The Impact Of Australian Taxation Law On Business Transactions

Personal Service Income in Australian Taxation Law

Discuss about the Impact of Australian Taxation Law.

The significance of the present discussion is to analyse the impact of Australian taxation law on different business transactions. There are different applicable taxation laws based on personal service income and other business contracts. The analysis of the following case studies will bring a clearer picture while implementing such taxation laws and benefits of respective individuals.

According to the case study, Hilary is going to transact a personal service income effort and in that concern, specific industry scale or professional field is the base of tax implication. Australian taxation law related to personal service income is only applicable when personal skills or efforts are directly transacted for income as an individual (Woellner et al. 2016, p.124). Hence, earlier Hilary has forwarded some manuscripts or new resources of mounting experiences and the respective library has modified the same for business use. It can be referred as personal exchange and possibly, Hilary did not have to think much about personal service income laws. Now, the scenario is different that It is simply manufacturing of articles and a matter of sale for business purpose. Australian taxation policy of personal service income can include any of the industries like the financial consultant, IT firms, and technology assistances, construction firms, medical representatives and legal assistance, but the important factor is that there must be an exchange of personal skills or experience. PSI is not applicable for those professionals who are engaged in working and only receiving remuneration or wages (Tan et al. 2014, p.67).

Personal service income in Australian taxation law is only effective when 50% or above money is paid for a contract or personal exchange of property in course of business. In the provided case study, Hilary is going to get entire money while exchanging the mountain-life history and Daily Terror newspaper is going to buy the same resource. It means it is an exchange of property in terms of the business transaction and Hilary has to pay for PSI taxation law of Australia. At a glance, the earlier two-money exchange can also be regarded as an income from personal exertion, but the exchange was made through delivering manuscripts and photographs. This effort does not fall into the category of buying or selling process. Whenever, Hilary is going to manage the entire life story for making a sale, the scenario is different. The amount of taxation in PSI is dependent upon applicants and it is possible that personal services business or PSB can claim for a tax return, but in that concern, certain proofs have to deliver in favour of a non-profit making transaction (Campbell, 2015, p.332). Hilary is going to get an amount of $10,000 and the deduction of PSI tax is based on the same amount while there is a matter of selling personal skills and expertise (Evans et al. 2015, p.231).

Assessable Income in Australian Taxation Law

According to the personal exertion income rule and evaluation of income generating source is the core prospect of taxation. Personal service income is not a matter of exchangeable property or amount, but the amount of evaluation is the skills or efforts those are related to produce the respective property or resource for sale. However, in the mentioned case study, the amount of exchanging the life history has already been mentioned and it is very clear that Hilary has to consider the entire amount based on the same.  

It may be a matter of business transaction or managing a loan, an agreement is necessary.  Without an agreement, there will be no course of implicating taxation laws according to Australian legislation (Barkoczy, 2016, p.147). However, the legislation has strictly provided to follow lenders or borrowers to make agreements, otherwise, in a case of disputes or calculation of the interest paid amount, courts and legal heads cannot provide a solution. In the given case study, the parent has not made any kind of agreement while lending money to the son. On the other hand, the amount is also fixed as an additional interest of $ 10,000 at the end of five years. Legal consideration or formal concerns cannot be made in the respective exchange of money, as there is no written document made while making an exchange of the money. A legal document always carries the detail of interest payable, repayment date signed by lenders and borrowers.

Assessable income is determined by calculating the amount of tax according to the interests and repayable money (Pinto and Gilchrist, 2013, p.79). In the mentioned case study, the understanding of transaction is made between the parent and son. Therefore, there is the least chance of official or formal document. There is no proof of lending money and repayment. In the entire term of five years, no one can make a claim, as there is no valid document available from either of the sides. It seems that the transaction of money or loan is invalid according to Australian taxation legislation and there will be no complaints recordable in a case of now or late payment.

Assessable income always needs proof or legal documentation while there is the matter of paying a tax (Taylor, 2014, p.102). In this case, there are no documents, but the son has paid the money through cheque. There is a provision in Australian income tax act that whenever a larger amount money is officially transacted, the respective person has to provide a source of the respective money or income (Henry et al. 2009, p.96). Based on the same, mother has to pay tax. There was a possibility that the additional amount or interest gained by the mother can be avoided from the assessable amount if the refund was made through the case. Due to having a proof of cheque and official paper, the money will be considered as assessable money.

Case Studies and Examples

Some earlier instances like the case of 2004 when an athlete, Stone and FCT registered a case due to the unnecessary claim of commission for a tax (King, 2014, p.14). The money received by the athlete was recorded as prize money and legislation offers a tax-free achievement in the case of gift or prize money (Chan, 2014, p.27). On the other hand, the commissioner has regarded the money as professionals’ income having an engagement of advertising, sponsorship and other relevant packages. In both the cases, the only record of the valid document is the money transaction papers. Some legal and formal written document of personal income includes award, bonus, salary, wage and living remuneration. Likewise, the mother has to pay an additional amount of money as tax having a record of the money transaction document i.e. cheque.

Scott has made two transactions of money in two different periods. The purchase of land has been made in 1980 and the building construction has been managed in 1986. It means that there is an engagement of two-taxation period. At the time of land purchase in 1980, the land has been valued $ 90,000 and it accounts as a pre-taxation term. On the other hand, the construction of building in 1996 has been managed with $ 60,000 and it recounts as post taxation period in terms of capital gain. According to the Income Tax Assessment Act of 1986, two different tenures of capital gain taxation accounts for different amounts (Newman, 2016, p.18). Here is a need for proper apportionment ratio that can establish actual amount of taxation evaluating net gain or loss of capital investment. The evaluation of apportionment can be made on the following terms:

The value of land as on 1st September 1980: $ 90,000

The value of construction as on 1st September 1986: $ 60,000

The total capital investment stands for: $ 90,000 + $ 60,000 = $ 150,000

Apportion Ratio will be 6:4   

Apportioned capital will be $ 80,000 X 40% = $ 320,000

The impact of capital gain will be levied upon $ 320,000. As the land was valued in earlier times, Scott does not have to pay taxes on the capital value and not on the net value. Pre capital taxation value cannot be implemented on the net value and there is a chance of saving money as the amount of $480,000 will not be considered for taxpaying. Now, in order to calculate tax on the evaluated money, there are two processes applicable according to Australian taxation law and those are like indexation and discounting method (Bird and Zolt, 2014, p.670).

Scott’s Net Capital Profit or Loss with the Current Year Ending

In order to adjust income flows and variations throughout the years, indexation method is used while evaluating capital tax. Purchasing power is not stable and at the same time, it rises according to economic growth. Therefore, it cannot be authentic to measure tax based on the purchased value.

Capital value of construction	$320,000
Base of indexation cost [60,000 * (68.70 / 43.2)]	$95420
Capital gain	$224,580

Table 1: Indexation method of taxation

(Source: Self-created)

The discounting method always brings profitable glances of taxpaying, as there are options available to avoid the rise of capital values based on economic growth. The property has been bought in 1980 and it has become ready for sale in 1986. The tenure of six years can bring a greater change. According to the discounting taxation method, Scott has to pay the following amount:

Capital cost of construction	$320,000
Incurred expense on building cost	($60,000)
Net gain	$260,000
Discount (50%)	$130,000
Net capital gain	$130,000

Table 2: Discounting method of taxation

(Source: Self-created)

From, the above calculation, it seems that Scott has to pay lower tax following the process of discounting method as it avoids the continuous rise including tax discounts. The net capital gain is same for both the calculation and that is $ 320,000. Indexation method incurs a tax of $224,580 whereas discounting method has calculated the amount as $130,000. Therefore, Scott should better follow the least tax payable strategy.

While making a sale of property, Scott has to evaluate market value substitution rule. There are different terms available under the market value substitution rule. While making a transaction of property, the initial stage is to evaluate both pre and pro-taxation net capital. The evaluation of apportioning ratio is as follow:  

The value of land as on 1st September 1980: $ 90,000

The value of construction as on 1st September 1986: $ 60,000

The total capital investment stands for: $ 90,000 + $ 60,000 = $ 150,000

Apportion Ratio will be 6:4   

Apportioned capital will be $ 80,000 X 40% = $ 320,000

Market value substitution value means a great tax saving concern as such transactions are regarded as prize money or gift exchanges (Minas and Lim, 2013, p.191). The two basic norms of substitution rules include:

• A capital gain taxation asset may be less or more than the net capital evaluated
• Transaction making process is not operated through capital benefits.
• There are no means of arm forces while making the transaction

Scott has decided to sale the property in $200,000 and it seems lower than the net asset evaluated. Therefore, Scott is going to gain a free term of taxation while making a gift measuring transaction only having the net cost of the property without having a transaction income.

If the owner of the property would be a company or entrepreneurship, there would be no means of tax calculation based on discounting method. A business firm or company tends to make commercial use of properties and Australian accounting standards have safeguarded amortisation norms for transacting commercial properties (Long et al. 2016, p.94). According to the legislation act and Section 115A, a commercial firm may get discounts in tax paying, but at the same time, the value of assets is reduced. Reduction in both the capital assets may cause a reduction in profit. (Nyst 2014, p.24) has stated that Australian Accounting Standards 116 has been especially managed to marginalise the payable amount of tax and profits of business firms. Moreover, having a company ownership, the overall value of the property would reduce and follow the same tax will be deducted according to the norms of AASB income tax act (Sourdin et al. 2015, p.97).

Conclusion

Therefore, these are all about the different legislation specified by Australian legislation for payable tax properties and business transactions. The discussions have clearly reflected that different calculations and directives are applicable to different kinds of transactions and property ownership. The case studies include the value of documentation while making an official deal, variation of taxable properties based on ownership and status of public service income. The implications of different tax calculation methods have brought the clarity of Australian taxation and policies.

Reference List

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Campbell, S., 2015. A mater of trusts: CGT issues when creating and dealing with UPEs. Taxation in Australia, 50(6), p.332.

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Evans, C., Minas, J. and Lim, Y., 2015, September. Taxing personal capital gains in Australia: an alternative way forward. In Australian Tax Forum (Vol. 30).

Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G., 2009. Australia’s future tax system. Canberra, Commonwealth Treasury.

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Newman, S., 2016. The new CGT withholding regime: More than meets the eye. Proctor, The, 36(5), p.18.

Nyst, C. and McAdam, R., 2014. Family law: Tax Office takes aim at separation property settlements: Draft ruling impacts private company transfers. Proctor, The, 34(4), p.24.

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Sourdin, T., Beresford-Wylie, S., March, A. and Shanks, A., 2015. Evaluating Alternative Dispute Resolution in Taxation Disputes.

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Taylor, D. and McNamara, N., 2014. The Australian consumer law after the first three years-is it a success?. Curtin Law and Taxation Review, 1(1), pp.96-132.

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