Taxation Law Issues - Assignment Example

ATO Week 2: TAX RESIDENCY According to ATO, one has to be present in the country for more than half the income year (183 days) to be considered a residence for tax purposes. As such, Stannos is a non-resident for tax purposes as he has been in Australia for less than half an year. There is a difference between a resident and a non-resident for tax purposes since the two groups pay different rates of tax for similar income amounts. For instance, the following was the non-resident tax rates for the year 2013/14 Taxable income Tax on this income 0 – $80,000 32.5c for each $1 $80,001 – $180,000 $26,000 plus 37c for each $1 over $80,000 $180,001 and over $63,000 plus 45c for each $1 over $180,000 On the other hand, the rates for residents were as follows; Taxable income Tax on this income 0 – $18,200 Nil $18,201 – $37,000 19c for each $1 over $18,200 $37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000 $80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000 $180,001 and over $54,547 plus 45c for each $1 over $180,000 The $20,000 would be taxed as follows; Amount in dollars amount of tax in dollars $18,200 0 $1800 $342 Total tax payable $342 But $3000 had already been deducted in respect of the income; hence, this would be offset against the tax payable. Week 3: Income from property George only allowed Smith to fell timber but not remove it from his land. In other words, the timber has not changed ownership as it remains in George’s land. This implies that a contract of sale has not taken place since no exchange of property has taken place. As such, George did not make a taxable income and hence he will not be assessed on the amount he was paid by Smith. If however, Smith promised to remove the timber, the timber would actually have changed ownership and would have been located outside George’s land. In this regard, a taxable sale would have occurred and hence George would be assessed on the income. Where George contracts to sell smith 9000 trees for $90,000 where the money is to be paid on a monthly basis, George does not make a taxable sale and hence he will not be assessed on this income. This is in line with Stanton v. FC of T (1955) 9 CLR 630; 11 ATD 1 in which, a taxpayer received a lump sum, payable in installments, for agreeing to sell standing timber. The agreement provided for a limitation on the quantity of timber sold, with a reduction in the price if the amount of timber found to be standing on the land was less than that contracted for, whether the timber was cut and removed or not. The quarterly installments of the purchase price were due independently of the amount of timber removed. The amount in question was held not be a 'royalty. On the other hand, George would be required to pay a capital gains tax on the value of land that he pays to Brown. In addition, he will be required to pay tax on the $10 royalty paid for every tree removed in the next ten years. Week 4: The income tax implications of the following incidents Based on ITAA 1997 Section 6-5(1) and in accordance to the ruling in case V6 88 ATC 140 an amount is assessable income if it is income according to ordinary concepts. In this case, the following principles apply 1. whether the payment is the product of any employment, services rendered, or any business; 2.   the quality or character of the payment in the hands of the recipient; 3.   the form of the receipt, that is, whether it is received as a lump sum or periodically; and 4.   The motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist. In this regard; 1. A $10,000 bonus paid by the Australian Cricket Control Board to the captain of the Australian cricket team for outstanding leadership during a successful tour of England will be considered income under ordinary concepts since it is received as a product of the employment the captain is involved in. In other words, he could not have received the bonus if he was not a player and a captain at that (s 21A of the ITAA 1936) 2. A boat valued at $35,000 given to an amateur footballer to turn professional cannot be considered since it does not have a repetitive character. Furthermore, it can only be considered as capital from which the footballer can derive income after turning it professional. 3. Profit of $25,000 made by a trucking company on the disposal of one of the 30 trucks it has leased to carry on its business is income and hence taxable in accordance to ITAA 1997 section 122.15 4. An exchange gain of $500,000 made by a manufacturer in respect of money borrowed in 1997 and used to finance construction of a new building is not considered income for tax purposes since this is not the ordinary business of the manufacturer. 5. Gift and payments made by a football club and its supporters to a star professional player, largely in their delighted response to his being selected to play for Australia. The club gave him a car valued at $25,000; supporters, through a collection at one game, gave him $2,425. In accordance to s 21A of the ITAA 1936, this will be considered income for tax purposes as it rises by virtue of his profession. Week 5: Section 100-115 of ITAA 1997 provides for the computation of capital gains tax or CGT. It should be noted that by selling his property, Brain has made some capital gains which should be taxed. The premises he had bought 10 years ago at $750,000 has now been sold at $1,360,000 representing an increase in value of $610,000. This is capital gains on the premises. Furthermore, he has been awarded goodwill of $440,000. This too should be subjected to capital gain tax. Brain has also received $20000 for the contract he signed not to open another business within a ten kilometers radius for the next five years. This too should be subjected to capital gains tax since it is the consideration for his not being in business in the next five years within the 10 km radius. However, it is worth noting that the items of fittings will not be subjected to capital gains tax provided they are not sold at values greater than they had cost. The trading stock will also not attract capital gains tax but can attract income tax if they were to be sold at a profit. In paying the capital gains tax, it is important that Brain computes the CGT from the various items together so that where Brain makes a capital loss; the loss can be offset against the profit. The sale of Brain’s home will be exempt from capital gains. However, if they decide to sell their shares in the property development company, these will attract a capital gains tax provided they make a profit from the sale. Week 6: FBT a) Car Assumptions: Car travels 25,500 km per annum = 0.20 Car cost $32,000 and used the whole year, 365 days Employee has not contributed anything FBT = $32,000*365/365*.20= $6,400* 2.0647(grossed up value) = $13,214*46.5% FBT = $6,144.55 b) Loan No GST has been paid therefore type 1 benefit FBT = $6,000*1.8692 (grossed up amount) = 11,215.2 *46.5% = $5,215 c) External expense payments FBT =$4,000*.20*2.0647*46.5% FBT = $768.07 Week 7: Taxation implication of; a) Pooling of assets –this enables a group of assets to be depreciated as a single asset. Pooling of assets may only be allowed if their cost is below a certain threshold with the maximum value being $2,000 though the tax payer may apply for a higher threshold. The tax implication is that it reduces the cost of compliance while still reducing incidences of non-compliance and hence the penalties associated with non-compliance. b) Low – value pool assets-low value pooling is a method of depreciating fixtures, fittings, plants and equipment within a property at a higher rate in a bid to maximize deductions that has the effect of increasing the owner’s annual cash flow. The tax implication of this is that it allows one to accelerate the depreciation effectively depreciating the bulk of the asset within 3-4 years instead of the time prescribed by tax authorities. Furthermore, since you use a higher rate, the method results in higher deduction which is advantageous to the tax payer. c) Software development pool-ITAA 1997 section 40.45 states that one may choose to allocate amounts of expenditure they incur on in-house software in an income year to a software development pool if it is expenditure on developing or having another entity develop computer software. However, this can only happen if one intends to use the software solely for taxable purposes. The business can then claim tax deductions from such expenditure. As such, the tax implications of software development pool are that it is tax deductible. d) Small business concessions- tax concessions are available for eligible small businesses on capital gains tax, income tax, goods and services tax, pay as you go installments and fridge benefits tax. However, to be eligible, small businesses have to meet some conditions including the business having an aggregate turnover of less than $2 million. These concessions include; i) A choice to account for GST on cash basis ii) Simplified trading stock rules iii) Simpler depreciation rules iv) Immediate deductions for certain prepaid business expenses References: Jared B2011, Advanced taxation, London, Rutledge. Read More