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HI6028 Taxation Theory

Question 1

  1. Facts of the scenario

The scenario shows that John has purchased the theatre hall which was not in its best conditions. Because starting any operations in the hall, it is very necessary to repair some of the portion of the ceiling in order to start any operations in the hall. John has decided to replace total ceiling instead of repairing one portion as he has thought of replacing the ceiling with the raw materials that is better in comparison of the old one so that the operations can be better. The addition of the new ceiling, erecting the ceiling as well as cost of the raw materials will together cost in 210,000. It is estimated that is that one portion  repairing will consists of the expense of 150,000. But John is concentrated on changing the entire ceiling that will help in improving the acoustics as well as the appearance of the hall. The scenario revolves around the income tax assessment act 1997 and needs detailed description of the allowable deductions for the purposes of income tax.

Relevant laws and cases

The determination of the deductions in terms of the income tax can be explained with the help of case law FCT v Western Suburbs Cinemas Ltd(1952) 5 AITR 300. This case law is helpful in making this clear as whether the expenses have incurred or they can be seen in capital character. As per the section 25-10 of the ITAA 1997 if a person has restored the ceiling or repaired, he/she is entitled to get deduction as per this section. Section 25-10 states that is the thing is completed changed or improved then that cannot be explained as repairs as the matter has gone beyond that. The case law W Thomas & Co Pty Ltd v FCT(1965) 9 AITR 710 states the scenario as restoring the effectiveness of the operations rather than creation of the exact thing in that form or material is imperative (Arnold, et al., 2019).

Application of laws and cases

According to the case laws and sections that have been applied it explains that the evaluation of the repairing of the ceiling can be done with the help of determination of the whether the ceiling consists of pieces that are worn out or replacing the flawed parts and correction of the same has been done is entitled of the deductions as per income tax act. Moreover, is the repaired and the improvement done is seen going beyond the matter of just repairs and the changes have been done completely, so in that case the deduction cannot be provided on the whole amount as it does not mean repairs, it means the complete change and installation of the ceiling in the hall (Zoepf, et al., 2018).

As per the income tax reasons, the allowable deduction will be on the following amount:

Repair cost that is estimated = 150,000

Total cost of repairs (actual) = 240,000

Deductions allowable on the amount = Total cost of repairs (actual) – Repair cost that is estimated

= 240,000 – 150,000

= 90,000

The amount that is liable to be deducted is 90,000 as it shows the costs that are in excess in comparison of costs that were expected for the repair. This amount of deduction is permitted as it is an additional expense. The owner of the hall will get the allowable deduction amount (Sachs, et al., 2012).

Conclusion

It can be seen that for improving the acoustics of the hall, 240,000 amount has been occurred. It is considered as capital amount. The estimated costs of repairs were 150,000. The deduction of the income tax will be entitled on the amount 90,000 as these are the additional expense. The taxable income of the owner will be decreased because of the deductions that are allowable as per the Income Tax Assessment Act 1997.

  1.  If the car is utilized for the business purpose, the total costs is deducted on the operations and the ownership. But the utilization of the car is happening for personal and business purposes both, then the deduction is done only of the utilization of the business cost. It is generally the amount of figure that is deductible on the expense of the car with the help of  different methods that are actual expense method and mileage rate method. If both the methods qualify. The deduction figure can be chosen with the help of the method that provides with the larger deduction.

Actual expense method : For utilization of the actual expense method, determination of the operating costs related to the portion of the car in comparison of overall utilization of the car that is used for the use of business. It certainly consists of the Depreciation, lease, registration fees, insurance, repairs, oil, tire, gas and many attributable portions related to driving the car for business purposes.

Depreciation: This can be calculated with the help of the MACRS method that is utilized by the car owners for the depreciation of the car that is seen to be in service since the time.

Recordkeeping: The substantiate of the expenditure must be recorded with the help of the adequate record required by the law. The deduction of the car expenses that is self-employed is done as per the Schedule C (Form 1040) if the organization is a sole proprietorship company.

Standard Mileage Rate: It can be understood as a method that can help in deriving the expenses on the car used for business purposes. For this method:

The operations of the car cannot go up to 5 cars at the same time as it will lead to fleet operations.

The depreciation must not be claimed.

The deductions on car must not be claimed as per Section 179.

The special depreciation must not be claimed on the car allowance.

The actual expenses must not be claimed after the year 1997 related to the lease of the car.

There are other ways by which the deductions are availed as per the expenses of the car. That can be seen as follows:

  • With the help of charity contributions
  • If the car is hybrid of electric
  • Conversion of the automobile
  • Deduction of the business use expenses
  • Deduction of the fleets of small business
  • No reimbursement of the expenses of the business.

Question 2

With the help of the analyzation of the case study, it can be observed that the total assessable income, tax liability, taxable income, Medicare levy surcharge and Medicare levy is needed to be calculated.

Total assessable income can be described and explained as the sum of passive income and taxable wages.

Calculation of the Total assessable income:

Taxable income+ Passive income

= $ 109,000 + $ 7,000

= $ 116, 000

Taxable income can be described as the gross income portion on which the taxes will be applied. It includes unearned and earned income. It consists of certain deductions so it ultimately decreases. The calculation of the taxable income can be derived as subtracting the deductions from Total assessable income.

Calculation of the Taxable income:

= Total Taxable income – Deductions

= $ 116, 000 – $ 11,000

= $ 105, 000

Tax liability can be described the sum that is due on the income that is taxable. It is the sum that is needed to be paid to the authorities that are related to the particular department. It is the accountable income tax liability owed to the government.

Calculation of the Tax liability:

= (0.1* $ 105,000) + (0.2 * ( $ 105,000 – $ 37,000)

= (0.1* $ 105,000 + (0.2 * ( $ 105,000 – $ 37,000)

= $ 10,500 * $ 16,600

= 27, 100

Medicare levy can be understood as the levy or a tax that is paid on the taxable income. It reduces or decreases if the taxable income is less than the slab amount. So, situations do not even need levy to be paid. It is equals to almost 2% of the taxable income.

Calculation of the Medicare levy:

= 2% of Taxable income

= 2% of $ 105, 000

= 2/ 100 * $ 105, 000

= $ 2,100.

In Australia, Medicare Levy Surcharge can be observed as 1% of the taxable income.

Medicare levy surcharge can be explained as an additional tax that is deducted on the income that as it is not needed to be paid after a certain level of income.

Calculation of the Medicare levy surcharge:

= $ 105,000 * 1%

= $ 1,050.

According to the outcome, the due tax of Julia in the financial year 2021 – 2022 is as $ 27,000 as well as the Medicare Levy Surcharge is $1,050 and Medicare Levy is $ 2,100.

Note: The Medicare Levy Surcharge is only applied when taxpayer doesn’t consist of the coverage related to health insurance (Sammut, 2017).

 

References

Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a structural analysis. Kluwer Law International BV. https://books.google.co.in/books?hl=en&lr=&id=WGfIDwAAQBAJ&oi=fnd&pg=PT20&dq=Income+Tax+Assessment+Act+1997+allowable+as+a+deduction+for+income+tax+purposes.&ots=cwYdrCPMDe&sig=f_UoJ2WjKb0WwuKQNKPR4tseQNU&redir_esc=y#v=onepage&q=Income%20Tax%20Assessment%20Act%201997%20allowable%20as%20a%20deduction%20for%20income%20tax%20purposes.&f=false

Sachs, H.M., Russell, C., Rogers, E. and Nadel, S., 2012. Depreciation: Impacts of Tax Policy. An ACEEE Working Paper, American Council for an Energy-‐Efficient Economy, Washington. https://www.aceee.org/sites/default/files/pdf/white-paper/depreciation-tax-paper.pdf

Sammut, J., 2017. Fiscal Fiction: The Real Medicare Levy. Centre for Independent Studies. https://www.cis.org.au/wp-content/uploads/2017/05/rr27.pdf

Zoepf, S.M., Chen, S., Adu, P. and Pozo, G., 2018. The economics of ride-hailing: Driver revenue, expenses and taxes. CEEPR WP, 5, pp.1-38. http://fuelandtiresaver.com/wp-content/uploads/2020/03/Zoepf_The-Economics-of-RideHialing_OriginalPdfFeb2018.pdf

 

Introduction

This assignment helps to understand the concept of GST and CGT with their consequences. The GST can be termed as the goods and service tax, which is indirect and that, can be imposed on the supply of services and goods. If the parties registered under the laws of GST then they are bound to pay tax as per the terms and conditions. The capital gain tax is the tax on the revenue that can be realised from the sale of assets. It also ascertains the different methods for tax for different assets. It also includes certain transactions such as the sale of shares, land and piano and analyse its legal effect. 

Question 1

Facts 

The city sky co. is the development Company and investment. The firm purchased the piece of land in Brisbane and plan to build the 15 apartment for sale. They also engage in lawyer services for development. 

Purchased land and plan to build the 15 apartments
Lawyer services that can be availed at $33000
Turnover of lawyer $300000 per year. 

Rules 

It can be asserted that City Sky is a developing and investment company which sells the apartments. By developing these apartments they have to recognise whether these are taxable or not. It can be investigated that these are taxable sales. The credit of GST can be availed in the following circumstances, these are:

  • As per the section, 40-75 the premises should be new residential premises. 
  • Before the year 1998, the premises can’t be used for residential purpose. 
  • There should be some consideration. 
  • The premises should be established in Australia
  • For the transaction, the seller should be registered. 

By analysing the above rules, it can be stated that the firm is bound for the taxable sales and inputs of credit which was rendered from the premises.  

Analysis

As per the Section 40-75, a New Tax system that is Goods and Services Tax Act 1999 was introduced. It consists of the price charged for the services and goods and credit should be claimed for the services which were bought for the business purpose. 

It is essential to register under the GST if the turnover is more than $75000 or $150000 or more in a non-profit organisation. It includes certain business such as the lending of money and provisions for fee credit, letting out the residential properties. It can also be observed that the “new” constructed premises should be let or sold out. If the firm purchases the new assets and sells the old assets to earn profits then in that situation, it is essential to register GST. But vice-versa, if this property is used for personal use and they did not earn any profit on this, then there is no GST. 

In case of residential properties, the sale will be raced input which means that the credits of GST cannot be claimed on the purchased items for sales as the existing properties are not bound for the GST (McClure and Govendir,  2016).  

The sale will be considered as the taxable sales, in case of new premises. The credits of GST will avail on the different purchase and sale will bound by the GST. 

There are certain premises which can be recognised as new if:

  • The premises has been developed or constructed after the innovation. 
  • The property should be new which means it should never be sold earlier. 
  • There should be the construction of a new building inland after demolishing the old one. 

There are certain conditions in which building can be new for the 5 years, they are:

  • The building can be used for residential purpose. 
  • It should be renovated properly.
  • The construction should be done after demolishing the old building. 

As per the provision of Australian tax, if any old and new premises are used for the commercial and residential purpose, then the sale will for both will be taxable. It states that they claim credits in the purchase items. It can also be observed that if the residential premises have been let out or sold then in that rent will be input tarred. This states that rent will not be considered under the GST(McClure, et. al., 2016).  

In addition to this, if a commercial estate has been sold out then there will be an occurrence of GST. In some transactions, it is necessary to register under GST such as buying and selling out property, leasing the commercial property etc.

Conclusion

From the above analyses, it can be stated that GST plays a crucial role in the business. There are certain transactions, which require the registration of GST such as buying and selling for the business purpose. If the business turnover exceeds the firm limit then, in that case, GST is necessary. 

Question 2: 

Facts 

This question analyses the concept of Capital gain tax with their consequences. Capital gain is triggered in a case when assets are realised or sold. The total capital gains minus capital losses can be termed as the “net capital gains”. Capital gain is a tax assessed on the difference between the purchase price and sale price of an asset. It also records the several transactions in which the company apply the CGT. The firm is bound to charge a 50% tax on capital gains. As per the rules of Australia, the value of capital gain operates as the returns of tax in which assets can be sold or disposed of. 

Capitals Gain Tax 
Material facts on the problems
Sale of Block $100000
In the year 1991-

Land

Legal Fees

Stamp duty

 $250000

$10000

$5000
Interest on loan $32000
Bill on Unites $2200
Advertisement $25000
Legal fees on dispute $5000
Removal of pine trees  $27500

 

Sale of 1000 shares@50.85: 2% brokerage on sales, purchased @ rate $3.5 in the year 1982
In the year 2015, sale of stamp collection $60000, Auction fees $5000.
In the Year 2000, sale of piano $300000, purchase price $800000. 

Rules /law

As per the provisions of taxation law, it can be asserted that the CGT is levied to the firm at the rate of 30% on the value of Capital gain but if a person is an individual it would be similar to the tax rate. There are certain situations in capital gain tax can be applied these are discussed below:

  • Property of estate, but is exempted in residence of the applicant who files the tax return.
  • If the items such as Units, trusts, sale of shares and other instruments are created under the ordinary course of business then they will be exempted from CGT (Eccleston, 2013).
  • Lease, other improvements, the goodwill which is charged on assets that is land without selling it.  
  • The involvement of new methods and techniques of encryption of digital assets can be charged on the capital gain tax. 
  • The collectables, personal assets that have a certain amount and value which implies the rate of capital gain tax. 

Further to this, it can be observed that the assets such as home, car which are used for personal use are exempted under this. According to the provisions of Australia law, the collectables are excluded from the capital gain tax. It includes the gemstones, boats and vehicles. In addition to this, assets such as jewellery, Antique pieces, photos, and wines are considered collectables. 

Capital Gain in terms of shares

 It can be noted that Emma has carried out certain transactions which include the shares. It is the units that include the managed funds and recognised as the capital gains. While purchasing assets, the company can levy a certain amount of tax on it and that can be changed (Eccleston, 2013). 

In case of shares, it can be analysed that the firm receives the payment which is non-accessible and units are redeemed from one fund to other funds. 

Sale of Stamp,   the sale of the stamp comes under the category of collectables and that are exempted under Australian taxation. It also provides the different category on which tax can collect, such as if the value of collectables is less than the $ 500. Secondly, if an individual purchased collectables before the year 1995. The disposal stamp is on or after the year 1995. It also consists the postage stamps and that will also be considered in this category (ATO, 2019). 

Analysis

It can be examined that the capital gain tax is the profit and that comes under the head of income. Capital does not apply to an innate estate and there is no concept of sale, there will be a transfer of ownership. As per the scenario, Emma developed certain transactions in the last preceding year that involves the amount of tax. 

Sale of land is the first and foremost transaction in which Emma wants to sell the land which was purchased by him(Mawuli, 2014). It shows the deductions and value of CGT can be followed properly. While doing this transaction, it also involves the other transaction such as legal fees, stamp duty etc. It does not recognise the cost of advertisement and the amount of interest is capitalised. 

Calculation of purchase price:

Cost of land $250000
Legal fees $10000
Stamp duty $5000
Legal fees $5000
Interest paid  $32000
Total cost $302000

The second transactions are related to the sale of shares in which Emma sold the shares and earn profit. The selling of shares is also recognised as the CGT. In this, the firm purchases the product in the year 1982 that includes certain units. It these acquired before 1985 then they are exempted from the rate of tax. But in this transaction, there is no such condition that arises before therefore tax is not chargeable on the shares(Tewari, 2018). 

The Emma also sell the shares in which auction fees are chargeable. In this, the value of collectables is not included in the category of Goods and sales tax. Sale of shares are exempted under the tax. 

Costing  $50000
Sale of consideration $60000
Auction fees $5000
Hence consideration will be $65000

Lastly, Emma sells the piano at the value of $30,000 which was bought at the $80,000 in the year 2000. This will not be treated as the capital gain tax as it is the personal assets and not used by the owner in a business. Therefore, it can be observed that the services and goods which are used as the business purpose will not be charged under the capital gain tax(ATO, 2019). 

Conclusion

From the above observation, it can be analysed that Emma involves different transaction in different years to calculate the amount of capital gain tax. In addition to this, there are some transactions on which capital gain tax are not levied. It can be stated that if the firm uses the assets for more than 12 months then the person can decrease the value up to 50% and that amount will not be held by the company. 

Conclusion

It can be concluded that the company city sky is liable to pay the amount of tax which is rendered from the lawyer. They also state that the amount of GST that is $330000 for the services of a lawyer can be treated as the credit and included in the liabilities. In the second situation, Emma is bound to pay the amount of tax on land.  They are not bound to pay the tax on shares as they have been acquired before the due date. Piano can be recognised as the personal assets and hence they are not taxable. 

References
  • ATO, 2019. Australian Taxation Office [Online] ATO. Available at: https://www.ato.gov.au/Non-profit/your-organisation/gst/[Accessed on: 18 September 2019].
  • Dixon, J. and Nassios, J., 2018. The effectiveness of investment stimulus policies in Australia. Centre of Policy Studies, Victoria University.
  • Eccleston, R., 2013. The tax reform agenda in Australia. Australian Journal of Public Administration, 72(2), pp.103-113.
  • Mawuli, A., 2014.  Goods and services tax: An appraisal. In Paper presented at the PNG Taxation Research and Review Symposium (Vol. 29, p. 30).
  • McClure, R., Lanis, R. and Govendir, B., 2016. Analysis of tax avoidance strategies of top foreign multinationals operating in Australia: An expose.
  • Tewari, V.K., 2018. Goods and Service Tax. GST Simplified Tax System: Challenges and Remedies, 1(1), pp.173-176.