Taxation Law: What Items of Business Are Taxed - Assignment Example

Running head: RESOLVING TAXATION LAW PROBLEMS Resolve taxation law problems by providing advice to the taxpayer or their accountant. Name: Institution: Professor: Course: Abstract This paper is based on the types of taxes that are imposed on business’s transactions, the different types on income taxes that are charged, and consequences of not paying these taxes. in taxation there are acts that may be seen as unlawful and there are others that are lawful in the Australian tax system. Immunity for different people and for different acts, (Wallschutzky 1985, P 46) this paper will try to explain what items of business are taxed and which ones are not taxed and to which extent, the different types of income s that are taxed. Tax periods and the financial year under which tax is calculated from will be further explained. This paper will show an analysis on the different ways that individuals try to evade tax or avoid it and what it may lead them to, the penalties that are attached to such acts. Lastly the paper will explain more on Goods and Services Tax (GST) the ways in which a company can register for (GST) for small and large organizations. Introduction Resident companies in this context (Australian companies) are subject to company income tax on their income, derived from all sources. Non-resident companies are required to pay income tax only On Australian-sourced income. Resident companies are those that are incorporated in Australia or those that handle their Business in Australia and either have their main management and control of the entire practices in Australia or the main people who make most of the decisions in terms of voting power are in Australia (residents) thus if a company in dictated by such thing its obliged in the Australian tax system is expected to pay tax. Generally companies are expected to audit themselves first to know what their tax liability for that particular financial year. Company tax is payable on a quarterly basis. Those Companies that are not required to Report their goods and services tax (GST) on a monthly basis and with income tax Payable of less than AUD $8,000 for the most recent income year can choose to pay an annual installment of tax rather than quarterly installments. In general, the annual payment date is normally by the21 day of October when the income year ends on 30 June. Quarterly company tax is payable within 21 days after the end of each quarter of the financial year. However, when tax payers have other obligations regarding tax liability where taxpayers are eligible to pay other quarterly obligations on a deferred basis like (GST) on a quarterly basis, the due date is the 28th day of the next quarter. After the end of the quarter except for the December quarter in which case payment date is 28 February). Question 5: On the financial/tax year and tax avoidance and tax evasion In most countries the official financial year usually runs from 1 July to 30 June. Companies’ financial years usually coincide with the tax year (Wallschutzky 1985, P 67). A taxpayer can choose to have an accounting year different to the tax year if they wish but this will need additional costs of preparing another set of accounts based on the tax year. On the other hand, if a taxpayer has a good reason for having a financial year other than 1 July to 30 June they can apply to the Tax Office to have a substituted accounting period (SAP) and align the tax year with their financial year. The Tax Office generally acceptS applications for an SAP where a subsidiary wants to align its tax year with its foreign parent company’s financial year. is the parent is outside the country.( Wallschutzky, 1985 P 69) The law recognizes the important distinction between taxpayers engaging in tax evasion and tax avoidance, and consequences that follow tax evasion. However, for some time the country’s Government has ignored the difference between the two concepts when it comes to residents using tax havens. The law to deter the encouragement of tax schemes, Division 290, of the Taxation Administration Act 1953 ignores the distinction between tax avoidance and tax evasion and deals with ‘tax exploitation schemes’ instead. The Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act) is another example, ignoring of the distinction between tax avoidance and tax evasion because it allows government agencies to detect resident taxpayers using tax havens by requesting their accountants, lawyers and financial advisers to report doubtful transactions that involve the transfer of money between tax havens as the case at hand. These two examples of statutory law are clear examples of the Government deliberately trying to finish off the trend of taxpayers having a haven and offshore financial centres (OFCs) as tax evasion which is considered a crime by law. The term ‘tax evasion’ explains the act in breach of the law whereby a person who is expected to pay tax derives a taxable income either pays no tax or pays less tax than what he would otherwise be bound to pay. Tax evasion includes the failure to make a record on tax on taxable income or the failure to disclose in a return the true amount of income resulting. Tax avoidance on the other hand, can be explained as the act within the law whereby income, which would otherwise be taxed at a rate appropriate to the taxpayer who goes ahead to spread the risk/blame of tax to various variable or people who do not hold a valid or do not have consideration. in the result he pays less tax than required. I our case study, All trading stock on hand at the beginning of the year of income and all trading stock on hand at the end of that income year must be taken into account in determining of the taxable income for that particular financial year. Each item of inventory must be valued at the end of each financial year at cost price valued at full amalgamation cost market selling cost or value which is the current selling value in the taxpayer’s trading market or replacement cost, which if the same condition and usage. The closing value at the end of the taxable year becomes the opening value at the beginning of the coming income year. Acceptable valuation methods include (first in first out) FIFO, average cost, average costing and retail inventory method, non-acceptable valuation methods include (last is first out) LIFO and the base stock method. There are certain small business where taxpayers who have an annual turnover of less than AUD $2million are only necessary to make such valuations where the value of their stock changed by more than AUD $5,000. In conclusion of this point we may say that yes the trading did take place just before the end of the taxable period but if well documented then there is no case of tax evasion or tax avoidance. In this case the time of the buying, is not a problem. Taxing of the sale of the BHP 1 million shares will be taxed according to the tax law. Selling of the Telstra shares of 4 million will be accounted for. In both cases at the end of the just beginning taxable year there will be a record of buying new shares which will incur a tax liability as a new asset in the business 6: Family Taxation and Trusts A Family Trust is one of the most common small business structures in the country. Unlike, others like the Unit Trust, when you establish a Family Trust to benefit the members of a family. Discretionary Family Trusts provide families with a great deal of advantage in sharing the tax burden among family members and protecting family assets. It offers some protection from bankruptcy and insolvency, low cost and simple structure to use. It allows you to distribute income to family members who are on low tax rates, it allows you to "stream" income: you can distribute one type of income to one person and another type of income to another person A Discretionary Family Trust can operate for up to 80 years In August 2002 all Family Trusts had to be amended. Otherwise you would automatically NOT be able to get the Capital Gains Tax Small Business Rollover relief. The relief reduces the CGT that your Discretionary Family Trust has to pay when it sells its business. (Buckley, 2003, P 62) A company pays 30% tax. After $60,000 you pay tax at 48.5%. However, if you realize a capital gain then your highest rate may drop by half to 24.25% and then half again to 12.12%. Given CGT roll over relief, you may be able to get that rate down to zero. Super pays tax at 15% (10% when it sells CGT assets). This rate distortion in the tax system means that you have to plan ahead. Perhaps 2 generations ahead of yourself, (Part IV A of the Income Tax Assessment Act 1936 and amendments.) Income tax is payable by resident individuals on non-exempt income resulting from worldwide investment or business sources. Non-resident persons are only required to pay tax on business done in the county’s boarders only. Income less allowable deductions, assessable income includes business income, employment income, and capital gains on certain assets, dividends, rent and interest. Allowable deductions include outgoings incurred in gaining or producing assessable income such as interest expenses and statutory deductions such as tax-deductible gifts to specified charitable entities. Insurance payable which may have a 1.5% levy, called the Medicare Levy is payable by resident individual taxpayers. This levy covers basic hospital and medical expenses for all residents and is assessed on the taxable income of resident person taxpayers with no maximum upper limit on the amount payable. Low income taxpayers may be eligible for an exemption or reduced levy. (Buckley, 2003 P 98) Higher income individuals without private health insurance are subject to an additional 1% Medicare Levy supplement. A 30% rebate is accessible to resident taxpayers for the cost of private health insurance. A low income tax offset of AUD $1,500 is available to taxpayers with a taxable income of less than AUD $30,001. This tax offset is phased out when taxable income is AUD $67,500 and over. (Buckley, 2003, P 99) The Government has renowned that criminals use complicated structures such as trusts, companies and managed investment schemes to launder money. This would be a big blow since if one is registered as a trust hence his books must be clean and up to the government specifications. However, what happens when a client seeks advice from their lawyer or accountant about starting a business or investment fund in a different country since they want to diversify their funds. Their accountant or lawyer will have to report this activity or be in breach of their obligations under the AML/CTF compliance requirements, or make the judgment that the activity is legal and do not amount to money laundering that would the simple way to go about it and if not then they would be in breach of contract. Hence they must report those transactions to the relevant government body or face serious consequences. While a partnership or trust may be allowed not to pay (PAYG) pay as you go installments, the partners, beneficiaries or trustees may not seem to avoid that. For example, if you’re a trustee in a trust, you probably have your own installment rate and must take account of your share of the partnership’s income in your own installment income. This is worked out according to a specific formula. The process does not apply to partnerships and trusts that are taxed as entities, such as corporate limited partnerships and corporate unit trusts. Lastly, relating to tax deductions incurred in criminal activities and sections relating to prevent the alienation of individual services income through companies, partnerships or trusts. (Goods and Services Tax) Act 1999 7: Tax on capital gains and other interest income including offshore investment Other diverse tax offsets are also obtainable to resident individual taxpayers such as medical expenses rebate, zone offsets, dependents and spouse rebates, and superannuation offset. When it comes to trusts, individuals and trustees may be entitled for a 50% cutback in their assessable capital gain this gives the taxpayer a certain relief on the amount of tax he is liable to pay, if the set conditions are met. If one Abides by the superannuation then the funds are eligible for a 1/3 discount. This reduction is only for individuals and is not available for companies. Wholly-owned groups of resident companies and trusts are eligible to elect to have their income tax obligation be re-calculated and be on a consolidated basis. By doing this then it means that the entire the group is seen as an individual and hence taxed as one person or one corporate taxpayer (Woodly & Rick 2011, p 98) With respect to the first point of occurrence if a businessman receives dividends from non-resident companies, which is a company that is not located within the country boarders then it does not qualify for tax offset but may be entitled to a foreign tax credit as it will be shown later. Alternatively, the dividend may be tax-exempt if the recipient is a resident company that has a 10% or greater interest in the foreign company irrespective of the wants in a foreign company, a group of five or fewer residential entities (either alone or together with associates) has definite control of the company. CFCs in seven listed countries (USA, UK, France, Germany, Japan, Canada and New Zealand) are largely exempted from the CFC rules. The Government has repealed the Foreign Investment Fund (FIF) rules. (Woodly & Rick, 2011, p 102) There are several areas where the CFC rules are allowed to pass, including an dynamic business exemption. The Government is currently reviewing the CFC provisions with a view to make the rules more lenient and more understandable to everyone. Foreign residents are exempt from Australian CGT except on any residential real property; business assets used in a citizen permanent establishment (PE) or equity interests in Australian or foreign companies or trusts with considerable interests in Australian real property either straight or indirectly through interposed entities. Australian real property includes Australian land and mining, quarrying and prospecting rights over the land. The second point includes with holding tax part which is treated differently from the other incidents On a country-by-country basis, each summary addresses the major taxes valid to business, how one is able to determine taxable income, handle other related business issues that may lead the company to incur a tax liability including, and the country’s personal tax regime. The final part of each country rundown sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. In nearly most foreign branch profits and capital gains of a resident company are normally not taxed when the income or gain is derived in handling of a business through a lasting establishment in a number of listed countries which includes the UK, US, Canada, France, Germany, Japan and New Zealand. Also losses from branches in the countries listed above may and cannot be claimed.(Woodly & Rick 2011, p 105) Foreign branches of resident companies in other countries (unlisted countries) are normally not subject to tax on any profits or gains where the income is from an active business and for capital gains where the company used the asset wholly or largely in a dynamic business. Losses which are also linked will also not be claimable. Withholding tax must be deducted from interest, royalties and dividends (to the extent they are not franked) paid to non-residents. Liability for the submitted of withholding taxes rests with the payer of such amounts. Withholding tax is unruffled through the, pay as you go (PAYG) system and is single-minded according to the payer’s PAYG withholding rank. The payer is also obliged to submit an annual report with the Commissioner of Taxation where such amounts have been withheld during the financial year. Bonds carry with them an exemption in taxation together with notes sold at a discount (including zero-coupon bonds) and "traditional securities" (certain interest bearing notes convertible to shares). Gains and losses from these come under ordinary income tax. (Medals and d. 2011, p 56) Interest in most cases is generally deductible to a small extent because it is dictated by the funds borrowed for income producing reasons. Interest deductions may be restricted by the thin capitalization provisions. The thin capitalization rules seek give a small potion if not to deny deductions for interest payments if the taxpayer’s does not go beyond the debt-to-equity ratio if it exceeds, an exception to this law is where the company can satisfy an arm’s length test, which mostly dwells on the company’s likely borrowings if it had acted at arm’s length and what independent finance providers would lend to the company on arm’s length terms. The thin capitalization provisions mostly apply to foreign controlled Australian entities and the inner investments of foreign nationals and Australian-based entities with foreign investments. Considered a de-minimize rule which ensures that all corporate entities and their associates where by regardless of their nature or business that it deals with on which it will claim no more than AUD $250,000 in debt deductions per financial year will not be subject to the thin capitalization rules.( Medal & d 2011, p 79) 8: Taxable Income rules governing transactions of goods and servicing taxation(GST) Any asset acquired before 20 September 1985, known as a pre-CGT asset. But an asset loses its pre-CGT status if substantial changes are made to it an example would be a major additions to a building, or on the death of the original owner, Is exempted from tax thus ruling out the first two shares acquired before 20th September 1985 at taxable items. A person, who deals in buying and selling shares or other assets as a business, treats those assets as trading stock. Any gains or losses on them are ordinary income rather than capital gains. The taxpayer needs to show by determine whether they fall into the category of a share trader or not. There's no precise law on share traders, but the ATO publishes a fact sheet with guidelines based on court rulings. It includes examples of definitely trading, and definitely not. Factors include whether the purpose profit making, the repetition and regularity of the transaction or activity, and whether organized in a businesslike manner. At worst a taxpayer can use the system of private rulings to get an ATO resolve on particular circumstances they're in or are contemplating.( Woodle & mick 2011, p 56) A trader has the advantage that losses can be offset against other income dividends for instance, and has a choice of pricing each share at either cost price or market price each year, so unrealized losses can be recorded immediately but unrealized gains held back. The disadvantage for a trader is that the 50% discount on capital gain tax (CGT) gains for assets held 1 year or more is not available. Prior to the introduction of capital gains tax in (1985, section 52 of the ITAA 1936) required taxpayers to declare (on their next return) assets they had acquired for trading. This was known as declaring oneself a share trader, but now there's no such election. Taxable income would be. It sold shares for $600,000 which it had purchased for $450,000 in June 1985. 0% It sold shares for $250,000 which it had purchased for $80,000 in March 1984. 0% It sold shares for $40,000 which it had purchased in May 2006 for $48,000. 50% discount It sold shares for $530,000 which it had purchased over the previous nine months for $320,000. Full payment The fund received fully franked dividends of $29,000 and interest from bonds and term deposits of $28,000. 50% discount. The fund received $22,000 commercial property rent of which related deductions were $8,000. The fund paid accounting fees of $8,000 which included the audit and tax return. GST exempted. The fund paid $220,000 for a painting by Aurthur Boyd. 100% deduction on the expense Employer contributions to the fund were $35,000 and employee contributions were $100,000 representing non-concessional contributions. 0% deduction Taxable income will be $20,000 +$850,000+ $14500+ $220000= $1104500 Tax liability will amount to 50% of 1104500= 552250 The goods and services tax (GST) is a tax that applies to most supplies of goods and services made in country. The GST also applies to supplies of real property examples include, land, buildings and interests in such property and intangible property such as trademarks, rights to use a patent, and digitized products downloaded from the Internet and paid for individually. The participating provinces harmonized their provincial sales tax with the GST to implement the harmonized sales tax (HST) in those provinces. Generally, the HST applies to the same base of goods and services as the GST. In some participating provinces, there are point-of-sale rebates equivalent to the provincial part of the HST on certain designated items. GST/HST registrants who make taxable supplies other than zero-rated supplies (0% tax) in the participating provinces collect tax at the applicable HST rate. GST/HST registrants collect tax at the 5% GST rate on taxable supplies they make in the rest of the country (other than zero-rated supplies). Special rules apply for determining the place of supply. For more information on the HST and the place-of-supply rules, In this case, the effective date of your GST/HST registration depends on when you go over the small supplier threshold amount of $30,000 ($50,000 if you are a public service body). If your revenues are over the threshold amount in one calendar quarter, you are considered a registrant and must collect the GST/HST on the supply that made you go over the threshold amount. In this case we are dealing as a fund so GST does not apply. References Wallschutzky, I. G. (1985). Definition of the Term, Tax Avoidance 14 Australian Tax Review, 38, 152. Woodley, Mick, (2011). Osborn’s Concise Law Dictionary 10th . 359. Buckley, Ross, (2003) Australian Law Journal Overseas Law. The Rule of Law and Economic Vibrancy, 77 424, 424. Australian Tax Avoidance Experience and Responses. In Cooper, Tax Avoidance and the Rule of Law. A Critical Review’ 247. The new measures were made law on 26 March 2003 and are contained in the Tax Administration Act 1994 (NZ) Read More