Taxation Law - Assignment Example

Assignment Task One ABC Tax Advisory Services Ms Kitty Dear Ms Kitty, I thank you for your recent letter. You have requested in your letter to be advised regarding the tax implications of the online trading that you have recently started on EBay. This advisory letter assumes significance as there has been a recent crackdown by the Australian Tax Office to target thousands of online vendors who are trading on EBay or the Trading Post. I shall be advising you by making references to relevant sections of the Income Tax Assessment Acts (ITAA 1936 - ITAA 1997) Factors that are likely to impact your taxation implications Under the Online Trading 1. The recent crackdown is targeting only individuals and businesses that have turnovers exceeding $ 20,000 in online trading in any of the last three financial years.  However as per the senior assistant commissioner of ATO, it avoids targeting "mums and dads that are selling the mower". EBay Australia has provided personal data of each seller and their monthly sales turnover for the periods in question to the Tax Office to enable them to match the said data with the data available with them on record to detect individuals or businesses that are either under-reporting or not reporting their incomes generated through these sources. 2. Taxpayers who are running a business through online selling sites, or have an existing business and are making additional sales through these sites are required to include this income in their Business Activity Statement (BAS) or tax return. 3. The Commissioner has encouraged those individuals or businesses who may have under-reported their taxable incomes in the last three financial years to make a voluntary disclosure of undeclared incomes by lodging an amended tax assessment or a revised BAS. Under the Capital Gains Tax (ITAA 1997 section 104-5) 1. Under the Australian Taxation system Capital Goods Tax (CGT) applies to any capital gain made on disposal of any asset, unless specifically exempted. CGT operates by having net gains treated as taxable income in the tax year in which an asset is sold or otherwise disposed of. Any asset held for at least 1 year, can first be discounted by 50% for individual taxpayers. Net losses in a tax year may be carried forward, but not offset against income. 2. Personal use assets and collectibles are given a different treatment under CGT. Thus a loss under one category cannot be offset against gain under the second category. Some of the significant exemptions relevant here are: Any asset acquired before 20th Sep 1985 known as pre-CGT assets. Personal use assets including boats, furniture, electrical equipment, etc acquired individually or as a set for up to $10,000. Collectables including art, jewellery, stamps, etc., acquired individually or as a set for up to $500. Although the total value of asset sales indicated by you is low, I have included all provisions that may be relevant to the information provided by you and which may likely impact your current income tax implications or in the future. Kindly refer back if you have any other concerns. Yours truly For ABC Tax Advisory Services Assignment Task Two Dear Mr. Max, Based on the facts provided, you wish to seek my advice on your intention to claim a deduction under the provisions of the Income Tax Assessment Act 1997 for the said sum of $ 4000 incurred in 2008 on account of feasibility expenditure on a business proposed to be started in 2010. Although section 8-1 permits the deduction of $ 38000 incurred by you in 2010 against your assessable income of $ 23,000, the expenditure of $ 4000 on the feasibility study being of a capital nature, is specifically disallowed by section 8-1(2) (a) which bars the deduction of any expenditure, loss or outgo of capital or expenditure of a capital nature. However, the Income Tax rules permit deduction under what is known as the Blackhole expenditure for business related expenditures. Certain expenses of a capital nature which could not be dealt elsewhere by other provisions of the Income Tax rules were allowed under section 40-880 of the ITAA 1997. Feasibility studies on setting up a business entity, being capital in nature, are permitted. A taxpayer can now claim deductions for business related costs in equal proportions over five years for certain capital expenditure he incurs in relation to a past, present or proposed business. Section 40-880 of the ITAA 1997 is also called a provision of last resort. Under section 40-880 a taxpayer may be able to deduct capital expenditure incurred by him subject to the business proposed being for taxable purposes and the taxpayer must be able to derive assessable income from it. He must also be able to demonstrate his commitment to commence a genuine business and to identify the nature of the business that is proposed. This may be done by means of a business plan, establishment of business premises, a feasibility study on the prospects of the business or capital investment into assets of the business. The deduction in relation to the proposed business is only available if it is reasonable to conclude that the business is proposed to be carried on within a ‘reasonable’ time. Once all these criterions are met Section 40-880 permits him to deduct the capital expenditure over a period of five-years commencing from the year in which the expenditure was first incurred. In addition to the above provisions he also has to meet the non-commercial loss provisions. As per these provisions the taxpayer has to meet certain tests laid out in section 35 of ITAA 1997 in order to claim deduction under section 40-880 of ITAA 1997. The tests relevant here relate to assessable income test and profit test. Section 35-10(2B) bars the deduction of a capital expenditure under section 40-880 from a non-commercial business activity. Now coming to the facts provided by you we see that 1. Although section 8-1 disallows deduction of $ 4000 being capital in nature, section 40-880 allows the deduction in equal proportions over five years. 2. In each of the years 2008 in which you incurred the expenditure of $ 4000 and the year 2009 you had no assessable income from a business activity. Hence you would not be able to claim the 20% deductions in 2008 and 2009. 3. In the year 2010 you were able to generate an assessable income of $ 23000 that meets the test of section 35-30 of a minimum of $ 20000 of assessable income from a business activity. Hence you would be able to deduct the first installment of 20%. 4. You would be able to deduct the remaining four installments of 20% each from any subsequent years in which you have an assessable income from a similar activity. Yours truly For ABC Tax Advisory Services Assignment Task Three a) Motor vehicle expenses incurred in carrying on business or to derive any taxable income are allowable deductions as per provisions of ITAA97 s 8-1. In the present assignment given that the “Business” Kilometers were in excess of 5000 Kilometers we determine below the maximum deduction available to Charlie for the year ended 30 June 2010: We first determine the total business kilometers covered by Charlie: Total kilometers travelled by Charlie as per his log-book records is 8155 Km Deducting the non-business travel on shopping and recreation being 1507 Km The total business kilometers is 6648 Km Out of his total expenditure we determine the total allowable expenditure: Total expenditure incurred by Charlie as per his log book is $ 9194 Disallowed expenditure is: On driver’s license $ 90 Expenditure on parking meters near his work on days when only drove from home to his office and stayed there working all day $450 Speeding fines when visiting customer’s premises $620 $ 1160 Therefore his total allowable expenditure is: $ 8034 The Australian Income Tax law sets out special substantiation rules for taxpayers who want to claim a deduction for ‘business related car expenses. This includes claims by an employee. There are four methods by which a taxpayer can claim a deduction: i) Log-book method: This can be used where business kilometers covered are more than 5000 Km. This requires taxpayers to maintain a log book in the first year of use of the car, for at least 12 weeks. That log is effective for five years subject to certain conditions.  However, odometer records must be maintained for every year, and receipts etc. kept for car expenses except for fuel and oil expenses.  For fuel and oil expenses, either receipts may be kept or an estimate made based on odometer records and petrol prices. Using this method the total kilometers travelled by Charlie for business purposes are 6648 Km which is 81.5% of the total of 8155 Km logged by Charlie. Therefore total deduction allowed to Charlie is 81.5% of his allowable deduction of $ 8034 = $ 8034 X 81.5% = $ 6548 ii) 12% method: This method is also used where business kilometers covered are more than 5000 Km. Here it is necessary to maintain the original documents relating to purchase of the car. The 12% method can be used where the original cost of the car exceeds the cost depreciation limit which is currently $57009. Since the cost of Charlie’s car is $59000 he can use this method to claim deduction. However the allowable deduction by using this method is 12% of the cost depreciation limit of $ 57009 = $ 57009 X 12% = $ 6841 iii) One-third of actual car expenses method: When business use exceeds 5,000 kilometers per annum this method of substantiation can also be used. Even though a log book is not required to be maintained here, the taxpayer must keep evidence of expenses in writing (Here too fuel and oil expenses are substantiated by receipts or odometer records) Using this method the actual allowable expenditure is $ 8034 One third cost = $ 8034/3 = $ 2678 iv) Cents per kilometer method: This method would normally not be applied here as it is used where the business use is 5000 Km or less than 5000 Km. However if applied the allowable deduction would be only for 5000 Km. Under this method business kilometers can be calculated based on reasonable estimates and no formal documentation is required. ATO’s rate for a 2600 cc car for the year 2009-2010 is 74 cents. Therefore using this method the allowable deduction is 5000 Km x 74 cents/100 = $ 3700. Decline in Value: For the period ending 30 June 2010 as per ATO’s estimate vide TR 2009/4 effective from 1 July 2009 the effective life of a motor vehicle is generally 8 years. Using the diminishing value formula as under we determine the decline in value as follows: Opening undeducted cost X days owned 365 X       150%       plant’s effective life (in years) = $ 59000 X 150 days X 150% 365 8 years = $ 4509 Temporary Investment Allowance: The investment allowance as per the Australian Government Treasuries Small Business and General Business Tax Break will be an additional tax deduction equal to 50% of the cost of an eligible asset costing $ 1000 for small businesses and 30% of the cost of an asset costing $ 10000 for general businesses. However it requires a commitment to invest prior to 31st Dec 2009. Charlie did not require a car prior to 1 Feb 2010 and he bought the car (asset) on 1 Feb 2010 as such he is not eligible to claim the additional 50% temporary investment allowance. Moreover he is an employee and not a “small businessman” and hence is not eligible to claim this allowance. References Task One ATO pilot triggered eBay sellers investigation: http://www.crn.com.au/News/223415,ato-pilot-triggered-ebay-sellers-investigation.aspx Data matching program targeting online sellers: http://www.taxpayer.com.au/media/news/data_matching_program_targeting_online_sellers.html Guide to Capital Gains Tax, Australian Taxation Office, publication NAT 4151-6.2005  Task Two Australian Tax Office: Blackhole expenditure: business related expenses http://www.ato.gov.au/Businesses/content.asp?doc=/content/69055.htm&page=5&H5 CCH Master Tax Examples Small Business and General Business Tax Break: Frequently Asked Questions http://www.treasury.gov.au/documents/1505/PDF/Frequently_Asked_Questions.pdf Task Three Did you know: car expenses? http://www.taxpayer.com.au/media/news/enews_dyk_carexpenses.htm Expenditure on driver’s license (disallowed vide case R49 84 ATC 387) Expenditure on Parking meters near his work on days when only drove from home to his office and stayed there working all day (disallowed vide ITAA36 s 51AGA; eg ID 2005/246) Parking fines and speeding fines are disallowed (TD 93/108). Guide to Depreciation: http://www.ato.gov.au/content/downloads/GuideDepreciation2001.pdf Premium Master Tax Guide: DEDUCTIBLE MOTOR VEHICLE EXPENSES http://www.premierwealth.com.au/pdf/tax/end%20of%20tax%20year%20strategies/Motor%20Vehicle%20Deductions%20MTG.pdf Read More