Revenue Law, Capital Gains Tax - Assignment Example

Name: Instructor: Course: Date: Revenue law Question 1 Capital gains tax is the tax deductions made on the gains one has made from the sale of an asset. Capital gain is therefore the difference between the original cost of an asset that is the cost incurred by the owner when buying it, and the amount received after the owner has disposed of that asset. The tax will therefore be deducted only where one receives more when disposing an asset than the actual cost of the asset.1 Capital gains tax generally forms part of the income tax hence it is not considered as a distinct tax.2 Capital gains tax is deducted on all assets acquired since the beginning of this tax system, that is, on 20 September 1985.3 Brian Brat had owned the farm for 21 years meaning that at the time he acquired the asset, the capital gains tax had not commenced. The land is therefore not subject to Capital Gains Tax as it was bought before the start of the tax system. Capital gains tax will however affect all the other assets that Brian has acquired. This means that it will apply to the acre of land purchased at the cost of $ 500,000, the eight townhouses constructed and also the sale of those units. The block of land bought after the sale of four of the units will also be subject to Capital Gains Tax. Since one of the units was to be used as the residential place for Brat, that specific unit will be exempted from Capital Gains Tax. Where a person is an individual and not a company any capital gains event that happens involving the dwelling place or the main residence, such event will not be subject to capital gains tax.4 The requirement for such exception is that the house must not have been used to produce any income. The land on which the house is located must also not be more than two hectares. Brat had chosen his residential house and then leased out the rest of the units hence he did not use that unit to gain income. The unit is therefore exempted from Capital Gains Tax. 5 Since the land he previously owned for 21 years was acquired before the commencement of Capital Gains tax, no deductions will be made. However, the acre of land he purchased on the waterfront is subject to capital gains tax. On this land he constructed eight units that cost him $ 125, 000 each. This amount is to be added to the total cost of the purchase of the land. This is because it will form part of the cost base that will be used to calculate the gains from the asset. The units gained a total of $ 75,000 from the sale hence the total of that amount for all the units sold will be subject to the Capital Gains Tax. The proceeds from the units sold are used to buy another block of land to be used to build more units. This block of land will also be subject to Capital Gains Tax once Brat decides to dispose it. Question 2 Section 6 of the Income Tax Assessment 1936 provides that taxable income or the amount that is subject to tax is the amount that remains after all the allowable deductions are deducted from the total income.6 This means that for every income that is taxable, a person is allowed to make deductions in order to come up with the final assessable income that is subject to tax. Allowable deductions therefore are meant to reduce the amount that is subject to tax as well as reducing the tax.7 The Income Tax Assessment Act provides that the deductions that are to be made on the taxable income are those that relate to losses and outgoings incurred by the person concerned.8. Losses and outgoings will be deducted from the taxable income only to the extent that they are incurred in the process of producing income that is assessable for tax purposes9. The expenses that are necessary in the making of the income that is to be assessed for tax purposes or are necessary for the holding of property that is the subject of the derivation of the income will be deductible. An expense that is important in deriving income will be regarded as a working expense and hence is deductible. Capital expenses, expenses that relate to the structure of the property, will on the other hand not be deductible. The court in Caltex Ltd10 held that what determines whether or not a deduction is allowable depends solely on the construction of section 51 of the Income Tax Assessment Act. In the case involving Nicola, the deductions that will made in regard to the expenditures incurred while acquiring the house will depend on the provisions of section 51. The working expenses, as stipulated in the Act, will be deductible from the expenses. The Act11 stipulates that working expenses are those that are important in deriving the income to be assessed for tax. In this case, the amount to be assessed for tax is derived from the house bought by Nicola. This therefore means that the expenses in regard to the purchase of the house will be deductible.12 Therefore, the loan Nicola took for the purpose of acquiring the house will be considered as a working expense hence will fall under the category of the allowed deductions. This includes the interest on the loan, the legal fees, loan charges and the stamp duty payments made in relation to the loan.13 The roof of the house which was replaced together with the timber floor replaced with a concrete floor will also be deducted. The income that was to be gained from the house was to be derived from the rent from the house. These expenses were therefore necessary in raising income. These expenses fall under the second limb of section 51 which allows all outgoings that are necessary in the carrying on of business to be deducted from the income to be assessed for tax purposes. However, expenses incurred in repainting of one of the bed rooms and the purchase of a gas water heater cannot be regarded as part of working expenses. These are domestic or private expenses and hence are not deductible under section 51 of the Income Tax Assessment Act. In Snowden & Wilson Pty Ltd14 the court stated that the requirement that the expense incurred should be necessary for the business or for the means that such expense should be appropriate or adaptable to the carrying on of the business. This means that the expense should be incidental to the business. The repairs done on the floor, the roof and the expenses in regard to the taking of the loan to buy the house were necessary for the actualization of the business which was to make the house conducive to be let out. This means that they could be deducted from the assessable income. Question 4 Goods and services tax (GST) refers to tax that is imposed in all goods and services. GST is therefore tax of a general nature that is applied to most goods and services.15 The current GST levy is 10%. It is important for the seller or buyer of a business to determine whether GST applies.16 If GST applies, the buyer may be required to pay GST on the purchase of the business. There are instances where the sale of a business is exempted from GST. A New Tax System (Goods and Services Tax) Act 1999 provides that where the supply of the business is of a going concern then the purchase will not be subject to GST.17 Roslyn has entered in to a contract with Natalie for the sale of the Conveyancing practice. The transfer is to be of all the assets of the business with the exception of the motor vehicle. The business would transfer to Natalie on the day of settlement of the contract. The issue is therefore whether the sale of the conveyancing practice falls under the going-concern exemption. The GST Act18 defines supply of a going concern as a supply where the seller of the business is to supply all the things necessary for the continuity of the business and where the seller of the business will continue with the business until the day when the business will be transferred to the buyer. The court in Allen Yacht Charters Ltd v CIR [1994] held that the sale of a charter boat could not be considered to fall under the going concern exemption. This was because the buyer did not determine the financial viability of the business, did not transfer the records of the booking of the yacht and he did not know the nature of the business. This means that it is important that all that is necessary for the continuity of the business be transferred. The contract between Roslyn and Natalie provided that all the assets of the business were to be transferred to Natalie on the completion date of the contract. The motor vehicle could not be regarded as a necessity in the conveyancing practice hence its lack of transfer does not disqualify the supply from the going concern exemption. Further, the assets of the business and the business as a whole would be transferred on the date of completion which meant that Roslyn was to continue with the practice until that day of completion. The analysis of the sale of the conveyancing practice shows that the transfer falls under the going concern exemption as provided under the GST Act19. It therefore follows that the transfer of the business to Natalie is not subject to GST. Question 5 Part 1 Section 620 defines a resident as a person who, among other things, has been in Australia continuously or intermittently for more than one half of the year of income. Such a person may, however, not be a resident of Australia where the Commissioner of Tax is satisfied that the usual place where he lives is outside Australia and that the person does not intend to take up residence in Australia.21 Jack had stayed in Australia for a continuous period of more than six years which means that he had been in Australia for more than one half of the year of income.22 Though he had travelled to Saudi Arabia and actually stayed there for 9 months, such stay was of a temporary nature. Jack later quits his job and returns to Australia. There he sets up a business together with his wife which all shows that he intended to stay. Jack had further intended to be out of Australia for only 9 months which was what happened then he returned. Jack was therefore a resident in Australia in regard to the provisions of section 6 of the Income Assessment Act.23 Part 2 Section 23AG24 provides that a resident who has been engaged in foreign service for a period of 91 days or more, any earnings made from the foreign service is exempted from tax.25 However, such earnings will not be exempted from tax if the earnings were not subject to income tax in the foreign country either because of a double tax agreement or a law giving force to a double tax agreement in the foreign country or where the law of the foreign country does not provide for the imposition of income tax on such earnings. 26 Jack stayed in Saudi Arabia for a period of 9 moths which means that he satisfied the requirements of section 23AG (1).27 The earnings were however not subject to income tax in Saudi Arabia. If the reason for the failure to deduct the income tax from the earnings was as a result of the provisions of the law in Saudi Arabia, this would mean that the income earned by Jack would not be exempted from tax in Australia. However in this case there is no evidence as to the reason as to why there was no income tax deducted from Jack’s earnings. This would mean that the reason as to why the income tax was not deducted does not fall within the reasons set out in the section 23AG (2) of the act. Jack’s earnings would therefore be exempted from tax in Australia under section 23AG of the Income Tax Assessment Act. Works cited A New Tax System (Goods and Services Tax) Act 1999 Australian Taxation Office, Australian Government, Working out your capital gain, Retrieved June 18, 2015, from: https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/ Braithwaite, Valerie. "Responsive regulation and taxation: Introduction." Law & Policy 29.1 (2007): 3-10. Chrisholm, Andrew, John Freebairn, and Michael Porter. "Goods and Services Tax for Australia, A." Austl. Tax F. 7 (1990): 127. Downing, Richard Ivan. Taxation in Australia: agenda for reform. Melbourne University Press, 1964. Income Tax Assessment Act 1936 Johnson, David. "Taxation in Australia." Australian Economic Review 30.4 (1997): 448-466. Mertens, Jacob. The Law of Federal Income Taxation. Vol. 6. West Group, 1949. Pinson, Barry, and John Ralph Gardiner. Pinson on Revenue Law: Comprising Income Tax, Capital Gains Tax, Development Land Tax, Corporation Tax, Capital Transfer Tax, Value Added Tax, Stamp Duties, Tax Planning. Sweet & Maxwell, 1978. Pope, Jeff, and Nthati Rametse. "Small business and the goods and services tax: Compliance cost issues and estimates." Small Enterprise Research 9.2 (2001): 42-54. Prebble, John. "Capital Gains Tax." Current Taxation 37 (1989): 93-94. Shipwright, Adrian, and Elizabeth Keeling. Textbook on revenue law. Blackstone, 1997. Tax, Capital Gains. "Capital Gains Tax." NEWSLETTER (2010). Tran-Nam, Binh. "Implementation Costs of the GST in Australia: Concepts, Preliminary Estimates and Implications, The." J. Austl. Tax'n 3 (2000): 331. Read More