Principles of Income Tax Law - Assignment Example

TAXATION LAW STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1 The sale of land on the 1st July 2010 purchased 25 years earlier in New South Wales (NSW). The land was acquired before 20th September 1985 hence it is not subject to capital gain tax. The proceeds from the sale of the land is the realisation of a capital asset, this amount is not assessable as income under the Income Tax Assessment Act 1997 (ITAA97) section 6-5. Suzette purchases a hectare of land on the waterfront due to boredom. Suzette commissioned a builder in October 2012 to design and build eight town houses at the waterfront land. Section 6(1) of ITAA36 states income ‘from property or income derived from property is income and not income from personal exertion’. Income is subject to taxation where one distinguishes between income from a business which is assessable as income and derivation from a hobby which is non-assessable. In Ferguson v FC of T (1979) 79 ATC 4261 the court created four tests in what constitutes a business. First, a profit making motive must exist, the activities must be repetitive or regular, the activities organised in a business-like manner and the capital employed and levels of operations be significant. The Federal Court in Ferguson v FC of T (1979) held that the nature of the activities that is leasing 5 cows for breading were in the nature of a business. In Whitfords Beach Pty Ltd v FC of T (1982) 150 CLR 355 the courts applied section 25A and sections 26 (a) currently sections 15-15 of ITAA97 making the profits assessable income under section 25 (1) NOW under section 6-5. The development of the waterfront land, leasing the property at a profit diminishes ability of Suzette claiming that this is hobby or a recreational undertaking. In May 2013 Suzette was successful in leasing five of the units on a short-term basis. The amount obtained from leasing the property is income within the meaning of section 6-5 of ITAA97 hence assessable as income. The application to change the title of the units to ‘strata titles’ and selling the four units in December constitutes a business making motive as held in Ferguson v FC of T (1979). The proceeds realised were used to purchase an adjoining block of land with the intention of building more units this constitutes repletion of business activity hence the proceeds of the sale is income within the meaning of sections 605 of ITAA97. In FC of T V Myer Emporium Ltd (1987) 163 CLR 199 the court held that the sale by Myer of their interest is separated from their right to repay the loan, this was a structural asset and hence the proceeds were not income. However the High Court stated that the amount was taxable under section 6-5 and section 15-15 of ITAA97 because it was a profit making scheme. In conclusion Suzette carries on a business as held in Ferguson v FC of T (1979) hence any amounts realised is taxable as income within the meaning of sections 6-5 of ITAA97. Question 2 Thang’s situation requires an analysis of the Capital Gains Tax (CGT) liabilities in relation to his activities. CGT is payable and assessable on events or assets that are realised as from 20th September 1985 which is part of statutory income under section 6-10 of ITAA1997. A capital gain is made when there is capital gain or loss after the occurrence of CGT event under section 100-20 ITAA97 and the event involves a CGT asset. In February 2006 Thang purchased an investment property in Perth for $200,000 paying stamp duty of $10,000. This is an acquisition of property and not a CGT event because there was no gain or loss as per section 100-20 of ITAA97. Thang got a tenant in August 2013 able to pay him a lump-sum amount of $2000 additional to the annual rent for entering into 12 months lease; however the tenant wanted to be released early from the lease. Thang and the tenant agreed that the lease would be terminated early in exchange that the tenant would give Thang $3,000. There was a CGT event occurring when the termination contract was entered into (FCT v Sara Lee Household (2000) 201 CLR 520). The amount $3,000 received as a compensation in connection with the termination of the lease constitutes income under ordinary concepts under sections 6-5 of ITAA97. As a general rule amounts received in connection with the cancellation or variation of a commercial contract is capital in nature as held in Heavy Minerals Pty Ltd v FC of T (1966) 115 CLR 512. This constitutes a capital gain by the lessee (Thang) while it is a capital loss for the lessor (Tenant). In distinguishing between capital and income one should consider the case of Van den Berghs Ltd v Clark (1935) AC 431. The tests employed are considering whether the contract forms part of the framework for capital circulation or whether it is incidental to the profit-making scheme (Van den Berghs Ltd v Clark (1935)). The House of Lords held that the compensation received was capital in nature. Thang surrendered his rights under the contract which affected his profit making undertaking hence $3,000 is subject to CGT. On May 3 2014 Thang entered into a contract for the sale of his property for $700, 000 settled in June 2014. The CGT event occurred in June 2014 when the capital was received (FCT v Sara Lee Household). Section 110-25 (2) of ITAA97 cost base includes acquisition costs. Thang made a capital gain because in deducting the capital proceeds from the cost base there is a net capital gain ($700,000-$210,000 = $490,000). The asset was disposed after 19th September 1985 it therefore triggers a CGT event under section 104-10 of ITAA97. In September 2006 Thang purchased the shares in Hong Pty Ltd for $2Million and in February 2014 he sold his shares for $4million. The assets of Hong Pty Ltd being a Pillow Manufacturing plant and factory at $2,500,000 and goodwill at $1,500,000 with an annual turnover of $2.5 m per year. In the case of FCT v Murry [1998] HCA 42 the court held that good will is a CGT asset when it refers to customer attraction and reputation and therefore $1,500,000 Thang’s good will is a CGT asset. In June 2014 Thang at the age of 53 purchased Julian Pty Ltd for $350,000 whose assets were a Bed and Breakfast accommodation $290,000 and a 10% share in investment property. There was no CGT event occurring because this was the purchase of a CGT asset hence there was no loss or gain. The issue under consideration is whether Thang can take advantage of the small business concessions to reduce the amount of tax payable on the sale of Hong Pty Ltd? Thang qualifies for the small business CGT concession when he meets the following criteria. First the CGT event that is the sale or purchase of an asset must happen in relation to the asset being solely owned by him and is used in carrying on the business. Secondly the CGT event must have resulted in a capital gain. Thirdly, Thang’s business must be a ‘small business entity for the particular year, meets the maximum net asset value tests or that Thang is a partner in a partnership that is a small business entity for the income year and that the asset is an asset of the partnership. Lastly the CGT asset sold must meet the active asset test contemplated in ITAA97 under sections 152-35 and sections 152-35. Sections 328-110 ITAA97 states ‘if the aggregate turnover of a business in the previous tax year exceeds $2,000,000 the business will not qualify for a small business entity in the next year’. In the case of Thang the aggregate annual turnover of Hong Pty Ltd was consistent around 2.5milliom a year and this means that he will not be considered as a small business entity. However Thang may be entitled to a small business concession if he meets the net asset maximum test and the CGT assets sold meets that active asset test in ITAA95 section 152-35. The maximum net asset value test is satisfied. Prior to the occurrence of the CGT event the sum of the net value of the CGT assets, the net value of CGT assets of entities connected with Thang and the net value of CGT assets of affiliates of Thang did not exceed $6,000,000 (s 152-15 of ITAA97). Thang has 100% ownership in Hong Pty Ltd the assets are worth $4Million ($2,500,000 +1,500,000) connected with his affiliates assets in Julian Pty Ltd worth$350,000 the total value of his net assets in 2014 are below the $6million threshold under section 152-15 of ITAA97. In this case Thang will qualify for the CGT small business concessions in the year 2014 provided that the sums of his net assets do not exceed $6,000,000 as long as the assets sold are active assets. Question 3 In the history of Australian taxation system, relief or equities have been made available to families in the form of concessions when it comes to calculating the income tax payable (Hodgson, 2005). Family tax concession was therefore available as deductions, offsets, and rebates reducing the tax payable by the family. In July 1st 2000 Family Tax Benefit (FBT) introduced to replace tax and welfare benefits available to families. This included the payment of child benefits available to parents paid for child care despite being paid outside the Australia tax system (Lodge v FC Of T 72 ATC 4174). The start of the family payment reforms will start on the 1st of July 2015 with an impact on savings of $4,777.3 in a period of five years (Parliament of the Commonwealth, 2014). These changes all form part of the 2014 budget measures Bill 2014 amending the Social Services and Other Legislations. The law prior to the changes were that families were to receive the base rate of family tax benefit Part A until such time when their income reached the higher income free area of $94,316 with a child add-on amount of $3,796 for each FTB child after the first. FBT under Part B is available to families with children who are aged 16 or continue to be full time students until they turn eighteen years. The law failed to apply equally to both the affluent families and the low income earners hence it was discriminatory or unequally in terms of its application (Hodgson, 2005). The law under Part B only applies to families where the higher earner in a single parent or couple earns an income of $150,000 per annum or less. The first of the changes to be made as part of the reforms effective 1st July 2015 is that the limits applicable to FBT that is Part A large family supplement to families with four or more child. The reforms remove FBT imposed on Part A per –child added to the higher income free area for each additional child after the first. It also ceases the use of indexation when reversing FBT end of year supplements to their original values. Part B of the FBT seeks to reduce the primary income earner limit from $150,000 to $100,000 per year. In Part B the limits to families with children below the age of six with transitional arrangements applying to current recipients with children above the age limit of two years. The changes introduces allowances for single parents of a maximum rate of FBT Part A for child aged six (6) to twelve (12) years inclusive and they are not receiving FBT under Part B. The per-child add-on as from 1st July 2015 will no longer apply. The new change as from the 1st of July 2015 means that FBT Part B will only be limited to families with children below the age of six. However a parent may apply for an extension to be entitled under Part B for additional 2 years until June 30th 2017 (Parliament of the Commonwealth, 2014). Starting the 1st of July 2015, the FTB at part B will no longer be limited to families with a higher earner or single parent having an income of $150,000 but this threshold is lowered to $100,000. Single parents in the proposed family reforms are given the single parent supplement starting 1st July 2015 with a maximum rate of FBT in Part a where the child is between ages six and twelve. This aims to offset the loss of assistance experienced by single parents an annual payment of $751.90. The other major change concerns the removal of education entry payment (EdEP). This means that education entry payment will cease from being taxed as from 1st January 2015. This provision is in conformity with section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. This is further informed by the provisions of Article 9 and 13 of the International Covenant on Economic, Social and Cultural Rights (ICESR) 1977 recognising the rights to social security and the right to education. In the 2014 to 2015 budget, there is relief for students cost of study that is there is equal aces to loans for undergraduate students that is the FEE-HELP loan while the 20percent will be removed starting January 2016. With the removal of the loan limits a student can access, this means starting 1st January 2016 no limits will be placed on the loan amount. A further change on the EdEP introduces a minimum repayment threshold for HELP starting in the 2016-2017 financial income year. In this case, a graduate will commence to pay his HELP loan debt once their income reaches $50,638 (Parliament of the Commonwealth, 2014). The next issue or determination is whether it is desirable to implement the changes considering fairness, efficiency, equality, protection of government revenue and any other relevant considerations? The change seeks to restore equity between income and support. This is because deductions or reliefs aim at restoring a form of ‘horizontal equity’ between individuals of a particular income level who differ in terms of marriage, health, children incurring different amounts of unavoidable expenditures’ (CCH, 1975). Equity aims at promoting equality in the taxation process because it ensures that no person is disadvantaged by the taxation process either equally or vertically. The recognition that single families, families with many children and students have hardship means that the State seeks to lessen the tax burdens imposed on them. As part of family goals, the policy seeks to ensure that families bear an appropriate tax burden while incorporating horizontal equity that is recognising that families incur additional costs (Hodgson, 2005). According to Adam Smith, he asserts that ‘subjects of a state ought to contribute towards state support as nearly as possible in proportion of their abilities in proportion to the revenue they enjoy under State’s protection’ (Adams Smith, 1776). The desirability of implementing this changes is to ensure that there is equality because persons with same income will pay the same tax (horizontal equity) while person with different incomes the one with a higher income will pay more (vertical equity) (Maither & Comm, 2013). This provisions that acknowledges the fact that people with families are not at the same level with a person with income with no dependents. This provision means that the new FBT introduced will universally apply to families with low or high income hence meeting the equitable tests of a taxation system. The fact that the new changes recognises the challenges experienced by single parents is shows that the government is willing to ensure there is fairness in the administration of taxes. References Adam, S 1937, (First Published 1776), The Wealth of Nations, 777-78 CCH Australia 2012, Australia Tax Master Guide 2012, CCH Australia Ltd, Canberra. CCH (eds) 1975, The Asprey Report: An Analysis, CCH, Sydney, p. 1200 FC of T V Myer Emporium Ltd (1987) 163 CLR 199 FCT v Murry [1998] HCA 42 FCT v Sara Lee Household (2000) 201 CLR 520 Ferguson v FC of T (1979) 79 ATC 4261 Hodgson, H 2005, ‘An Historical Analysis of Family Payments in Australia: Are They Fair or Simple?: An Analysis of Transfer Payments to Australian Families Applying the Criteria of Equity and Simplicity’ Journal of the Australasian Tax Teachers Association vol.1, no.2, 318-342 Human Rights (Parliamentary Scrutiny) Act 2011 Income Tax Assessment Act 1997 Income Tax Assessment Act 1936 International Covenant on Economic, Social and Cultural Rights (ICESR) 1977 Lodge v FC Of T 72 ATC 4174 Maither, L & Comm, B 2013, Curiosities and Anomalies in the Federal Income Taxation of Trusts and Estates, 4th edn, Lyndon Maither, Sydney. Parliament of the Commonwealth of Australia, House of Representatives (2014) Social Services and other Legislation Amendment (2014 Budget Measures No.2) Bill 2014: Explanatory Memorandum Ministry of Social Services, Sydney. Parsons, R W 2001, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting, Law Book Company, Sydney (1985) Whitfords Beach Pty Ltd v FC of T (1982) 150 CLR 355 Read More