Advanced Revenue Law - Assignment Example

INCOME TAX LAW STUDENT NAME TUTOR COURSE DATE Question 1 Bill Smith carries on a business that is valued at $1,500,000, with an aggregate annual turnover of $2,643,557 for the 2011-2012 financial years, with the Capital gain of $886,000. Bill is aged 66 years hence his qualification for CGT Concessions. In the first instance his disposal of his assets can be considered as a CGT event. There are certain qualifications that are considered before a business is considered to qualify under the small business concessions, this include; whether it meets the minimum net value asset test and also whether the asset is a continuing or active asset. Further the aspect of good will also plays a huge role in the consideration of taxing a business not qualifying under the Small business CGT concessions to be taxed as such. In the derivation of income, it is critical to know whether a person does carry on a business to derive assessable income. In Ferguson v F CT the court stated that the test applied to determine whether a person is carrying on a business, then the profit making motive is necessary, the regularity or repetition of the activities, a need of organized activities as well as the amount of capital employed in the business and volume of operations. In this case the Capital is $1,500,000, a turnover of$2,643,557 and a capital gain of $ 886,000. Bill Smith has been operating the business in 10years, with the activities being carried on such as building, plant and equipment and good will, hence this can be considered as a business in deriving income. The annual turnover made by Bill can be considered as a profit; hence the business is a business making activity with the aim of getting a profit, In order to determine whether the business owned by Bill is a small business, then there is need to prove that he has an annual turnover of $2 million however, if it is less than the $2 million provided then the business will not be a small business for that year. In this case Bill’s turnover is $2,643,557 for that actual current year turnover hence one can consider this as not being a small business. The business being run by Bill does not qualify based on the fact that the annual turnover for him is more than the $2million required to qualify under the 2011-2012 year. This is based on the fact that annual turnover is accounted for each year. If however it would have been less, he would have qualified under the small business concession. In order for Bill to effectively know and consider whether he can qualify for the small business concessions, then Bill must determine whether he does satisfy the small business concessions, and if so then there is need to determine whether Bill does qualify for the small 15-year exemption which is not relevant for a depreciating asset. In this case, the CGT asset being sold is considered an appreciating asset and hence, Bill can apply the small business concession. Bill’s business is a small business entity. In order to qualify for capital gains tax concessions for small business in Australia, then a person needs to be an individual, a sole trader, a partner in a partnership or a company or a trust. In this case the business carried on by Smith can be considered as a sole business owned by an individual hence can qualify as for taxation under the CGT small business concessions. CGT is considered to be a necessary payment made by an individual for any capital gain made, and mainly informs the net capital gain. In this case the ‘net capital gain’ which is $886,000 in Bills case. The business ran by Bill can be considered to be that of a sole trader and even though he does not meet the $2,000,000 annual turnover, the assets he owns however do not aggregate to $6,000,000. Capital Gains Tax (CGT) is taxed as assessable income depending on whether a person has made a capital gain or loss. In this case however, Bill Smith has made a Capital Gain and In general it is considered that there is no separate taxation in capital gain tax. Bill, Smith seeks to undertake the Small Business Concessions which was set out in FCT v Murray (1998) considering the application of good will by a small business. Section 995-1 states that the ‘net value’ of a business as the amount by which the sum of the market value of its assets (including good will) exceeds the sum of its liabilities. In determining whether a business is entitled to a small business concessions; it must have reached a 15-year exemption at subdivision 152-B, owned for 15 years and the owner has reached aged 55 years. In this case, the person concerned must have owned the CGT asset being disposed continuously for at least 15 years as well as the relevant individual is 55 years old and retiring or is permanently incapacitated. The business owned by Smith was for 10 years having reached 66 years. It is not stated whether the two stipulated conditions need to occur separately or considered individually, however Bill Smith qualifies based on the fact that he is above the necessary age of 55 and he has continuously held possession of the property for ten years, even though it does not qualify for 15years exemption rule for small business. The conditions are that there needs to be CGT event happening to a CGT asses of the taxpayer in an income year, the event would have resulted in a Capital Gain and the taxpayer is a small business entity or satisfies a maximum net asset value test and that the asset is an active asset as per section 152-10 (1). The CGT event that does occur in Bill’s case is the total disposal of the asset and there is no hope of it being replaced or modified as well as he is already above the age of 55. Further in determining whether Bill might be considered to be taxed under the small business concessions, then the small business retirement exemption provides for an exemption of capital gains up to a life time limit of $500,000. This is in view of the total capital gain made on the disposal of the CGT asset. This exemption provides that if the individual is under the age of 55years then the amount ought to be paid to a superannuation fund. In this case, the retirement exemption does not compel Bill to deposit this amount to the superannuation fund. If Bill fails for an exemption under the 15-year exemption, then he can qualify for the retirement exemption being above the age of 55 years. The Small Business CGT concessions provides a small business rollover where an individual is entitled to defer all or part of a capital gain on the business asset for a minimum period of two years. In this case Bill can have the option to defer any payment by two years on the gains made on the CGT assets. This provision applies also in instances where a person does acquire another asset to replace the existing asset or to make a capital improvement on the existing asset within the duration provided. The gain can be deferred only if a person does dispose of the asset or improve the asset as well as changing it. This qualification is not necessary and applicable to Bill’s business because his intention of disposing his CGT asset is to totally dispose it off. The maximum net asset value test to be considered before small business concessions is made is that the CGT asset must not exceed $6,000,000 based on the total market value of the assets less any liabilities. Bill Smith CGT assets qualifies based on the fact that the asset is less than the maximum $6,000,000 required. The business also qualifies in the active asset test where the business must be an active asset for 7.5 years if it is owned for more than 15 years or half the test period if it is owned for 15 or less years. The asset owned by Bill have been in continuous possession by him for 1o years. In this case, the sale of Bill Smith assets on the year of income can be considered as a CGT event and can qualify for small business concessions. Based on the fact that he is already 66 years and above retirement age, he is able to disregard the capital gains arising from business assets up to a limit of $500,000. Bill Smith may also qualify for a 50% reduction as long as Bill satisfies the conditions of section 152-10(1) in the disposal of a CGT asset based on the fact that he is disposing all his assets and good will is considered. Bill is also able to qualify for the retirement exemption as well as the fact that during the ten years, the business has been continually owned and controlled by him. Question 4 The Goods and Services Tax Act, 1999 is mainly concerned with the taxation of individuals and businesses for the private consumption of goods and services; it is not paid by the consumer but by the persons carrying on the business. In this case therefore, Mary Philips being the individual carrying the business for catering for persons travelling from abroad is liable to pay for GST on consumable GST tax supplies and input used by them except when they are tax exempt and not Mr. Lee. The Act only intends to apply to persons carrying out businesses that are considered to be in the provision of goods and services. Determining whether or not the business carried on by Mary is a business, the tests applicable are those provided for in the case of Ferguson v FC of T where the needs to be a profit making motive , the business must be repetitive in nature , the activities that are being carried out should be organized, the volume of operations. In this case therefore in considering the services that are offered by Mary Philips for her overseas travel services, one can say that it is organized, repetitive as well as its aim is to earn a profit, there is a business being carried out as well as there are financial transactions involved. The GST tax is collected by the business and it is collected at every stage of the transaction as well as it is taxed on the value added at each stage of the commercial chain. It is allowable however for Mary to claim input tax credits on anything that is acquired by her to make the taxable supply and this therefore means that it will be deducted from GST payable by the business. A supply in GST taxation is the supply of goods, services, provision of any advice or information, grant, assignment in order to further a business. It is therefore expected by Mary that she ought to have registered as well as comply with the GST provisions. Therefore for every transaction that is given by Mary within the business is subject to taxation depending on whether it is a GST supply or input taxed. Mary Philips carries on a business catering for overseas travel, with the provision of free pick up services. Mary Philips receives Mr. Lee from Singapore who uses the free bus service, purchases breakfast and is prepared lunch. The services rendered to Mr. Smith re rewarding and he gives Mary a tip. It is contended that a Goods and Services Tax (GST) is to be paid on private consumption of goods and services, it is to be paid by the consumer rather than by business, is collected by business at each stage of the commercial chain. The tax is considered to be charged on value added as well as it eliminates the cascading of tax. In this case, for every service that is offered by Mary Philips, is considered to be taxed on the business and not to be taxed to the consumer. The fact that the transport service is used to further the business activity of Mary Philips, it can therefore be exempted from GST taxation as it is free and as opposed to a loss, it can be considered as capital, for without the service, then no business can be effectively carried out. The transaction between Mr. Lee and Mary involve a GST transactions, in a foreign currency taxable for a GST-free or input supply. The currency provided by Mr. Lee is taxable on the basis that it was offered for a GST supply. In this instance therefore Mary could either choose to change the currency at an agreed rate, a commercial exchange rate or at the RBA rate. Further it is considered as a GST supply in form of financial supply through transaction. The types of supplies that are expected to be carried out in Mary Philips business include; taxable supplies which a business can claim deductions on both the GST outputs and input credits, GST free supplies which one can only claim input tax credit and input-taxed supplies where a business cannot claim either GST on the inputs nor input tax credit. In converting the foreign currency and if it is on a cash basis as in the case presented, then the day of conversion would be the receipt date, or the day of transaction. Therefore, the currency conversion would be taxed on the day of transaction. The payment was given by Mr. Lee on the provision of a taxable supply and in this case, the GST applicable would be 10% of the value of the supply and this would be the value of the GST-exclusive consideration that is paid for the value of the GST Supply. In order for a business to determine whether or not it has made a taxable supply, then it must consider whether the supply that was made was made in consideration. For instance, the free transport service can be said to be made for consideration on the basis that any person who uses it, will have to use all other services that are catered for by Mary Philips for their overseas travels. Secondly, the supply that is made is made on the course or furtherance of an enterprise that one is carrying on. The payment made by Mr. Lee can be said to be in the furtherance of the business that is offered by Mary Philips through the service to overseas travellers. Thirdly the supply that is given is connected with Australia, and this qualifies because Mary Philips business is carried on in Australia. In this case, Mary Philips ought to have fulfilled the requirement of being registered as at section 9-5 of the GST tax Act as well as the supply is not GST-free or input taxed. In Australia the GST tax regime is based on a broad –based tax of about 10% that is placed on the supply of most of the foods that are supplied and consumed in Australia as from 2000. Some of the GST supplies are usually not considered for taxation and are called the GST-free supplies; this includes food, in this case. An input taxed supply is considered to be taxed on the basis that the GST is not charged on the supply as well as the input tax credits is not on anything that is accrued from any goods that are imported to make the supply. This input taxed supplies include: financial supplies that relate to the transaction of money amongst others. A taxable supply is made if the supply is made for consideration, it is made in the course of furtherance of an enterprise one carries as well as the supply is connected with Australia, in this instance the supply is not GST-free or input taxed at section 9-5 of Goods and Services Tax Act 1999. Generally a supply includes the supply of services and goods as well as financial supply. The liability for GST is on the consumer, and the value is the GST excluded from the price. GST free is provided in cases of certain transport and in this case the free service transport offered can be considered to be GST Free. Generally subdivision 38-A provides that foods and ingredients for food are GST-free except where specified as taxable however beverages are taxable where explicitly specified as GST-free. Food is taxable if it is consumed on the premises in which it is supplied, it is a takeaway food or listed under Schedule 1. The transport free service can be considered as GST free hence not liable to taxation, while on the other hand the breakfast that is taken by Mr. lee within the premises are taxable. The sandwiches though are not eaten at the premises but are ordered as a takeaway to be eaten by the lake can be considered as taxable as it satisfies for taxation as it is a hot takeaway order. The wine ordered by Mr. Lee is considered as taxable based on the fact that all beverages are taxable except where it is explicitly specified as GST Free. It is stated in Scott v FC of T by Windeyer J that “unsolicited gift does not become income merely because it is traced to gratitude endangered by some service rendered, in considering where a gift is taxable or not taxable, the question to be answered is whether the gift was in a relevant sense, a product of the recipient’s personal services or on the other hand an exceptional payment due to the recipient personal qualities. Moreover Section 15-2 (1) of ITAA97 provides that the assessable income includes the value to you of all allowances, gratitude’s , compensation, benefits or bonuses provided to you in respect of, or for or in relation directly or indirectly to any employment of or services rendered by you. In this case therefore Mary Philips is liable to pay tax on the tip that is given to her by Mr. Lee. Question 7 Matrix investment Limited is incorporated in Australia where it receives income from investment from different companies worldwide. The tests for company taxation includes; that the business is incorporated in Australia, it carries on business in Australia and its place of central management and control is in Australia as well as the shareholder test and carries on business in Australian more than 50%. A company is taxable in Australia as provided for under section 6(1) of ITAA 1936. If it is not, then the company must be carrying on business in Australia, with its central management and control as well as its voting control by majority of Australian residents. Matrix Limited is incorporated in Australia, therefore it qualifies to pay taxes on both statutory and income that is earned by it in Australia. Section 6-5 and 6-10 of ITAA 97 states “income that is earned by the corporation is worldwide”, with deductions applicable to companies being considered under section 8-1 of ITAA97 for any taxpayer. Matrix Ltd is required to lodge the returns in view of the entire amount that is given to them in form of income to include; the dividend (AUD 4million) payable to them on it owning 100% shares of the Beta Limited a corporation incorporated in the US, dividend payable to it by Alfa Ltd of AUD 750,000 after the deduction of a withholding tax of AUD 250,000, the branch office income of AUD 7 million and the investment of the treasury bong of AUD 6,500,000. The Company owns 100% of the Shares in Beta Limited a US incorporated company and a dividend of AUD 4million. The fact that Matrix Ltd qualifies as an Australian Company as per section 6 (1) (b), it is incorporated and has its central management in Australia, the income that is derived from the shares is derived from a foreign company. It means that the amount made by Matrix Limited is not taxable in Australia based on the fact that the investments are accrued on in the US as well as the management and control of the US incorporated company is in the US. The dividends thus payable to Matrix Ltd can be considered as having been derived from a company that is neither incorporated nor carrying on a business in Australia. In Australia, the basis for international income taxation is dependent on residence of the taxpayer where tax is payable on any income worldwide, as well as the source of the income is considered to be territorial, the place of derivation as per Esquires Nominees v FCT. Since the liability for any company to pay tax is dependent on the residence of the company then tax is sources of income based on the principal of capital export neutrality. In this case Matrix Ltd has sought to create investment in different countries, hence in taxation; different principles would be applied to determine whether the tax is payable in Australia or the source of income derivation. Dividends are taxed on the place where the company derived profit as stated in Esquires Nominees v FCT where the company was involved in investment in Norfolk Island, incorporated there and investments in Australia, it was held that the Company was a resident in Norfolk Island as it was incorporated there, its central management was there, hence the source of dividend income was Norfolk Island. In this case withholding tax would apply. It receives a dividend of AUD 750,000 shares in Alfa Ltd where it owns 8% after the deducting withholding tax of AUD250,000 the company conducting business in UK. As held in Esquires Nominees v FCT (1973) that the activity giving rise to the profits derived by Matrix was the holding of 8% shares in Alfa Ltd and the activity took place in UK hence the profits that are derived are not sourced from Australia hence it is not taxed in Australia. Further is stated in FCT v Mitchum that for income to be taxable, then it must have its source in Australia, and if not, the individual or company is not liable to taxation. In this case, the dividend received by Matrix Ltd is not taxable as the source of the Income is not Australia but the UK. The place of conducting the business as well as the source of income is derived from the activities that are carried out by Alfa Ltd in the UK. The amount of dividends that is payable to Matrix Ltd is subject to taxation in the UK in based on the residency of the company, its incorporation as well as the effective control of the business. Matrix Ltd can be shielded from double taxation on the exemption system whereby income subject to taxation in more than one country is taxed in one country and exempt in the other country, or the income can be exempt from either the source country or the residence country. In this case, Matrix Ltd can claim exemption under double taxation based on the fact that the dividend is already taxed at the source country in the UK where the income was derived. A withholding tax is usually taxed on dividends that are paid by the company that distributes the dividends. In this case it ought to be paid by the non-resident company living in a non DTA country and is unfranked and it is taxed at the rate of 30%. Since Alfa Ltd is incorporated in a DTA country, therefore the withholding tax will be taxed at the rate of 30% base. Since Australia has a DTA agreement with UK therefore double taxation of the dividends will be avoided. A branch Office earns income of AUD7 million, in this case Australia will seek to treat this taxation differently. The Australian tax regime provides an exemption. The exemption arises when foreign income derived by an Australian Resident company in carrying on business if the income is earned through a permanent establishment in comparably taxed foreign country as provided under section 23 of ITAA 1936. In this case therefore the tax that is paid in the source country can be considered as a credit, against that taxpayer’s liability to pay taxes in the home country. In this case, since the AUD 7million that is earned from the source country is Generally, Section 23 AH exempts a foreign branch active income this is either non-investment, non-passive income from carrying on a business in a listed foreign country without a permanent residence. In this case, the branch office can be considered as a permanent resident of the country, and hence the income or source of income is derived from the source country and not from Australia. The exemption will therefore apply if it is derived from a listed country with a comparable taxation system such as Australia. In view of what was held in Esquires Nominees v FCT (1973), is that it does not qualify as statutory or ordinary income in Australia as the source of income is from the other country and not Australia hence not taxable in Australia. Investment in US treasury bonds yields income of AUD 6,500,000. It is important to consider that ITAA36 section 6(1) (b) does apply as long a business is incorporated in Australia, it carries on business in Australia and it has its central management and control in Australia, therefore it satisfies this test and is liable to taxation in Australia. Section 6C 25(2) provides that ordinary income have an Australian source if and only if , derived from a source in Australia for the purposes of ITAA97, and it involves identifying the property or event that gives rise to or generates income and the geographical status of the property or event. In this case therefore, the source of Income does not fall under the provisions of ITAA97 on statutory and ordinary income therefore the amount is not taxable in Australia. Further the income from the Treasury bond is considered an investment by Matrix Limited. The source of the income in consideration of the case of Esquires Nominees v FCT is that income is considered to be ordinary or statutory as long as it is derived from Australia. The investment made by Matrix Limited is in the foreign country with the income being paid to Matrix. This income will not be considered a taxable in Australia based on the fact that the source income was not derived from Australia. The US has a Double Tax Agreement with Australia; hence the company cannot be taxed on double means hence the exemptions provided by the DTA, foreign tax credits as well as deductions will be applied. However since the US does not base taxation on residency. However since the Matrix Company does not have a permanent residency in the USA as per the provision of Articles 5(1-4) that is a fixed place of business through which the business of a non-resident is carried, then the income would be taxable under Australian Law. It is therefore probable that Australian taxation principles would apply on the income received on the bonds. List of References Capital Gains Tax Act Deutsch, R., Friezer, M., Fullerton, I., Hanley, P., & Snape, T. (2012). The Australian Tax Handbook 2012 Book. Sydney: Thomson Reuters. Gilders, A., Taylor, B., Walpole , S., Burton, S., & Ciro, M. (2012). Understanding Taxation Law 2012. Sydney: LexisNexis. Goods and Services Act 1999 (GST) Income Tax Assessment Act 1997 (ITAA97) Read More