Australian Taxation Law (Case Study)

This document provides expert advice on Australian Taxation Law (Case Study) and analyzes the taxation consequences of various transactions. It includes solutions and analysis for Our Earth Pty Ltd and Sam. The document is a study material for Australian Taxation Law.

Australian Taxation Law (Case Study)
Australian Taxation Law (Case Study)
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Australian Taxation Law (Case Study)
Table of Contents
Question 1: Advise Our Earth Pty Ltd of the taxation consequences of the above transactions..................2
Question 2: Advise Sam of the taxation consequences of the above transactions........................................5
References.................................................................................................................................................11
Question 1: Advise Our Earth Pty Ltd of the taxation consequences of the above
transactions
Analysis of the provided case, shows that the company Our Earth Pty Ltd, he sue the company
for copying their intellectual property and received compensation by means of legal action. This
will be considered as the capital gain for the company Our Earth Pty Ltd (Gouveia, 2017).
Generally, intellectual property of a company or individual are considered as asset of the
company and according to the law of taxation any money received in relation to sale, purchase or
legal action in relation to the asset of the company or individual will be considered as Capital
Gain (Black, 2018).
According to the ruling of the Taxation Law, the company who has received any amount as part
of compensation, the same amount will be considered as capital gain and capital gain tax will be
levied on the aforesaid amount (Fishman, 2019). It does not matter if the amount is included in
the assessable income of the receiver or not according to Part IIIA of the Income Tax
Assessment Act 1936 ('the Act') (Office, Taxation Ruling, 2019).
For the identification of capital gain transactions generally look-through approach is adopted so
that this process will help to identify the relevant asset (Fishman, 2019). This method requires
through analysis of the available assets of the company which can be mostly related to the
transaction. This method and system is referred as the ruling of the underlying assets of the
company (Fishman, 2019).
Apart from that it is also considered that if the asset is a notional asset of the company. The term
notional asset can be defined as the assets which is deemed to be created under subsection
160M(7) (Office, Taxation Ruling, 2019). While calculating the capital gain tax the permanent
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Australian Taxation Law (Case Study)
reduction value of the assets is also calculated and it’s also impact the reduced value but also
refers the damage in the value permanently until and unless some specific action can be taken by
the payer of tax (Djukanovic, 2018).
In case the company has paid excess amount of tax, then the company has the right to claim the
same as compensation (Black, 2018). Apart from that the taxpayer can also use this thing as a
breach of contract can seek the compensation (Fishman, 2019). The right to seek the
compensation has been provided under Part IIIA. This right to seek compensation can only be
applicable in case of personal injury or damages (Store, 2019). A right to seek compensation can
be discharged once it is discharged, satisfied and released (Store, 2019).
In case of any additional amount for compensation, adjustment can be made for taxation which
can be calculated over the liability of income tax which also includes the capital gain tax
(Fishman, 2019). This capital gain tax may arise as a result of the compensation received in
respect of the asset of the company as well as individual (Black, 2018).
In case there is a change in the asset ownership then under subsections 160M (1), it is deemed
that the asset has been affected by acquisition or disposal. Subsections 160M (2) and (3) also
focuses on the change in terms of ownership of the assets (Fishman, 2019). The provision for the
change in the ownership can occur in respect of the acquisition of the asset (Black, 2018).
However, not all acquisition of assets is subject to capital gain tax (Office, Taxation Ruling,
2019). An asset to be considered as a capital gain has to be recognized and protected by law that
can assist to enforce the same (Legal, 2019). Personal freedom and liabilities for work also play
an important role in equitable rights and accordingly the assets will be considered if they will be
treated capital gain tax purposes or not (Office, Taxation Ruling, 2019). However, that does not
suggests that the money any other form of consideration in relation to the personal asset will not
be treated as a personal freedom and liberty and that it cannot be taxed under the provisions of
capital gain tax (Legal, 2019).
Accordingly personal character has also a legal right which may not be that much capable of
assignment including the rights that a person holds in a contract for personal services will be
considered as an asse (Black, 2018)t. Some of the other examples of the same includes right of
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Australian Taxation Law (Case Study)
party for a covenant which is restrictive in nature, exclusive tie agreement, sporting club right
under the agreement and the sportsperson for a particular club etc (Store, 2019).
Generally, the right to seek compensation is used for the purpose of compensation in relation to
assets under the provisions of capital gain tax (Fishman, 2019). The right to seek the
compensation for assets under the capital gain tax scheme is possible (Black, 2018). This
question was answered in the judgment of a leading case of Australia through the judicial
authority. This can also be better explained and analyzed with the help of that relevant case law
(Office, Taxation Ruling, 2019).
According to the capital gain tax legislation of United Kingdom, there can be different types of
cases while analyzing the definition of the assets while considering the capital gain tax (Black,
2018). In the case of O'Brien (Inspector of Taxes) v. Bensons Hosiery (Holdings) Pty Ltd [1980]
AC 562, the Court concluded that any legally binding right can also be turned considering the
fact that it is an asset under the provision of the Capital Gain tax of United Kingdom (Store,
2019). In that case, the payer of tax defended that the rights for a service with an employer
generally does not constitute as an asset (Black, 2018). Lord Russell of Killowen in the aforesaid
case concluded that if an employer is able to gain a substantial sum of money to release him from
his duties and obligations, the rights of the employer can be quite sufficient that the it is the asset
of the employer, something which can be turned into a asset considering the ability to turn his
ability to an asse (Office, Taxation Ruling, 2019)t.
Similarly, the Whiteman on Capital Gains Tax, after an analysis of the UK case law, provides
that it can be very hard to resist the conclusion that in case of appropriate circumstances, the
right provided to sue for the loss and damages is an asset with regard to a gain that may be
realized later (Fishman, 2019).
Some of the other leading case laws, in respect of capital gain tax are mentioned below;
Hepples v. FC of T 91 ATC 4808; (1991) 22 ATR 46
Gummow J further concluded (90 ATC at 4517; 21 ATR at 66):
Lockhart J commented, however, (90 ATC at 4508; 21 ATR at 55):
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Australian Taxation Law (Case Study)
According to the ruling of the Taxation Law, the company who has received any amount as part
of compensation, the same amount will be considered as capital gain and capital gain tax will be
levied on the aforesaid amount (Fishman, 2019). It does not matter if the amount is included in
the assessable income of the receiver or not according to Part IIIA of the Income Tax
Assessment Act 1936 ('the Act' (Fishman, 2019).
For the identification of capital gain transactions generally look-through approach is adopted so
that this process will help to identify the relevant asset. This method requires through analysis of
the available assets of the company which can be mostly related to the transaction. This method
and system is referred as the ruling of the underlying assets of the company (Store, 2019).
In the provided case, it shows that the company Our Earth Pty Ltd, he sue the company for
copying their intellectual property and received compensation by means of legal action. This will
be considered as the capital gain for the company Our Earth Pty Ltd (Office, Taxation Ruling,
2019). Generally, intellectual property of a company or individual are considered as asset of the
company and according to the law of taxation any money received in relation to sale, purchase or
legal action in relation to the asset of the company or individual will be considered as Capital
Gain (Black, 2018).
Hence, the amount received by the company as compensation for breach of intellectual property
rights will be treated as a capital gain and the amount received will be added to the total
assessable income of the company and will be placed under the heading capital gain (Office,
Taxation Ruling, 2019).
Question 2: Advise Sam of the taxation consequences of the above transactions
Analysis of the provided case shows that Sam purchased 80 acres of farmland in late 90s and
then also purchased additional land adjoining to the existing land with an intention to expand his
business. With the passage of time, he get old and drought condition was also there in his
township so he decided to sell of his entire farming land. For this purposes, he hired a selling
agent who will help him to do this work (Office, Calculating the cost base for real estate, 2018).
The selling agent suggested that the value of the farm is not according to its actual value and the
return price will be low in that case (Legal, 2019). He then suggested that Sam consider selling
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Australian Taxation Law (Case Study)
the land as a sub-division. This would likely generate a higher return per acre than selling the
property as farmland (Office, Vacant land, 2018).
Accordingly, Sam re-zoned and received council approval for the sub-division and also paid the
electricity, water and surveyor fees. The land was sold later and the legal fees and commission of
the agent was also paid by Sam (Interest.com, 2011).
In this case, the land sold by Sam will be considered as a capital gain. However, the charged that
are paid by him such as electricity, water and surveyor fees, legal fees and agent commission will
be regarded as expenses and will also be added in the total selling price of the land (Gouveia,
2017). According to law when a vacant land is acquired by a person for private or investment
purposes it will be considered as an capital asset (Office, Vacant land, 2018). The capital asset
will be subject to tax when a land is sold (Office, Calculating the cost base for real estate, 2018).
However, when a person is engaged in a business of sale and purchase of land then the amount
received from such sale or purchase will not be considered as a capital gain (Perez, 2019). The
income generated in such cases will be termed as business income or ordinary income and for
that a business needs to get itself registered under the Goods and Service tax (Office, Vacant
land, 2018).
When a person buys a vacant land with an intention to build a rental property than the person can
claim deductions for the expenses he incurred for the land he holds. However, the following
conditions must be filled for the same (Office, Vacant land, 2018);
Land will be considered as a capital asset
Rental property must be build on the vacant land
Land will be used as trading stock
GST will be applied for the transactions related to property
Deduction claim for the vacant land
Generally the capital gain tax is levied on the assets of a company or individual whether it may
be a block of land or any sort of tangible assets as well as intangible asset. For determination of a
transaction to be considered as capital gain, one thing that has to be analyzed is that if the
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Australian Taxation Law (Case Study)
property or thing sold is a real asset for the company or individual. The determination of real
asset is one of the crucial factors in this. The assets can be both in the form of tangible and
intangible.
IN the aforesaid case, it is clear that a block of land will be considered as a tangible asset and the
sale of the same will be termed as a capital gain and is subject to tax. For the identification of
capital gain transactions generally look-through approach is adopted so that this process will help
to identify the relevant asset (Fishman, 2019). This method requires through analysis of the
available assets of the company which can be mostly related to the transaction. This method and
system is referred as the ruling of the underlying assets of the company (Fishman, 2019).
Apart from that it is also considered that if the asset is a notional asset of the company. The term
notional asset can be defined as the assets which is deemed to be created under subsection
160M(7) (Office, Taxation Ruling, 2019). While calculating the capital gain tax the permanent
reduction value of the assets is also calculated and it’s also impact the reduced value but also
refers the damage in the value permanently until and unless some specific action can be taken by
the payer of tax (Djukanovic, 2018).
If Sam has paid excess amount of tax, then the company has the right to claim the same as
compensation (Black, 2018). Apart from that the taxpayer can also use this thing as a breach of
contract can seek the compensation (Fishman, 2019). The right to seek the compensation has
been provided under Part IIIA. This right to seek compensation can only be applicable in case of
personal injury or damages (Store, 2019). A right to seek compensation can be discharged once
it is discharged, satisfied and released (Store, 2019).
Here the profit that Sam made with the sale of land will be not be added to his total assessable
income considering the provisions of trading stock or a scheme of profit making that can be
arised for the realization of land in a enterprising manner and for such project the provisions for
capital gain tax will be considered as an exclusive application (Black, 2018). The
implementation of capital gain will be benefited in the following cases (Interest.com, 2011);
The general 50% discount can be availed. However this scheme is not available for companies
(Legal, 2019).
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Australian Taxation Law (Case Study)
The land which is taken or acquired before 20 September 1985, as at that time the scheme of
capital gain tax was not introduced and it was not subject to tax (Legal, 2019)
The land was purchased after 19 September 1985 and before 21 September 1999, in that case the
base of cost will be adjusted with the consumer price index movement.
The losses has been carried forward by the landowner (Legal, 2019)
The concession or exemption applied including the exemption for residence or small business
concession (Office, Calculating the cost base for real estate, 2018)
Generally, capital gain can be calculated as follows; (Office, Calculating the cost base for real
estate, 2018)
Capital proceeds from the sale of the land - Cost Base
Cost base generally includes the cost of the acquisition of land, incidental cost incurred if any as
borne by the landowners while acquiring or selling the land which includes stamp duty,
professional fees, expenditure on improvements, cost of purchase of land such as money
acquired interest on land (Office, Calculating the cost base for real estate, 2018). Apart from that
the expenditure that has been incurred which can also be deductible is also subtracted form the
cost base (Office, Calculating the cost base for real estate, 2018).
There were some improvement to the capital gain tax rules were made after 19 September 1985
where separate payment of capital gain tax was introduced which also include the structure of the
building constructed on the land and other improvement that are made for the improvement of
the land which may also include the cost which can be intangible improvements (Office, Vacant
land, 2018). The improvements that are capital in nature can qualify to separate assets that are
relevant to the base cost and the relevant improvement must also not exceed the threshold limit
(Gouveia, 2017).
According to the facts of the case, Sam purchased 80 acres of farmland in May on which he
conducted a beef cattle breeding operation. In February 1995 he purchased an additional 20 acres
of adjoining farm land in order to expand his operation. There was no house on the farmland so
Sam lived in the nearby township (Interest.com, 2011). Due to ongoing drought conditions and
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Australian Taxation Law (Case Study)
Sam’s advancing age, he decided in 2017 to sell and retire from farming. A local real estate
agent valued the property (Perez, 2019). Given the time and effort Sam had put into the farm
over the years he didn’t feel this was enough of a return on his investment. As the property was
located close to town, the real estate suggested that Sam consider selling the land as a sub-
division. This would likely generate a higher return per acre than selling the property as farmland
(Gouveia, 2017).
Sam re-zoned and received council approval for the sub-division in May 2017. Over the period
he paid surveyor fees, electricity and water connections and main road access. The local
construction company agreed to buy the entire sub-division. Although the contract for sale was
dated in April, settlement didn’t take place until July 2018. Apart from that he also paid the
Agent’s commission and legal fees payable amount (Office, Vacant land, 2018).
Here the total capital gain of Sam will be calculated basing on the formula for calculation of
capital gain that is capital proceeds from the sale of the land - Cost Base (Interest.com, 2011). In
this case, the Cost base will includes the cost of the acquisition of land, incidental cost incurred if
any as borne by the landowners while acquiring or selling the land which includes stamp duty,
professional fees, expenditure on improvements, cost of purchase of land such as money
acquired interest on land. Apart from that the expenditure that has been incurred which can also
be deductible is also subtracted from the cost base (Office, Calculating the cost base for real
estate, 2018).
It is to be note the land of Sam was purchased in the year 1995 which suggests that at that time
capital gain tax was introduced and he will be taxed accordingly considering the value of
property he sold and the capital proceed that he has obtained. Some improvement to the capital
gain tax rules were made after 19 September 1985 where separate payment of capital gain tax
was introduced which also include the structure of the building constructed on the land and other
improvement that are made for the improvement of the land which may also include the cost
which can be intangible improvements. The improvements that are capital in nature can qualify
to separate assets that are relevant to the base cost and the relevant improvement must also not
exceed the threshold limit (Gouveia, 2017)
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Australian Taxation Law (Case Study)
Analysis of the entire case suggests that the land sold by Sam will be considered as a capital
gain. However, the charged that are paid by him such as electricity, water and surveyor fees,
legal fees and agent commission will be regarded as expenses and will also be added in the total
selling price of the land (Gouveia, 2017). According to law when a vacant land is acquired by a
person for private or investment purposes it will be considered as an capital asset (Office, Vacant
land, 2018). The capital asset will be subject to tax when a land is sold (Office, Calculating the
cost base for real estate, 2018). However, when a person is engaged in a business of sale and
purchase of land then the amount received from such sale or purchase will not be considered as a
capital gain (Perez, 2019). The income generated in such cases will be termed as business
income or ordinary income and for that a business needs to get itself registered under the Goods
and Service tax (Office, Vacant land, 2018).
Here the profit that Sam made with the sale of land will be not be added to his total assessable
income considering the provisions of trading stock or a scheme of profit making that can be
raised for the realization of land in a enterprising manner and for such project the provisions for
capital gain tax will be considered as an exclusive application. The implementation of capital
gain will be benefited considering The general 50% discount can be availed, The land which is
taken or acquired before 20 September 1985, as at that time the scheme of capital gain tax was
not introduced and it was not subject to tax, The land was purchased after 19 September 1985
and before 21 September 1999, in that case the base of cost will be adjusted with the consumer
price index movement, The losses has been carried forward by the landowner and the concession
or exemption applied including the exemption for residence or small business concession
References
Black, E. (2018, December 4). What is Capital Gains Tax and how do I calculate it? Retrieved
from https://www.realestate.com.au/advice/what-is-capital-gains-tax/
DJUKANOVIC, C. (2018, March 21). Bringing inheritance money into Australia. Retrieved
from https://www.worldfirst.com/au/blog/guides/bringing-inheritance-money-australia/
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Australian Taxation Law (Case Study)
Fishman, S. (2019). Tax Consequences of a Legal Settlement. Retrieved from
https://www.lawyers.com/legal-info/taxation/tax-consequences-of-a-legal-settlement.html
Gouveia, C. (2017, November 6). Australia: Income tax implications for property development
projects. Retrieved from
http://www.mondaq.com/australia/x/642948/real+estate/INCOME+TAX+IMPLICATIONS+FO
R+PROPERTY+DEVELOPMENT+PROJECTS
Interest.com. (2011, January 3). How can I reduce my capital gains taxes on the sale of vacant
land? Retrieved from http://www.interest.com/home-equity/news/how-can-i-reduce-my-capital-
gains-taxes-on-the-sale-of-vacant-land/
Legal, B. (2019). CAPITAL GAINS TAX PROPERTY IN MELBOURNE . Retrieved from
https://www.behanlegal.com/capital-gains-tax-property-recording
Office, A. T. (2018, June 29). Calculating the cost base for real estate. Retrieved from
https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Calculating-
the-cost-base-for-real-estate/
Office, A. T. (2019). Taxation Ruling. Retrieved from
https://www.ato.gov.au/law/view/document?docid=TXR/TR9535/NAT/ATO/00001
Office, A. T. (2018, October 8). Vacant land. Retrieved from
https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/Vacant-land/
PEREZ, W. (2019, January 24). The Tax Implications of Selling Gift Property. Retrieved from
https://www.thebalance.com/selling-gift-property-3192977
Store, T. (2019). WHAT TYPES OF LEGAL EXPENSES ARE ALLOWABLE AS TAX
DEDUCTIONS? Retrieved from https://taxstore.com.au/news/what-types-of-legal-expenses-are-
allowable-as-tax-deductions-2
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