Taxation Theory, Practice & Law

This solved assignment provides a comprehensive analysis of taxation theory, practice, and law in Australia. It covers capital gains tax, fringe benefit tax, and GST implications, with detailed calculations and practical examples. The assignment is a valuable resource for students studying taxation law.

TAXATION THEORY,
PRACTICE & LAW
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................1
QUESTION 1.......................................................................................................................................1
Determination of Net Capital Gains/Loss for the current tax year ending 30th June........................1
QUESTION 2.......................................................................................................................................9
a. Advising Rapid-Heat about its fringe benefit tax.........................................................................9
(B) Stating recommendation if Jasmine will use money for purchasing shares.............................11
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
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INTRODUCTION
Taxes in Australia are levied and collected by Federal Government through Australian
taxation office. There are various tax laws and regulations which are imposed on different segment
of society. Income tax in Australia is imposed at progressive rates which means amount of tax
increases as taxable amount increases The two statues which covers them are Income Tax
Assessment Act 1936 followed by Income Tax Assessment Act 1997. The Goods and Services tax
are also collected and levied by the Federal Government and distributed to different States on
formula defined by Commonwealth Grants Commission. The legislation which covers GST is A
New Tax System (Goods and Services Tax) Act 1989. This Project report consists of analysis of
data given by the client which includes Capital gain tax on various assets, its GST implications, the
Fringe Benefit provided to the employee’s which is governed by FBT Act 1986. This reports also
depicts ways for savings in the tax for client and provides alternatives for solving different issues
occurred by the tax implications.
QUESTION 1
Determination of Net Capital Gains/Loss for the current tax year ending 30th June
To determine CGT on various assets provided by the client the act which covers them is
Income Tax Assessment Act 1997. Capital gain tax are taxes which are levied on purchase and sale
of assets provided by act (Evans, 2015). This law covers different methods to calculate CGT on the
basis of utilization of asset.
(A)Block of Vacant Land
The CGT treatment on sales of land generally depend upon whether it is considered as
capital asset or for commercial transaction (Feld, 2016). The Block of vacant land is usually
considered as capital asset I.e. why it is subject to CGT but if is used for trading stock in any real
estate business than income from sale proceeds will be treated as ordinary income (O'Connor,
2018). If the land is acquired before 11:45am on the 21st September 1999 and held for more than 12
months, then “Indexation Method” will apply otherwise “Discount Method” will be applied. The
cost base includes all expenses in acquiring the asset which includes stamp duty, brokerage etc.
Sec 104(35) of the Act describes the contractual rights-:
1. the time of event is when you enter into contract or create other rights to acquire
asset.
2. If you dispose of asset the CGT event will occur when you stop being the owners of
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the asset.
Calculation of Cost Base on 3/06.
Purchase Price of Land 100000
Add Rates And taxes 20000
Cost Base Unindexed 120000
Sale of Land on 3/01 next year
Proceeds from sale of land 320000
Less Cost Base Unindexed 120000
Net Gain in next year 200000
Calculation of Taxable CGT for next year
As, property is acquired after 11.45 am on 21st September 1999 discount model will be
applied.
So, taxable capital gain income for next year will be $100000(200000*50%).
Interpretation-:
The capital gain on sale of vacant land will be chargeable for CGT in next year as in given
case ownership of asset will be transferred in next year on 3/01. As per provision stated above
which states, that you need to stop being owner of asset which does not mean receiving advance for
sale of land is transferring of asset to other person. In this case the contract of sale will be signed on
3/01 next year so CGT will be charged in the next year. It is also given that amount will be received
in installments that will not affect CGT, as amount receive in installment or lump sum the CGT will
be charged on the date of sale of contract which is 3/01 next year.
(B)Antique Bed
It is a type of collectables which includes items kept for personal use or enjoyment. It
includes-:
1. Paintings, Sculptures Drawing etc.
2. Antiques
3. Jewelry etc.
The Capital Gain or loss will not be considered if the collectables acquired is of $500 or less ().
Section 104(20) states regarding loss and destruction of asset (Capital Gains Tax,2018). The time of
event will be, when you first receive compensation for loss and destruction.
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Calculation of Cost Base on 12/11 current year
Particulars Amount Indexation Factor Net Amount
Purchase Price 3500 2.90 10157.22
Add Additions for value 1500 2.67 4011.88
Cost Base Unindexed 5000 14169.09
Capital Gain / loss because of Sales or Theft or Destruction
Particulars Amount
Claim Received from insurance 11000
Cost Base indexed 14169.09
Net Capital Gain/loss -3169.09
Interpretation
The Loss by theft of the Antique bed resulted in to capital gain or loss when insurance claim
has been received to them. As the property was purchase before 11:45 am on 21st September 1999,
indexation method is applied. The market value of the collectables is not considered here because
we know cost of purchase of asset and as insurance is received in the current year so asset will be
eligible for capital gain/ loss in the current year. As, insurance claim of $11000 received is lower of
cost base $14169.09 so there is capital loss of $3169.09 for the asset which can be set off with any
other capital income from collectables.
The indexation rates that has been taxes are
Year Indexation rates
July 85 38.8
July 86 42.1
Jan 18 112.6
(C)Painting
It is also a type of collectables so all the provisions that are applicable for Antique Bed is
also applicable for painting.
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Calculation of Capital Gain/Loss
Particulars Amount Indexation factor Amount
Purchase Price of Painting
indexed
2000 2.97 5941.95
Sale Proceeds 125000 125000
Net Capital Gain/loss 119058.05
Interpretation
As the painting was purchase before 11:45 am of 21st September 1999 so Indexation Method
will applicable. So as in the given data sales of painting has been taken place in the current year on
3rd April the capital gain/ loss will be of current year. So, Here the Purchase price after indexation is
$5941.95 and the sale proceeds are $125000, the capital gain is $119058.05 for the current year
from the sale of this asset.
(D)Shares
These are treated as same way as any other asset are treated for the capital gain purposes.
The CGT event occurs whenever there is sale of shares.
(i)Sale of Common Bank Ltd Shares-:
Cost of Purchase
Particulars Amount
Purchase Price(a) 15
Qty of common bank shares(b) 1000
Add Stamp Duty on purchases(c) 750
Net Cost of purchase d=(a*b)+c 15750
Sale Proceeds
Particulars Amount
Sale Price(a) 47
Sales of common bank shares(b) 1000
Less Brokerage Paid(c) 550
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Particulars Amount
Net sales value e=(a*b)-c 46450
Gain/Loss
Particulars Amount
Gain/Loss (e-d) 30700
(ii)Sale of PHB Iron Ore Ltd
Cost of Purchase
Particulars Amount
Purchase Price(a) 12
Qty purchase of PHB Iron Ore Ltd(b) 2500
Add Stamp Duty on purchases(c) 1500
Net Cost of purchase d=(a*b)+c 31500
Sale Proceeds
Particulars Amount
Sale Price(a) 25
Sales of PHB Iron ore Ltd(b) 2500
Less Brokerage(c) 1000
Net sales value e=(a*b)-c 61500
Gain/Loss
Particulars Amount
Gain/Loss (e-d) 30000
(iii)Sale of Young Kids Learning Ltd
Cost of Purchase
Particulars Amount
Purchase Price(a) 1
Qty Purchase of Young Learning Ltd (b) 10000
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Particulars Amount
Add Stamp Duty on purchases (c) 1100
Net Cost of Purchase d=(a*b)+c 11100
Sales Proceeds
Particulars Amount
Sale Price(a) 0.5
Sales Young India Learning Ltd (b) 1200
Less Brokerage paid (c) 1000
Net sales value e=(a*b)-c -400
Gain/Loss
Particulars Amount
Gain/Loss (e-d) -6900
(iv)Bulid Ltd
Cost of Purchase
Particulars Amount
Purchase Price(a) 1
Qty Purchase of Build Ltd.(b) 10000
Add Stamp Duty on purchases(c) 1100
Net Cost of Purchase d=(a*b)+c 11100
Sale Proceeds
Particulars Amount
Sale Price 2.5
Sales Qty (a) 10000
Less Brokerage paid(b) 900
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Particulars Amount
Net sales value e=(a*b)-c 24100
Gain/Loss
Particulars Amount
Gain/Loss (e-d) 23000
Interpretation
In the above point the case (i)(ii)(iii) in which the shares are purchases after 11:45 am on 21st
September 1999 the discount model will be applied.
Total capital Gain/Loss of the 1st three points
Particulars Amount
Gain or loss will be 53800
Taxable capital gain will be
(53800*50%)
26900
In the (iv) point purchase of asset and sale of asset in done within 12 months so “The Others
Method” will apply which says Net Sales Proceeds less Net purchase Value will be taxable Capital
gain.
Particulars Amount
Net Sales Proceeds in point iv 24100
Net Purchases value in point iv 11100
Taxable Capital Gain/Loss 13000
(E)Violin
Particulars Amount indexation factor Net Amount
Net Cost Of Purchase 5500 1.65 9093.98
Net Sales Cost 12000 12000
Gain or loss will be 2906.02
The Indexation rates are-:
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1999 2018
68.1 112.6
Interpretation
Property purchase before 11:45 am on 21st September 1999 the indexation model will apply
so after indexing the net capital gain from violin will be $2906.02.
Capital Gain Loss in current year-:
Particulars Amount
Total Capital gain Loss for the current year 158694.98
Capital gain From Collectables 118794.98
Set Off Carried Forward
As per section 102 of ITAA 1997 that losses from collectables can be set off only from
profits of collectables and carried forward loss of past year can be carried for n no. of years.
Particulars Amount
Capital losses from past year 7000
Collectables losses of current year 1500
Total Losses from collectables 8500
So, first set of loss of collectables with the profits of collectables-:
Particulars Amount
Capital gain From Collectables 118794.98
Less set off Capital losses from collectables 1500
Net Capital gain from Collectables 117294.98
Capital Gain/Loss after setting of losses from collectables is $157194.98
Now past year losses are needed to be set off
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Particulars Amount
Total capital gain will be after setting off collectables
are
157194.98
Less set off Capital losses from past year 7000
Net capital Gain/loss for the year ended 30th June 150194.98
Interpretation
Taxable Capital Gain/Loss of the current year ended 30th June is taken out as $150194.98.
So, Capital Gain tax will be chargeable on this amount as per the ITAA 1997.
QUESTION 2
a. Advising Rapid-Heat about its fringe benefit tax
(A) An Electric Heaters Manufacturer Rapid-Heat Pty Ltd hires jasmine as employee of the
company and provide Fringe Benefits to her so in this question there is analysis of Fringe Benefits
provided by them under Fringe Benefits Tax Act 1986(Fringe Benefit Tax 2018).
Section 7 of FBTA states that car will be treated as for private use when any day car is not parked at
business premises and parked at home of employee (Scott, 2012). The definition of Car has been
given by the act-:
1. Goods Carrying capacity of vehicle should be less than 1 tone.
2. Vans, motor cars, station wagons or any utilities
3. Other Vehicle carrying passenger less than 9 occupants.
Section 9 of FBTA defines two methods for calculating Fringe Benefits, they are-:
1. Statutory Method-: States that there is no need to show actual value of cars in taxable
value.
2. Cost Method-: Where actual value of cars is shown as gross taxable value.
Section 9 also prescribes that any amount which has been paid as expense in respect of fuel
or repairs and documented evidence given by employee in holiday period will be borne by
employer(Rimmer,2014). Motor vehicle which has been gone for repairs and maintenance will not
been treated as private use.
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In the given case, Jasmine has been provided car for traveling purpose and the car is not
restricted for private use. The expenses incurred of $500 will be borne by employer as documentary
evidence for that is given and that has been reimbursed by Rapid-Heat Pty Ltd.
The car scheduled for annual repairs for five days will not be treated as private use but
vehicle parked at airport for Ten days will be taken as personal use.
Statutory Method
A flat Statutory percentage is provided by act is 20% regardless of distance traveled if FBT
related to car is given after 1st April 2014 and if not than schedule regarding the kilometer is given it
should be followed I.e. if there is preexisting commitment in place before 7:30 pm on 10th May
2011 to provide car (Fringe Benefit Tax 2018).
Calculation of No. of Days
Period mentioned is from 1/05/2017 to 31/03/2018 so no. of days is 335 days less 5 days for
repairs and maintenance. So, net no. of days will be 330 days.
Base Value of car is given as $33000
Period as taken out 330 days
Expenses incurred that has been reimbursed by employer $500
So FBT paid will be (33000*20%)*330/365=$6058
Calculation of FBT-:
Particulars Amount in $
Base value of Car 33000
Statutory rate given by act 20.00%
Term of car that has been used 330
FBT payable will be 6058
Interpretation-:
As FBT are analyzed regarding of motor vehicle which has been provided to jasmine the
Fringe Benefit tax that has been payable is $6058. The car was in operation for 335 days out of
which 5 days are for repairs and maintenance so, net days 330 days. The days for which car has
been parked will not be subtracted as it taken for personal use. So after all the calculations the FBT
payable will be $6058.
Fringe Benefits as Loan
In the given case jasmine was provided of $500000 at interest rate of 4.25% so the following
sections mentioned below of FBTA will be applicable-:
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Section 16 provides loan as a FBT wherein employer provides loan to their employee at some low
rates of interest other than statutory rates provided by the Reserve Bank of Australia(Burkhauser,
2015). The taxable value which is needed to be taken out of loan will be-:
1. Difference between amount calculated as interest if the statutory rates are applicable on the
outstanding daily balance of loan.
2. Any Accrued interest.
Section 16 also mentions that if any asset purchases by using loan doesn't generate any income than
FBT will be NIL (Fringe Benefit Tax 2018). For ex-: If loan taken for house purchase for residential
purpose will be free from FBT and if it has been rented and source of income started from that FBT
will be charged.
Interpretation-:
So, in the loan provided by Rapid-Heat of $500000 out of which $450000 has been
purchased for holiday home (assumed to be for residential purpose) and $50000 has been lent
interest free to her husband. So the FBT charged will be NIL as both the activities which are done
using loan doesn't generate any income.
Electric Heater
Calculation of FBT
Particulars Amount in $
Electric Heaters Sold to Jasmine(a) 1300
Cost to Rapid-Heat(b) 700
Sold in market(c) 2600
Loss in sale to jasmine d=c-(a+b) 600
FBT rate @ 47% 282
Interpretation
The heater is sold is less than market price as sold to general public so there is loss of $600.
So, FBT will be charged @47 % on $600 which is $282.
GST act 1999 defines that input tax credit will be available for things that are used for
business like motor car etc. (O'Connor, 2018). So here in the given question Car that is purchased is
for employee and expenses on that car is also for business purpose so company can claim Input
credit on both items.
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(B) Stating recommendation if Jasmine will use money for purchasing shares
If Jasmine has used $50000 for purchase of shares which is an income bearing asset so FBT
will be chargeable on interest of $50000.
The FBT that will be charged is mentioned below in the table-:
Particulars Amount
Interest rate charged 4.25%
Statutory Interest Rate as per Reserve Bank 5.50%
Difference between rates 1.25%
Days for which it will be charged
1st September 2017 to 31st March 2018
212 Days
Loan which is used for income bearing activities $50000
FBT Charged will be (50000*1.25%)212/365 $363
Interpretation
If loan will be used for income bearing activities, then FBT will be calculated for difference
in the statutory rates of interest and the rates provided by the company I.e. 1.25% for the days i.e.
212 which it has been used for that in fiscal year. So, the chargeable FBT will be $363.
CONCLUSION
In present scenario the economic growth has brought fast reforms in taxation system. The
above reports examine the process of defining the structure of tax payer by means of which taxable
income is acquired. This report will help in analyzing the assessable income of any individual or
organization. It consists the provision of capital gain, fringe benefit tax, income tax and analysis
with calculations of all of them as required by client.
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