Australian Taxation System: Case Studies and Solutions

Desklib provides solved assignments and past papers to help students understand complex topics.

Assessment 3: Case Study
1

Contents
Introduction................................................................................................................................3
Question 1 (a).............................................................................................................................4
Question 1 (b).............................................................................................................................4
Question 2..................................................................................................................................6
Question 3..................................................................................................................................7
Part 1......................................................................................................................................7
Part 2......................................................................................................................................7
Question 4..................................................................................................................................8
Question 5..................................................................................................................................8
Question 6................................................................................................................................10
Question 7................................................................................................................................11
Conclusion................................................................................................................................12
References................................................................................................................................13
2

Introduction
The aim of the assignment was to gain a basic understanding of the taxation laws of Australia
and to learn and adopt methods and techniques to understand the scenarios and apply the
knowledge acquired to solve the questions. All questions test basics for different provisions
and help to understand the importance of minute details which gives essence to a provision.
3

Question 1 (a)
The Commonwealth and the States have legislative powers. The Commonwealth powers are
covered by the scope of section 51 and the states have the power to make legislation related
to the topics covered by the concurrent list. As per section 109, in case of any inconsistency
between the Commonwealth powers and the state power, the powers of the Commonwealth
shall succeed.
Under section 51(ii) empowers the Commonwealth to make laws for levying of taxes. Before
the commencement of INCOME TAX ACT, 1942 both the states and the Commonwealth had
the power to impose income tax but by enacting the Act the Commonwealth had gained the
monopoly on levying taxes on income. Further, an Act called State Grants also known as
Income Tax Reimbursement Act, 1942 states has also aimed at gaining the monopoly by
enacting the provision of funding to the States if they levied no tax on the income. This Act
was lately inferred under section 96 and States have relied on it(Eccleston and Woolley,
2014). Section 90 confers an exclusive power to the Commonwealth to impose "Duties of
Customs and Excise”. The section aims to maintain uniform trade relations with countries
around the globe. Section 55 provides that the laws imposing the tax shall deal with only the
subjects related to the imposition of the tax.
Question 1 (b)
The whole taxation system of Australia is separated into and carried by distinct institutions
namely, The Parliament, Courts, and The Australian Taxation Office. The doctrine of the
separation of powers in Australia makes a clear distinction of roles and responsibilities. Each
institution operates in its jurisdictions without overlapping responsibilities and maintaining
harmony in the whole system(Appleby and Webster, 2013).
Parliament House is the home of democracy of Australia, where laws are made on various
matters including taxation. A new law can be made and or changes can be made only with the
authority or act of/by the parliament. Initially, a proposal is passed to the cabinet of ministers
and if agreed by them, it takes the form of a formal bill. Bill is a formal document prepared
for bringing new laws into existence and make changes to the existing tax laws.
4

Australian Taxation Office is the official tax revenue collection agency and is overseen by the
serving Treasurers. Basically, it is responsible for managing the revenue systems and
administration of tax legislation including excise and superannuation.
Courts and legal system oversees the taxation process and makes sure policies are correctly
implemented and followed rigorously. Not only they provide guidance to the ATO regarding
tax-related issues but they also act relief mechanism to the assesse in cases where it feels that
the assesse is wrongly or overly charged with assessed income(Li,2012). Ultimate taxation
authority is held by the High Court in Australia and its decisions are considered final and
unchallengeable.
Although each of the institutions has a distinct set of roles and responsibilities, they are not
mutually exclusive and there are certain components that overlap and need to look into by all
of them or in a combination depending on the situation. But at the same time, they cannot
function out of their jurisdictions i.e. ultra-vires(Devos, 2012).
5

Question 2
In many cases, assesse is double taxed because of having an income source from different
countries and he/she may be subjective to the tax provision of both countries. To curb this,
almost every country has entered into a double taxation avoidance agreement laying down
provisions and methods for calculating the income of an assessee in such cases. Australia has
a tax treaty with many nationsto avoid double taxation. The assessee will be taxed as per the
tax treaty entered into. Normally, an assessee is taxed in his/her home country but in cases
where the assessee has a PE (Permanent Establishment) in the source country, the person is
taxed there itself. Permanent Establishment is defined as:
 Business operations carried on by an Australian resident entity at or through a fixed
place of business in another country(Sakurai and Braithwaite, 2019).
 Business operations carried on by a foreign resident entity at or through a fixed place
of business in Australia
Fixed Place of business can be defined as refers to a permanent place where operations are
carried from whether partially or wholly. But the place should be actively involved in the
operations and not just used as a service center used only for storage facilities and delivery
purposes.
In the given question a non-resident US-based manufacturer sales goods in Australia to the
residents. He/she has been operating as a sales representative from a serviced office. The said
office comes under the purview of exceptions not included in the definition of PE. Hence, per
the tax treaty, the profit derived from the sale of products in Australia are to be taxed in the
home country only i.e. the USA(Harding, 2013).
6

Question 3
Part 1
a. CGT (Capital Gain Tax) was introduced on 20th September 1985 and hence any
transactions before that will have no tax consequences. In the given question land was
being used for commercial purposes and the assessee decided to sub-divide/sell for
profit purposes. In the first scenario, the land is sub-divided into 80 units and sold to a
property developer. In the second scenario again the land divided and sold as separate
packages to the highest bidders. Both the scenarios attract CGT, but as the property
was owned since 1st November 1976, the above-mentioned transactions will have no
tax consequences(Appleby and Webster, 2013). In the third scenario, the land is being
sold entirely to a development company for fees and hence GST has to pay on such
fees by the developer and ordinary tax will be paid by the assessee on the total amount
received by him/her on the sale of the last block.
b. As it is already discussed in the (a) part, all the transactions will attract CGT if the
land was purchased after 20th September 1985 and hence accordingly both scnerios1
and 2 will now attract CGT and will be considered under long term capital asset while
calculating CGT. Scenario 3 will have no changes as the GST will still have to be
paid by the developer and ordinary tax by the assessee on the sale of the last block.
7

Part 2
CGT on the sale of land will only be considered at the time of sale of plots and not when they
are converted into plots. In both scenarios 1&, 2 CGT will have to be paid at the end of the
second financial year when the plots are sold to a property developer and highest bidders
respectively(Eccleston and Woolley, 2014). For the third scenario, both GST and ordinary tax
are to be paid on their incidents and not actual payment and hence required to be paid at the
beginning itself.
8

Question 4
The rulings of the landmark case of Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 shall
be applied in this question. In a given case the issue was whether the interest incurred on the
loan taken is to be capitalized or expensed out allowing it as a deduction from the assessable
income and such income will be generated in the future years.
In the question, Amity sold her catering business and purchased land to start her agricultural
business. She purchased land on installment basis and paid a deposit along with two
installments and interest will accrue on the unpaid amount. The contract in substance is
identical to a loan taken for the purchase of land.
The rules of the judgment of the above-mentioned case shall be applied in the current
scenario. Although Amity retired her share from the business owing to the disagreement with
the other partner, Archie, they have been earning a small portion of income through the sale
of cattle and agistment over the period of 2 years(Devos, 2012). Hence, the said interest will
be allowed as a deduction over a period of 2 years.
9

Question 5
Maurice is an individual who has sold some assets in the previous year and it has been asked
to calculate the net capital gains or loss for the year for him. Maurice is a taxpayer who is a
resident of Australia so all the provisions related to the Australian Taxation Office (ATO) for
calculating capital gains shall apply to him. The assets in the consideration of Maurice case
are as follows;
 He acquired a house on 20th February 1989 for $140,000 – For the purpose of
calculating CGT most personal assets of an individual like home, car, furniture, etc.
are exempted from the taxation point of view. Hence, the given values of home are
not useful for determining the capital gain of the individual.
 Shares in FUL Pty acquired on 10 April 1984 at the cost of $15000 – As per ATO
provisions, all the assets acquired by an individual since tax on capital have started
are subject to taxation unless they are exempted by law. The taxation has begun on
20th September 1985 and as these shares are acquired before the application of this
law and hence not accountable for the purpose of capital gains.
 Furniture acquired on 20 May 2010 for $9500 – As explained in the first point the
provisions clearly mentions that the most personal assets are excluded from CGT
calculations and furniture is an inclusive part of most personal asset. Hence this will
also not form a part of CGT calculations.
 Block of vacant land acquired on 20 June 1997 at a cost of $100,000 – Vacant land is
usually considered as a capital asset and is subject to CGT. Maurice is an individual
hence it can claim the cost of land as deduction while calculating CGT. He has
acquired the asset in 1997 and has held the asset for more than a period of 12 months
so he is also eligible for the indexation method for calculating CGT. The indexation
method uses CPI for indexation purposes. CPI for the quarter of 1997 when the asset
was purchased is 66.9 and the CPI for the quarter of sale in 2018 is 113. Thus the
indexed purchase cost of vacant land for Maurice will be: (113/66.9)* 465,000 =
$168,909. The calculation of land from CGT is provided below;
Calculation of CGT from Sale of vacant land:
Vacant land sold on 15 May 2018 465,000
10

(-) Indexed cost of purchase 168,909
(-) Additional purchase cost (Interest cost over the period) 110,000
Capital gains from the Sale 296,091
Here it is to be noted that the interest expenses incurred on the land for $110,000 are
added in increasing the cost of the asset and cannot be claimed as an income tax
deduction because this land is not generating any income. Also, the indexation is not
done because the interest is given for the period not yearly.
 There is a carry forward loss of $12500 from last year and $5000 from the earlier
year. And as per the ATO guidelines, there is no restriction in carrying the loss of
previous years. Therefore, the Net CGP taxable for Maurice will be calculated as:
Net Capital Gain for the year 2017/18:
Capital gain from the sale of vacant land 296,091
(-) Brought forward capital loss 17500
Net taxable CGT 278,591
11

Question 6
Liberal Plan will enable tax cuts of $77bn for High-Income Earners
The overall tax burden will reduce for all class earners in the form of Coalition's income tax
package under the Liberal Plan. The majority of the benefits of the tax cut will be received by
the high earners. They will be paying 4% less of the overall income tax. The lower bracket
will pay 1.7% more, while the middle bracket will pay 2.2% more owing to the applicability
of flat tax rates from 2022 onwards. The said changes are regressive in terms of tax as a
progressive taxation policy charges less tax from the middle and lower bracket. This will
create income disparity among different classes and concentration of income into the hands
of a few people.
Change in the superannuation System and its effect on the budget
Labour has initiated changes to the superannuation system which will allow the Government
to reap $30bn over a period of 10 years. Such changes will be carried out through
withdrawing tax concessions on contributions. This will allow the government to charge tax
on income derived on superannuation and will benefit the GDP and economy in general.
12