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Australian Taxation Laws - Case Study & Assignment

   

Added on  2020-01-07

11 Pages3352 Words104 Views
TAXATION LAW

INTRODUCTIONTaxation Law in the AUSTRALIA requires payment of tax at three levels: The CentralLevel namely Her Majesty's Revenue and Customs, Developed National Government and thelocal state government. The majority of revenue for HMRC comes from income tax, VAT,National Insurance contributions, Fuel duty and Corporation Tax. Amongst all these heads,Income Tax constitutes to be the largest source of revenues, which the government procuresfrom the citizens. On the other hand, Corporation Tax constitutes to be the fourth largestcontributor of the revenues which are procured by the government.1 Some of the primary issueswhich shall be considered under the given circumstances are:Tax implications of transfer of land at a nominal value, when the parties involved arerelated to each other. Tax Implications which the shareholders shall bear in respect to profits distributed by thebusiness. LEGAL POSITION AND APPLICATION ON FACTSThe Income and Corporation Act 1988 (ICTA) specifically excluded the domestictransactions between Australia entities or individuals through Schedule 28AA, subject torestrictions. However, with the changing times and requirements the government amended thisprovision in the year 2004 to remove the said exemption imposed on the Australia to Australiatransactions. Therefore, the transfer pricing legislation is now applicable on such transactions.The primary rationale behind introduction of this amendment is that it could be a potentialbreach of the provisions of Treaty of Rome. Thus, it is important to note that the tax authoritieshave adopted a strict approach for Australia to Australia transfer pricing transactions, as it hasthe potential to increase tax evasion cases. The fact that the law does not require submission ofconsolidated tax return and thus, the tax collection of the authorities shall be at stake. Inpursuance to the same, some of the specific rules which shall attract the transfer pricingarrangements are:An agreement to undertake a transaction is entered into between the parties involved inthe case;1Karkinsky, Tom, and Nadine Riedel. "Corporate taxation and the choice of patent location within multinationalfirms."Journal of International Economics88.1 (2012): 176-185.1

One of the individuals has a direct or indirect control over the decisions of the otherentity or is personally controlling the operations of the other.The arrangement which has been ascertained between the parties is distinct from thearm's length price or provision which two unrelated parties would have agreed upon;The difference in the provision gives rise to an advantage under the Australia Tax laws.Income Tax Assessment Act (1997) furnishes information regarding the mannerthrough which amount of tax can be calculated. Section 8(1) of such Act entailsdeductions are available for expenses incurred. Along with this, separate provision hasbeen made for the deduction of expenses which are not directly associated withproducing income. Hence, by following the laws and legislation firm better decisions canbe undertaken regarding taxation. On the basis of these conditions it can be stated thatthe proposed transaction of transferring land into a new company for a very nominal priceof $1 shall attract the applicable provisions of Australia to Australia transfer pricingarrangements.2 It shall be noted that though the company shall be considered a distinctperson from its management, in light of the Solomon v. Solomon (1896) case, for thepurpose of taxation the authorities have the entitlement to pierce the corporate veil. Inrespect to the same, it is stated that Francesco, Maria and Giovanni shall be considered tohave a complete control on the operations and management of the company soformulated. On the other hand, the land is owned by Francesco and Maria, thus is beingsold by them to this newly established company. In the case of DSG Retail Limited v.Revenue & Customs Commissioners (2009) it was observed that the court considered theparties as related for the purpose of application of transfer pricing, when one of theparties had an in direct connection in the management of the other party.3 In pursuance tothe same it can be stated that the two parties shall be considered as associated parties,eligible for application of rules is relation to connected persons. Furthermore, it is alsoimportant to comply with the participation condition, in pursuance to which it refers totransactions wherein the parties involved have a control over each other's operations orare controlled by a common authority. The specific parties which could be included in2Michaely, Roni, and Michael R. Roberts. "Corporate dividend policies: Lessons from private firms."Review ofFinancial Studies25.3 (2012): 711-746.3Devereux, Michael P., Li Liu, and Simon Loretz. "The elasticity of corporate taxable income: New evidencefrom AUSTRALIAtax records."American Economic Journal: Economic Policy6.2 (2014): 19-53.2

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