Taxation Law and Mr Mick - Case Study Example

Tax Law and Practice (BLO2206) Assignment STUDENT NAME: ID NUMBER: TEACHING PERIOD: Semester 3 YEAR: 2015 LOCATION (circle):C CQ F M S W B FACULTY/SCHOOL: DEPARTMENT: PLEASE LIST ALL CODES AND TITLES FOR WHICH THIS PAPER IS TO BE USED: UNIT OF STUDY CODES UNIT OF STUDY TITLES BLO2206 TAXATION LAW & PRACTICE Introduction Mr. Mick is a retired mechanic but has continued doing business as a form of hobby. He has created a system of fulfilling the requirements of the customers and participated in numerous factors to market his operations. Mr. Mick is a member of numerous car organisations and associations. In fulfilling the business activities, Mr. Mick receives support and assistance from some of the family members and should be taxed as indicated in Part 2-42 ITAA 1997 (Div 84-87). It raises concerns on ordinary income [s.6-5(1) ITAA 1997] and statutory income [s.6-10(1) & (2)]. However, the concerns of Mr. Mick are determining whether he is supposed to pay tax because he believes that the current tax structure allows him not to pay any tax. The paper discusses the tax obligations of Mr. Mick through incorporating numerous taxation techniques. The techniques include deduction and application of numerous legal requirements in determining the actual amounts to be paid. Moreover, the paper advises Mr. Mick to open an alternative business structure so that he can be shielded from numerous tax obligations. 1. Mick asks you to briefly provide him with some advice as to whether he may potentially have any tax issues. In understanding Mr. Mick approach to business, a hobby should be differentiated from a business. The indicia of business variables should be considered in differentiating or identifying a business. Some of the components identifying a business include profit motive, system and organisation, sustained activity, size and repetition of transactions. Mr. Mick has worked since 2013 and continued to generate profit yearly (see Div. 86 ITAA 1997). The business is a system and organised because there is appropriate documentation through the use of an accounting packaged called MYOB and also the presence of website called “American Hot Rod Parts.” Therefore, Mr. Mick is operating a business, and appropriate taxation structures should be employed in determining the amount of taxes (Barnett & Harder, 2014). The differentiation between a hobby and a business, and associated benefits are discussed in FCT v Myer Emporium Ltd. The costs associated with carrying out the business transactions are deductible, but the hobbies costs are not (Australian Taxation Office, 2016). Therefore, Mr. Mick will not deduct the costs associated with fulfilling his hobby as a car enthusiastic because of (s.8-1(2)(b) directive. However, if the participate results in a business transaction, Mr. Mick is allowed to deduct the costs incurred. Capital expenditure is not deductible based on s. 8-1 (2) (a). The ute bought on 1/7/2013 is a capital component because it is used to accomplish and improve the business operations. It is a capital because it brings an advantage to the taxpayer obligations (Barnett & Harder, 2014). It is also a ‘once only’ expenditure, but the costs for using the equipment including depreciation can be deducted as special deductions (check (s.8-1(2)(a)) and Div.40 of ITAA 1997) (Mangioni, 2015). Moreover, the ute enlarges the profit making capability of the business. Therefore, Mr. Mick will not deduct costs associated with acquiring the ute but can deduct costs associated with its usage including depreciation and maintenance (Australian Taxation Office, 2016). The cost of doing business or marketing the business is deductible; for example, the postage, advertising, and printing and stationery. These are activities that would result in additional income for the business. For example, without advertising, customers will not be engaged resulting in lower revenue generation. Mr. Mick also aims to expand the marketing capacities through the use of major media channels including the Age and Herald Sun for the year 2016. Investment in marketing increased from $3,000 to $10,000 and may be attributed to use of the additional media channels. In addition, the donation to Heart Foundation of $6,000 is deductible because it is a known institution and Mr. Mick’s business will not benefit directly from the donation (Australian Taxation Office, 2016). It is not a marketing campaign rather it is providing a social investment to the public. Interest payments are deducted based on the circumstances and nature of the borrowing. The interest paid relies on the use of the borrowed amount (Barnett & Harder, 2014). For example, if the interest is related to the purpose of gaining assessable income, the interest payments are deducted. The nature of the security and the amount of interest does not matter, but the important component is the significance of the borrowed funds towards accomplishing the business activities (Australian Taxation Office, 2016). Mr. Mick will deduct the different interests based on the periods because it is within the legislative position of acceptable deductibles. The following are some of the deductibles and identified periods: (2013) $9000, (2014) $6400 and (2015) $10,000 according to s 25-25 ITAA 1997. Understanding income is important to understand assessable income (Australian Taxation Office, 2016). The general attributes of ordinary income include must be “earned”, the income should be differentiated from the capital, the existence of ‘principle of mutuality’ and the income should be in the form of money, or the component can easily be convertible into money (Barnett & Harder, 2014). The aspects of income are further elaborated in Tennant v Smith and FCT v Cooke & Sherden. Furthermore, the aspect can be seen as an income if it is normally recurrent, regular and periodic. The aspect of earned is clarified in Arthur Murray (NSW) Pty Ltd v FCT. Four types of income exist, which are income from personal exertion/services, income from property, income from business and exempt income. Mr. Mick frequently travels to deliver the spare parts to his customers. The motor vehicle costs are deductible because it contributes to effectiveness at the workplace. The petrol cost of $2,600 for 30 June 2015 and $2,600 for 30 June 2016 are deductible (based on S.8-1). However, clarifications should be done to determine whether the petrol was also used for personal obligations. In addition, since the travel distance for the period 30 June 2015 is 4622 km and for the financial year ended 30, June 2016 is 4122 km, the cents per kilometre strategy is used to determine the deductions based on Div.28 ITAA 1997. The amount is less than 5000 km, which Div.900 ITAA 1997 states that alternative methods can be used to calculate the motor vehicle expenses. Tax free threshold The tax free threshold is defined as the amount of money that an Australia resident to earn before paying income tax (Australian Taxation Office, 2016). When the income is less than $18,200, tax on this income is not applicable. The following table summarises the income tax rates for the period 2014-2015: Taxable income Tax on this income 0 to $18,200 Nil $18,201 to $37,000 19c for each $1 over $18,200 $37,001 to $80,000 $3,572 plus 32.5c for each $1 over $37,000 $80,001 to $180,000 $17,547 plus 37c for each $1 over $80,000 $180,001 and over $54,547 plus 45c for each $1 over $180,000 Source (Australian Taxation Office, 2016) Mr. Mick argues that he is within the tax free threshold area meaning he is not required to pay any tax on the income. The solution to determine whether his assertion is correct, the strategy is calculating the amount of income after every financial period: In 2013, Mr. Mick made a profit of $4,000 meaning it is within the free threshold limits Profit calculation for the financial year ended 30 June 2015 Description $ $ Sales 55,000 Less purchases 23,000 Profit before expenses 32,000 Expenses: Petrol 2,600 Advertising 3,000 Printing and stationary 300 Estimated travel deductions at 10 cents per kilometre 462.2 Total expenses 6362.2 Total taxable income 25,637.8 The $25,637.8 is above the $18,200, which is above the allowable free threshold amount. The difference is ($25,637.8 - $18,200) $7,437.8. Therefore, for the financial period 30 June 2015, Mr. Mick is required to pay tax on $7,437.8 Profit calculation for the financial year ended 30 June 2016 Description $ $ Sales 355,000 Less purchases 83,000 Profit before expenses 272,000 Expenses: Petrol 2,600 Advertising 10,000 Printing and stationary 3,000 Estimated travel deductions at 10 cents per kilometre 412.2 Donations to Heart Foundation 6,000 Total expenses 22012.2 Total taxable income 249,987.8 The $249,987.8 is above the $18,200, which is above the allowable free threshold amount. The difference is ($249,987.8 - $18,200) $231,787.8. Therefore, for the financial period 30 June 2015, Mr. Mick is required to pay tax on $231,787.8. 2. Mick also requeststhat you discuss potential tax structures to overcome and reduce any future tax liability. Mick should change the business structure to a private company (Australian Taxation Office, 2016). The significance of the change is to address taxation complications and continuity of the business whatever happens in the future (s.103A ITAA 1936). A private company is a separate legal entity and the enable income and general taxation principles similar to individual taxation are applied (Barnett & Harder, 2014). However, companies are treated in a different way compared with individual taxation (s 109). The uniqueness of company taxation includes no Medicare levy, no tax free threshold, flat rate of tax, and special conditions when claiming tax loss deductions and bad debt. The transfer of the business structure provides the owners to employ different systems in the calculation of tax (Hogan & Young, 2014). For example, imputation system can be used to determine the amount of taxation and prevent issues with double taxation (Barnett & Harder, 2014). Moreover, it enables the individuals for a credit depending on individual taxation requirements (Australian Taxation Office, 2016). Through the use of imputation system, the franked distribution of dividends is possible, which also decreases the overall tax amounts. Through the use of a private company entity, Mick can benefit through tax avoidance (Australian Taxation Office, 2016). According to IRC v Duke of Westminster [1936], the arrangement of business to avoid tax is legal, but tax evasion is illegal. Furthermore, numerous legislative provisions exist for special conditions for companies to claim deductions for tax losses and bad debts. Moreover, Division 6AA applies to some extent in calculating the tax obligations (Barnett & Harder, 2014). S. 177C also discusses when a tax benefit is obtained. Some of the opportunities enabling tax benefit based on S. 177C include deduction is allowable under certain conditions; capital loss has been incurred, not included as assessable income (based on (s.4-15(1) ITAA 1997)) and foreign tax credit has been obtained. Mike operates with international companies, and the important of the spares part may require specific tax benefits and these benefits can be obtained through changing the business into a company. Conclusion In conclusion, Mr. Mick should back dated payments for his business obligations. The argument of free tax threshold is applicable to some extent. However, the changing requirements of the business affect the amount of tax to be paid. Moreover, Mr. Mick should also change the business structure to a private company because of the numerous benefits obtained from the change of the business. The recommended advice is to pay the taxes and also to change the business structure. In the calculations, Medicare levy is not integrated and integrating the Medicare levy will have a minor influence on the tax amount. References Australian Taxation Office. (2016). Tax free threshold – for individuals. Australian Government. Retrieved from https://www.ato.gov.au/Rates/Tax-free-threshold-for-individuals/ Barnett, K., & Harder, S. (2014). Remedies in Australian Private Law. Sydney: Cambridge University Press. Hogan, A., & Young, M. (2014). Rural and Regional Futures. Sydney: Routledge Publishes. Mangioni, V. (2015). Land Tax in Australia: Fiscal Reform of Sub-national Government. Sydney: Routledge Publishers. Read More