Discuss about the Determining The Residential Status Of An Individual and Evaluation of CGT.
Issues:
Laws:
The laws related to the issue comprise of residential status.
Taxation ruling of TR 98/17
Discussion:
For the purpose of determining the residential status of an individual several tests have to be taken that include the Domicile test, 183 days test and superannuation test.
In case of domicile test it is seen that Kate has her permanent address in Australia. The reason being that while in Fiji she only took a rented house (Geljic et al. 2016). The house rented by them was not even found by them rather came with the employment package. Hence Kate satisfy one of the test i.e. Domicile test thereby she will be considered to be a resident of Australia.
Conclusion:
As Kate is a resident of Australia her global income will be taxable. Therefore the income earned by her from her employment in Fiji, along with the amount of money earned by her through rent and investment will all form part of her ordinary assessable income. Hence for the year ending 30th June 2018 she will have to include an amount of $19000. Because rest of the incomes have been earned by her in the year ending 30th June 2017.
Issues:
Whether an amount representing the market value of the residential property provide to Bernie be included in his assessable income for the year ended 30th June 2018?
Laws:
Analysis:
It is interesting that in case of Australian tax laws the definition of ordinary income is not clearly defined but certain general inclusions have been given along with some general deductions (Gitman et al. 2015). The inclusion includes:
Some of the exclusions include:
It is seen that the house given to Bernie is in exchange of the service rendered by him. The consideration received by an entity in exchange of a service may be in cash or in kind. In this case it is in kind.
Conclusion:
As the income earned by Bernie is not included in the exclusions from ordinary income it has to be taken into consideration while computation of the taxable income of Bernie. The consideration may be in cash or kind. The monetary value of the consideration must be included in the assessable income of the assessee.
Issues:
Whether the amount paid by Brown to the tune of $200000 be included in the ordinary income of Melanie ?
Laws:
Discussion:
It is interesting that in case of Australian tax laws the definition of ordinary income is not clearly defined but certain general inclusions have been given along with some general deductions. The inclusion includes:
Some of the exclusions include:
The income earned by Melanie by way of receipt of certain amount in exchange of cancellation of contract is not included or does not fall within any of the categories of the exclusions (Tucker 2016).
Conclusion:
The amount received by Melanie is due to the cancellation of the contract by Brown. It is irrelevant whether the business conducted by Melanie will continue after receiving the amount or not. Hence it is concluded that the amount received by Melanie will form the part of her assessable income for the year ending 30th June 2018.
The prime purpose of undertaking the report is to shed light on the deduction that is given to the small businesses in respect of capital gains. It further gives out details like what kind of capital gains are permitted for the small businesses. In addition to this all the condition that are needed to be fulfilled of rate purpose of availing capital gains are also discussed. It is observed that the small businesses have heavily contributed towards the economic development of Australia and generation of employment opportunities (Evans et al. 2014). An estimated data provides us that around 49% of the private sector jobs or employment are provided by the small businesses. It can be roughly computed that the small business contribute 97% of the private sector businesses. Hence it has become clear that small businesses are indispensable part of the Australian economy.
Australia is an important member of the Organisation for Economic Development and Cooperation (OECD). It was also the last member who adopted the capital gains tax via implementation of Income Tax Assessment Act 1936 Part IIIA. Capital gain was made effective from 20th of September 1985. All the matters relating to the same is dealt with in the section 160 A to 160 ZZU. It has to be duly noted that prior to the introduction and implementation of the capital gains tax in the country gains arising out of the transfer of asset was not taxed (Evans et al. 2015). However the income that was generated from other ordinary activities was taxed at the prevailing normal rates. This created a disparity in the taxation system. For the purpose of eradicating the disparity capital gain tax was introduced.
Gains arising out of the assets that were acquired on or after the 20th of September are subject to the capital gains tax. The assets which were purchased before 20th of September are not subjected to tax in respect of the gains arising out of their transfer. They are termed as pre capital gain tax assets. No separate rate of tax that has been allocated for the purpose of charging capital gains. Section 6(5) and 6(10) of the Income tax Assessment Act 1997 requires all the assesse to pay their taxes in respect of all the statutory and ordinary income. In respect of capital gains the marginal rate of tax is applied as it is regarded as a statutory income. Income Tax Assessment act 1997 specifies that the gains arising from the disposal or transfer of shares, real estate or interest in trust has to be treated as capital gain tax event as per the guidelines of the section 200-20. Hence, it can be concluded that the tax that is charged and paid on the profit earned from the transfer or disposal of asset is known as capital gain tax. All the members’ countries of the organisation responsible for the economic development and cooperation have already applied the laws relating to the capital gains taxation (Yuan 2017). On deeper analysis it was observed that there are presently two methods that are being applied by the member countries of the OECD. As per one of the approaches the incomes termed as capital gains are termed as ordinary income. Under these approach only normal rates of personal taxation is applied on the amount realised as capital gains. As per the second approach the capital gains are not considered or taken into account as ordinary income. Under this approach a different rate of tax is being applied on the amount that has been realised as capital gains for the purpose of computation of tax payable. On drawing comparison between the developed and economically strong nations it was found that the rate of tax applied in the country of Australia is the highest in respect of the amount realised as capital gains. In other words the tax charged by the Australian government in respect of capital gains is much higher than rest of the countries (Woellner et al. 2016).
On 21st of September 1999 the new amended form of capital gains tax was presented. The new amended form of the tax was adopted due to the presence of the following reasons:
The above mentioned reasons were the prime causes for the changes that were made in the existing capital gain tax structure. For the purpose of alignment of the tax structure of Australia with other countries the system o indexation and averaging was completely abolished. It has greatly helped the taxpayer by reducing the complexity of the procedures significantly. It is clearly observable that the tax burden was higher in case of the small businesses. Due to the high tax rate prevalent in the country the savings of the small businesses was heavily affected. This phenomenon was negatively impacting the economy of Australia. The prime reason for the changes that were being made was to protect and safeguard the interests of the small businesses present in the market of Australia. The concessions given to the small businesses earlier were rationalised and extended. All the provisions were merged in the new legislation thereby, reducing the cost of compliance. It was commented by the treasury that the main reason for extension of the concessions given out to the small businesses of the country was to increase the availability of funds in their hands for the purpose of expansion. This would in turn help the economy of the country to grow as more individuals will come forward willing to invest in small businesses (West and Lam 2016). The legislation tried its best to encourage the individuals to invest in small businesses by making available the concession in respect of the small businesses at the time of acquisition or disposal of asset or during the time of dissolving the business. The capital gain tax regime would enable the promotion of the culture of savings and investments among the individuals of the country. It was objectively observed that most of the time the heavy burden of tax compliances fell on the individuals and the small businesses hence the legislation made sure to reduce the tax burden (Evans and Krever 2017).
Capital gain tax concession for the small businesses is dealt by the provisions of The Income Tax Assessment Act 1997 division 152. The provisions of the act suggest that in event of compliance of all the provisions and condition by the individual and the small businesses, the capital gain tax burden is reduced or eliminated (TEO et al. 2016). The legislation has made available four kinds of concessions in respect of Capital gain tax for the small businesses:
The only stipulation for availing the concessions provided by the legislation is that the business will have to satisfy all the condition mentioned in the provisions.
In case the capital gain tax becomes payable on the event of sale of active assets of the entity, it is allowed to delay the payment of the capital gains tax. The assets sold must be replaced by the assesse within the limited time given. It is not required that the replaced assets would have to be used for the same purpose as the old ones. In addition to this the replaced assets can be used by the assesse in other business too. In case the small business is selling its share or transferring its interest in a trust, to avail the exemptions of small business it must be the controlling authority of the company just prior to the CGT event (Freebairn 2016). In the event of selection of roll over relief by the assesse then it is eligible to get a concession to the extent of the cost base of the assets replaced by it.
An exemption can be availed by the assesse in respect of the capital gains arising out of small business if the proceeds are used for the purpose of retirement by the assesse. However, there is a maximum limit of $500000 that can be claimed by the assesse in his lifetime as retirement funds. The age of the assesse should be 55 or more for the purpose of availing this benefit (Freebairn 2017). The assesse can claim the exemption even if he is younger than that if he chooses to invest the money earned in the superannuation funds, savings accounted for the purpose of retirement or in some authorised deposit fund. The tax payer is entitled to apply for more retirement exemption in addition to the 50% deduction received. It is thus found that 25% of the capital gains tax I adjusted against the threshold of $500000. It should be remembered that this particular exemption is available for only those individual who are carrying out business as sole proprietor or in partnership form. As per the requirements stated out there can be more than one controlling interest in case of trusts. In case the company or the trust does not have a controlling interest it will not be eligible for the exemption (Hicks and Tran 2014).
For the purpose of becoming eligible for the termination exemption the person is not necessarily required to retire from his occupation or business. The amount in respect of termination payment is the one which is selected for the purpose of retirement exemption and the same is not considered as perquisites. In the case of the company the tax payer is required to get a termination from the office as per the guidelines issued by ATO in ID 2002/493.
Any small business that has failed to comply with the condition of the 15 years and thereby not getting the exemption corresponding to that can however be eligible for 50% exemption in the capital gains if it is able to satisfy other basic conditions. This concession is allowed or given in addition to that of the discount available to it (Hemmings and Park 2017). By satisfying the necessary conditions any small business can reduce its total capital gains by 75%. In other words the company and make itself to pay taxes only in respect of 25% of the capital gain amount. The entity in order to maximise its deduction can first avail the 50% general deduction and thereafter apply for 50% exemption applicable in case of small businesses. Further the entity can set off unabsorbed capital losses of the previous year and of the current year with the capital gains of the current year. The amount of capital gain can be reduced by application of the small business rollover or the retirement exemption. It is up to the taxpayer in which manner he will be applying and availing the exemptions (Daley and Wood 2016).
If prior to the Capital Gain tax event, the asset that has been sold was held for more than 15 years the small business is not required to pay any amount in respect of capital gains. This concession is available only for the individuals. In addition to this the individual must be retiring or incapacitated to avail the benefits of this concession. In case the entity is a company or a trust there must some individual present as a controlling authority throughout the period of ownership (Prince 2016). Only after complying with the above mentioned conditions the entity will be allowed to avail the benefits of the concession. The assets on the basis of whose sale proceeds the capital gain exemption is given should be active while computation of the exemption. An asset is considered to be active if it had been used for at least half the period of its life or ownership.
There is a slight difference in the rule in case of the 15 year exemption. As per its requirements the capital gains tax must be in effect for at least 15 years prior to the capital gain tax event. In other words the asset must be held for 15 years before the capital gain tax event. Only after the complying with the above mentioned conditions the company is allowed to avail the benefit of the concession. Assets that have been acquired under the provisions of the section 124B, rollover relief or under the provision of section 126A are eligible for the receipt of special treatment in case of broken marriage (Murphy 2018). As per the provisions the ownership of the asset will remain constant in cases of involuntary disposal. In case of replacement it will be deemed that the original assets were purchased for the purpose of getting this exemption only. If a small business becomes eligible for the purpose of 15 year exemption after fulfilling all the conditions it will not have to pay capital gains taxes as per the provisions of section 102-5(1). Similarly if any company or trust qualifies for the exemption it will not be required to pay any sort of taxes. However in case of company and the trusts it is mandatory on the part of the company to distribute the benefits received in respect of the capital gain tax among the various shareholders within a time period of 2 years from the capital gain tax event (Stilwell 2016).
The effective tax system is the parameter upon which the capital gain concession to small businesses is measures. The various factors for the evaluation include principles governing the efficiency, equity and simplicity of the system.
Equity:
The concept is mainly focussed on fairness and justice. Vertical equity and horizontal equity are the two concepts of equity. Within the concept of vertical equity there is a necessity of maintaining certain level of fairness and justice between two income groups. This implies that the person earning more will have to pay more taxes. In case of horizontal equity all the business entities will be treated in a same manner that is operating within the same economic circumstances (Australia 2015).
Efficiency:
This concept revolves around the notion that the systems should be capable enough to earn the maximum returns by applying minimum resources. The inefficiency present in collection of taxes from the citizens cannot be eliminated completely but can certainly be reduced to acceptable levels (Alm and Khan 2017).
Simplicity:
The tax system present in the country should be simple. The tax structure is considered to be simple if the rule and regulations laid out by the statute are easy to understand. Along with easier understanding the cost of compliance and administration is significantly reduced (Paul 2017).
Conclusion:
From the above discussions it is very clear that the taxation system of Australia has become very efficient simple and equitable. The introduction of concession to small business in respect for capital gain tax was introduced for the purpose of increasing the equity within the system. The remaining complexities of the system should be effectively dealt by the government by taking corrective measures.
References
Alm, J. and Khan, M.A., 2017. Tax Policy Effects on Business Incentives in Pakistan (No. 1705).
Australia, M.B., 2015. Re: Think: Tax Discussion Paper.
Boccabella, D. and Freudenberg, B., 2017. Who Bears the Burden for Business Losses: To What Extent Are Liability Issues of Business Structures Taught in Australian Accounting Degrees?.
Cassells, R., Duncan, A., Gao, G. and Tarverdimamaghani, Y., 2015. The Costs of Doing Business in WA: Pressures and Barriers to Industry Performance.
Daley, J. and Wood, D., 2016. Submission to Standing Committee on Economics inquiry into Tax Deductibility.
Evans, C. and Krever, R., 2017. Taxing Capital Gains: A Comparative Analysis and Lessons for New Zealand.
Evans, C., Hansford, A., Hasseldine, J., Lignier, P., Smulders, S. and Vaillancourt, F., 2014. Small business and tax compliance costs: A cross-country study of managerial benefits and tax concessions. eJournal of Tax Research, 12(2), p.453.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.
Freebairn, J., 2016. Design alternatives for an Australian allowance for corporate equity. Austl. Tax F., 31, p.555.
Freebairn, J., 2017. Comparison of a Lower Corporate Income Tax Rate for Small and Large Businesses. eJournal of Tax Research, 15(1), pp.4-21.
Geljic, S., Koustas, H. and Burke, D., 2016. Small business restructure roll-over. Taxation in Australia, 50(7), p.404.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Hamzah, A., 2016. PENYELARASAN STRATEGI BISNIS DAN STRATEGI SISTEM/TEKNOLOGI INFORMASI UNTUK PENINGKATAN KINERJA ORGANISASI. InFestasi, 3(2), pp.79-89.
Hemmings, P. and Park, T., 2017. Creating good conditions for innovation-driven productivity gains in Australia.
Hicks, A. and Tran, A., 2014. Small business concessions. Taxation in Australia, 48(7), p.367.
Murphy, C., 2018. Modelling Australian Corporate Tax Reforms: Updated for the Recent US Corporate Tax Changes.
Paul, E., 2017. Australia: Too Many People?-The Population Question: Too Many People?-The Population Question. Routledge.
Prince, J.B., 2016. Tax for Australians for Dummies. John Wiley & Sons.
Stilwell, F., 2016. Taxing times in Australian capitalism. Australian Socialist, 22(1), p.2.
TEO, E., Barros, C. and Hinchliffe, S.A., 2016. Clash of the Deeming Provisions: Pre-Capital Gains Tax Concessions, Tax Consolidation and Policy in the Federal Court.
Tucker, J., 2016. Draft legislation to enhance flexibility for small business to restructure. Bulletin (Law Society of South Australia), 38(1), p.28.
West, M. and Lam, D., 2016. Small business restructure roll-over-Opportunities and traps. Taxation in Australia, 50(9), p.521.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
Yuan, H., 2017. Review of structures for SMEs. Taxation in Australia, 52(6), p.302.
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