Australian Tax Law - Case Study Example

Australian tax law 1.1 The assessable income of a resident of Australia is inclusive of ordinary income derived directly or indirectly from all sources in or out of Australia. Tax is levied on the taxable income of the taxpayer derived during the income year calculated by a process of deducting from the tax payer’s assessable income all allowable deductions (CCH Guide, 2009). Earnings for personal services are assessable in the year of receipt (or constructive receipt) and nit in year in which the income have been earned, except where the services are rendered in the course of a business or professional practice which is subject to an accruals basis of accounting. Added to this fringe benefit income is not taxable. Therefore one would have to safely assume that the three basic incomes to be added within the scope of Nicholas’s assessable income would be $5000 paid by Utopia, $50, 000 by Equip and the $6, 000 advance paid by United given the fact that all of these amounts cam within the financial year ended June 30th and are thus taxable within this year. 1.2. Capital gains tax is applicable in cases where the assets acquired deemed acquired under anti-avoidance rules. Liability on Australian CGT arises only where a CGT event occurs. Australian tax law provides an exclusive list of CGT events that potentially given rise to CGT. The most common event covers disposals or the change in ownership of the CGT asset. In this case therefore there would be a liability to CGT. In this case Daniel has received $5 million as payment for his share of the rent from his tenants in favor of a one-off receipt. On a yearly basis this would turn out to be $1 million, which is to be included in his assessable income for this year. 1.3. A class of temporary residents was announced into Australia tax law in 2005 Federal Budget. A temporary resident is a person who holds a temporary visa. A temporary visa is one that enables a person to remain in Australia during a specified period, or until a specified event occurs, or whiles the holder has a special status. Specified by the rules, effective July 1, 2006 if a person qualifies as a temporary resident then tax exemption for the following is applicable: All ordinary and statutory income derived from a foreign source, net capital gains made on assets other than those which represent taxable Australian property. The idea in the context of this case therefore would be that the income that Elizabeth derives from an Australian source is taxable while those derived from her French sources of income are not taxable in Australia. Thus for the year ended June, 30, 2010 her assessable income in Australia would be $20, 000 from her salary and $500 she receives as dividend totaling $20, 500. 1. 4. Generally income derived by way of a scholarship, bursary or other educational allowance or assistance by a student receiving full time education at a school, college or university is exempt from tax s51-10 in 2.1A ITAA 97). However income that is derived by student as a payment by a person or authority on the condition that the student would be (or will if required) enter into or continue to be a party to, a contract with the person or authority that is wholly or principally for the labor of the student (s51-35(d)) or the scholarship is a payment where it is not provided principally for educational purposes. In this case, the amounts given by way of books and residence are primarily to do with the education are hence are not taxable incomes. The job as a waitress that Kate does on the other hand, is primarily her private contract with another private party, not directly funding her education hence is taxable. Tips as well which are given out of tips which arise out of a person's employment and are given as a regard for services are assessable to tax. Her total assessable income would therefore be $4500. 1.5: With respect to income that is generated through the compensation from insurance with respect to the damage or destruction of capital, asset or trading stock is not assessable in the yearly taxation income context. This would essentially then mean that this would not have to be included as income in yearly tax return statements. The pay-out needs to be taken into account for capital gains tax purposes. Compensation for loss of capital asset is not assessable under ITAA97 s5-6. nevertheless the loss of the asset due to the fire may have long terms CGT implications in case the warehouse was acquired after September 20, 1985 (s104-20(1)), although a taxpayer could elect the usage of the CGT roll-over provisions (s124-70) if the requirements of s124-75 are met. 1.6. The distinction between gains which are capital in nature and profits which are revenue in nature is of critical importance to both resident and non-resident investors. In summary, this is because capital gains are generally eligible for concessional tax treatment. Briefly, these cases are authority for the following propositions: where the owner of an investment chooses to realise it, and obtains a greater price than what it was acquired for, the enhanced price is not profit; where enhanced values are obtained from realisation or conversion of an asset, the gains may be revenue gains where what is done is not merely a realisation or change in investment, but an act done in what is truly the carrying on, or carrying out of a business; the fact that a profit or gain made on the realisation of enhanced value is the result of an "isolated transaction" or "one off" commercial venture does not preclude it from being characterised as income, where a taxpayer has entered into the isolated transaction or commercial venture with a profit making intention or purpose. In the context of this case therefore Mariner Ltd is a company operating in the construction industry supplying skilled workers to employers in that industry. Its principal customer is Construct Ltd and generally it received $15 million of income from Construct annually. Given the fact that the amount that has been paid by Construct to Mariners’s Ltd is a lump sum one off payment for the compensation of losses incurred it would not be a part of the ordinary income but a special income or even a capital gain event. This would therefore not fall in the ordinary income category. 2.1. The policy statements with respect to taxation in Australia in general and tax relief in particular are based on the application of the principle of outlining tax relief in cases characterized by non-private expenditure. The idea here is that these should be afforded tax relief in cases when the economic benefits through the expenditure are to be received or consumed by the taxpayer. The benefits we are talking about here are not necessarily income generated by the expenditure, although sometimes that is the case, but rather the direct benefits the taxpayer acquires from the expenditure. There are three essential elements that are under consideration here. Given the fact that the businessman in question does not follow the STB rules of accounting, the financial year would not be applicable and he would run his business by the calendar year on year closing. Under Australia tax law, trading stocks are not considered assets, but would fall under the purview of the capital gains tax. The idea here is that the trading stocks would not fall in the income bracket of a personal income tax thereby meaning that the deductions on would not be allowed within this year, especially in the light of the fact that the trading and sale of the stocks would happen in the next fiscal year. Short selling is not part of exemptions. On the other hand, future benefits from expenditure on plant are consumed as the plant is used in the manufacturing process, even though income from the goods produced may not be seen for some time. In case pf the lease of the property he owns, the tax law in Australia is clear on the fact that the lessee of the property is treated as the owner until the lease term ends and is entitled to an annual deduction equal to the finance charge component worked out each year. In this case therefore the deductions applicable would be $5, 400 for the chemical and the lease rent paid. 2.2 A loss of money caused by theft, stealing, embezzlement, larceny etc by an employee or agent of tax payer is deductible in the year in which it is discovered if the money was included in the tax payer’s assessable income of that or an earlier year (ITAA97 s25-45). Deduction is not available when the loss was caused by the actions persons acting in a private capacity (like a non-employee) (CCH Australia, 2009). The idea with respect to the stolen $12, 000 would be a relative issue given the fact that in there would have to first be a determination of whether or not the money stolen was stolen by someone from outside the company. The law also states that some workers compensation payments are tax deductible. It has to be understood that while daily wages etc would not be exempted from taxation, payments that are not recurring are excluded. These would include lump sum payments such as termination or severance pays (OECD Report, 2002). The third aspect is that of the compensation paid for the defamation suit. Some types of damages are excludable from gross income whereas others are treated as ordinary income. The treatment of damages depends on the origin of claim. Damages for non-physical injury such as defamation are not excludable (Kess and Weltmen, 2008). $50,000 that was paid to the movie star therefore was no tax deductible. 2.3. Capital gains tax is payable in Australia only for capitol gains realized except for certain provisions relating to deferred-interest debt such as zero-coupon bonds. The tax is not separate in its own right, but forms part of the income tax system. Land tax is a deductible expense. The amount varies according to the tax in each state. a highly geared business with a lower hearing has a greater chance of falling under the exemption threshold. S 160ZZR squarely raises the issue of what is regarded as good will. In general terms goodwill is a type of personal property. In the context of this scenario therefore there are two essential implications that have to be considered. First is that actual market value of the business that Karen bought from Joe and the goodwill value of the business. The second part of the amount that she has paid Joe is a manifestation of the requirement for him not to set up business in the same town all over again which cannot be stated as capital gain expense. Hence only the amount that has been paid as the actual market value of the business would be tax deductible in the present financial year. 2.4. Each partner pays tax on their share of the partnership's net income. Each partner must include the whole of their individual share of the net profit or loss in their individual tax return, whether the income has been distributed to them or not. A partner who is a non-resident of Australia for tax purposes for the whole of the income year is assessable on only that part of their share of the partnership net income that is attributable to sources in Australia. A partner who is a non-resident of Australia for tax purposes for only part of the income year is assessable on the aggregate of: 1. their share of all the partnership net income that is attributable to the period they were a resident, and 2. their share of all the Australian sourced partnership net income that is attributable to the period they were a non-resident. The individual partners, not the partnership, make a capital gain or capital loss from a capital gains tax (CGT) event (read Introduction to capital gains tax). For CGT purposes, each partner owns a proportionate share of each asset. If any details on the statement or advice you received are missing or wrong, contact the managing partner. In the context o this partnership therefore the amounts that have been appropriated by the partners would be payable by them. Capital expenditures are deductible over a period of five years. Also the assessable income of the partener is based on the individual interest in the net partnership income. A aresident partnetr can claim a deduction for their individual interest in the partnership loss as is attributable to the period where the loss is attributable to the period when the partner is resident. 3.1 Non-residents are taxed on income "sourced" in Australia, including situations wherein Rental income from Australian real estate owned by a non-resident individual is deemed to have an Australian source and is therefore taxable in Australia. non –residents are only subject to Australian capital gains tax (CGT) in respect of taxable Australian property (i.e. real property held directly by a foreign resident and any capital asset other than Australian real property used by the foreign resident at any time in carrying on a business through an Australian branch (CCH Editors, 2010). With respect to the property that is owned in Australia therefore there would automatically be capital tax gain implications. Australia's treaties generally reserve taxing rights to Australia where a non resident carries on business in Australia through a permanent establishment or where the gain relates to real property located in Australia.  This can include a direct interest in real property or an interest held indirectly through a company, partnership, trust or deceased estate where the assets consist wholly or principally. Where the property in France is concerned, the primary concerning factor would be defined in terms of whether or not this property has in fact any tangible contact with the capital gains made on property or business in Australia through a permanent residence quotient or otherwise. If this is not the case and the property in France is in fact detached of Australia income connections than the value of this property then there would be no implications for the capital gain taxation in Australia. 3.3. In case of a partnership, taxation on capital gains are made individually and not in the holistic sense of the partnership per se. those would mean in the context of this case that assuming that the partnership that Des and Alice entered into the capital expenditure incurred $2, 00, 000 plus $ 3, 500 on building and $ 5, 000 on sale of property charges. The property overall was old off for a combined sum of $ 5, 60, 000. The CGT claim in this context would be the market value of the property in 2010, plus $5, 000 incurred for sale costs subtracted from the sale v value of $ 5, 60, 000, divided by two. Added to this in Alice’s case would be the $ 20, 000 which is a capital gain from the sale of the shares in 2010. 3.3. Capital tax gain provisions are enlisted in the Income Tax Assessment Act (ITAA) as income. An individual or a trustee is entitled to elect to include 50% of a realized capital gain in assessable income (Atherton, 2003). Under the aegis of the Australian law, there is no deemed realization on death. Any capital gain or loss is disregarded; similarly, any capital gain of loss on the transfer of an asset from personal representative to gain or loss on the transfer of an asset from personal representative to beneficiary is disregarded. An asset passing to the legal personal representative or directly to a beneficiary is deemed to be acquired at market value if it was acquired by the deceased before payment of capital gains tax. All other assets are deemed to be acquired at the deceased cost base. Thus subsequent disposals by personal representatives or beneficiaries would be subject to capital gain or capital loss. The sale of the property by the taxpayer would give rise to a CGT event which would arise where the capital proceeds from the sale exceed the cost base. In this context therefore, William acquired property worth $5, 50, 000 and had to pay loan settlement worth $50, 000 which are tax deductible. The ultimate sale fetched him $ 6, 50, 000. The total capital gain would therefore be $ 50, 000. One arrives at the amount given the fact that the total gain on property sale amounts to $ 1, 00, 000 but $50, 000 that William has paid as loan reimbursement would be deductible, making the capital gain amount to $2, 50, 000. 3.4. The commonwealth imposes a capital gains tax (CGT) by deeming certain gains and receipts (after allowance of any capital losses available) to be assessable income. The tax, when announced was to be upon realized real gains on disposals of assets which were acquired before September 20, 1985. Assuming that some of the assets of the business retain pre-CGT status, a vendor would ensure that a proper and full apportionment of consideration is made towards those assets. Some assets are grandfathered particularly effectively by rulings. Non-binding Ruling IT2328 states that commissioner accepts goodwill of a business as being as pre-CGT asset of the business was founded or (presumably purchased) by the vendor before September 20, 1985. This is applicable not just in the context of gains on disposal of assets but also in the case of capital receipts. In the context of this case therefore a CGT event has happened by the sale of the business estimated at 3, 50, 000 which was ultimately sold for 4, 20, 000 accruing a capital gain in favor of Bernie worth $ 70, 000. given the fact that the agreement to not trade was a matter of a separate contract and was mostly unrelated with the gains made on the sale of the business, the profit she brought in would not be considered a part of the capital gain event but a totally different accountancy/taxation variable in the context of a personal income tax. The ultimate capital gains accrual that fall within the purview of her consideration would come up to be to the tune of $ 70, 000 that is the profit she has made from selling her business. References: OECD Report, (2002). Main economic indicators: comparative methodological analysis: 3rd Edition. OECD Publishing.p85 Kess, S., and Weltmen, B., (2008). 1040 Preparation and Planning Guide (2009). Cch publishers. p65 CCH Editors, (2010). International Master Tax Guide 2009/10 6e. CCH Australia Ltd. p183 Taxing non residents on Australian capital gains and profits. Retrieved April 26, 2010, Atherton, R., (2003). Estates, taxes, and professional ethics: papers of the International Academy. Kluwer Law International. pp35-36 Woellner R, Vella, Burns L, Barkoczy S and Krever R, 1999 Australian Taxation Law (CCH 9th ed, 1999) 922-923.  Temporary Resident Tax Measures. Retrieved April 25, 2010, http://www.uhyperth.com.au/UKAustralianTax/ArrivinginAustralia/TemporaryResidentTaxMeasures/tabid/160/Default.aspx Chrsitenson, S. A, and Duncan, W. D., (1997). Sale of businesses in Australia. The Federation press. p183 CCH Editors. (2009). Australian master tax guide: tax year end edition 30 June 2009. CCH Australia Ltd. pp214-216  Woellner, R., Barkoczy, S, Murphy, S., Evans, M., (2009). Australian taxation law 2009. CCH Australia Ltd. p932   Read More