Practice Questions And Answers On Australian Taxation Law

Issue

Calculating the net capital loss or gain from the assets bought and sold by Eric.

· An antique vase                                                                                 $2,000

· An antique chair                                                                                   $3,000

· A painting                                                                                            $9,000

· A home sound system                                                                        $12,000

·  Shares in a listed company                                                                  $5,000

The assets sold were as follows-

· antique vase-                                                                              $3,000

· antique chair-                                                                            $1,000

· painting-                                                                                  $1,000

· sound system-                                                                        $11,000

· shares-                                                                                    $20,000

Regulatory provisions

For the purpose of determining capital gain or loss, as per the Australian Tax provisions, the holding period of an asset is the critical point to be considered. According to the provisions stated thereto, if the asset holding period is more than a year, indexation or discounting method is applied for this purpose of determining capital loss or gain (AO, 2015). On the other hand, if the defined period is less than a year then the taxable amount is calculated as-

Sales price – purchase price

The loss arising from one transaction is compensated by the other.

Applicability of cited provisions in the case

In the present scenario, the assets have been held by Eric for less than twelve months, and due to the same reason, the other method in which gain is ascertained through reducing purchase price from selling price will be applied. The capital gain or capital will be calculated in the following manner:

Conclusion

It can be concluded from above calculation that in present year net capital gain (Total capital gain –Total capital loss), i.e. $5000 will be taxable in the present year.

Issue

Brian as a bank executive borrowed a loan of $1m for three years on 1 April 2016 at a rate of 1% p.a. as a part of his remuneration package. The loan is payable in monthly instalments. 40% of the loan amount was used by Brian for the purpose of generating income. He met all his monthly obligations related to payment of interest.  The fringe benefit for the year 2016/17 is to be calculated for Brian. The benefit is also to be calculated in the case when the total interest is to be payable at the end of the year along with the principal amount. Determining the effects if Brian is relieved from paying the interests.

Regulatory provisions

Fringe benefits are the extra amount paid by the employers to employees instead of wages or salaries. In the above case, Fringe benefit arises when there is no interest payable on the loan. Several fringe benefits have been determined by the tax provisions regarding the same (Bond and Wright, 2017). These provisions also contain specific rules of valuation for each benefit. The taxable value of fringe benefits is calculated by the measuring the difference in the interest rate payable by the borrower with that of the statutory interest rate. The statutory tax rate for the year 2016 and 2017 were 5.65%. 

Applicability of cited provisions in the case

 The taxable value of fringe benefit

= Amount of interest in accordance with statutory rate (working note 1) – The amount of interest actually paid by the assessee (working note-2) * proportion of loan applied for producing income

=$56500-$10000

=$46500 *40%

=$18600

Working Note :1

Amount of loan * rate at will loan provided by bank

=$1000000*1%

=$10000

Working Note: 2

Amount of loan * statutory rate of interest

=$1000000*5.65%

=$56500

Conclusion

In the present case as only 40% of the total amount of loan taken has been applied for producing income; the same will be the taxable amount of fringe benefits tax. The fact that whether interest is paid on monthly or yearly basis does not have any effect on the amount of fringe benefits tax. Moreover, if in a situation Brain is not liable to pay any amount of interest and released from whole liability that the entire amount of interest will be taxable. The same will be further proportioned to the extent amount has been applied for producing income.

Issue

Determining the allocation of loss for the purpose of tax for Jack and Jill. They both have borrowed money for the purpose of purchasing a rental property as joint tenants.

As per the written agreement executed between them for the profit entitlement, Jack is allowed 10% share in profit and Jill is allowed to have the rest that is 90%.  Jack is entitled to loss, if any, by 100%. There was a loss of $10,000 arose in the past year. Calculating capital gain or loss that will arise on their part if they decide to sell the property.

Regulatory provisions

The tax provision applicable for the purpose would be TR 93/32- distribution of net profit and loss among co-owners. The co-owners of the rental property are not to be considered as partners as per the law unless the partnership is for the purpose of carrying on some business. If they are considered as a partner, this would be irrelevant since it is an unreal partnership and not according to the provisions for partnership (Braithwaite, 2017). This form of unreal partnership would entail many other implications and not just share of profit and loss. In partnership, any event of loss does not mean the loss of their interest. Hence, their mutual interest in their rented place is retained even after the loss.

Applicability of cited provisions in the case

In the present case as Jack and Jill both are co-tenants, and as per the agreement of partnership, it has been provided that the ratio of profit between them is 1:9 (Jack : Jill) and in case of loss the ratio is 1:0 (Jack : Jill). However, in accordance with above provision no partnership existed among the respondent and their spouse as per the general law. Further, renting single premises cannot be said as conducting business; thus their partnership will not be treated as a partnership for income tax purposes. Further, profit and loss should be apportioned on an equal basis, i.e. 50: 50 as they both have equal right in business. The same result was concluded in case of FCT v Whiting (1943), 68 CLR 199 at 204; 2 AITR 421.

Conclusion

From above analysis, it can be assessed that it is necessary to ascertain whether both the responder and the wife are notional partners for presenting the same in the eyes of the law or they are actually partners in accordance with general law. Thus, they will be liable for equal profit and loss and not in accordance with the ratio provided in the partnership agreement for income tax purposes.

Issue

An agreement was carried out between IRC and Duke of Westminster regarding its associates which comprise gardener, house helpers and other servants. As per the agreement, Duke was liable to pay additional money, and in return, same was liable to pay money as a reward for the same. Further, affidavit relating to payment of additional wages was submitted in which it was declared that additional sum would be paid by Duke in case they provide extra services. Even after the agreement, some servants received wages as they received before and on the other hand, Duke received a benefit in tax liability due to the agreement which he submitted that he will pay additional charges to his servants.

Regulatory provisions

The decision was made by Lord Tomlin which declared that every individual is having the right to order his affairs in a way that liability of tax in accordance with appropriate Acts is less in any other case it would have actually been (Woellner and et.al. 2016). Further, if he succeeds in ordering them to secure this result. In that case, it does not matter the manner unappreciative Commissioner of Inland revenue of other authorities may be his ingenuity. Moreover, he cannot be compelled to pay an increased tax.

Relevance in present scenario

Provisions have been made by the constitution in the recent year which requires the advisors to inform the HRMC regarding any scheme which results into the evasion of tax liability. Further, it would not be assessed by the board and the action which is taken after receiving notifications relating to the scheme of tax evasion. It was assessed by Lord Wilberforce that the decision of the case of Westminster prevented the court from noticing the actual transaction to some alleged basis substance (Long, Campbell and Kelshaw, 2016). However, the court should identify the facts relating to the case and make decisions relating to same. Further, it can be said that the existing scheme was encouraging tax avoidance in the absence of any commercial justification. Thus, the Tomlin Westminster ruling specifies that taxpayer never had a right to abuse in that way in first place, this means that he does not suggest for avoiding tax but assist for non-right to have not had tax avoided.

Issue

Bill, an owner if a piece of land, which he intends to use for the purpose of grazing. The land has pine trees which when sold to a company in the form of timber is expected to generate $1,000 for every 100 metres. Bill is to be advised that would these receipts be considered for the purpose of taxation. Measuring the implications if he receives a lump sum amount of $50,000 by the logging company against the right to any amount of timer collected from his land.

Regulatory provisions

According to TR 95/6- point 22- subsection 36(1)- The section deals with the provision of disposing of standing timer, not in ordinary course of business. As per the provision of this section, the sale price arising as a result of the disposal of planted trees is a taxable income during the year in which the disposal arises. It does not matter if the person if the person is carrying a business related to forest or not and also when the tree disposal is not as a part of normal course of business (Barkoczy, 2016).  The point to be considered here is that the tress must be the subject matter of business or just a part of it. The value of trees is to be valued on the market rate on the date of disposal- TR 95/6.

Point 25 of TR 95/6: The point deals with disposal of rights to standing timber. It has been provided in the provisions of the specified section that a taxpayer engaged in forest operations may put the timber to sale. The income produced thereon is taxable as per this subsection. Moreover, the royalty obtained by the taxpayer pertaining to the right given for the purpose of procuring timber on the taxpayer’s land would be considered for the purpose of taxation (Barkoczy, 2017). This rule would be applicable even if the selling of right is not a part of normal course of business of the taxpayer.  

In this regard, the judge Lord Tomlin said that it is allowed for each and every person to arrange their business affairs in such a way so as to reduce the tax implications. If the person succeeds in the same, then they can safeguard their interest.

Applicability of cited provisions on the case and Conclusion

In the first scenario, the transactions are relating to disposal of standing timber which is not in ordinary course of business. Thus, the income which is being received by the Bill, i.e. $1000 for each 100 meter of standing timber will be taxed under section 36 (1).

In the second scenario where a lump sum amount is received; it will be taxable under section 25 (1); as the income received is in accordance with the provision of specified section.