The purpose of taxation - Essay Example

He purchased this business from another owner in July of that same year. The business's total market value metes between $275,000 and $330,000. A potential buyer, Margaret, was willing to purchase the business and relieve the fiscal duties from Mr. Smith's hands. Peter Smith grew anxious because he will be charged by the capital gains tax and he tries to make every effort to avoid selling the property earlier than June 30. Margaret negotiated with Smith to purchase the business with a deposit of $33,000 and finish the payment with a settlement and installments.

Under the negotiations, Peter is required to provide vendor's finance to Margaret. When the final installment was paid, Peter Smith had a net gain of about $10,000 (based on its property's highest market value). Because Mr. Smith provided Margaret with vendor finance, he is liable to increase the sales price, earn interest, and may acquire an interest in Margaret. (http://www.investorwords.com/5844/vendor_financing.html) Under CGT (Capital Gains Tax) reforms of 2006, all income arising from Australian sources are subject to income tax.

The sources that are taxable range from real property, company, trusts, and land. In addition, gains acquired from a sale of a company on the premises of Australian real property are also considered a source. The Federal Government of Australia passed the reforms to mitigate the Australian CGT base as it applies to non-residents who possess a concrete interest in Australian entities. The CGT reforms will expand the Australian CGT base because it concerns non-residents who dispose of interests in resident or non-resident entities whose worth is irrefutably linked to Australian real property.

An unregistered resident was previously only subject to Australian CGT on gains made in respect of assets that had the necessary connection with Australia. Such assets included land and buildings located in Australia, shares in Australian companies or trusts and assets used at any time in carrying on a business through a permanent establishment in Australia. Since Mr. Smith business resides in the country, it is subject to those rules. He will have to pay a property tax on the foreclosure of the business.

Under Australia's double tax agreement, Australia has the right to tax the profit on the purchase of Australian real property regardless if the person is not a resident of the country. If Peter Smith is a non-resident, he will be taxed under the precepts of Taxable Australian Property in a few categories. The federal government will tax the estate based on principles of Taxable Australian real property. It must be a CGT asset that has an indirect Australian real property interest and is not covered by a CGT asset that addresses the disregard for profit or deficit after the relinquishment of his or her citizenship of being an Australian.

Another aspect is should that real estate has been used for fiscal affairs and transactions and not covered by Taxable Australian real property and indirect Australian real property interest assured on the Income Tax Assessment Act of 1997, it will be taxed. Furthermore, the purchase of Mr. Smith's property may be considered as an "indirect real property interest." That is, a membership interest at least ten percent in a resident or -as in Mr. Smith's case- non-resident quiddity where