Discuss About The Lump Sum Payment Was Recurring In Nature?
Eric has procured etc various assets like collectibles, personal use assets, in the last year and because of appropriate information in the question, it is assumed that such assets are not held more than a year. As a result, the indexation advantage cannot be availed by Eric owing to such holding period and when the sale value of such assets exceed their acquisition cost, they become liable for capital gains tax (ATO, 2017).
The reason behind the purchase of personal assets can be attributed to the fact that these facilitate self-use and enjoyment. Furthermore, if the procurement expense of these assets is more than $10000, then the capital gain tax shall incur on the sale of such assets. Eric has purchased a home sound system for $12000 in the given case. In addition, collectibles have been purchased for personal benefit as well and if their procurement expense is more than $500, then taxability of capital gain tax must incur upon the same (ATO, 2017). Eric has purchased collectibles like painting, an antique vase, and antique chair respectively. It can also be witnessed from the case that he has purchased some shares in a listed company that pursues a procurement expense of $5000. For computation of capital gain, the sales proceeds must be deducted from the procurement cost of the assets
|
List of assets acquired by Eric |
Sale consideration |
Procurement expense of such assets |
Net capital loss or gain |
|
Antique Chair |
$3,000 |
$1000 |
$2000 Loss |
|
Antique Vase |
$3000 |
$2,000 |
$1000 |
|
Painting |
$1000 |
$9,000 |
$8000 Loss |
|
Home sound system |
$11000 |
$12,000 |
$1000 Loss |
|
listed company shares |
$20000 |
$5,000 |
$15000 |
|
Net capital gain= $5000 |
Based on the above computation, it can be seen that the losses for the year have been set-off with the income in the same year so that net capital gain can be determined. Furthermore, it must also be noted that the above-mentioned assets have formed part of the computation because their acquisition cost is more than what is specified for taxability of capital gain. Overall, after considering all such scenarios, the net capital gain comes to $5000 for Eric in the given year.
It can be seen in the given case that Brian has been offered a loan of $1 million from his employer at a very special rate of interest that is repayable in monthly installments. This criterion is similar to that of a loan fringe benefit because, in this benefit, the employer attempts to offer his employee a loan at a special rate of interest (lesser than that of the required rate of interest). Sometimes, in such benefit, no interest is charged from the employee (Pratt & Kulsrud, 2013). Thus, since in the given question as well, the criterion prevails, the loan offered to Brian will be considered a loan fringe benefit. Furthermore, to compute the taxability of such benefit, such required interest rate must be known and since the question does not specify the same, the interest rate on April 1, 2016, shall be considered the statutory or required interest rate. On April 1 2016, the rate was 5.65% respectively.
The taxable amount of such benefit will be computed here without accounting for the deductible rule. For such purpose, the loan interest (actual interest) will be deducted from the loan interest (required or statutory interest).
Therefore, loan interest (actual interest) = $1000000 * 1% = $10,000. Similarly, the loan interest (statutory) = $1000000 * 5.65% = $56,500
Taxable amount is equal to $56,500 – $10,000 that amounts to $46,500
The loan interest (required or statutory interest rate) will be computed after assuming that the same was actually payable by Brian.
Hence, it amounts to $10,00,000 * 5.65% that gives $56,500
The loan amount of one million obtained by Brian has been utilized for meeting future obligations and other income generating purposes. He has used around forty percent of such loan. Therefore, the amount of hypothetical tax-deductible interest expenses will amount to $56,500 * 40% that gives $22,600 respectively.
In this step, the same criterion as mentioned above will be considered, except the fact that the interest expense will not be hypothetical and instead, it will be the actual interest amount.
Therefore, it shall amount to $10,000 * 40% that gives $4000
The amount obtained in step (d) will be subtracted from the amount obtained in step (c). Hence, it will amount to $18,600 ($22,600 – $4000)
The final amount will be computed by subtracting the amount derived in step (e) from the amount in step (a).
Therefore, this amounts to $27,900 ($46,500 – $18,600).
Instead of monthly installments, if the interest was repayable after the expiry of the loan, then the deemed time of such loan would be considered from the time when such interest was paid or it became payable as a whole.
It can be observed from the given question that an agreement has been entered into betwixt Jack and Jill so that they can purchase a rental property with the borrowed money. Besides, based on the agreement, both are going to serve as joint tenants of the purchased property. However, if they decide to sell the same in the upcoming future, Jill shall obtain 90% of the profits while Jack will attain the rest. In addition, if there is no gain from the sale of such property, the entire amount of loss shall be borne by Jack alone (Renton, 2005).
Nevertheless, it can be seen that the loss amount of $10,000 incurred in the last year must be borne by Jack alone and the amount can either be added to his other income (if any) or can be carried forward in the next year. With the help of this right, Jack can easily make use of the loss amount to determine his total income for the year. Nonetheless, if the property is sold, there may be either a loss or income from the same.
In the case of gain, both Jack and Jill shall share the profits but in the ratio of 10:90 and Jack can also utilize the losses incurred last year to set-off against the income accruing in the current year so that net income can be calculated. In contrast to this, if there is a loss from the sale of such property, Jill is under no obligation to bear the same because as per the agreement, the entire loss must be borne by Jack alone (Sadiq et. al, 2014). However, he can carry forward the same or set-off the same in order to ascertain his total income for the year. Therefore, on a whole, it can be concluded that in the given case, the sharing of profits is done in the ratio of 10:90 while the losses will be borne by Jack alone. Thus, the treatment of tax does not affect Jill in any circumstance and Jack remains always liable to bear the entire amount of losses in his books of accounts.
The case of IRC v Duke of Westminster [1936] AC 1 assists in representing the principle that every person has full right to manage his accounts and financials that can allow him to minimize his total tax payable in a year. Besides, it is also mentioned in the case that if any person is successful in minimizing his total tax payable by the adoption of legal ways, then even the Commissioners of Inland Revenue does not have any right to stop them from doing so. The only requirement that this case law necessitates is that the documents depicting the truthfulness of the transaction must be genuine in nature and then the courts even cannot rely on some underlying framework to contradict their doings. Nevertheless, with due course of time, the significance of this rule has been lost because of the arrival of many other similar case studies in this regard (Adams, 2011). As a result, the viewpoint of people in relation to the observation of accounting and taxation affairs has become distinct in nature in the current situation.
The utmost significance of this rule in the current scenario is that it plays a key role in preventing the organizations from influencing relevant material from the financial statements. This means that the rule assists every organization and individuals to operate their affairs in a genuine way (Adams, 2011). For instance, a business organization can make use of legal ways to write off its fixed assets to their respective carrying value so that the losses and debts that are exerting pressure over it can be avoided. In such a scenario, even if such business organization does not have proper relevant documents in regard to the same, then also it will be sufficient to just write off the fixed assets (Nethercott et. al, 2013). However, such business organization must not try to engage in illegal methods to manipulate their material information from the financial statements because this rule restricts them from doing so.
The owner of a big piece of land accommodating hue pine trees intends to graze his sheep on such land but the prevalence of such trees obstructs him from doing so. Bill who is the owner wants to hire a logging company for the same so that the company can obtain as much as timber from his land and in return, he is compensated. In the first case, it can be seen that Bill intends to receive $1000 for every meter of timber cleared by the logging company. In this case, since a number of receipts is not provided, the same will be regarded as a revenue receipt. As a result, it must not attract capital gains tax (Cartwright, 2013). However, in the second case, it can be seen that Bill intends to receive $50000 as a lump sum amount for clearance of the entire trees from his land. This receipt is purely a capital receipt because of the following reasons:
Therefore, this receipt will be regarded as a capital receipt and hence, will attract capital gain tax as well. On a whole, even though in both the cases, Bill receives some amount of money, yet their nature is altogether distinct. Besides, the criterion of a capital receipt as mentioned above is not visible in the first case because it was not a lump sum payment and it was recurring in nature. In contrast to this, the second case occurs only after giving a right to the logging company and it can be treated as a sale of an asset to a company (Nethercott et. al, 2013). Whilst the first case is taxable at normal rates, the second case is taxable under capital gains.
References
Adams, J. (2011). What is The Difference Between Tax Avoidance and Tax Evasion?. Accessed September 19, 2017 from https://www.taxinsider.co.uk/680-What_is_The_Difference_Between_Tax_Avoidance_and_Tax_Evasion.html
ATO. (2017). Capital Gain tax. Accessed September 20, 2017 from https://www.ato.gov.au/general/capital-gains-tax/
Cartwright, M. (2013). Death to the Australia Tax?. Accessed September 19, 2017 from https://www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/Tax-responsibilities
Nethercott, L, Richardson, G & Devos, K. (2013). Australian Taxation Study Manual. Oxford University Press
Pratt, J.W & Kulsrud, W.N. (2013). Federal Taxation. Penguin Publishers.
Renton N.E, (2005) Income Tax and Investment. John Wiley & Sons Australia Ltd
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan,S, Krever, R, Obst, W, & Ting, A. (2014). Principles of Taxation Law. Sydney
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