Taxation Law Case Study: EEG Company and Tax Liabilities Analysis

This case study analyzes the tax implications for Exclusive Emerald Gems Pty Ltd (EEG), an Australian resident company, upon its relocation and business liquidation. The report determines the tax liability for the assessable year, considering relevant statutes and tax rulings. It calculates capital gains and losses from the sale of business and residential premises, as well as the valuation of inventory. The case study also examines tax implications for bad debts, doubtful debts, annual leave liabilities, and the liquidation of plant and equipment. Furthermore, it addresses capital gains tax on the sale of a motor vehicle and shares, considering the residency of the shareholders and the application of discounts. The analysis covers various aspects of Australian taxation law, including capital gains tax, deductions, and valuation methods, offering a comprehensive overview of the tax consequences associated with the company's decisions.

Taxation Law
CASE STUDY
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Introduction
In the present case, the respective jewelry manufacturing company is Exclusive Emerald Gems
Pty Ltd (EEG) which is a registered Australian resident company and is marketing their jewelry
to the retail buyers. The objective of this report is to determine the tax liability on the transaction
made in the assessable year by taking the note of the relevant statute. Further, the tax
implications would also need to be discussed as per the relevant tax ruling.
Discussion
(a) In this case, EEG has chosen to relocate the business operation from Australia to New
Zealand from July 1, 2017. Hence, the company has decided to liquidate the business and
thus, the respective capital gains need to be determined. Under section 104-10, ITAA
1997, the capital gains would be determined as per the capital event A1 has been incurred
(Barkoczy, 2017).
Computation of capital gains/ capital loss
 According to section 110-25, ITAA 1997, cost base amount of the respective assets which is
going to liquidate needs to be determined for the computation of capital gains or capital loss.
 Cost base of any asset comprises both actual purchasing cost of the asset and the associated
incidental costs which has incurred during the buying and selling or during maintaining of
the asset (CCH, 2013).
 In this regards, the expenditures which has done for increasing the market value of the assets
and also the ownership costs would be taken into consideration while determining the cost
base of asset (Woellner, 2014).
Calculation
For Business premises
Purchased price of the business premises = $ 1,310,000
Cost of ownership (incurred on the amount of interest paid on loan at the time of purchasing of
the business premises) = $165,000
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Incidental cost of the business premises (amount of legal and agent fees at the time of sale of the
premises) =$45,000
Cost base (business premises) = Purchased price of the business premises+ Cost of ownership+
Incidental cost of the business premises
Cost base=1310000+165000+ 45000=$ 1,520,000
Sale price (business premises) = $ 1,810,000
Capital gains/ loss = Sale price –Cost base
¿1810000 – 1520000 = $ 290,000
The EEG has a capital gain of $290,000 from the liquidation of the business premises.
For Residential premises
Purchase price of the residential premises = $ 550,000
Incidental cost of the residential premises (amount of legal and agent fees at the time of sale of
the premises) = $12,000
Cost base (residential premises) = Purchased price of the residential premises + Incidental cost of
the residential premises
Cost base= 550000 + 12000 = $ 562,000
Sale price (residential premises) = $ 670,000
Capital gains/ loss = Sale price –Cost base
= 670000 – 562000 = $ 108,000
The EEG has a capital gain of $108,000 from the liquidation of the residential premises.
Net capital gains (FY2017)
EEG has capital losses to the tune of $115,000
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Net capital gains = Capital gains from sale of business premises + Capital gains from sale of
residential premises
¿ 290000+108000 – 115000=$ 283,000
For the year end i.e. June 30, 2016, the company has to make payment of capital gains tax at the
rate of 30% on the derived capital gains.
(b) The three main valuation methods are as highlighted below:
 Cost value
 Market value
 Replacement value
As per section 70-45, the concerned taxpayer can adopt any of the above highlighted valuation
method for trading stock. When the inventory valuation is higher that means the total amount of
costs of goods sold is lower and thus, the amount of taxable income would be maximized
(Gilders et. al., 2016). It can be seen that the market value of inventory is maximum at $245,000
and thus, the market valuation method need to be adopted.
Further, in regards to the stock arising from Malaysia, the physical possession and title is not
defined. However, the taxpayer company has the legal position to dispose. However, as per IT
2570, the taxpayer should have the right to dispose the trading stock irrespective of the fact that
the respective title or any physical possession is present or not (Sadiq et. al., 2014). Therefore, it
is suitable to take a note of goods from Malaysia as on June 30, 2017.
(c) EEG has written off bad debts and classified doubtful debts during the assessment year
on June 30, 2017 and hence, the tax implication for needs be determined.
For bad debts
As per section 25-35, EEG has written off the bad debts of $20,000 which are considered for tax
deduction because the following conditions have been satisfied (CCH, 2013).
 The debt had originally gone bad
 There was presence of actual debt
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 It has been reported in the current assessment year
 The debt has contributed to the assessable income of EEG
For doubtful debts
According to section 25-35, the doubtful debts would be taken into consideration for tax
deduction only when they are written off. It is apparent that besides the above no doubtful debts
have been written off and thus, tax implication would not arise for doubtful debt (Deutsch et. al.,
2016).
For annual leave liabilities
As per section 8 (1), ITAA 1997 the expenses in the form of annual leaves liabilities of $155,000
would be taken as tax deduction for EEG. However, the estimates of liabilities in this regard
would not be a critical factor because the actual expense has to be taken into consideration for
determining tax deduction (Woellner, 2014).
(d) The objective is to determine the tax implication with respect to the liquidation of the
plant and equipment.
Selling price = $190,000
Adjustable value (for plant and equipment) = $210,000
It can be seen from the above that selling price of the depreciating asset i.e. plant and equipment
is lower than the adjustable value. Therefore, the liquidation of asset would amount capital loss.
This capital loss would be balanced by the capital gains incurred. Further, it is essential to note
that this amount would not be tax deductible because the nature of the receipts is revenue
receipts but more towards a capital adjustment (Barkoczy, 2017). Therefore, the capital gains
deduction (¿ $ 210,000−$ 190,000=$ 20,000) would be present.
(e) It can be said that motor vehicle is an antique item and hence collectible.
Calculation
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Cost price of motor vehicle = $50,000
Ownership cost of motor vehicle (interest amount) = $1,500
Cost base of motor vehicle (as per section 110-25) ¿ 50000+1500=$ 51,500
Sale price of motor vehicle = $77,000
Now,
Capital gains/loss = Sale price of motor vehicle - Cost base of motor vehicle
= 77000 – 51500 = $ 25,500
It can be seen that EEG has capital gains of $25,500 from the liquidation of motor vehicle.
Further, as per section 115-25, the vehicle has derived long term capital gains and hence, 50%
discount can be availed by taxpayer (CCH, 2013). Therefore, taxable amount would be 50% of $
25,500 and thus, $12,750 would be available for CGT.
(f) As per section 855-10, capital gains tax would be applicable for foreign tax resident only
when the respective property is assessable for taxation in Australia. Moreover, as per
section 115-115 the 50% discount would be offered to the foreign taxpayer only when the
purchasing date of the property is before May 8, 2012 (Woellner, 2014). It is also
essential that the holding period of the property is higher than 12 months as on May 8,
2012.
Mr. and Mrs Smith have purchased share in EEG in 2004. Also, the holding period is greater
than 1 year and thus, discount method would be used for the computation of tax payable. Further,
the capital gain from the sale of shares would be taxable in Australia irrespective of the fact that
Mr. and Mrs Smith are classified as foreign tax residents.
Capital gains tax would not be applicable on the account of liquidation of motor vehicle despite
the residency of the taxpayers as it is exempt from the net of capital gains (Gilders et. al., 2016).
Mr.and Mrs Smith has also purchased shares in ABC. Assuming that the shares have been
acquired around one year before May 8, 2012, the capital gains would qualify for 50% discount
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Thus, only 50% of the capital gains would be taken into consideration for capital gain tax in
Australia (Sadiq et. al., 2016).
(g) CGT implication on shares liquidation
Purchasing cost of share (for 1 member) ¿( 100× 100)=$ 10,000
Selling price of share (for 1 member) ¿( 500× 100)=$ 50,000
Capital gains (for 1 member) = (50000−10000)=$ 40,000
As per section 115-115, only half of the capital gains ($20,000) would be considered for CGT
because 50% discount would be applicable for taxpayer (Nethercott, Richardson and Devos,
2016).
Thus, CGT would be payable by Mr. and Mrs. Smith on $ 20,000 each.
Conclusion
On account of the above, it is apparent that shifting to New Zealand and consequent sale of
business would have immense tax implications that need to be considered. Also, even as foreign
tax residents, for the property which is liquidated in Australia, capital gains would arise and
suitable tax would need to be paid by the couple so as to avoid any adverse implications.
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Reference
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed., North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook
8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law
2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016,
4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
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