Revenue Law and Its Guiding Principles - Thesis Example

N/A, LAW REVENUE LAW By: Name: Course: Tutor: Institution: Date: This paper delves in the discussion of revenue law. Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise and therefore Revenue law has guiding principles which are recognized and applied when dealing with revenues from business (William, 2007, P.4) .This paper is divided into three different case studies. CASE STUDY ONE Part one Overview CSI Ltd is multi-national group company with 80% of its shares being in consulting services Australia Ltd (CSA) incorporated in Australia. Core activities of the company are to raise finances and investing in order to generate funds. Centralized management and head offices services are also provided by the CSI Ltd to other companies in the group in the group for services fees at a market value. Main income source of CSI Ltd are investment incomes, interest on loans to other companies in the group and other service fees. Three out of ten Board members are in Australia and the rest in other head offices in different countries. Four senior executives are also based in Australia while the rest in other different head offices. At least three out of ten board meetings were held in Australia during the 2016 Income year and the remaining held in New York. Issues: Does the central management of CSA Ltd in Australia? Does the company’s voting power being controlled by shareholders who are residents of Australia? Law: Section 6(1)(b) of the ITAA 36 Malayan shipping company Ltd V FCT (1946) Esquire Nominees Ltd v FCT De Beers Consolidated Mines v Howe (1906) Source (Psaltis, 2009, P. 37) Discussion: In view of the above cases, for an incorporated company to be considered as a resident of Australia, it must have its central management in Australia and the voting power be controlled by shareholders who are also residents of Australia. The Consulting Service International Ltd has about 80% of its shares in Consulting Services Australia Ltd (CSA) which is above the minimum requirement of 50% or more. Even though the company has its head office is located in New York, most of its board members and seniors executives are based in Australia which makes Australia to be where central management takes place. Conclusion: From the above discussion, we can conclude that Consulting Service International Ltd (CSI Ltd) is considered a resident of Australia for purpose of taxation for the income year ended 30th June 2016. Part two Overview At start of 2015 income year, set up an eBuy A/C for free to sell some of their belongings and saves for an oversees holiday. Began to import Low-cost home decorator items at the beginning of 2016 income year at the cost of $16,000 All listings of items are made at the minimum bid price at 210% of the cost price. Up to 30th June,2016, the total sales of stock items = $38,000 30% increase of sales volumes for July, 2016 from previous. Sold rights to their designs a lump sum of $200,000 during 2016 Income year. Linda and Lucky to also get $ 1.20 per additional items sold for a period of 12 months. Up to 30th June, 2016, 20,000 items had been sold by the retail company with payment due to be receiving in July, 2016. Luke and Linda left the business and engaged in professional occupations. A. Issues: Does the sale of personal belongings below their cost be considered to be carrying out business for taxation purposes? Will importation of low-cost items and selling them at higher prices be considered a purpose for taxation? Law: S 995-1 of the Act. Evans v FCT (1989) Babka v FCT (1989) 20 ATR 1251; 89 ATC 4963 Source (Psaltis 2009, P. 54). Discussion: In view of above case and legislation about indicators of business, Luke and Linda in 2015 income year, they were not carrying out any business because they were selling their belongings at a lower price than their cost and therefore no profit was being made. The selling of belongs was done once and for it to be regarded as business it should a regular and frequent. In 2016 income year, Luke and Linda were considered to be carrying out business because they were selling the items through their eBay auctions which meet the system and organization indicator of business. All their listings are made with a minimum bid price that represented 210% of the cost price which means they are making profit ,this fulfil the profit motive indicator of business. Conclusion: In view of the above discussion, we can conclude that Luke and Linda Lucky were not carrying out any business activity in 2015 income year for taxation purposes but in 2016 income year, they were carrying out business activities for taxation purposes. B. Issues: Can the income received by Luke and Linda Lucky in 2016 income year in relation to the sale of the design be considered as an ordinary income? Law: Section 6-5 (25 (1) Income Tax assessment Act 1997, Sec 6.5 of Australia. Whitfords Beach Pity v FCA (1983) FCT v Myer Emporium (1995) 163 CLR 199 Source (Bitomosky 1991, P.4). Discussion: In reference to above laws, the profits derived by the business in the commercial transaction will be income if it is in the ordinary course of the business and the proceeds of change in the investment of capital are not income. The amount received by Luke and Linda from sale of the design to retail company was not in the normal business course of selling customized items but it was an extra ordinary transaction of sale of their whole business. Conclusion: From the above discussion, we can conclude that the amount received by Luke and Linda Lucky in relation to the sale of the design to the retail company are not ordinary income. C. Issues: Can the cash or accrual basis of accounting be applied to Luke and Linda? Law: Section 6-5(4) Brent v FCT (1971) Arthur Murray (NSW) pity Ltd v FCT (1965) 114 CLR 314 J Rowe & son pity Ltd case Source (Delany, 1994, P.27). Discussion: In reference to above laws, the general principle of income derivation is that trading income is consider as accrual basis while wages ,salaries, rent and the interests are treated as cash basis of accounting. Luke and Linda were receiving income from the trading activities of selling customized items and then later they were engaged as a teacher and as an engineer where each of them started to earn salary monthly. Conclusion: From the discussion above, we can conclude that both cash and Accruals basis of accounting will apply to Luke and Linda. CASE STUDY TWO Overview Main retail premise in Cairns was damaged by cyclone on the roof and car park. The damage makes it unsafe and unattractive to potential customers. 50% of the car park was damaged. $110,000 used to replace gravels on car park and $200,000 for new concrete. All those expenses paid on 30th June, 2016. Cost of Roof replacement was $ 42,000 The building is 4years old The cost of titles previously used to make the roof =$ 30,000 Company received an invoice of $42,000 but paid $10,000 and remaining on 15th july,2016 = $42,000-$10,000 = $ 30,000 Roof construction was finished on 15th May,2016 Legal fee for the 2016 income year = $ 15,000 Mediation to occur in 2017 and incase positive outcomes is reached, compensation will be received for the damages. Issues: Did the expenses of repairing the warehouse occur when the income-earning activity has stopped? Did the payment legal fee take place when the business is being undertaken? Law: Section 8-1(2) Placer Pacific Management v FCT Brown v FCT Charles Moore & Co (WA) Pity Ltd v FCT (1956) 95 CLR 344 FCT v Day (2008) HCA 53 Source (Pastis 2009, P.120). Discussion: From the above laws, the expenses that the taxpayer has incurred after the business has stopped may be deductible if the expenses is related to the former income earning activity and also the expenses can be incurred in the course of running the business and has a connection in the earning of assessable income are generally deductible. Baby warehouse incurred cost to repair their damaged warehouse after it stopped operating due to unattractiveness to potential customers. After repair and resumption of the business, the business enterprise paid legal fee in order to claim compensation. Conclusion: Therefore from the discussions above, we can conclude that the expenses incurred by the Baby warehouse are deductible in the 2016 income year. CASE STUDY THREE Part one The land acquired initially by Mary in 1st July, 1984 from Ipswich QLD is a capital gains tax asset. The Capital gains tax event was a disposal. Since Mary acquired land in 1st July,1984 before 20th September ,1985 the land is pre- Capital gain tax asset and therefore it is exempt from Capital gains tax. The relevant transaction date will be on 1st January, 2016. The cost base for the house will be $ 205,000 Indexing does not apply as the acquisition is after September, 1999. The capital proceeds on the sale of the house will be ; = $ (649,000-299,000) = $ 350,000 The capital gain will be ; = $ (350,000-$205,000) = $ 145,000 Law: Sara Lee case McDonald case Gardiner v FCT (2000) ATC 2018 Source (show 2012, P.497) Calculations: House & Land Combined Land on which the House is built House Proceeds $ 649,000 Less Value of each block of land $ 299,000 Net proceeds $ 350,000 $ 205,000 Less total cost base $ 205,000 Capital Gain $ 145,000 Less Possible Concession $ 3,800 Net capital Gain $ 141,200 Part two The land which was initially acquired by Justine from Toowoomba for investment purposes is a capital gain tax asset. The capital event has is disposal. The land is exempted based on the pre- capital gain tax acquisition date and the residence as well as since it is a principal residence. The relevant date will be 1st June,2016 The cost base for the house will be $195,000 Indexing does not apply since the acquisition is after September, 1999. The capital proceeds of the house and land will be $ 390,000 Law: Sara Lee case McDonald case Gardiner v FCT (2000) ATC 2018 Source (chow 2012, P.497) Calculations: House & Land Combined Land on which the house is built House Proceeds $ 390,000 Less Total Cost Base $ 195,000 Capital Gain Less Possible Concessions Net Capital Gain Conclusion: Since the sale of the house and not land is subjected to capital gain tax, then the Net capital gain of the land cannot be determine References Bitomsky, (1991) Concepts of Assemble Income. Revenue Law Journal Vol. 2 Chow, (2012) 50th Edition, Australian Master Tax Guide. CCH Australia, North Ryde, Sydney Delany, (1994) Accrual concept of Accounting. Revenue law Journal Vol.44 Psaltis, (2009) Introduction to law. Final exam notes. William & Burton (2008) 2nd Edition, West’s Encyclopedia of Revenue. Read More