Australian Tax Law - Assignment Example

Name) (Instructors’ name) (Course) (Date) Australian Tax Law 1a. There are different car valuation options available for Fast Ed. He may apply the cost at which he purchased the goods in stock at year end or he may value them at the existing market rate. The latter option is the best because it gives the net realizable value. Inventory at stock during the end of the financial period may be valued through the net realizable value option, which looks at the current market value of the stock in terms of the price that they would fetch if they were to be sold in the current market. On the other hand, the inventory at year end may be valued using the cost or purchase price that was used to acquire the stock. His option is not preferred because it ignores the price fluctuations in the market and assumes that the stock would be sold at a margin of the price it was acquired.This taxation ruling is found in the Income Tax Assessment Act of 1936. b. The tax effect of swapping a car that cost $17,000 for a debt of $18,000 is that the difference of $1,000 will be liable to taxation. The selling price of $19,000 will be disregarded as the $18,000 will be taken to be the new selling price. The debt will be taken as the new selling price of the vehicle. Therefore, for taxation purposes, the gain on sale of the car will be liable to tax. However, in this case, the gain on sale of the car is not $2,000 but $1,000, which will be liable to tax, because the new selling price has changed from $19,000 to $18,000. Exchanging the car for the debt makes the new selling price of the car to be taken as the value of the debt. c. Fast Ed is inseparable from the car business as the owner is a sole proprietor. Drawings, therefore, are not exempted from taxation and any car that he has taken for personal use from the business will be deemed to be a sale. However, the amount liable to tax is the realized figure of $19,000. The income and expenses generated or incurred by the business are tied to the individual owner, meaning that other personal withdrawals are seen as cash from the business. The tax authorities insist on a limited amount that a sole proprietor can draw from their business, although the general practice is that drawings are not allowed as a tax deductible expense. Thus, any amount realized from the vehicle’s value will be subjected to taxation. This is because the drawings from a sole proprietorship will be deducted from the net profit in the business financial statements before this profit can be subjected to taxation. d. The tax effect of lowering the selling price of the older models of Ford hatchbacks from $28,000 to $18,000 is that they will be valued at the new price for tax purposes. Although the older model was acquired at a higher cost, the tax liability will be based on the new selling price. What this means is that the owner of the business will just have to bear loss for the price difference, although the tax authorities will have to tax the amount he has realized as this will be liable to tax. The selling price may change, but the tax rate for the vehicles remains the same, as long as a certain amount was realized from the sale of the hatchbacks. 2a. Salary income is liable to tax. The same goes for any bonus that is earned in the line of work that one specializes in. Income earned from salaried employment is taxable under Australian law. Bonuses are considered as part of employment income and they are also taxable. It therefore means that both the salary and the bonuses should be taxed. This is according to the Tax Bonus for Working Australians Bill No. 2 of 2009. b. Prizes are considered to be windfall income and they are therefore not liable to any tax. They are treated like lottery winnings. Windfall income is money that one does not expect to get, and it follows that the tax man also should not expect to tax it. Lottery winnings in charity sweepstakes and lotteries are clustered under windfall income and the individual should enjoy the winnings with a relaxed mind. c. Travel expenses are allowable for tax purposes. It therefore means that any gain on travel expenses refunded is taxable on the employee who receives it. Ideally, the tax man qualifies travel expenses as expenses that have been incurred by the business to generate revenues. It is only prudent that they are deducted from earnings before they are taxed. However, where the interest has been refunded to the employee, it becomes a form of income earned in their line of duty, thus making it liable to tax. d. Tips and gifts like iphones received in the line of duty by an employee are subjected to tax. They are considered to be part of the employee’s earnings. This argument is presented due to the fact that the employee earned the tip or gift because they are expected to be tipped in their line of duty. These tips for part of their earnings and that is why they are taxed. e. Monetary compensation awarded to an employee as damages for personal injuries incurred in a car accident should be exempted from taxation as it is not part of an employee’s main income. Such compensation is deemed to be tax free as long as certain conditions relating to them are fulfilled. However, the underlying fact is that monetary insurance compensation, whether periodic or in lump sum, should not be taxed. f. A share that appreciates from $5 to $7.50 makes the shareholding taxpayer to be liable to capital gains tax. This is subject to the disposal of the shares and not based on their value appreciation only. When the share price changed from$5 to $7.50, it means that it appreciated in value, making the shareholder wealthier than before. It is this increase in wealth by $2.50 for every share that the tax man wants to tax. g. Selling the televisions means profit is made and this profit ought to be taxed. This would be the normal case if the transaction was legal in nature. However, these televisions were stolen and the law does not encourage taxing illegitimate ventures. Other illegalities like hoarding, money laundering, drug dealing, or racketeering are also not taxed as they are illicit. 3. A progressive tax rate structure is a tax set up that acknowledges that various people within an economy earn different amounts as salaries (Australia Income Tax Legislation). Given this fact, the progressive tax rate seeks to be equitable to the different levels of income earners by taxing them according to the amounts they earn. That is why the progressive tax rate devises tax brackets for different individuals. People earning, say up to $10,000 are taxed at 10%; the next batch above $10,000 but below $20,000 is taxed at 15% and so on. It is the preferred system under the Income Tax Act and its aimed at ensuring that low income earners are taxed a lesser amount than high income earners who will pay a higher tax amount according to their incomes and the tax brackets within which they fall. The progressive tax rate aims at ensuring that a fair and equitable tax system is in place where every individual is catered for without the feeling of oppression. The higher the income, the higher the tax percentage it will be subjected to. The progressive tax rate aims to use the funds of the high income earners to finance essential services for the low income earners. Most countries, including Australia, have adopted the progressive tax rate because it is reasonable in the sense that those who have more are taxed more and the ones with less are subjected to lesser taxes. The progressive tax rate has also proven to be productive. This is because this form of taxation yield more internal revenue for the government than any other kind of tax rate. Still on the same, the progressive approach to taxation is also known to be effective because the cost of mobilizing and collecting the taxes are far much fewer than the total amount collected. The progressive tax rate can also be lauded for ironing out income inequalities within the society in terms of equitable distribution of financial resources. The equal circulation of taxable income in the country results in an equitable society as the poor get to satisfy their needs better while the wealthy only forfeit part of their luxuries. In the end, there is an overall progress in the growth and development of a nation, albeit at a gradual rate. The progressive tax rate has its limitations as well. The tax rate discourages savings within an economy when the rich fear of being subjected to high tax rates. The lack of savings creates a crunch in the provision of credit capital, meaning manufacturers and producers will find it hard to finance their operations. There are other people who see the progressive tax as being discriminative against the rich because they are always taxed more to benefit the poor. This is always seen as taking from the hard working guy to enable the lazy one to keep getting lazier. The other disadvantage of a progressive tax is the fact that rich people tend to hide their assets and financial wealth overseas, thus depriving the domestic economy the much needed liquidity and stability of prices. 4. There are various factors that qualify one as a resident citizen when it comes to taxation matters. In this case, Charles will qualify for taxation in Australia for the financial year 2014/15 up to the month of August before he relocated and sought employment in the United States. This is because he will be considered a resident of Australia by birth and who has spent at least a day in the country during the said period of 2014/15. His income will be subjected to tax in Astralia because for the whole year up to August he will have been in the country for more than six months, meaning any income that he had generated while in Australia will be taxable. However, Charles’ domicile status changes once he moves to the US. This is because he will be generating income outside Australia, thus his income will be liable to tax in the US. In addition, this is dependent on whether Charles will visit Australia again in the course of the year. If he does not spend even a single day in Australia within the given financial year, then his income will not be liable to Australian tax laws (Nethercottt. al.). However, if he spends even a single day in Australian soil, then his domicile status will change to that of a resident and this will make him liable to Australian taxation. There is also the 183 day rule under the Australian tax law. Under this law, if Charles goes back to Australia and stays put in the country for more than 183 days, then his foreign status will change and any income he would have generated would be liable to Australian taxation. On the other hand, if he visits his country of birth and does not stay for more than 183 days in any given year, then it follows that the income he has made while in America will be taxed in the United States and not under Australian tax laws. His new domicile would change completely because he has made the United States of America his new found home, and not Australia. In retrospect, it means that he is Australian by nationality, but his domicile, the place of permanent residence, will be in America. The legislation governing his residency status is found in subsection 6(1) of the Income Tax Assessment Act of 1936. 5a. As per the earlier contractual agreement, if Ben was to buy the boat within the three years of hiring, which he did, then the applicable amount would be the hire fees as opposed to the purchase price. The capital gain here is the hired amount plus the purchase price quoted earlier. Ben exercised his contract option of buying the boat within three years, even after commencing with hiring it out initially. At the time of his purchase, Ben had spent a substantial amount on the boat as hiring charges. Upon acquisition of the boat, these hiring fees are automatically converted into the cost price when they are factored cumulatively. The seller stands to benefit from the capital gain which will consist of the cumulative hiring fees and the purchase price from Ben.All the tax related issues touching on chargeable capitaol gains can be found in the Capital Gains Tax Act of 2012. b. There will be no capital gains on the asset that got burned in the fire because compensation will not be forthcoming since the asset had not been insured. Had the asset that got razed down been insured, then there could have been a good chance of receiving a fair compensation from the insurance as part of the fire insurance policy cover. This compensation could have amounted to capital gains because the asset owner would be receiving income for a loss that they have not suffered. This being the case, the capital gain in form of insurance compensation could have been liable to taxation. c. The option to buy the beach house qualifies as a transaction cost which is liable to capital gains tax. Over and above the amount that Joe would make from selling the house, the $2,000 option will also be subjected to taxation. Under the Australian tax law, the transaction costs of capital assets are liable to taxation because they involve the transfer of immovable property, where capital gains or losses are expected. This makes the capital gain in which Joe will obtain from selling the beach house liable to taxation, together with the option of the transaction cost of $2,000 that will also be chargeable for tax liability. d. The disposal of this property for $400,000 means that there has been a profit of $150,000 because it was purchased at $250,000. This capital gain on the household property will qualify for a capital gains tax under Australian tax law. The transfer of fixed assets like immovable properties will attract either a capital gain or a capital loss. The Australian tax man is only too happy to subject this gain from the transfer of property to taxation. e. The home that Steve acquired has appreciated in value from 2005 throughout to 2014. Although the home was valued at $500,000 in 2008, the tax liability for capital gains tax purposes will be based on the initial cost value of $375,000 back in 2005. Steve’s home will be treated like any other immovable property or fixed asset. It must be noted, however, that the capital gain from the appreciation in value of Steve’s home will only be taxable if he decides to sell the home and makes the quoted financial gains. However, if the value of his home appreciates yet he does not sell it, then there will be no value to tax because there has not been and monetary gain from the appreciated value of the home. Works Cited Nethercott, Les, Grant A. Richardson, and Ken Devos. Australian Taxation Study Manual: Questions and Suggested Solutions. North Ryde, N.S.W: CCH Australia, 2010. Print. Australian Income Tax Legislation 2011. North Ryde, N.S.W: CCH Australia, 2011. Print. Australia Tax Guide: Volume 1. Washington: International Business Publications, USA, 2010. Print. Barkoczy, Stephen, Cameron Rider, John Baring, and Neil Bellamy. Australian Tax Casebook. North Ryde, N.S.W: CCH Australia, 2010. Print. Read More