Advance Revenue Law in Australia - Case Study Example

Running Head: ADVANCE REVENUE LAW Advance Revenue Law [Writer’s Name] [Institution’s Name] Advance Revenue Law Answer1 As mentioned in the question 1 On 16 November 2012, Garry Wong received an amended income tax assessment notice dated 10 November 2012 for the 2011-2012 financial year disallowing a claim for overseas travel expenses of $16,000, he should file for a dispute., as a valid claim and within what time must he lodge his intention to dispute the amended assessment. Inorder to file fro the dispute of the income tax assessment Gerry will have to write to the income tax department requesting an amendment to his assessment, Gerry may even ask registered tax agent to write the request. Face value , in nearly all cases is considered. This means that the authority even accepts the information contained in the filed request for the amendment in question (Deutsch ,2012). After Gerry’s request will be processed they will issue him a new notice of assessment, i.e. the notice of amended assessment. The amended assessment will show the new amount payable or refundable amount. If Gerry submits a request for an amendment before they process his tax return, they will be processed at the same time and thus Gerry may receive just a notice of assessment. As they do not owe Gerry any money, no payment will be made on their behalf , in the same manner Gerry does not owe them any money, thus the notice of amended assessment will not mention any payable amount (as well as any interest and fine) . Gerry must keep in mind that time it will take to process his amendment entirely depends on how he files for it and if it was due to an accounting or administrative error on the behalf of the income tax authorities . For the standard processing times Gerry must follow the table below , it is measured from the time they receive the entire information which is required to process the amendment in question . Lodgment method Time to process Our mistake Your mistake Mail or fax 14 days 56 days Online (tax agents) 14 days (Australian government , 2012) 28 days Gerry should also keep additional information available as • If they require more information, they may ask him for it within 14 days of receiving his request in this case normal processing time (for instance, due to the intricacy of the issue). If so they will contact Gerry or his private agent within 14 days of receipt of the new required information and issue a new completion date. If they refuse to process Gerry’s amendment and he still requires the changes in his tax return, he may life an objection to the appropriate assessment (Coleman & Hart 2012). Gerry will receive Information explaining the entire process in a letter informing Gerry is his objection has been accepted or not. . Gerry must be made aware of the fact that if the commissioner has issued assessments according to section 106(1) (usually known as default assessments) and if Gerry afterward file tax returns regarding those default assessments after the appropriate response periods, the Commissioner can consider the tax returns as amendment requests (Coleman,2011). The Commissioner may normally amend the assessments according to section 113 after making sure that request for a assessment is applicable or not . on the other hand, if Gerry is within the applicable response periods he may consider issuing NOPAs with his tax returns pursuant to section 89D(1) so that he can support his request of disputes rights against the likelihood that the Commissioner does not use the section 113 discretion (Deutsch , 2012). Section 113 consists of an extensive discretion assisting the Commissioner to amend assessments to make sure their correctness, however it gives less guidance regarding the process which the Commissioner should follow inorder to exercise this discretion in practice (Coleman,2011). therefore, it is essential to look at the legislative system, background and the applicable case law .in Gerry’s case where the intention of the amendment is to provide effect to the prescribed provision regarding the supply or acquisition of property--the arranged provision has been beforehand applied, however Gerry’s case does not include supply or acquisition, in making or amending an assessment in relation to the taxpayer in relation to the year of income; or in any other case--the prescribed provision, the relevant provision, or Subdivision 815-A of the Income Tax Assessment Act 1997 , as the case may be, has been previously applied, in relation to the same subject matter, in making or amending an assessment in relation to the taxpayer in relation to the year of income (Cooper 2010). This section does not prevent the amendment of an assessment at any time if the amendment is made, in relation to a contract that after the making of the assessment is found to be void ab initio , to ensure that Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (about CGT) is taken always to have applied to the contract as if the contract had never been made (Cooper, 2010). Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of this Act set out in this table. Notwithstanding anything contained in this section, when the assessment of the taxable income of any year includes an estimated amount of income, or of profits or gains of a capital nature, derived by the taxpayer in that year from an operation or series of operations the profit or loss on which was not ascertainable at the end of that year owing to the fact that the operation or series of operations extended over more than one or parts of more than one year. the Commissioner may at any time within 4 years after ascertaining the total profit or loss actually derived or arising from the operation or series of operations, amend the assessment so as to ensure its completeness and accuracy on the basis of the profit or loss so ascertained. Gerry should know that the period allowed for amendment must approach the minimum necessary for the Tax Office to identify erroneous assessments and then only will they correct them. This method helps them to reduce the factor of unnecessary delays at no cost or possibility to revenue collection. As per the amendment process of disputes like Gerry’s the Tax Office at present modifies its compliance activities in a manner which fulfils the conflicting situations and characteristics of taxpayers. It is carried out by adopting a market segment approach which differentiates between businesses of different sizes, people who are working at jobs and not-for-profit taxpayers. In Gerry’s case the tax office will select a segment and treat his case like wise. The duration of time which the Tax Office takes to assess returns thus differs according to the compliance activities it selects. For the case like the one Gerry has filed , the compliance activity is mainly based on practices like income matching. Suppose the before mentioned processes reveal probable non-compliance, then the Tax Office can implement the audit action. Both ways the Tax Office is usually in a situation to know if an amendment must be made to a person’s assent that has a case like Gerry. Like wise if could also be said that , if Gerry’s assessment had to under go audits of taxpayers with complex affairs and transactions concerning large amounts of funds then it would need more time to complete. Thus, it may be pointed out that the nature of the taxpayers’ case and the administrative processes (planned to defend taxpayers’ rights) which area part of these audits. As per the process Gerry must be made aware of the fact that during the assessment of his amendment of dispute audit actions might be postponed by problems related to access to the data, claims of legal professional privilege, hindrance in replying to requests for information or time to comment on Tax Office statements of facts or position papers Presently, the duration for an amendment reducing a taxpayer’s legal responsibility reflects those for amendments raising a taxpayer’s legal responsibility (Fisher 2012). This method has been supported in the previously for fairness element of the method. If the Tax Office can raise a taxpayer’s legal responsibility for a certain period, a taxpayer must be able to apply for a reduction for the same duration . It may even be possible that Gerry’s case goes through a shorter review period as it is the recommended process for individuals like Gerry , however the question which may arise is that whether equal periods should be continued, or if a predetermined amendment period of four years for every amendment reducing a taxpayer’s legal responsibility is a better option. Thus, Gerry Submission may be divided according to the before mentioned terms , with a little support for every method.. The assessment may consist of standard 4 year duration for all kinds of taxpayers as it would permit more time for them to correct their error where they had overstated their liability and would support assurance by mean of a single rule. Nonetheless, maintaining the current formal balance of management in the law for amended assessments as well had appeal from consisting of both balance and fairness. The Tax Office has recommended the assessment that both objectives may be achieved via the Tax Office utilizing its current legislative discretion to concur to a appeal to extend the time for an objection in conditions where the new shorter assessment periods may otherwise deny a taxpayer of a lawful claim for a credit amendment (Krever , 2012). Practice Statement PS LA 2003/7 consists of the before mentioned approach . Answer2 William was advised by his friend to start the business as a trust so that he can share the income with his wife and children. He has nothing to worry as Discretionary trusts are a very popular structure to carry on a business. Plus he will also have benefit of Asset protection in case a beneficiary becomes bankrupt. William will also be able to use the discretionary trust to hold assets or conduct a business is the need for asset protection for the trustee in bankruptcy or a claim against a taxpayer for negligence or other legal liability. He must also be made aware of the fact that the trustee is the legal owner of the assets held within the trust and no beneficiary has an entitlement to those assets if the trust is structured as a discretionary trust (Sadiq ,2012). Here William must also note that the benefit he may gain is that a trust provides asset protection in case of beneficiaries becoming bankrupt, as a beneficiary is not entitled to a specific share of the assets of a trust unless he or she is the appointer. He should also be made aware that any right to trust property a beneficiary may have is dependent upon the trustee exercising its discretion in the beneficiary’s favour. So in effect a key feature of a discretionary trust is that the trustee has an absolute discretion in allocating trust income or capital to a beneficiary each year. Note also that it was held in ASIC Re-Richstar Enterprises Pty Ltd (No 6) (2006) 63 ATR 524 that a beneficiary had a contingent interest under the Corporations Act 2001 (Cth) in the property of a trust where he had the ability to appoint and dismiss the trustees (Fisher 2012) It may be William is worried about the tax benefits in establishing a trust given that he has a wife who does not work as well as three teenage children that attend university. How ever he has nothing to worry about as One of the most important benefits of trusts is the opportunity of income splitting. Apart from this William can also distribute the Dividends a beneficiary and carry the imputation credit as a tax offset. This too may serve as a great advantage for William. One more point to keep in mind is that William can also distribute the Capital gains to an individual beneficiary and the individual can claim the 50% CGT discount (Kenny 2012 a). But William must be made aware of the fact that , Division 6AA prevents income being distributed to minors with little or no income tax being paid (Minor Beneficiaries – Under 18 years) (Kenny 2012 b). William may also be wondering about the benefits in establishing a service trust as well as the trading trust. In such a case it may be noted that the Tax office examines whether the service fees being claimed are deductible under the income tax law. William should also be made aware of the fact that the taxpayers acquiring a deduction for fees and charges in the conduct of its business for the attainment of staff, clerical and administrative services, site, plant and/or equipment from an related thing. These provision are at times are kwon as Phillips arrangements. William’s query as to whether expenditure made under a service arrangement is deductible depends on what the expenditure was calculated to achieve from a practical and business point of view. This is a question of fact. To make things clear for William the most appropriate definition of a trust is the official transfer of assets (e.g. property, shares or funds ) to two or three people to a trust company with directions that they hold the assets for the assistance of others. In this case scenario the trust is the company and the group which will gain the assets is William’s family , apart from this the group will gain assets according to different time periods. William must also be made aware of the fact the separation of the legal ownership and beneficial ownership is an important characteristic of the trust concept. In this concept trustees are considered as legal owners however the beneficial owners may still be considered as the beneficiaries, and the trustees have to fulfill a number of responsibilities towards the beneficiaries; especially the responsibility of loyalty and a responsibility to consider beneficiaries’ interests more then their own. William should also know that a trust like the one he is considering it’s time period will completely be set by William, however he should specify the trust period in the trust document. Even in this case scenario he must specify till when the children are entitled to the fund. At times people only make the children entitled till they are minors or at times they entitle after they turn 18 or till they are married , the choice is entirely William’s decision. William keep in mind that if he is converting his business into a trust then he may select himself and his wife as trustees, if he desires to do so , so that he can retain management of the assets as well as the decision making power however he should use this for the advantage of the beneficiaries. It is a known fact that trusts like the ones which William is using have always been used to avoid or address issues regarding matters of taxation and domestic matters. Domestic matters Discretionary Trusts have always helped families to share the assets and money of the business. William too was advised by his friend to start the business as a trust so that he can share the income with his wife and children Taxation By creating trust of the business William can place chosen assets especially affair share of the income for the family . This may help in reducing the taxes and prevent chances of bankruptcy. By creating a Discretionary Trust of the Business for the benefit of your spouse and children, William as mentioned several times above can take advantage of the nil rate band of tax and save approximately thousands of pounds Australian Dollars which would other wise be used for income tax purposes . The Finance Act 2006 made essential and distinctive modifications to the taxation of trusts. There was an established pattern of taxation of trusts. Every kind of trust had its own tax system. But, The Finance Act 2006 brought about alterations to this established pattern and currently the situation is much more complicated and much more risky due to the new system (Burns & Krever 2000). However in Williams’ case Finance Act 2006 does not set forward much of a risk . As long as he does not mention the word tax in his written document and highlights the fact that it is for the good of his family, the risks may be less . It may be said that William will have to be very careful about the verbatim in the documents to save him from legal actions or complications. He must emphases on income splitting . He has nothing to worry about as One of the most important benefits of trusts is the opportunity of income splitting. William should also know that if he follows his friend’s advice then the beneficiaries i.e. his children and wife will hold the trust property. A discretionary trust generally has other beneficiaries and companies included but in William’s case he can even skip out this condition as he is doing it for the benefit of his family. It may also be noted that William’s family will not have an interest in the assets of the trust. They only have an obligation to be considered or a mere hope till such time as William uses the discretion to make a distribution. The general beneficiaries will have to be named in the trust deed as they will be eligible to collect a distribution of income or assets at the discretion of William . The advantages of discretionary trusts are quite substantial. No other entity comes close to offering all the advantages of the discretionary trust; some offer a number of advantages of the discretionary trust. Moreover of one individual’s s advantage is another person’s disadvantage. For instance, supplier to discretionary trusts can have difficulty receiving payment for debts, and minimized tax by means of discretionary trusts, should be made up by means of other taxpayers or government services should be reduced. William should also be made aware of the disadvantages of those using a discretionary trust? The most important one is the risk of a “rogue trustee” (Burns & O'Donnell ,2000). This means, the trustee may use their discretion in a manner contrary to the needs of the individuals who started the discretionary trust. With cautious legal drafting, as well as sensible selection of appointers, safeguard in opposition to this can be provided. Thus William should consider a discretionary trust as he will have dual benefits one being William will also be able to use the discretionary trust to hold assets or conduct a business is the need for asset protection for the trustee in bankruptcy or a claim against a taxpayer for negligence or other legal liability and the other being sharing the income with his children and wife. Answer3 Matrix Investments Limited is an Australian public company that invests in many foreign companies either directly or indirectly. It receives the following income from foreign investments during the 2012 – 2013 financial years. Case 1 1. It owns 100% of the shares in Beta Limited, a US incorporated company and it receives a dividend of AUD 4 million Matrix Investments Limited should be made aware of the fact that Dividends are taxed under an 'imputation' system. The before mentioned is highlighting the fact that the dividends are paid from profits on which the company has previously paid tax, furthermore the company imputes or gives the tax in question to the receiving shareholder. Matrix Investments Limited will be given a franking credit along with the dividend which shows that the tax which the company has paid , this is something that shareholder may utilize to balance their own tax charge. Matrix Investments Limited must be informed that dividends may be entirely franked (which means that the franking credits has been attributed to 100% of the dividend paid), partly franked ( this means that the credit has been attributed only to a part of the dividend paid) or unfranked ( this means that no credits are attributed). Matrix Investments Limited dividend statement must show the exact the % amount to which the dividend is franked (Coleman etal 2004).. Matrix Investments Limited may require the above mentioned details if they file for income tax return. They must provide both the quantity of the dividends as well as the total of the franking credits attributed to them. The information may be utilized to calculate Matrix Investments Limited franking tax offset. If the entire franking credits as well as any other tax offsets along with credits which Matrix Investments Limited is obliged to are more than their tax liability, Matrix Investments Limited unused franking credits can be considered as a tax losses. Matrix Investments Limited must be advised that they can just claim franking credits which is attributed to their dividends if they held the shares for approximately forty five days (excluding the dates they purchased and sold them) when the dividend was given (Coleman etal 2004). (This law is valid as Matrix Investments Limited total franking credits for the year will be more then $5,000 ) Case 2 2. It owns 8% of the shares in Alfa Limited, a UK company involved in selling software in Europe. Alfa limited pays a dividend of AUD750, 000 net after deducting withholding tax of AUD250, 000 Matrix Investments Limited must be made aware of the fact that Withholding tax on any dividends to the degree that thy are considered as being unfranked (i.e., franked dividends to abroad shareholders do not have any withholding tax) a this type of tax may very well be implemented on interest and discounts received at different rates. Matrix Investments Limited should know that entities are indebted, by provisions in Subdivision 12 – F in Schedule 1 to the Taxation Administration Act, to withhold income tax payable underneath subsection 128B(4) from the dividends which they will pay or receive (Kenny 2012 a). It may also be noted that exempt income does not comprise of Australian dividends on which subsection 128B(4) withholding tax is allocated and so the taxpayer is not indebted to file an Australian tax return on their behalf.. ‘Withholding tax’ in this situation would mean final income tax to be paid, in s 128B iDivision 11A in Part III of the ITAA 36, on flat rates according to the gross total of particular dividends, as well as non – share dividends, interest and royalties. Matrix Investments Limited should be aware of the fact that Subsection 128B(1) recommends that the dividend income to which s 128B maybe applicable , furthermore subsection 128B(4) implements a liability to income tax on the individual who receives it, according to the regulation given below: : “128B(1) [Dividend] Subject to subsections (3), (3A), (3D) and (3E), this section applies to income that: is derived, on or after 1 January 1968, by a non – resident; and consists of a dividend paid by a company that is a resident. “ (CCH , 2012 2053) “128B(4) [Tax on dividends] A person who derives income to which this section applies that consists of a dividend is liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applied” (Cch , 2012 2053) Thus , Matrix Investments should under the above given calculations of income tax regarding dividends. Case 3 3. A branch office of Matrix Limited in France earns commission income of AUD 7 million Matrix Limited must be made aware that after July 1, 2004, active business income made by AUSCO by using a foreign branch is entirely exempt from corporate income tax in Australia except if: the foreign branch is located in a listed country , the countries listed are America, UK, New Zealand, Canada, Germany, Japan, and France and if Matrix Limited earns adjusted tainted revenue i.e. passive income, tainted sales, tainted services revenue which corresponds for more than 5% of the foreign branch’s gross income and the income is present in Australian system as being concessionally taxed local revenue (income normally which may consider tax exemptions or preferential tax conduct in the foreign income tax system as well) (Kobetsky etal 2006); If Matrix Limited’s branch was not located in France and earned adjusted tainted revenue like the above mentioned kinds of income then it would be considered for more than 5% of the foreign branch’s gross income. Likewise, capital gains and capital losses set via the AUSCO on the disposition of assets utilized as considered as a segment of the active business operations of a foreign branch may be exempted for corporate income tax until :: • if Matrix Limited’s foreign branch is located in a country in the provided list , as earlier defined, along with the capital gains or losses are particularly present in Australian system and considered as concessionally taxed” capital gains or losses have been earned due to the nature of passive-type assets; or • if Matrix Limited’s foreign branch is located in another country which is not listed in the country list and the capital gains or losses have been earned due to the disposition of particular passive-type assets (Fisher , 2012). Matrix Limited must also be made aware of the fact that the active business income or capital gains as a result identified via a foreign branch May not in reality be issued for tax in the relevant foreign authority for AUSCO to meet the criteria for the participation exemption. As for profits earned or capital identified by means of a foreign branch may be applicable for payment of corporate income tax in Australia, AUSCO might claim a direct foreign tax credit or a foreign income tax offset for foreign taxes paid accordingly.. Case4 4. Investments in US treasury bonds yield interest income of AUD 6,500.000. For Matrix Investments Limited it is very important to be aware of the fact that a country that enforces tax on the interest income from its government bonds should give a higher rate of interest as compared to one that does not enforce tax (supposing a similar risk profile and market liquidity) to catch the attention of international investors Foreign tax credits that can be accessible in a bondholder’s home country are not an adequate means for offsetting taxes withheld in another system . A Matrix Investments Limited should make sure that Australia’s rule regarding amount of major foreign investors, particularly pension funds along with investment funds, are free from taxation in a lot of their home countries, making foreign-tax credit system inappropriate or not important for them . However Matrix Investments Limited may be advised that even in the most prefect scenario, foreign tax credits include a timing cost to the investor because of the lapse of time between the payment of the foreign tax and delivery of the profit of the home country tax credit. Matrix Investments Limited must be made aware that the security given via the U.S. Treasury Bond ( commonly called the "long bond"), the interest attainted by investors is excepted from state income tax. This may make the Treasury bond viable with additional higher-risk bond problems . Matrix Investments Limited is advised to strictly follow the system which highlights on interest attained by means U.S. Treasury Bonds “Generally, any non U.S. person who buys the bonds of a U.S. corporation will be subject to a withholding tax of 30% of any interest paid, subject to the terms of any treaty with the country where the foreign investor is a resident or citizen. “(Jacobs & Duke 2006 p1) Matrix Investments Limited is also advised to keep purchasing such bonds as they are free from tax U.S. and generate strong revenue , there is no unusual tax treatment for Treasury Bond interest it the need is special . Matrix Investments Limited may well expect a change in the tax treatment of US Treasury bond produces . It may be suggested to Matrix Investments Limited that the manner in which investors design their portfolios can lessen their enticement to invest in tax-exempt bonds as compared to taxable bonds . 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