Income Tax Law and Entities - Essay Example

Name: Instructor: Course: Date: Income Tax Law In the Australian context, every person and company should pay income tax as well as some other entities according to Income Tax Assessment Act (ITAA) 1997. The implications of income tax for both For Gals Ltd and Alice accepting the offer by Pinefolds Winery Ltd will be first determined by establishing whether each is a taxpayer entity. The implications will also be dependent on whether or not there is a jurisdiction to Australian income tax, and whether or not any items of the offer and other amounts are included in assessable income, either as statutory income or as ordinary income. Income Tax Entities Income tax is payable by entities, such as individuals, company (an unincorporated body or body corporate), a corporate limited joint venture, a trustee, a trustee of a company unit trust, and trustee of a public trading trust according to ITAA 1997. This implies that For Gals Ltd is an income tax entity. For Gals Ltd and Alice are residents in Australia. Section 6(1) defines a resident as a person who is domicile in Australia or a company, which is incorporated in Australia (Australian Income Tax Legislation 62). Alice lives in Australia and carries on her business in Australia. Alice was carrying on business with a profit making intention and she has to pay tax annually (Ferguson v Federal Commissioner of Taxation). The court would hold that Alice is carrying on business because of the volume of the operations as well as capital employed. She also invested heavily in the company. At the time For Gals Pty Ltd Started its business, Alice intention was for the company to profit from its operation and hopefully to grow it as a long-term investment, which it did. For Gals Pty Ltd would become a completely owned subsidiary of Pinefolds Winery Ltd. After buying For Gals Pty Ltd, Pinefolds Winery Ltd would be considered as a wholly owned subsidiary. Alice would hold her one share in the new company. Furthermore For Gals Pty Ltd, Alice, and Pinefolds Winery Ltd are running at arm’s length in trading with the “buy out”. Assessable Income Trading stock is not income according to ordinary concepts. It is statutory income. Statutory income refers to income, which is not ordinary income, however it is integrated in the assessable income by assessable income provisions. The Trading Stock on Hand has a current market value of $300,000 whereas the offer price to buy out the trading stock is at $250,000. It is income from business. Trading stock is an assessable item. Ordinary income refers to income from personal exertion, income from business, income from property, profits from isolated (singular) transactions and miscellaneous types of receipts. Alice has to pay income tax for trading stocks. According to Section 705-30, in case assets for the joining individuals are ‘trading stock’ the individuals terminating value for the assets is assessable on condition that the asset was handy at the beginning of the income year in which the joining takes place. The amount of the outgoing sustained by the joining individual (Alice) after the buy out will increase by the sum of every outgoing forming component of the assets, which joining individual suffers while she held the asset. In case assets of the joining individual is taken as a economic plan to, which the terminating charge for the assets amounts to the consideration amount which the new individual would require to obtain, if it was to get rid of the assets before joining (Mackenzie & Alfred 680) Plant Plant is income accruing from ordinary concepts: one arising from sale of property. It is not statutory income. Statutory income refers to totals, which are not ordinary income however; they are incorporated in the taxable income through assessable income provisions. The ordinary income from the sale of property-plant and it has a tax adjustable value at 30 June 2012 of $500,000. For an asset with a claim to obtain a total, which will be integrated in reckonable income, the assets market worth should take into consideration the tax payable on the amount (Tax Guide 57). The income assessable in a year of income of a resident taxpayer includes income or a profit or gain accrued. Payment for the plant is ordinary income. The payment for the plant was in no way a reward during the time Alice was the sole owner of For Gals Pty Ltd. There is a general principle of law that the amount paid for the plant is income according to ordinary concepts. The assessable income in this case includes the profit that will arise from undertaking the carrying out the profit-making plan-sale of a business. Goodwill Goodwill is not an assessable item. Assessable items include income according to ordinary concepts also known as ordinary income. Goodwill does not lie in any group of the defined groups of ordinary concepts: income from business, income from personal exertion, income from property, miscellaneous types of receipts and profits from singular or isolated transactions. In Australia, the quantifiable income consists of ordinary income resulting indirectly or directly from the all resources, which are in Australia or abroad in the income year. Amounts, which are not regular income except that they are contained in reckonable income under the provision of ITAA 1997 about assessable income, are referred to as statutory income. Though a sum is statutory income, as it had been integrated in reckonable revenue under the ITAA Act, it could be made non-exempt non-assessable revenue or exempt income. Goodwill is neither a regular income nor a statutory income; thus, not reckonable income so it is not necessary that Alice pays the income tax for it. In case a particular amount is exempt income, added costs other than its being exempted from income tax exist. For instance, Goodwill is an asset that is affected by Capital Gain Tax (CGT). There are various assets that are affected by CGT and people involved with them have a CGT liability. They include inheritance, leases, business goodwill, subdividing land options, contracts, a company liquidation, leaving Australia, relationship or marriage breakdown, shares, working from home, a civil lawsuit, trusts, bankruptcy and incorporating a company. Alice thus has a CGT liability because of the Good will. Alice interest in the goodwill is a post-19 September 1985 asset, as ITAA97 Div 109 provides that where an asset in acquired under a contract (the basis upon which she would have acquired his interest in the goodwill, the acquisition time shall be the time of the making of the contract. A possible difficulty arises for Alice in that the value of goodwill of the company may increase so that, upon subsequent disposal of his interest in goodwill, she will be required to determine the goodwill interest disposed and its CGT consequences. Business Premises and Land Business premises and land is income according to ordinary concepts. It is income from property. It is not statutory income. Statutory income refers to totals, which are not ordinary income however; they are incorporated in the taxable income through assessable income provisions. Restrictive Covenant Restrictive covenant is not an assessable item. Assessable items include income according to ordinary concepts also known as ordinary income. Restrictive covenant does not lie in any group of the defined groups of ordinary concepts: income from business, income from personal exertion, income from property, miscellaneous types of receipts and profits from singular or isolated transactions. In Australia, the assessable income incorporates ordinary income accruing indirectly or directly from the every source, in Australia or out during the entire year. Amounts that are not ordinary income save for their inclusion in assessable income under the provision of ITAA 1997 is referred to as statutory income. Even though a sum is statutory revenue, as it had been integrated in reckonable income under this Act’s stipulation, it can be made non-assessable non-exempt earnings or exempt revenue. Restrictive covenant is neither an ordinary income nor a statutory income; thus, not assessable income meaning Alice will not have to be taxed for it. In case an amount is exempt income, several costs other than its exemption from income tax exist. For instance, Restrictive covenant is an asset that is affected by Capital Gain Tax (CGT). Golden Handcuff Payment Golden Handcuff payment is assessable income. It is not statutory income however it is income from personal exertion. There are three categories of personal exertion; ones directly accruing from services and employment rendered, incidental to services or employment rendered as well as unrelated to services or employment rendered. The Golden Handcuff payment is also provided for as a special condition of the sale contract. This special condition states that the amount is to be paid to Alice and not to For Gals Pty Ltd her agreeing to work for Pinefolds Winery Ltd and no other similar business of the type in the next three years. It is thus assessable income. Trading stock on hand, plant, business premises and land, golden handcuff payment are all assessable income and thus Alice has to pay income tax for them however for the Goodwill and the restrictive covenant, she will not pay any tax however there will be CGT consequences. Works Cited Australian Income Tax Legislation. Taxation Administration Act. Australia: CCH Australia Limited, 2011. Print Australia, CCH Australia Limited. Australian GST Legislation with Overview. 2011, 14th ed. CCH Australia Limited, 2011. Print Ferguson v Federal Commissioner of Taxation (1979) 9ATR 873, 876-7. 85 Income Tax Assessment Act 1997. Act No. 38 of 1997 Mackenzie, Gordon, and Alfred, Tran. “Risk as a Measure in Taxing Financial Arrangements.” Australian Tax Forum 26.4 (2011): 665-691. Print “Tax Guide.” Charter 82.1(2011): 56-57 Read More