Principles of Income Tax Law - Assignment Example

Properties of the Law on Income Tax By + Properties of the Law on Income Tax Solution Property law in the Australia has evolved over the years. In this regard, it is imperative to note important factors such as time of purchase and the value of property before deciding the amount of tax payable for such entities as per Australian Property Law. The case under study is about Suzette, who undertook a number of financial transactions, some of which could attract taxes as per the United Kingdom’s system of taxation. The decision by Suzette to sell a farm that she had owned for 25 years meant that she was to stop paying property tax on that property. This deduction is based on the fact that she was no longer the owner of the farm, and, therefore was not in any position to benefit in any way from the land, For this reason, she would not be liable to pay tax on that property (Weisbach, 2008, 43). After the sale of her property, Suzette decided to rent the property. As a tenant, Suzette was not liable to pay any property tax since she was neither the owner of the house in which she lived nor was she the owner of the land on which the property was built. However, Suzette had bought one hectare of land in New South Wales. As the owner of the property, Suzette was liable to pay taxes on the piece of land, whether she lived on it or not. In the United Kingdom, a land buyer has to pay Stamp Duty tax on land. The same provision is in the Australian law on purchase of property. All individuals who purchase flats, houses, buildings and land in the United Kingdom have to pay the Stamp duty tax as per the law (Finney, 2008, 53). The same applies in Australia. The amount that a land buyer has to pay in stamp duty tax depends on the value of the purchase. If the value of the property goes beyond a certain figure, the owner pays a specific amount. Another determinant of the rates payable on property purchased in the United Kingdom depends on whether the property is used for residential purposes or whether it is a commercial property. Before building flats on her piece of land, Suzette would not claim deductions on tax for ownership costs of the land as per Australian law. However, it would be advisable that she includes ownership costs in the cost base of her land. In Australian law, she would have taken steps towards reducing tax liability in the event that she desired to sell the land. After a while, Suzette decided to build flats on the piece of land that she owned. When an individual decides to build structures on their property, such as rental houses, they are liable to pay a number of taxes. For owning property in the United Kingdom, individuals have to pay income tax on the rent received. The income tax is calculated after excluding the running costs incurred in running the property. Among the income taxes to be paid is the Self-Assessment Tax (Williams, 2006, 12). In many cases, tax paid in self-assessment tax is for property rented out that attracts rent every year amounting to more than 2500 pounds. In the event that the amount due to the landowner in rent is less than 2500 pounds, the owner can call the tax authorities to report on the same. In the United Kingdom, just like in Australia, income tax on rented property is charged on all the sums that the property owner receives for use of facilities such as furniture, cleaning of the place, arrangements of repairs, heating and even provision of heated water (Commonwealth Law Bulletin, 2010, 197). Australian law on property prevails upon owners of rental taxes to file their tax returns on an annual basis. However, Suzette would not be liable to pay GST on the rent if she leased her property. Suzette can file for tax exemptions on the property on which she lives. In the event that she fails to notify the authorities on the fact that she stays in one of the units, she may end up paying taxes for all the eight housing units, minus the units that she was not receiving income. Further, she needs to pay additional tax on the additional land that she acquired after she purchased extra land just as she was paying taxes before the construction of the initial rental housing units (Commonwealth Law Bulletin, 2010, 208). Solution 2 The new law on capital tax came into existence in September 2009 in the United Kingdom. The capital gain tax is paid on two regimes. The first regime is the old one, which came to existence in the year 1985. The old regime calculates capital gains tax through the indexing of capital; gains in order to account for the inflation that existed during the period when the landowner owned the property (Weisbach, 2008, 55). As per the case under study, Mr. Thang was liable to pay the capital gains tax for the property he owned because it was an investment property. In the event that he bought the property before the new regime came to effect in 1999, he would use the old regime to calculate the amount that he was due to pay in capital gains tax. The rate of inflation that prevailed, all considerations paid to the changes in the rate of inflation throughout the period he owned the property, would be considered. Mr. Thang owned the property from the year 2006 to 2014. This means he would not pay capital gains tax according to the old regime. The second regime would be the new regime, which begin applying in the year 1999. The new regime calculates the amount to be paid in capital gains tax by a landowner by applying the marginal tax rate due to be paid by the individual to 50% of the entire capital gain. There are many rules that can be applied by the tax authorities in the calculation of an individual’s capital gains tax, especially with concern to acceptable deductions. The owner of the investment property to include only the costs that can be deducted in form of taxes as per the provisions of the law (Commonwealth Law Bulletin, 2010, 205). Under the new law on capital gains tax, Mr. Thang would have to pay 2500 pounds, since he received 5000 pounds in rent from his tenant, inclusive of the amount he received from the tenant for the cancellation of the lease. These charges would apply to the period between August 2013 and January 2014. Mr. Thang would not be liable to pay any money in capital gains tax for the months that he was not receiving payment for his investment property (Weisbach, 2008, 73). As per the case study, Mr Thang sold his property for 700,000 pounds in June 2014. Mr. Thang paid 200,000 pounds for the purchase of his investment property. This shows that he made a profit of 500,000 pounds on the property. The law in the United Kingdom posits that for property sold at a profit, income tax has to be paid. For this transaction, the capital gains tax is chargeable (Finney, 2008, 87). Mr. Thang is selling property on which he was not living. In that case, he cannot claim an exemption from paying the amount due. If he lived on the property, he would have applied for an exemption of a certain value, which would come in the form of a Private Residence Relief. Therefore, Mr. Thand would have to pay capital gains tax on the profit he made from the sale of his investment property. In 2006, Mr. Thang bought 100% shares of a company, Hong Pty Ltd at a cost of 2 million pounds. By buying these shares, he was liable to pay a duty or tax for the transaction. The tax that he was to pay is the tax for Stamp Duty Reserve, in the event that he bought the shares electronically. However, in the event that he had to buy through filling a form indicating a transfer in the stock, he would have to pay a stamp duty. The value of this tax, in both scenarios, would be deducted from the entire value of the shares purchased. Therefore, the amount of tax deductible would come from the amount that Mr. Thang bought the shares at, which was 2 million pounds. The amount would be charged from the prevailing value of the shares in the stock market (Williams, 2006, 32). The annual returns for the company were estimated at 2,500,000 pounds every year. This meant that Mr. Thang had to pay income tax for the amount gained in profits during the period that he had shares in the company. Mr. Thang then sold these shares in February 2014 for 4 million pounds. Because Mr. Thang owned all the shares of the company, he would have to pay capital gains tax on the profit he made from the sale of his shares in Hong Pty Limited. He made a profit of 2 million pounds. In addition to that, Mr. Thang had benefited from the interest accrued by Hong Pty Limited. Therefore, he was liable to pay capital gains tax on this profit (Weisbach, 2008, 71). It is imperative to note that capital gains tax paid by an individual is calculated from the profits made, not the entire value of the property sold. Later in June 2014, Mr. Thang purchased another company, Julian Pty Limited, for 350,000 pounds. In this scenario, we can assume that Mr. Thang not only bought all the shares of Julian Pty Limited, but also the entire asset base owned by the company. This would give him the responsibility of paying capital gains tax on the property he purchased in the event that he sold the returns on the shares that he had he bought (Finney, 2008, 132). Further, in any event that Mr. Thang had sold his shares in Julian Pty Limited and made a profit, he would be liable to pay capital gains tax. Mr. Thang cannot claim exemption based on the smaller businesses that he partly owned. This is because these businesses are separate entities for which different taxes are paid separate from the tax paid for his other investments. Therefore, he has to pay taxes for every business unit that he owns separately (Williams, 2006, 41). The purchase of a company does not mean that the taxes paid on the property can be attached to the taxes payable on the other companies owned by an individual. In Mr. Thang’s case, his businesses are separate from him, such that the taxes payable by Mr. Thang in his individual capacity. On the same note, any other establishments owned by Mr. Thang is considered to be a different entity from the others with regard to taxes (Commonwealth Law Bulletin, 2010, 212). Question 3: Policy Paper i. In 2014, the government of Australia passed laws changing a few elements in the law on the system of Family Payments. Prior to this change, the law on the system of Family Payments as passed by the Parliament of Australia in 1999 posited that a person stood to benefit from Family Payments if he or she had at least an FTB child. A person also qualifies if he or she does not receive this relief as they reside abroad and still has one child who benefits from rent assistance. Further, this person has to be a resident of Australia or holds a visa classified in the special category and living in Australia. In addition to that, a person qualifies for such assistance if their family tax benefit rates, after being worked out as per Part 4 Division 1 and without regard to existing reductions as stipulated under Clause 25A or 5 of the First Schedule, is more than nil (Byrne, 2014, 1). The Social Security Act further provides ground for qualification for the family payment, positing that an individual has to hold a valid visa determined by the in-charge Minister to serve the purposes set out in subparagraph 729(2)(f)(v) of the same Act (Byrne, 2014, 1). Further, the person has to be in the country, or is temporarily out of Australia for less than 6 weeks (The Advertiser, 2014, n.p.). The Australian Senate referred to the law’s provisions on Family Assistance while proposing amendments to the Family Assistance Act of 1999. The aim of making this amendment was to implement measures that sought to increase savings in the budget. The Bill sought to bring changes to the Family Assistance Act to: a. Maintain the prevailing Child Care Rebate cap at $7500 for every child every year through an action of continued pausing of the CCR limit indexation for three years, stretching to June 2017 b. Maintain the income thresholds of the Child Care Benefit at the applicable amount for three years to June 2017. The changes have changed Social Security services in Australia. To begin with, the changes in the Family Benefits law tighten the criteria for eligibility. Further, the changes reduced the amount of money payable to Australian families with young children. The indexation was also to stop until three years had elapsed. The new law also put limits in place on the amount of income that individuals can earn before the withdrawal of their benefits (The Advertiser, 2014, n.p.). Further, the government announced the introduction of a scheme for parental leave. However, the government reduced the upper income from $150000 to $100000. The government reduced the supplement awarded to every child under the Family Benefits scheme at the end of every year from an indexed $726.35 to $600. Single parents whose children are between 6 and 12 years old will receive $750 for every child (Byrne, 2014, 2). The changes in the law on social security also brought about changes in Education Entry Payment. The announcement was that the changes would begin working on the first day of 2015. The law set limits on the period that a person can receive payment and continue to be eligible for DSP while they reside out of Australia. Most of the DSP recipients will from 1 January 2015 will have their payments restricted to 4 weeks for overseas residents every year (Byrne, 2014, 2). Further, the government will implement tighter conditions for payment through the Youth Allowance and the Newstart for youth below the age of 30 who can the ability to work full time. The reason for tightening these conditions was that the youth would be encouraged to choose between earning and learning. The eligible recipients of this aid through the Newstart program and the Youth Allowance will wait for 6 months before receiving payments, varying by the period that a period has worked (Byrne, 2014, 2). People who enjoy exemption from waiting for six months are people attending school on a full-time basis or those who work on a part-time basis but exceeding 30 hours every week. Others are single parents who receive Family Tax Benefits for their child, a parent who is a principle carer and a part-time apprentice (Grieve, 2014, 12). The government will also pay Youth Allowance to individuals from 22-24 years old who become unemployed. However, this payment will be receivable to eligible individuals until they turn 25 years old. The government pays out the Education Entry Payment once every year for a payment of $208, which is taxable. ii. The changes to the law on Social Security was encouraged by the need to save on budgetary spending by the Australian government. Largely, these changes are justifiable. This is because of the savings that the government hopes to make from the slashes in relief to the public are of a significant amount (Bulmer, 2014, 37). The projected amount of money to that the government will save from the reduction of relief payments. To begin with, the amendments to the law on family payments will save budgetary spending by an approximated $8.3 billion over a period of 5 years. This is a significant amount of money, considering the fact that there are many areas in the economy that this amount of money can be directed to serve and benefit the people of Australia. By putting tougher restrictions for eligibility for applicants for family tax benefits, the government will encourage families to engage themselves in economic activities that generate income (Grieve, 2014, 12). Increased reliance on the government by residents of Australia in the form of relief piles immense pressure on the government. This pressure is a derailing factor, considering the fact that the government is responsible for important functions that are of benefit to the public. Some of the important factors that the government undertakes are national security, defense, education, healthcare, pensions and infrastructural development (The Advertiser, 2014, n.p.). In order to perform all these tasks effectively, the government of Australia needs to have adequate financial reserves. An alternative would be to increase taxes on incomes and products, which would place a hefty burden on the public. Further, increasing taxes would be an unfair move, considering the differences in income. A section of the population would face increased hardship in purchasing basic commodities, leading to more poverty in the society (Bulmer, 2014, 76). The other option for financing these projects and more would be to increase borrowing by the government from international financial institutions such as the World Bank and the International Monetary Fund. The government would also have the option of asking for loans from other countries. However, this move would only serve to postpone the financial issues, since these loans would attract interest upon payment. This will increase the burden on the taxpayer, spreading the loan payment over a longer period (Grieve, 2014, 12). The option taken by the government to reduce amounts payable to the public in relief and stopping reviews on the limits set on relief is viable. First, it would increase efficiency in the dispersion of funds to important sectors of the economy. This efficiency would be supported by the availability of funds saved from the slashed relief. The government of Australia would be able to facilitate more programs and projects with reduced concerns of financial restrictions. Secondly, the reduction in relief for the youth would ensure that the youth are actively involved in employment. By funding the unemployed youth aged 22-24, the government of Australia gives ample time to this section of the population to acquire jobs. It is imperative to note that the government is actively involved in efforts to reduce the rates of unemployment in Australia. These efforts involve investment in projects that provide opportunities to the youth (Bulmer, 2014, 46). On the matter of government revenue protection, the changes in the law regarding tax benefits for families and payment on education entry ensure that the government protects its financial reserves. Protection of revenue becomes possible with a reduction of expenditure. With a reduction in expenditure, the government can involve itself in activities and projects that will benefit the public and ensure the implementation of various economic activities through which the government can gain additional income (Grieve, 2014, 12). However, some areas of the amendments go against the principles of equality. For instance, single parents work harder because they are sole parents. It is important that single parents receive adequate help from the government so that they are able to provide for their families in the same manner that families with both parents working provide for their families. In order to promote fairness, there is need for the government of Australia to consider the special sections of the public in their reviews of the laws on the family tax relief and the Education Entry Payment (Byrne, 2014, 2). Bibliography Commonwealth Law Bulletin (2010). United Kingdom: property law. Commonwealth Law Bulletin , 36(1), 197-212. Bulmer, J. (2014). Updated economics (2014 ed.). Macksville, N.S.W.: David Barlow Pub.. Byrne, J. (2014, May 15). Summary of the Australian 2014/2015 Federal Budget. Mondaq Business Briefing, pp. 1-2. Finney, M. (2008). Wealth management planning: the UK tax principles. West Sussex, England: John Wiley & Sons Ltd. Grieve, S. (2014, May 15). Federal Budget 2014-15: The Government Delivers on Austerity but Not Genuine Tax Reform. Mondaq Business Briefing, p. 12. How the 2014 Federal Budget will affect You and Your Family. (n.d.). The Advertiser. Retrieved September 12, 2014, from http://www.adelaidenow.com.au/news/south-australia/how-the-2014-federal-budget-will-affect-you-and-your-family/story-fni6uo1m-1226916700069?nk=15be8acf16315e30adac21e6b4ddccf9 Weisbach, D. A. (2008). Economics of tax law. Cheltenham, UK: Edward Elgar. Williams, D. E. (2006). Capital gains tax and the private residence (4th ed.). Kingston-upon-Thames: CCH : Wolters Kluwer (UK). Read More