Advanced Accounting and Revenue Law - Assignment Example

ADVANCED ACCOUNTING AND REVENUE LAW STUDENT NAME TUTOR COURSE DATE Question 1 Bill Smith carries on a business which he has owned for the last 10 years with a total value of $1,500,000. It is therefore a fact that his main motive of carrying on the business was in the intention of making a profit. The aggregate annual turnover of $2,643, 557 is obtained in the financial year 2011-2012, he is a sole trader, aged 66 years and seeks to claim for CGT small business concessions, but this would be dependent on whether he meets that requirement to qualify for a CGT small business concessions. The Small Business CGT Concession is applied to a business based on being; a small business, continuously owned as an asset for at least 15years with the owner being at least 55 years old or older , whether retiring or incapacitated. Additionally it must be 50% active asset reduction that in consideration of the capital gains with the retirement exemption where one must be aged 55 years or older entitled to a lifetime limit of $500,000. In FCT v Sara Lee Household, a CGT event occurs when an asset is disposed, that is the date of the sale of the business and the sale of Bill’s business can be considered as a CGT event. The CGT event that is held in this case is carried out with no prospect of improving it or replacing it hence a loss of the means of gaining assessable income. The CGT event affects the profit making structure of the business as was the case in Van den Berghs Ltd v Clark (Inspector of taxes ) 1953 AC 431. Thus affecting the income to be earned by Bill as well as the fact that he is at a retirement age, and he has no additional prospect of improving the business or leasing it. In Australia the Capital Gains tax is taxed whether a person has made a capital gain or a capital loss. The “net value asset test” is considered to apply for any person who seeks CGT for small business concessions. The ‘net value’ of any business is considered to be the amount by which the sum of the market value of the given assets does not exceed the value of the sum of its liabilities. It is contended that the maximum asset value test is that the CGT asset should not exceed $6,000,000, with Bill’s total assets amounting to $1,500,000. This therefore means that Bill meets the net asset test contemplated under CGT taxation. However the fourth aspect cannot be imposed on Bill based on the fact that the business is not a roll over a he does not intend to improve, replace the asset or change it in a particular way. It is also contended that the annual turnover that is to be expected to qualify for CGT Small business concessions is that the annual turnover must be less than $2,000,000 and in this case the annual turnover of Bill Smith business is $2,643,557 and therefore does not qualify under the 15 year exemption period. In this case the business ought to have been carried on for at least 15years with an annual turnover of $2,000,000. Bill’s business is an active asset on the basis that it has in the last seven and a half years been in his possession (half of the test period) as he has owned the asset for 10 years which is less than the 15 years but more than half. Satisfying the criteria for qualifying for CGT Small business concessions means that one must meet the conditions that are set out at section 152-10 (1) . The first exemption is that the owner of the business must have been in their possession for a continuous period of 15 years and in this case though Bill Smith has owned the business for a period of 10years; it has been with him continuously. However he can qualify on the basis that he has been in possession of the business for seven and a half years as well as the possession has been continuous. The business can however qualify for CGT Small business concessions based on the fact that Bill Smith is of the age of 66 years. Retirement can be considered based on the basis that the person disposing the CGT asset must be above the age of 55 years the retirement age. On the basis that Bill has reached the retirement age, as well as he has no prospect of earning income, after the disposal of his asset. Even though he does not meet all the criteria set out at section 55 of the CGT provided he has owned the business for 10years. Retirement deduction can be considered on the basis that he is already above the preservation age of 65 years old. The limit entitled under the retirement exemption is $500,000 that can be given to Bill Smith. Good will is all a factor to be considered in CGT small business concession, and it is an intangible asset that is connected with the business that one does engage in. In FCT v Murray it was contended that there was no goodwill in the case of the sale of a taxi license based on the fact that good will in relation to a CGT asset means customer attraction as well as the effect of reputation. Hence to qualify under the good will exemption, then it would be appropriate for Bill to prove that the sale of the business will directly impact on the customer base as well as the reputation of the company. Bill Smith disposal of his asset does qualify for the small business concession based on him having qualified under the retirement qualification contemplated by the Act. It can be considered that even though he has been in possession of the business continuously for the last 10 years, he fails to meet the aggregate turnover requirement required for small businesses concessions but his assets are less than the $6,000,000 value, he does qualify for the retirement. Good will is also a factor in the determination of whether the business ought to qualify for small business concession. Question 4 The business owned and run by Mary Philips can be considered to qualify for taxation purposes under the Goods and Services Tax Act 1999. This is based on the fact that the business is carried on with the intention of making a profit involves the delivery and provisions of services. The Goods and Services Tax is aimed at the taxation of private consumption of goods and services on amount collected by the business. The liability in case of goods and services tax lies on Mary Philips rather than Mr. Lee to pay for the GST tax. GST is calculated on the basis that it can be a tenth of the value or an eleventh of the price where price is calculated on the GST minus the included price. The business operates the free bus service in this case the GST is taxed, if it can be proved that the main intention for carrying out the free bus service business is to gain a profit. Generally the GST provisions do provide for free GST supply for certain transportation services that are given. GST is taxed on an entity, and in this case the business is an entity that is run and owned by Mary Philips for the purposes of gaining assessable income under section 6-5 of ITAA97. It can be contended that the giving of the transportation service is to ensure that Mary Philips derives a profit for the service business and therefore it can be considered as a GST –free supply. Mr. Lee does purchases breakfast and pays for some sandwiches which he intends to eat by the lake. This transaction can be considered to fall under the GST-free or input supply. Generally the GST Act provides that this can be taxed on the basis of it being either an input or a GST supply. The GST also provides that certain foods are taxable whether they are taken within the premises or whether they are taken as hot take away meals hence it can qualify under the GST tax regime. The purchase of the breakfast is taxable since it is purchased and taken within the premises. The sandwiches based on the fact that they are GST supply that are taken as a hot takeaway to be eaten outside the premises. can be considered as a taxable supply under section 9-5 of GST 1999, based on the fact that is given for consideration as well as it is made in the furtherance of an enterprise that is carried on. In this case the supply is not GST-free or input taxed. The bottle of gourmet sandwiches and a bottle of wine are subject to taxation on the basis that they are GST supplies. The GST Act 1999 provide that certain beverages are tax exempt depending on whether they are bought or eaten within the premises. It is contemplated that foods and ingredients of foods at Subdivision 38-A of the GST for human consumption is GST-free except where it is explicitly specified. It is also provided for that wine that wine sold to travellers under the sealed bag system are considered to be GST free. Moreover the GST Act 1999 contemplates the fact that food is taxable if it is consumed on the premise in which it is supplied and in this case the breakfast that is taken at the premises by Mr. Lee is taxable. It is also contemplated that any hot takeaway food is also taxable hence the sandwiches taken by Mr. Lee are also taxable. Moreover the wine can be considered as a beverage and therefore it can be taxable if it is explicitly specified as GST-free, since it is consumed by a traveller. It can also be taxed on the consideration of whether it was got as a GST free supply for the retailer. Exchange of currency to Australian dollars, can be considered under section 9-10 of the GST At 1999 to be a financial supply. This is based on the fact that the exchange of currency is considered to be input taxed supply as well as there is no GST payable on the supply. Moreover there is no input tax credit for GST included in price of acquisitions. ITAA 97 provides at s 15-2(1) that a assessable income includes the value to you all the allowances, gratuities, compensation and benefits that are made directly or indirectly to, any employment of or services rendered by a person. In the New Tax System (Goods and Services Tax) Foreign Exchange Conversion Determination (No. 2) 2001, it is stated that where the consideration for an acquisition is expressed in foreign currency, the tax would include the GST that is payable under the Australian Currency under 18A. The accounting for GST in this case is done on a cash basis therefore, the conversion can be on the transaction date, the invoice date or on the day any of the consideration is received for the supply. Therefore Mary Philips can elect the day for taxation on the payment using foreign currency for the GST-free and input taxed supply. The large tip that is given to Mary can be considered as income depending on whether the tip was earned in the process of deriving the taxable income or not. The ITAA97 at section 6 provides that to be taxable income, it must be earned in the process of deriving their assessable income. In this case the tip is earned by Mary can be considered to have been earned in the process of earning the derivable income and hence is taxable as income under ITAA97. According to the holding in Brajkovich v FCT it was contended that a business activity denotes organized activity carried out with the objective of profit making rather than being a hobby. Further a gift cannot be treated as income if there is ample evidence that the desire for the payment was mainly to express appreciation of the taxpayer’s personal qualities as was held in the case of Scott v FCT. In this instance therefore, it can be said that the tip given to Mary Philips cannot be taxed since there is ample evidence that it was made based on the appreciation for the personal qualities of Mary Philips in giving services to Mr. Lee. Question 8 The “Lee Family Superannuation Fund’ is a self-managed complying superannuation fund therefore it ought to be taxed on the basis that it is a complying super fund. Generally superannuation funds in Australia are taxed at a flat rate of 15%. Shares are considered to be property under Australian law, hence the sale of any shares, the amount earned is considered as income for taxation purposes under section 6(1) of ITAA 36. Shares can also be considered as CGT assets under section 100-25(2) and when there is a net capital gain after its disposal, then it ought to be included as assessable income under subdivision 102. Determining whether a Self-managed superannuation fund is liable for taxation, it would be critical to examine it through the Capital Gains tax. In order to know whether there is a capital gain, the net capital gain needs to be determined by; the total capital gain for the year less total capital losses for that year and any unapplied capital losses from other years less the CGT discount and any other concessions. In case the asset was owned for at least 12 months then it is entitled to at least 12 months. The fund sold $600,000 which it had purchased for $450,000 in June 1985. In this case a capital gain was made of $150,000 after its sale for $ 600,000 then the $150,000 can be considered as assessable income for the SMSFs. Subdivision 100-25 (2) provides that a CGT asset does include shares in a company, however since the asset that was sold was acquired before September 20th 1985, then it does not qualify for taxation and hence it is tax exempt. It sold shares of $250,000 which it purchased for $80,000 in March 1984 hence the Lee SMSFs made a capital gain of $170,000 after the sale of the shares at $250,000. Capital gains in Australia are taxed as assessable income on assets or CGT events from the 20th September 1985 as statutory income under section 6-10. Since a capital gain was made from an asset bought before September 1985, the $170,000 capital gain made is not subject to taxation hence it is not considered assessable income in the financial year. The fund made a loss of $8,000 after it sold its shares at $ 40,000 which it had purchased at $48,000. A capital loss is usually made when the asset is reduced cost base is less the capital proceeds. In taxation if it has made a capital loss, then the capital loss is not allowable deduction and is only able to be offset against capital gains. Since the shares were acquired and sold after 20th September 1985, it can be considered for CGT taxation, however since it is a loss, then it would be applied on the next year’s income in the order in which it was made subdivision 102-15, since net capital losses can be carried forward indefinitely. The fund gained a $200,000 on the sale of the shares at $530,000 which it had purchased for $320,000.Since the super fund had a capital gain therefore it can be considered as assessable income for taxation. The acquisition of the shares was done after the 20th of September 1985, however since it was only held for nine months, it cannot attract the discount percentage if it had been owned for 12 months. In this case therefore the CGT capital gain would be taxed at the rate of 33.3/3% based on the fact that it is a complying superannuation fund. The fund received a fully franked dividend of $29,000 and interest from bonds and term deposits of $28,000. Dividends are considered as assessable income under s 44 (1) of the ITAA36 based on the fact that it is income under ordinary concept as well as in the case of Eisner v McComber. Franked dividends are paid after tax has been deducted therefore the fully franked dividend is not liable to taxation. The $ 28,000 is taxable based on the fact that it is considered as assessable income for the super fund. The fund received $22,000 commercial property rent of which related deductions were $8,000 S6(1) ITAA 36 it is contended that income from property or income derived from property means all income not being income from personal exertion, and in this case income of $22,000 from commercial property is considered as assessable under section 15-15 of ITAA97. The fund paid accounting deeds of $8,000 which included the audit and tax return. Section 25-5 (1) allows for specific deductions on tax related expenses, this is in regards to managing tax affairs, complying to obligations imposed on a person by law, as well as in obtaining a valuation. This means that it does not qualify for taxation as it is treated as a specific deduction. The fund paid $220,000 for a painting by Arthur Boyd. Subdivision 108-10(2) provides that an artwork, jewelry, antique, coin collection, rare folio or manuscript are classified as collectables. S 118-10 provides that there is an exemption if the collectable was acquired for $500 or less. The painting obtained was to be kept for personal se 108-20(2) this would give rise to tax exemption of $10,000. The asset is treated as a single personal asset, and the cost base of personal use assets-disregard 3rd cost element –non-capital costs of ownership 108-30 Employer contributions to the fund were $35,000 and employee contributions were $100,000 representing non-concessional contributions. An employer is entitled to a deduction for all the contributions to a complying superannuation fund on behalf of the employee under subdivision 290-B of ITAA97 however no deduction is allowed either in ITAA97 or ITAA36 for employer superannuation contributions. It is contended that non-concessional contributions are generally considered as ‘after tax’ contributions that are made to a super fund and this is not included in the fund’s assessable income. In this case therefore the $35,000 and the $100,000 will not be subject to taxation as they will be considered as after tax as well as it does meet the minimum amount required for non-concessional tax contributions. The limit being set out by ITAA97 is $150,000 per year or $450,000 every 3 years. The Lee Super fund can be taxed on the basis that it is a qualifying fund with taxation based on a capital gain or a capital loss as well as whether it was acquired prior to 20th September 19985 or after. Capital gains that are made after this period will be subject to taxation depending on whether it was held for more than 12 months before its sale. The taxation of capital loss by sale of the asset is to be made or carried forward to the next year if the income earned cannot meet the year’s requirement. Question 6 In Australian taxation system, for any business to qualify for taxation, it must be carried on with an intention to gain a profit from the undertaking. The business intended to be carried on by William Brown (William), is intended to be an engineering business in Canberra, therefore he seeks advice on the minimization of income tax as well as any other tax. ITAA 1936 contemplates that a trust is a ‘flow through’ structure that is not assessed on its income. Taxation of a trust is usually considered under the provisions of ITAA 36, and a trust is considered to exist when there is a settlor, a trustee and a beneficiary in which the trustee is obligated to the beneficiary for the benefits derived from the trust property or asset. William in this case can prefer to set up a discretionary trust which would cover for all the family members. In establishing the trust, William (the settlor) will only be required to settle $20 and he can elect whether he wants to retain any power to revoke the trust or obtain a beneficial interest in the trust income. However, retaining the power an additional tax would be imposed under s 102 of ITAA 1936 hence it would be best if he does not retain any power under the trust. Taxation of trust income is usually dependent on whether there is a beneficiary presently entitled to income (Vegners v FCT) or whether such a beneficiary is under a legal disability this includes minors or persons who cannot give a valid discharge to the trustee in respect of payments made to them. In creating the trust, an advantage is incurred based on the fact that the income is spilt for taxation purposes as opposed to general taxation. This is based on the fact that once the net income is determined, then the beneficiaries who are presently entitled (Wife and Son) as well as beneficiary with legal disability (Elizabeth ) are allocated the income for assessment purposes. The benefits that can be derived by Mr. William for setting up the trust would be that any dividends can be distributed to a beneficiary and carry the imputation credit as a tax offset. Moreover if the trust incus a capital gains, it can be distributed to individual beneficiary and the beneficiary can claim 50% CGT discount on the capital gain. Mr. William can name his wife and his two children as beneficiaries. Williams’s son is above the age of 18years and in university hence he is treated as an adult the same as his mother. They can be considered as beneficiaries presently entitled as was held under Harmer v FCT, hence they are liable to pay income tax at rates less than 46.5 %. However since trust does allow for streaming income to a particular beneficiary does allow for tax planning opportunities. In naming his family members as beneficiaries to the trust property, it means that the family can directly and flexibly distribute income and assets as well as be in direct control of all assets as well as the funds. William’s daughter is under the age of 18 years and therefore she is to be treated as a minor in relation to the fact that she is named as a beneficiary in the trust. Even though Division 6AA prevents income being distributed to minors with little or no income tax being paid, but tax can be applied on a minor beneficiary. In this case if Elizabeth is an “excepted person” or the income is not classified as “excepted assessable income” then penal rates of tax would apply. This would depend whether the amount would be between $0-416 which is not taxed and when it exceeds $1,307 then it is taxed at 45% of the total amount of income that is not excepted income. However if William is to set up a testamentary trust then trustee would be entitled to pay normal marginal tax for an adult at first $6,000 tax free. Further by Mr. William setting up a trust will be able to take advantage of tax offsets since trust losses are not distributed to the beneficiary but are carried forward. It is contended that by setting up a trust the a business asset of Mr. William will be protected from other liabilities in case one becomes insolvent or bankrupt since asset protection is extended to other types of liabilities. If the trust set up takes the form of a unit trust, then in case of a claim for negligence, the as was held in Broomhead Pty Ltd (In Liquidation) v Broomhead Pty Ltd, then the holders of the unit trust are liable to indemnify the trustee against any liabilities incurred in carrying on the business. The liability would be based on the share of each beneficiary limited to the proportion of his or her beneficial interest as per Justice McGarvie. The only thing that Mr. William needs to consider is that he needs to avoid any form of unsuitable accumulation profits because under ITAA 1936 any undistributed income will be taxed at 45% as at s 99A. Moreover the beneficiaries that are listed under the trust are not liable for the debts of the trust, contrasted to when Mr. Brown choose to operate as a sole trader. It is also contemplated that if Mr. William will choose to sell any of the capital assets then it would be considered as a Capital gain, hence attract capital gains tax. This would be based on the cost of the capital asset and the proceeds that are received after the sale. A trust however gives benefit to the trust beneficiaries since a discount is given on the amount that is payable on capital assets which have been held for a period of more than 12 months. 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 Tax Act , 1999 (GST 1999) Income Tax Assessment Act ,1936 (ITAA36) Income Tax Assessment Act ,1997 (ITAA97) New Tax System (Goods and Services Tax) Foreign Exchange Conversion Determination (No. 2) 2001 Woellner, R. B., Barkoczy, S. & Krever, R., (1999). Australian Taxation Law. 9th ed. Sydney: CCH Ltd Read More