Advanced Revenue Law - Assignment Example

Revenue Law Name: Instructor: Course: Date: Question 5 Background Peter Gow is an investment advisor with BZK Limited, a large financial planning group in Sydney that has funds under management of $260 million. He has advised the Board of Directors that they should sell the fund’s 1 million shares in BHP which will result in a profit of $12 million to the company. The Board agrees and on 14 May 2012 the shares are sold. Peter also notices that the 4 million Telstra shares have not performed as well as expected and that they currently show a loss to the group of $16 million. The Board agrees that the shares should be sold due to their lack of performance and on 16 June 2012 the Telstra shares are sold. In November 2012, Peter notices that a number of stockbrokers from the large banks are now recommending that Telstra shares are a ‘buy’ and an excellent investment due to solid growth projections in the future. Peter now recommends to the Board that 4 million Telstra shares be bought. The Board agrees and on 19 September 2012 the shares were acquired. The auditors for BZK have just completed the accounts for the company and have advised the Board that their actions in selling both the BHP and Telstra shares prior to 30 June may constitute tax avoidance under Part IVA. Peter has to understand what is meant by tax avoidance and how the transactions conducted by BZK, through his advice, might be considered to be acts of tax avoidance. Part IVA of the 1936 Income Tax Act would assist in determining not only the position of BZK limited but also the best arguments to use to defend BZK against the possible claims of tax avoidance. Tax Avoidance Tax avoidance is the act of reducing one’s tax liability within the provision of the applicable law. It is not considered a criminal offense but it is unethical. Tax avoidance is fought all over the world. Australia has not been left behind in the fighting of this vice which eats into the tax revenue and if not checked, would negatively the cash flow of a country. Examples of tax avoidance activities include a situation where high income individuals split their incomes among minors or unemployed spouses so as to reduce their tax liabilities (Kendall, 2009). Another example is the transfer of assets by an individual or a company to other owners or companies just before the income tax falls due. By the time the tax falls due, the company or the individual would not be able to pay. In addition, engaging in “sham transactions” may also constitute tax avoidance. “For example presenting a dividend (assessable) as a loan (not assessable),” (Kendall, 2009). In the case of BZK, the sale of significant number shares just before the period end (30th June, 2012) may actually constitute tax avoidance. Furthermore, 4million Telstra shares were sold and the bought again within a period of 4 months. It raises suspicion of tax avoidance though in the real sense the company sold the shares when they were performing poorly and repurchase them after notable signs of improvements were seen. Tax avoidance is meant to reduce the tax liability and thus the taxpayer is perceived to enjoy tax benefits as result of paying less tax than they would have paid. So, how does the law determine and act on the cases of tax avoidance? In Australia, Part IVA of the 1936 Tax Act provides guidance on how tax avoidance is addressed legally. Part IVA Part IVA is the Australian Taxation Law’s General Anti-Avoidance Regime (GAAR). It is a provision of the 1936 Tax Act and serves to reduce any Australian income tax benefits resulting from any transactions which the Commissioner of the Income Tax can successfully establish that the dominant purpose of a party involved in the transaction was to reduce the incidence of the Australian income tax (PWC, 2008). Elements of Part IVA For the Commissioner to apply part IVA to cancel a tax benefit obtained by a taxpayer, there are three elements which must be present. 1. A scheme is present: the definition of a scheme is very wide; it covers not only a series of steps that makes a scheme but also the “taking of just one step” (by reference to action). This means a scheme is always there and is an obvious fact in the determination of acts of tax avoidance. 2. A taxpayer must have obtained a tax benefit: a tax benefit may be termed as an event that reduces the tax liability of the taxpayer, than they would have paid. 3. Having regard to several objective criteria in the legislation, the sole or dominant purpose of a person who entered or carried out the scheme was to enable the taxpayer to obtain the tax benefit. It is quite difficult in some situations to determine the sole purpose of the scheme and for this reason the current legislation is being amended in order to address this issue. It is worth noting that if only one of the above stated elements is missing, then part IVA may not apply or may be defended successfully by the tax payer. But a scheme is always there; this means that the taxpayers can defend themselves by proving that there was no tax benefit or that the dominant purpose was not get the tax benefit. How is Part IVA Applied? There is a process that is followed; it does not apply automatically. The commissioner of Income Tax is the one to determine if part IVA applies. This is normally done during or after an audit by the Australian Tax Office (ATO). The ATO usually gives the taxpayer a chance to comment on the position by writing. The commissioner then takes the determined position to the ATO internal GAAR panel. The panel also allows the taxpayer to present their case. After the panel hearing and discussion, the panel issues a revised assessment of the position. What are the consequences? It the commissioner succeeds in applying Part IVA, the commissioner cancels the tax benefits obtained by the taxpayer from the scheme, and make them to pay the tax that was earlier on saved. In addition, the commissioner may impose a further penalty equal to either 25% or 50% of the taxation saved from the scheme (based on the kind of the scheme). Interest on the unpaid tax is also imposed on the tax payer. This interest is derived from the period the tax fell due and the time it was actually paid (The Guardian, 2007). Limitations of Part IVA The “tax benefit,” that the taxpayer is supposed to have gained from a scheme in which its sole purpose was to get the tax benefit, is not well defined in Part IVA. How is the tax benefit determined by the commissioner? Should it be in monetary form only or other forms of benefits are also considered? To better define the “tax benefit” outlined in part IVA, “On 16 November 2012, the Assistant Treasurer released draft legislation and explanatory material amending the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936” (Moore Tax News). This amendment proposes a new way of determining the tax benefit enjoyed by the tax payer from the scheme. The tax benefit would determined by comparing the tax consequences of the scheme under investigation and the tax consequences that would have arisen, or might be expected to have arisen, if an appropriate alternative scheme were pursued. This alternative scheme is referred to as an ‘alternative postulate’. The difference between the tax consequences of the scheme and the alternative postulate is a tax benefit obtained in connection with the scheme (Moore Tax News). This is expected to improve the effectiveness of Part IVA in curbing tax avoidance among Australian tax payers. BZK’s Position The sale of both BHP and Telstra shares prior to the period end (30th June, 2012) may actually constitute tax avoidance under Part IVA, as recommended to the Board of Directors by the auditors of BZK Limited. Huge numbers of shares, both BHP shares and Telstra shares, sold just before the period end could raise suspicion of tax avoidance tactics. In addition, the repurchase of a similar number of Telstra shares is another whistle blower. However, Peter should be able to develop strong arguments to defend the company against the cases of tax avoidance that may be raised by the commissioner of Tax. Part IVA would be the best guide for Peter to develop those arguments within the premises of the Australian Tax Laws as per the Income Tax Assessment Act of 1936. For PHP shares, where Peter advised the board to sell 1 million PHP shares in order to achieve a profit of 12 million, tax avoidance is likely to be determined by the Commissioner of Income Tax. This is because the three elements stated by Part IVA are all present. There was a scheme among Peter (the investment advisor) and the board of directors, the company obtained tax benefits resulting from the dividends not declared on the 1million BHP shares that were sold, and the dominant role of the scheme can be said to have been to gain the tax benefits apart from making profit. However, if it can be proved that the dominant purpose of the scheme was to make the 12 million profits, the tax avoidance guilt would be prevented or successfully defended. Similarly, in the case of Telstra shares, tax avoidance would be suspected because of the sale of the 4million Telstra shares just before the close of the financial period and the fact that an equal number of Telstra shares were bought again after only 3 months. So, there was a scheme but the other two elements outlined in Part IVA might not be easy to determine since BZK Limited sold the Telstra shares owing to the losses associated with them. Peter should therefore develop arguments that would be used by BZK limited as a defense in case the Commissioner identifies those transactions to constitute tax avoidance. These arguments should be based on the three elements, that must be present for a tax avoidance to be constituted, stated in Part IVA. However, since a scheme is always there, Peter should concentrate on the other two; that there was no tax benefit achieved, and that the dominant or sole purpose was not to achieve tax benefits, if any. Furthermore, in case the commissioner determines that BZK limited engaged in tax avoidance by selling shares just before the period end, BZK limited through its Board of Directors would also give its position. This is because before the commissioner takes his/her position to the GAAR panel, the taxpayer is issued with a form to indicate their position on the scheme. In addition, BZK limited also has a chance to defend itself during the GAAR panel. So, BZK Limited should be able to convince the panel that the sole or dominant purpose of the scheme was not to get the tax benefits. In fact it could be easier to prove that there was no tax benefit that resulted from the transactions. In conclusion, Peter should sit with the Board of Directors of BZK Limited and decide on the best way forward, in case the commissioner determines that BZK Limited may have been engaged in Tax Avoidance. This is because there are so many favorable options available to BZK Limited, which are not in violation of Part IVA of the Income Tax Assessment of 1936. It would be more favorable if the Commissioner of Tax does not determine a case of tax avoidance involvement by BZK Limited. Question 7 Income from foreign investments of Matrix Limited (Australian Resident Company) As a general matter, Australian resident corporations have access to exemptions on the receipt of dividends from foreign corporations and on the realization of capital gains on the disposition of shares in foreign corporations. Australian resident corporations may also benefit from an exemption on active business income earned through foreign branches. Australian resident corporations further have access to foreign income tax offsets in mitigating the incidence of double taxation. Income earned by Australian residents (both individuals and corporations) is assessable for tax purposes in Australia irrespective of the withholding taxes or other taxes imposed on those incomes by foreign jurisdictions. However, Australia has tax treaties with many countries around the world including France, Japan, US, UK, among others; this allows the tax payers of Australia to claim refund on double taxations. Therefore, the tax payers may claim refund for double taxation in respect of the received foreign income or the taxes imposed on that particular income. Prior to July 1, 2008, tax payers were able to claim foreign tax credits. But as of July 1, 2008, the tax payers are required to claim foreign income tax offsets in respect of the withholding taxes imposed by the foreign jurisdictions. The foreign tax offsets allows Australian and non-resident tax payers to claim a tax offset for a particular assessable income on which foreign tax has been (or is deemed to have been) paid (Delloite, 2011). The amount of the offset should be equal to the foreign tax paid, with respect to a regulation which shows the Australian tax that would have been paid on that amount and other amounts from foreign sources. Before the offset is granted, the tax payer must have (or is deemed have) paid the foreign income tax, and the offset may only be applied in the income year in which the foreign tax relates (Delloite, 2011). Offsets may not be carried forward to the financial periods ahead. However, the offsets are allowed to be carried forward within the first five years in which the tax credit came into existence. The ensuing paragraphs details the Australian tax treatment of various foreign income including dividend income, commission income and interest income. 1. Dividends from foreign corporations The dividends received by Australian companies (AUCO) from a foreign company after 30th June, 2004 are “fully exempt from corporate income tax irrespective of the country of residence of the paying foreign corporation” where: AUCO has a direct voting interest in the relevant foreign corporation of at least 10 percent (non-portfolio investment); and AUCO does not receive the dividends in its capacity as trustee. So as long as the above conditions are met, the profits of a corporation may be remitted to Australia, tax free. The profits distributed as dividends to AUSCO need not actually be subject to tax in the relevant foreign jurisdiction for AUCO to qualify for the participation exemption. AUCO should not have the right to claim a foreign tax offset pertaining to the withholding taxes charged by foreign jurisdictions on the payment of dividends qualifying for the participation exemption. On the other hand, if the above conditions are not met, the dividends earned by AUCO form a foreign are fully subject to corporate income tax at the rate of 30 percent. In this case, AUCO has the option to claim a direct foreign tax credit (prior to July 1, 2008) or a foreign income tax offset (as of July 1, 2008) in respect of withholding taxes paid to a foreign jurisdiction on the receipt of such dividends, but not for underlying taxes suffered. This ensures that there is no over-reimbursements in terms of foreign income tax offsets. Dividends (AUD 4 million) from Beta Limited The dividends of AUD 4 million received by Matrix Limited (an AUCO) from Beta Limited (a US corporation), is fully exempted from corporation tax in Australia. This is because Matrix Limited has a direct voting interest in Beta Limited; it owns 100% of the shares of Beta Limited. In addition, Matrix Limited is not receiving the dividends in its capacity as a trustee but as an owner with controlling interests. However, Matrix Limited should not be able to claim any withholding taxes charged on those dividends in the foreign jurisdictions, qualifying for exemption. If Matrix Limited claims foreign tax offsets, then they may not be granted and, if granted, they would not be exempted from the income taxation in Australia. Dividends (AUD 750,000) from Alfa Limited The dividends of AUD 750,000 received by Matrix Limited from Alfa Limited (a UK corporation) are taxable at the corporation rate of 30% in Australia. So, Matrix Limited should include the full amount of dividends earned, AUD1 million (AUD750, 000+AUD250, 000 withholding tax deducted), in its assessable income during the 2012-2013 reporting period. Furthermore, Matrix Limited should claim the foreign income tax offset of AUD 250, 000 that was deducted in UK in respect of the dividends (AUD 1million) received. Matrix Limited must have paid (or is deemed to have) paid those foreign tax before claiming it. They should also claim it during the year in which the foreign taxes were incurred and not necessarily when it is paid. It is advisable for Matrix Limited to claim this foreign income tax offset within the 2012-2013 financial period. 2. Commission income of AUD 7 million, earned by its branch in France The tax treatment of the commission income earned by Matrix Limited from its branch in France depends on two things; the location of the branch (whether it is a listed or unlisted country), and the time it was earned. Prior to 1st July, 2004, active business income earned by an Australian resident’s branch in a foreign country is fully exempt from corporate income tax in Australia unless: the foreign branch is located in a listed country such (US, UK, New Zealand, Canada, Germany, Japan, and France) and earns an adjusted tainted income such as passive income, tainted services income, which is more than five percent of the gross income of the foreign branch and the income is recognized by the Australian Tax Act as a taxable local income (income generally subject to tax exemptions or preferential tax treatment in the foreign jurisdiction); or The foreign branch is located in another country, which is not listed, and earns adjusted tainted income such as passive income, tainted services income which is more than five percent of the gross income of the foreign branch. The active business income or capital gains earned through a foreign branch do not have to be subject to tax in the applicable foreign jurisdiction for the Australian resident company to qualify for the participation exemption. If the income earned through a foreign is subject to corporate income tax in Australia, the company may claim a “direct foreign tax credit” prior to 1st July, 2008, or “a foreign income tax offset” as of 1st July, 2008 in respect of the taxes paid in the foreign jurisdiction. So, the commission income of AUD 7 million earned by Matrix limited, through its branch in France, is taxed fully in Australia (the corporate tax rate in is currently 30%). This is because France is a listed company. Matrix Limited should therefore include the full amount (AUD 7 million) in its assessable income in the 2012-2013 financial period. However, Matrix limited may claim a foreign income tax offset in respect of the foreign income taxes paid in France during the 2012-2013 reporting period. The foreign income taxes must have been paid by Matrix Limited, in order to be claimed. Furthermore, Matrix Limited should claim it within the 2012-2013 reporting period. 3. Interest income from US treasury bonds Australian residents (both individuals and corporations) are taxable on their worldwide income. This kind of income is taxed irrespective of the withholding taxes imposed on it at the foreign jurisdiction (U.S. jurisdiction). The interest income (AUD 6,500,000) earned by Matrix limited from its investments in US treasury bonds is fully subject to corporation tax at the rate of 30% in Australia. So this interest income of AUD 6,500,000 should be included in the assessable income of Matrix Limited during the 2012-2013 financial periods. However, Matrix Limited may claim a foreign income tax offset with respect to the withholding tax charged on the interest income in the US jurisdiction. The foreign income tax must have (or is deemed to have) been paid by Matrix Limited before claiming it. It is also advisable that this offset be claimed within the period it is incurred; in this case Matrix Limited should claim it within the 2012-2013 reporting period. Question 8 A. Adjustments for GST The GST (Goods and Services Tax) is a wide opportunity to sell toll of 10% on greatest part effects and menial duties performances in Australia. It's a utility adjected assessment, not a vents custom, in that it's reimbursed to all parties in the shackle of produce other than the final consumer. GST is a utility affixed assessment that's leads on furniture and labors as by the GST Act of 1998. The GST Act of 1998 stipulates that GST is to be applied or fitted or put on to a store of effects, menial duties and performances connected to real peculiarity, responsibility or rectilinear. Taxable supply stores hold furniture totally inside Australia, from or to Australia or veritable peculiarity in Australia. Certain marks of supply stores are independent of GST; prototypes hold novel unprocessed regimen of medicine works, schooling menstrual discharge, childcare, commodities, pre-owned actual state and make progressing transactions. Female bird and venture bargains effects or menial duties are to be spent or used for resupply to an end patron they may obtain a refund (input tax credence on the sum of GST embodied in the value). A Business Activity Statement (BAS) for reporting to the Australian Taxation Office must be completed by registered enterprises for GST for each and every quarter ending December, September, March and June. Businesses, within 20 working days of the end of each and every quarter, must lodge their Statements with ATO. Before the assessable income is determined, all the transactions subject to GST must be adjusted accordingly. The GST rate applicable in Australia is currently 10%. The transactions are adjusted as follows, where applicable. a) It sold shares for $600,000 which it had purchased for $450,000 in June 1985 b) It sold shares for $250,000 which it had purchased for $80,000 in March 1984. c) It sold shares for $40,000 which it had purchased in May 2006 for $48,000. d) It sold shares for $530,000 which it had purchased over the previous nine months for $320,000.   Sales purchases Net Income price $530,000 $320,000   GST (10%) $53,000 $32,000   Net $477,000 $288,000 $189,000 e) The fund received fully franked dividends of $29,000 and interest from bonds and term deposits of $28,000. Dividends and interest from bonds and term deposits received are not supplies. Therefore they are not subject to GST f) The fund received $22,000 commercial property rent of which related deductions were $8,000. Rental income is not subject to GST g) The fund paid accounting fees of $8,000 which included the audit and tax return. The fees of managing the fund including accounting fees are not subject to GST. They are not supplies. h) The fund paid $220,000 for a painting by Aurthur Boyd. This is a supply of service (painting) and is therefore adjusted for GST of $22,000 (10% of $220,000). i) Employer contributions to the fund were $35,000 and employee contributions were $100,000 representing non-concessional contributions. The contributions of both the employer and the employee are not supplies and therefore not subject to GST. B. Taxable Income and Tax Liability of the Superannuation Fund Self-managed superannuation funds (SMSFs) are subject to income tax but receive concessional treatment provided they are complying funds. A complying SMSF’s assessable income is generally taxed at a rate of 15% while non-complying fund is taxed at a rate of 45%. The most common types of assessable income for complying SMSF’s: a) Assessable contributions which include interest, dividends and rent b) Net capital gains: this may include gains realized on the revaluation of assets and are normally included as part of the assessable income of the SMSFs. However, certain types of SMSF income are taxed at different rates: Non-arm’s length income is taxed at 45%; this include income received from SMSF’s trade with its related parties, income received by the SMSF by being a discretionary beneficiary of a trust (this falls under the category of statutory income), among others. Such income, if received by SMSFs, is taxed at 45 percent. No-TNF contributions are taxed at 46.5%; TNF is a tax file number issued to every tax payer. If the SMSFs TNF is missing, the contributions of the SMSF are taxed at 46.5 percent. The Assessable income of “Lee Family Superannuation scheme” should be determined as follows: The tax liability of Lee Superannuation Fund = 15% of $574, 0000; a tax rate of 15 percent is applicable because Lee Superannuation Fund is compliant and has a TNF. Notes: 1. The capital gains was realized from the revaluation of shares: First, the shares that were bought in 1984 for $450, 000 were revalued at $470, 000 thus resulting in $20,000 as a capital gain. Second, the shares bought in 1985 for $80,000 were revalued at $95, 000; resulted in $15, 000. 2. Paintings worth $220, 000 paid to Arthur Llyod is not deductible for tax assessment purposes since it is not “directly” involved in the generation of the taxable income. 3. Accounting fees of $8, 000 are deductible for tax assessment purposes since it is part of the management costs directly involved in the generation of the taxable income. 4. The superannuation contributions (amounting to $100, 000) made by the employer for the employees are income tax deductible. However, the superannuation contributions made by the employees on behalf of themselves are added to their assessable income; normally taxed at the rate of 31.5percent. 5. Dividend income and term deposits are also included in the assessable income since they are part of the main income of the SMSFs 6. The tax liability of Lee superannuation fund is determined using a rate of 15 percent since it is a compliant fund that is registered with ATO. References Delloite, 2011. Taxation and Investment in Australia 2011. Available from http://www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Tax/Taxation %20and%20Investment%20Guides/2011/dttl_tax_guide_2011_Australia.pdf. Kendall, K., 2009. Tax Avoidance in Australia. ConTax Student e-Newsletter. PWC, 2008. Taxation of Foreign Source Income in Selected Countries: Report Prepared for the Advisory Panel on Canada's System of International Taxation. Melbourne: Advisory Panel on Canada's System of International Taxation. The Guardian, 2007. Shall I transfer my shares to a SMSF? Available from http://moorestephensresources.com.au/articles/767/1/Moore-Tax-News---Changes-to- Part-IVA/Page1.html. Read More