Income Taxation - Assignment Example

Running header: Tax Law. Student’s name: Instructor’s name: Subject code: Date of submission: 1 The decision whether Basil is an Australian resident for tax purposes depends on whether Basil generally resides in Australia for the period. Here; the following factors are considered; i) Physical presence in Australia- to be a resident, a physical presence is necessary. In this case, Basil has a residence in Australia for the three years as he has rented a house and even intends to buy one if he finds Australia conducive (Chris, E2010). Furthermore, he has rented out his residence in the UK as he no longer resides there. ii) Duration of visit- Basil is in Australia for work and intends to stay for three years which is a relatively long time and hence he qualifies to be a resident. iii) Family ties-the fact that he has transferred his immediate family members to live with him in Australia makes him more of an Australian resident. Iv) Present habits and way of life- Basil is in Australia for at least three years (Catherine, 2009). Furthermore, his habit makes him more of a resident in that he is engaging in business like activities like buying shares and furniture. v) The domicile of choice- In this case, Basil will be considered an Australian resident for tax purposes if his chosen domicile is Australia (Thomas, 2011). The fact that he intends to stay in Australia for a substantially long period of time (3 years) and indeed rented a place of residence would imply that his domicile of choice is Australia and hence a resident for tax purposes. This can be deducted from the facts in FCT v Applegate (1979) case where the solicitor had moved to villa for an indefinite time period with his wife and established a law firm there. He had indeed surrendered a lease on his flat and secured a 12 month renewable lease for a house in villa. He came back to Australia when his wife had a baby but went back to villa immediately after. Although his stay in villa was intended to be permanent, he got sick during the second year and hence returned to Australia. The issue was whether he was a resident for the second financial year given that tax is imposed on an annual basis and hence residency is determined on an annual basis. The court held that he had established a permanent residence in villa since he had gone there for a substantial period of time, taken his family and given up his lease in Australia. As such, he was a resident outside Australia for the year. A similar deduction can be made based on the findings in FCT v Jenkins (1982) case where he went overseas for three years but unfortunately got sick within the period and had to return to Australia before the end of the three years. In this case, the court held that three years is significant and hence he had a permanent place of abode outside Australia and hence not an Australian resident for tax purposes. Therefore, based on the above factors as well as the decisions in the two cases, Basil qualifies to be an Australian resident for taxation purposes. 2. Tax position and accessibility for Basil a) Salary –being a resident for tax purposes, the tax rates for residents will be applied in determining his taxable income for the $12,000 earned per month. The salary having been entirely earned in Australia will be assessed for taxation based on Australian taxation laws for residents. However, Basil will need to furnish the taxing authority regarding any allowances and rebates he is entitled I to in order to ensure that he is not being overtaxed (Edward, 2012). Such rebates would include medical insurance, family and spouse rebates among others. In addition, he will be entailed to allowances for expenses that he incurs and are directly related to earning of the income. After all the rebates, allowances and allowable expenses have been deducted, Basil can then have the resulting taxable income subjected to Australian resident income tax rates in order to determine the amount of tax he should surrender to the tax authorities. Note that the whole of his salary will be subjected to taxation in Australia regardless of the amount that is banked back in England. b) Rent subsidy – The rent subsidy of $600 per month is a taxable allowance for Basil and is indeed considered part of the salary as far as taxation is concerned. The house allowance whether received in form of cash or non cash compensation will be considered taxable compensation to Basil. However, Basil needs to establish from his letter of the contract whether the housing subsidy is given to him as a gross in which case he will be responsible for the tax thereon or as a net in which case the company will be responsible for paying the tax thereon. Incase, the subsidy is given to him as a gross, then it he should add it to the salary before he can compute his taxable income and hence taxation for the given period. c) Motor vehicle- Basil is provided with a motor vehicle by his employer for his private use. In this case, the fair market value will be used to determine the amount of tax that Basil should pay for the vehicle benefit provided. This is the amount payable by a third party in an arms length transaction to lease the motor vehicle on the basis of all facts and circumstances. As such, the amount the employer considers the vehicle benefit will not be used in this case but the fair market value will be used in assessing the taxable motor vehicle benefit provided to Basil. d) Phone account- the phone account benefit will not be taxable for Basil provided this is done for non compensatory business use. This includes reasons such as ; i) Basil needs to contact his employer at all times for work related issues ii) Basil is required to be in contact with fellow employees even outside normal working hours iii) Need to contact clients when out of office normal hours As such, the phone account benefit will not be considered in assessing Basil’s taxable income. e) Holiday- Basil is a specialist and therefore and executive employee. The non cash holiday benefit given in recognition of achievement is therefore taxable on him and should be included in his gross income to determine the amount of tax he should pay (Griffith, 2004). As such, his taxable income will have to be adjusted in order to reflect the value of the benefit awarded to him for his outstanding performance. f) English rent- being an Australian resident for tax purposes, Basil will have to declare his income from their house in England on his tax assessment returns whether it is already taxed in England or not (John, 2001). This will have an advantage of enabling him claim for a foreign tax offset as well as other deductions related to managing his overseas property. Where the deductions claimed are more than the rental income, he will use this to reduce his Australian taxable income. g) Gain on English Shares- Although he is an Australian resident for tax purposes, Basil made the investment in shares many years before he relocated to Australia. However, he sold the shares and made a capital gain when he had already relocated to Australia and therefore an Australian resident for tax purposes. As such, he would need to disclose the capital gains in his tax assessment returns. incase he has already paid tax on the capital gain in England, he may be entitled to tax income offset or credit depending on the differences in taxation. f) Australian shares- he bought the Australian shares and sold them after he settled in Australia. However, these were sold at a loss. As such, he is not entitled to pay any tax on them but he should disclose the loss in his tax assessment returns as the loss will be used to reduce the amount of taxable income hence bringing down the amount of tax he is to pay. g) Chairs- although he is not in the business of selling chairs, he certainly made a huge profit after selling the chairs (Janet, 2003). This is considered a profit and hence an income which should be disclosed in his tax assessment returns. The profit is the income and is taxable and hence should be added to his taxable income in determining his taxable income and hence the tax he should remit to the tax man. B1) FCT v Stone (2005) 59 ATR 50; 2005 ATC 4234: In this case, Ms Stone was a full time employee as a senior constable in Queensland police force in addition to being a leading Australian Javelin thrower. Ms Stone disclosed her earnings from both the sources but failed to report the grants from her athletic activities as assessable income and made no claim for deductions relating to the javelin throwing activity. However, the commissioner made an assessment for both the earnings claiming that the total receipt was assessable income for taxation purposes. However, Ms Stone objected the commissioner’s assessment and referred the case to the court. In deciding the case, the court considered a number of factors including -what income is according to ordinary concept? -Whether the athletic activity was a business or a hobby? -whether any of the payments to Stone was a reward for personal service? -Whether the athletic grant was a compensation for an income item (Jennifer, 2010)? The judge held that the grants represented gains from an activity of business nature. The grants represented reward for service performed and that the grants were gains that are compensation for an activity that had a character of income. As such, Stone was liable to pay tax on the grants awarded. FCT v Rowe (1997) 35 ATR 432; 97 ATC 4317 In this case, the defendant used fuel in carrying out his ordinary business activities. The amount of fuel used included fuel tax and the entity claimed the cost of fuel as a deductable business expense when lodging its tax returns for the year. The entity also claimed the fuel tax credit when lodging its business activity statement for the year. The issue was whether tax credits received by the entity in its normal business activities are accessible under the income tax assessment tax act. It was held that the tax credits received when the entity carries on a business activity are assessable. However, the assessable amounts may only include amounts which are income according to ordinary concepts according to the act as well as amounts which are not ordinary income but are specifically included by the act. 2. Why grants in stone were income while those in Rowe were not The courts held that grants to Ms stone on one hand were income and thus taxable while grants to Rowe on the other hand were not income and thus not taxable. In deciding whether a grant is an income and thus taxable, various factors must be examined and if a grant meets them, then it is considered income and taxable. The factors include; a) Whether the grant is earned / whether it accrues by virtue of office or employment. In this case, the grant by Stone was earned after performance of an activity while the grants in Rowe were not earned but were to facilitate performance of a business (Faith, 2012). Thus, grants in Stone qualified as income and hence taxable while in Rowe’s case they didn’t qualify and hence not taxable. b)The recurrence nature. In Stone’s case, the grants were of a recurrent nature whenever there was an event while in Rowe’s case they were not. c) Origin –in Stone’s case, the grants originated from exploitation of a skill and thus considered a business and hence are income while this was not the case in Rowe (Davidson, 2005). Thus, Ms Stone’s grants were considered income and hence taxable based on the fact that they are of business nature and contributed to earnings on a regular basis for the athlete. In other words, they qualify as earnings according to ordinary concept while grants to Rowe were to facilitate performance and hence not income. Thus Stone’s grants are income and hence taxable while Rowe’s grants are not income and hence not taxable. References: Chris, E2010, Tax and accounting, Australian tax review, vol.125, no.3, pp95-101. Catherine, C2009, Critical evaluation of Australian and international tax law, Australian tax review, vol.120, no.4, pp72-78. Thomas, D2011, Example and explanation s: Federal income taxation, Oxford: Oxford University press. Edward, J2012, The oxford introductions to U.S. law: Income tax law, Sydney, Light house publishing company. Griffith, L2004, Basic federal income tax, London, Rutledge. John, K2001, Federal income taxation of individuals, Melbourne, Prentice hall Janet, M2003, Taxation law and taxation issues, Tax lawyer, vol.25, no.19, pp25-36. Faith, K2012, Tax law, Journal of Australian taxation, vol.14, no.5, pp.20-24. Jennifer, D2010, Tensions in tax decision making, Australian tax forum, vol.12, no.3, pp.45-49. Davidson, M2005, Tax law, London, Rutledge. References: Read More