore, the knives are correctly included in the trading stock. c) The issue is to assess the income tax implication of employee leave liability/payments and doubtful debt/bad debt provisions on Cut and Chop. Under section 8-1 of the ITAA 19978, an employer is entitled to a tax deduction due to the amounts set aside for employee leave payments. However, section 26-10 of the ITAA 1997, indicates that an amount cannot be tax deductible unless it is actually paid or is an accrued amount. Section 8-1 of the ITAA 19979 indicates that a taxpayer can deduct a debt or part of it that has been written off. Therefore, Cut and Chop are supposed to deduct the leave amounts paid in the year from the income for the year. This will reduce the assessable income for tax by $297,000 for Cut and Chop in the income year. On the other hand, Cut and Chop cannot deduct the provision for bad debt since it has not been written off. The company has to include the $185,000 amount for doubtful debt in their assessable income. d) The issue is to explain to Cut and Chop the tax implications in relation to the disposal of the depreciating assets. Under NAT 768210, the ATO indicates that a taxpayer is supposed to account for GST on the disposal of a capital asset. If the taxpayer is registered for CGT, they must report the sale amount at the total sales on the activity statement for the relevant tax period. In conclusion, Cut and Chop is required to include the amount received for the sale of the depreciating asset ($120,000) in the assessable income since it is registered for GST. e) The issue is to determine the income tax implications of the loan and the sale of the motor vehicle. Section 25-25 of the ITAA 199711 states that borrowed expenses are deductible over the period of the loan so long as they are incurred in producing assessable income. In this case, the loan of $85,000 was used by Mr. Parisi to purchase a motor vehicle for historical reasons and as a long-term investment. This shows that the money was used for private purposes. The interest on the loan is not tax deductible. Also, the sale of the motor vehicle is not tax deductible. f) The issue of law is to determine the CGT consequences of the relocation to Fiji assuming Mr and Mrs Parisi would be considered non-residents of Australia for tax purposes. Australian residents can cease to be Australian residents if they move to a foreign country indefinitely. They become foreign residents for tax purposes from the data of leaving. However, they will be taxed on income generated within Australia. According to section 855-20 of the ITAA (1997)12, for a CGT asset to be taxable in Australia, it must be situated in Australia. However, under section 855-25 of the ITAA (1997)13, an interest held in a test entity is considered an indirect Australian real property interest and is taxable. In this case, the manufacturing facility in Fiji is not definitely situated in Australia and is therefore not taxable. The motor vehicle and the antique collection will be taxed on the year ending 30 June 2015 since Mr and Mrs Parisi will still be Australian residents. The shares Mr and Mrs Parisi own in Cut and Chop amount to an indirect interest in real property situated in Australia. However, for the year ending 30 June 2015, Mr and Mrs Parisi will still be Australian residents and will therefore be taxed as Australian residents. As from 31 August 2015, Mr and Mrs Parisi will be considered non-residents. Still their ownership of real property in Australia, it will be deemed not to have been disposed. However, Mr and Mrs Parisi may opt to treat all assets as taxable Australian property and will therefore not be deemed to have been disposed. g) The issue of law is to determine the tax implication of income generated from investments in Australia. According to Barkoczy (2015)14, Australian 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. By acquiring the shares in Cut and Chop, Mr. and Mrs. Parisi will be treated as Australian non-residents for tax purposes from 31 August 2015. But for the year ending 31 June 2015, they will be considered Australian residents. On both instances, Mr and Mrs Parisi will be taxed on the income earned from trading with the shares. This income may be generated from dividend payments or income from the sale of shares. Read More