Taxation Law Issues - Assignment Example

University: Subject: Student: Semester: Question one Section 6-5(1) of the ITAA 1997, defines ordinary income as income that is subjected to taxation because it is earned from ordinary business transactions and is included in the assessable income for the Australian residents even if the income was earned from business outside the country. A good example of ordinary income is the capital gains earned from reselling of capital assets such as land or property and commission income. This ordinary income is recognized as a gross income or proceeds and not the profits alone. These incomes are articulated in the statutory income provisions of ITAA. For all Australian residents, capital gain tax applies to any gain made from sell of their property depending on their intentions of purchase. Capital losses are exempted from taxation according to the Australian taxation laws. Real estate properties other than the main residence home of an individual are subjected to the capital gain taxation just like other assets that may include the business premises vacant and rental properties. Like in our case the capital gain from the sale of the renovated tennis courts qualifies as ordinary income because it will be treated as an assessable income of Peta according to the Australian taxation law (H, 1990). Issue The issue in this scenario is whether the capital gain earned by Peta from the renovation and sale of the two tennis courts she had bought and sold to it the Tennis club should be subjected to taxation. We are required to determine whether Peta’s transaction was a personal property investor or profit activity engagement. We are also required to determine whether she was able to make a capital gain after resurfacing the two tennis courts at a cost of $100000 and selling it at price of $600000.Additionally we are also needed to know the motives or the intentions of Peta when she made the decision of purchasing the house and two tennis courts in Kew (Ross, 2011). Rules The Australian Federal court has over time modified the taxation provisions of the capital gains made by individuals. The rules that determine whether the capital gain depends on whether the defendant was a personal property investor or someone conducting a profit activity on property of a real estate investor An individual or small business that has transacted a property that creates an event of capital gains tax will be able to enjoy a discount capital gain of 50%.The court and ITAA at the moment has established a guideline on the taxation on capital gains from profit activity taken by an individual because once one has the intentions of reselling a property for profit making purpose she/she attracts a marginal tax of 46.5% after the net capital gain has been added to the assessable income of an individual. However most of the personal assets according to the Australian taxation law are exempted from capital gain taxation such as home, car and personal use assets such as furniture. Capital gains taxation cannot be applied to depreciating assets such as fittings in a rental property. For the residents of Australia the capital gains tax applies to their properties all over the world while for the foreigners it applies to an asset that is Australian taxable (H, 1990). Case study Chris has known Tom; his friend for a very long time and was actually looking for a property to purchase in Avondale. Chris has another friend in real estate with a property that he knows Tom will like. Chris goes ahead and buys the property knowing that he will actually sell it to his friend Tom at a profit (Ronald, 1986). HELD Chris must pay tax on any capital gains made from the sale of the property .Chris purchased that property having an intention of reselling it to Tom so that he can make a profit. The rule of profit activity capital gain applies. However Chris is entitled to enjoy the net capital gain discount of 50% before his income was treated as assessable income The Federal court said.IR395 Application From the scenario of Peta, it’s clear that when she made the decision to buy the home with two tennis courts, she had an intention of putting up the units on the courts and sells them at a profit and this qualifies the capital gain from the renovated tennis courts as ordinary income. On top of this the tennis courts were not part of the main residence home so they will attract a capital gain taxation event as per section 5-6.According to the case of Peta, it was evident that Peta actually incurred a cost of $100,000 to resurface the two tennis courts which she later sold at $600,000 to the tennis club that had offered to purchase it, making a capital gain of $500,000. The amount is considered as taxable income under section 6-5 of the ordinary income act since Peta is seen to be conducting a profit making activity on renovations because when he purchased the house together with the two tennis courts his intentions were that she and her family could live in that house and she could build three units on the two courts and sell them at a profit .This now makes the capital gains from the sale of the renovated tennis courts taxable according to section 5-6 of the CGT in Australian Law (Ronald, 1986). Conclusion In conclusion Peta will have to pay the capital gain tax in relation to the gains that she made from the sale of the renovated tennis courts because her intentions of purchasing the courts were to construct three units on the courts and sell them at a profit. This means that she was carrying out a profit making activity that attract capital gains tax on any profits made by the investor. For instance in our case the net capital gain from the resale of the two tennis courts that is $500000 will be assumed to ordinary income according to section 5-6 of the Australian law and will be added to the assessable income of Peta and taxed at a marginal tax rate prevailing in Australia that is 46.5% after enjoying a capital gain discount of 50% on the net capital gain. This is because Peta bought the property with an intention to construct three units and resell them at a profit thus qualifying the property transaction as a profit making activity. Since she had a profit motive she will have to pay the capital gains tax (H, 1990). Question two Advice to ABC LTD relating the fringe benefit tax ALAN INCOME TAX COMPUTATION FOR THE YEAR Basic salary 300000 OTHER BENEFITS mobile handset Dinner 330 total taxable income 300330 less deductible income Phone expenses 2000 gross taxable income 298330 Tax liability first $80000 2600 second ($169010-$80000) total FBT liability Inclusive of GST =6600*2.0802=$13729.32 Cost of school fees=$20000 Inclusive of GST=20000*1.8868=$37736 1Total fringe benefit taxable=$50[1],465.32 Fringe tax payable=51465.32*49%=$25218.01 Advice to ABC ltd Fringe benefit tax is a kind of tax that an employer pays in relation to the benefits that he/she offers her/his employees including their families and the associates of the company. Alan is entitled to receive the full amount of $220 monthly for the two years relating to the business calls because the calls she made were work related purposes only amounting to $220 monthly. Alan is not eligible to claim any allowances on the mobile set purchase from ABC ltd because the handset was provided by the employer. The entire end year dinner cost paid by ABC LTD will be subjected to taxation using the actual method application according to the Australian tax laws. If you use the actual method of valuing entertainment fringe benefit tax will only apply to entertainment an employer provides to its employees. The value of the food or drink or recreation (dinner), and the associated accommodation or travel that will be subjected to the taxation is the actual amount that an employer pays for the benefit of its employee. ABC LTD cannot claim cost deduction on the mobile phone because its cost exceeds the set limit by the Australian law since the mobile phone was bought at $2000.The law clearly states that any mobile phone purchased for purposes of earning income; one can only claim a deduction for some or all of the cost of the asset. The deduction amount that can be claimed depends on the cost of the mobile phone: One can claim deduction on items that don't form part of a set and cost $300 or less, or form part of a set that together cost $300 or less, the claim can be raised immediately for the deduction of their cost. For handsets that cost more than $300, or that form part of a set that in together cost more than $300, ABC Ltd can claim a deduction for their decline in value that is $300 only (Ronald, 1986). If an employee’s phone was used for both personal and work-related purposes the employer needs to keep records, such as a diary containing calls and messages records for the month so that, if requested, he/she can show how he apportioned the amount of private use and work-related use. If the asset is used for both work and private purposes you will need to apportion the amount you claim to the work related costs only. Question one b. Explain how answer in A will differ if ABC ltd had five workers The cost incurred by ABC LTD to buy the handset will not change and will only attract an allowable deduction of a maximum of $300. The full amount that was paid by ABC for dinner of will be subjected to taxation basing on the actual method application according to the tax laws. If you use the actual method of valuing entertainment fringe benefit tax will only apply to entertainment you provide to your employees and/or their associates. The amount that will be paid for dinner shall be divided by the new number of employee so as to get the individual’s cost. The mobile expenses by Alan are deductible since it’s an allowable expense since the handset was specifically used for work related purposes. This answer will not differ from the answer in question a by the change in number of employee thus increasing the amount of dinner cost that will be subjected to fringe benefit tax. The number of employees in this situation has reduced from 20 to 5 of which is a very significant change but will not affect the cost of dinner that will be taxed under the fringe benefits of Alan by the ABC ltd. The total amount paid for dinner will reduce to $1650 since it will only be charged on the 5 employees. Question one c.) Explanation When an employer provides entertainment to both employees and non-employees of the company (for example, clients), only the part of the entertainment relating to employees and their associates is subject to fringe benefit tax. If one cannot easily determine the actual expenditure, he/she can use a 'per head' basis of apportionment. Entertainment that is provided to the clients by the employer he/she will not be subjected to fringe benefit tax under this valuation method. Unlike the case in question a, the ABC ltd will have to use the per head basis in order to determine the fringe benefit tax per employee as shown above this is because the employer decided to include the clients in the dinner and clients are treated as non-employees who are associates (Ross, 2011). ALAN INCOME TAX COMPUTATION FOR THE YEAR Basic salary 300000 OTHER BENEFITS Children school fees 0 mobile handset 2000 Dinner 330 2330 total taxable income 302330 less deductible income Phone expenses 300 gross taxable income 302030 Tax liability first $80000 26000 second ($169010-$80000) 28753.725 total fringe benefit tax liability 54753.725 Bibliography Australian Gorvenment (2016) 'Income and deductions for business', Australian tax office , May, pp. https://www.ato.gov.au/Business/Income-and-deductions-for-business/. Australian tax office (2013) 'Fringe benefits tax (FBT)', Journal of Australian Taxation. Braedon, C. (2000) Taxation in Australia - Page vi, Melbourne. ‎Brian, H. (2010) Comparative Income Taxation: A Structural Analysis - Page 24. CCH Australia, Limited (2011) Australian Tax Casebook - Page 419, Sydney. CCH Tax Law Editors (2008) Income Tax Regulations: Winter 2008 Edition - Page 8. Commonwealth Consolidated Acts (2016) 'INCOME TAX ASSESSMENT ACT 1997', Assessable income and exempt income, May, pp. http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/. H, R. (1990) Australian Taxation Law, CCH Australia. Lang, M. (2014) Introduction to the Law of Double Taxation Conventions. Peroni, R. (2008) International Income Taxation: Code and Regulations, Selected Sections, Sydney: XSpringer. Ronald, D. (1986) Law's Empire, Havard University Press. Ross, W. (2011) Income Taxation In Ausralia, Thomson Reuters. Thomas, K. (2004) Capital Gains, Minimal Taxes: The Essential Guide for Investors, London: Cingage Learning. Read More