Taxation Implications on Profit and Loss: Three Case Studies

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TAXATION

Executive summary
Taxation and its regulation support the revenue and annual income of Australia. This
study aims to analyse implication of taxation related laws and policies to understand
three different cases of Helen, Barbara, and Patrick to decide their profit and loss in
their separate instances of transactions. Income Tax Assessment Act, Copyright Act
and relevant concepts such as capital gain tax (CGT), assessable income and their
consequences are discussed to derive comprehension about the given scenario.
Moreover, the policies and regulation procedure are invited to gain understanding
and provide solutions to situations given for analysis. Nonetheless, calculations are
done and cases are cited to support the analysis logically.
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Table of Contents
Introduction................................................................................................................. 4
Question 1...................................................................................................................4
Capital Gain Tax for antique impressionism painting...............................................4
Capital Gain Tax for historical sculpture..................................................................4
Capital Gain Tax for antique jewellery.....................................................................5
Capital Gain Tax for picture.....................................................................................5
Consequences of CGT............................................................................................ 6
Question 2...................................................................................................................6
Income of Barbara in first scenario..........................................................................6
Income of Barbara in alternative instance................................................................7
Question 3...................................................................................................................7
Impact of arrangements on Patrick’s assessable income........................................7
Conclusion.................................................................................................................. 8
Reference list.............................................................................................................. 9
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Introduction
The tax department of Australia acts to collect revenue and deliver different benefits,
social or economic that supports the superannuation system of Australia. This study
focuses on understanding about the tax system of Australia along with income and
deductions, FBT, CGT, income tax administration and other provision to analyse
given scenario.
Question 1
Capital Gain Tax for antique impressionism painting
In given scenario, Helen as sold the antique painting for $12,000 after the purchase
in 1985 at the price of $4,000. The huge gain of profit is evident from this transaction.
However, this kind of transaction comes under Capital Gain Tax (CGT), which states
that assets bought before September 1985 are excusable from CGT (ato.gov.au,
2018). On the other hand, the sale of products in 2018 will ensure the addition of
GST as per the Income Tax Assessment Act 1997, under section 140-230
(legislation.gov.au, 2019). As commented by O'Connell (2017), CGT is only
applicable with higher rate of tax for non-inventory assets, such as precious metals,
property, and art and such. Therefore, the selling of the asset will ensure the
payment of 28% of tax as per CGT. Therefore, the profit can be as follows:
Tax rate of 28%
Particulars Value Capital
gain
Taxable
amount
Net profit after tax
deduction
Selling price $12,00
0
$8,000 $2,240 ($8,000-$2,2240)=
$5,760
Purchasing
price
$4,000
Table 1: Applicable CGT for selling antique picture
(Source: Created by learner)
As analysed above, the selling of the antique piece has costed Helen to pay a
certain amount (i.e. $2240) as a part of 28% of GST tax as determined for antique
assets to the government of Australia. Further, it can be detected the net profit for
the asset is quite high and Helen can gain $5,760 as net profit after the sale of the
asset.
Capital Gain Tax for historical sculpture
While selling the asset, Helen has triggered the applicability of CGT. As mentioned
by Evans et al. (2015), collectible assets are highly charged with CGT, when they
are priced above $500 and after December 1995. In the second instance, Helen sold
a historic sculpture to raise funds for her fashion designing business. The sculpture
was sold on January 2018 at price of $6,000 after its purchase on December 1993.
Therefore, the asset was bought during the exemption period and sold with the extra
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charge of GST. For being a working individual, Helen can access the discount in
income as the government of Australia has announced a discount of 50% on income
tax for working individual. However, the sale of the historic product comes under the
loyalty tax and amounted to 28% for the products (ato.gov.au, 2018). Therefore, the
net profit of Helen after selling the product will be as follows:
Tax rate of 28%
Particulars Value Capital
gain
Taxable
amount
Net profit after tax
deduction
Selling price $6,000 $500 $140 ($500-$140)= $360
Purchasing
price
$5,500
Table 2: Applicable CGT for selling historic sculpture
(Source: Created by learner)
From the data, it can be seen that the capital gain is low and Helen needs to pay
high taxable amount for the sale of the asset within the country. With the GST tax at
28% for the collectible product, Helen needs to pay $140 from the capital gain of
$500. Therefore, the net profit is only $360, which is low.
Capital Gain Tax for antique jewellery
Antique jewellery comes under the collectible assets under the CGT policy. The
capital gain tax policies provide provision to disregard loss of capital gain for assets
below $500 of purchase value and collected before December 1995. As the antique
jewellery was bought in October 1987, which is before the exempted time period, the
product will be exempted subsequently. Though the product fulfils one criterion that
is the purchase value is way higher than $500 and is $14,000, the year of purchase
made it exempted and results in less value for the product. Moreover, CGT will only
be applicable if the product is bought after December 1995 and at a price higher than
$500.
Helen bought it at $14,000 in 1987 and sold it with a loss due to low jewellery price in
Australia. The loss for the product is ($14,000-$13,000), which is $1,000. It is evident
that Helen was unable to obtain right value for the product in 2018. As commented
by Woellner et al. (2016), the capital loss can be used to reduce the capital gain to
balance out the loss. Therefore, Helen can be advised to analyse the total gain and
loss to reduce the impact of loss on income.
Capital Gain Tax for picture
The picture, Helen sold was purchased during 1987 at a price of $470. However, the
picture was sold at a high rate in 2018 at a price of $5,000. The transaction
represented a huge profit gain by Helen and can be supportive to raise funds for the
business of fashion designer. However, the CGT of Australia provided the provision
of exemption of luxury or collectible products bought before December 1995 and at a
price below $500 as per Income Tax Assessment Act (legislation.gov.au, 2019). It is
clear that the asset fulfils both the criteria for GST exemption as it was bought before
1995, during 1987 and the price is lower than $500, which is $470. Therefore, the
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10% GST for collectible arts are not applied for this transaction conducted by Helen
in this instance. Therefore, the profit obtained by Helen in this instance is as follows:
Tax rate: not applicable
Particulars Value Capital
gain
Taxable
amount
Net profit after tax
deduction
Selling price $5,000 $4,530 n/a $4,530
Purchasing
price
$470
Table 3: Applicable CGT for selling picture
(Source: Created by learner)
From the analysis, it can be seen that the sale of picture has become highly
profitable for Helen.
Consequences of CGT
Payable CGT
Products for
transactions
Sellin
g
price
(SP)
Buyin
g
price
(CP)
Obtained
profit/los
s
Taxabl
e
amoun
t (at
28%
GST)
Net
gain
Total
payabl
e CGT
Total
profit/los
s
Impressionis
m painting
$12,00
0
$4,000 $8,000 $2,240 $5,76
0
$2,100 $5,400
(profit)
Historic
sculpture
$6,000 $5,500 $500 $140 $3,60
Antique
jewellery
$14,00
0
$13,00
0
-$1,000 $280 -$720
Picture $5,000 $470 Not applicable
Table 4: Total CGT liability
(Source: Created by learner)
From above analysis, it can be seen that Helen can obtain a huge profit of $5,760
with an amount of payable tax of $2,240. Moreover, income is high to fund the
business sufficiently.
Question 2
Income of Barbara in first scenario
Barbara is a professional economist had been contacted by Eco Books Ltd to write a
book on economic and was offered $13,000. The book "Economic Principle" was
written after the contract was signed between the two parties with copyright policies
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for the publication house. The payment for the book was $13,000, which was paid
through check by the publication house after the agreement to the contract by both
parties. Barbara has gained additional $4,350 for selling the manuscript of written
book to the library of the same publication house. Additionally, the sale of the
interview manuscripts collected during the writing of the book earned her an addition
$3,200.
In Australia, Capital Gain Tax is applicable to the total income of an individual. The
right to integrity of authorities as per Copyright Act 1968, an author could have the
right to agree to a contract with respect to work (legislation.gov.au, 2019). Moreover,
the income can be considered under personal exertion income as the information
collection and representation are conducted under personal achievements. On the
other hand, Campbell (2018) stated that income with direct investment of personal
attributes can be considered as income of personal exertion. The total income is
related to book writing and relevant processes. Therefore, it can be stated that
Barbara has earned income through personal exertion.
Income of Barbara in alternative instance
In the alternative case scenario, it is considered that Barbara has completed the
book writing in her spare time before the approach of Eco Books Ltd. In this
instance, Barbara might have faced issues regarding the authors' copyright as the
book would have been written previously and might not be paid like the first instance.
In the case between SPI POWERNET PTY LTD & ANOR v FC of T, the claim of
deduction of payment due to copyright issues led to court judgements. As per
Income Tax Assessment Act 1997, the transmission of knowledge before the
contract resulted in the breach of contract and resulted in the payment deductions.
As the source of leaving the information was not detected and the copyright was
discredited of early conduction, the case was dismissed and the appellant Powernet
had to pay 25% penalty (iknow.cch.com.au, 2019). Similar results can result for
Barbara, even payment deductions can be obtained under Copyright law of
Australia.
Question 3
Impact of arrangements on Patrick’s assessable income
In the given scenario, it can be seen that David had a loan of $52,000 for his father
Patrick without any legal agreements and procedures. However, the verbal contract
between them ensured a repayment of $58,000 after five years of the loan access.
This agreements also countered the payable interest for loan, which could have
been negated by David while loan repayment. However, David repaid the total
amount of the loan after two years with an interest rate of 5% on the borrowed
amount. Therefore, the total amount along with 5% interest becomes the assessable
income for Patrick. As commented by Campbell (2018), assessable income is the
gross income that involves salary, interest and such before the deduction of income
tax. The assessable income without any legal procedures and documents can be
directed to reduce the amount of income tax for an individual. The contract between
Patrick and David supported this provision and increased assessable income
significantly.
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In general, consideration, when agreements are constructed with legal procedures
and with agreed and fixed interest rate, the receiving party needs to pay the tax as
determined by Income tax policy and Fringe Benefits Tax (FBT) (ato.gov.au, 2019).
Therefore, in the given scenario, Patrick would have to pay a specific amount as
income tax after receiving the total amount of loan along with 5% interest on the
basic loan amount. The income without any interest and loan payment is considered
under ordinary income, whereas, addition of interest rate on the basic amount paid is
considered as taxable income under the Income Tax Assessment Act 1967.
Therefore, a certain amount of tax is to be deducted from the total payment as
determined by the policy.
The legislation of Australia emphasises that a transaction between the amounts of
$37,000 and $90,000 is included under the taxable transactions and the receiving
party is needed to pay 19.36% of tax on the basic payment. This transaction pattern
is also considered under the assessable income. Therefore, it is evident if the
transaction had been conducted with legal considerations and statements; Patrick
was needed to pay a certain amount as tax. In the case study of Alizarin society, the
assessable income is $4,800. The deductible expenses summed off to $9,070, which
led to the taxable income of the company as $1,730 as per the tax regulation in
Australia (ato.gov.au, 2018). Therefore, it is evident that the assessable income of
Patrick would have been reduced with legal procedures. Nonetheless, the
arrangements as determined by Patrick would have been suited for the increased
amount of assessable income without any taxable amount to be paid. In addition, the
interest amount as paid by David at the end of second year had earned him higher
assessable income without the tax payment requirements (aph.gov.au, 2019).
Therefore, it is clear that Patrick had conducted a profitable income significantly.
Conclusion
In conclusion, it can be stated that the taxation laws and policies are an integral part
of tax regulation and income for the government. The capital gain tax, taxable
income and assessable income define the net profit or loss for any kind of
transactions. Legal understanding and procedures reflect upon the certain taxable
amount reflecting upon the net gain or loss. Nonetheless, the given instances
provided the scope to understand the pattern of tax rate for products and
transactions respectively. Moreover, it can be said that the understanding of the
taxation procedure of Australia helps in deciding value transactions and
management of taxable amount.
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Reference list
aph.gov.au, 2019. Income Tax Self Assessment. Available at:
https://www.aph.gov.au/parliamentary_business/committees/house_of_representativ
es_committees?url=jcpaa/taxation06/subs/sub26.pdf [Accessed on 20 May 2018]
ato.gov.au, 2018. Capital gains tax. Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed on 20 May 2018]
ato.gov.au, 2018. Case study 1: Alizarin Society. Available at:
https://www.ato.gov.au/non-profit/your-organisation/in-detail/income-tax/mutuality-
and-taxable-income/?page=34 [Accessed on 20 May 2018]
ato.gov.au, 2018. Working out your capital gain. Available at:
https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-
loss/Working-out-your-capital-gain/ [Accessed on 20 May 2018]
ato.gov.au, 2019. Assessable income. Available at: https://www.ato.gov.au/non-
profit/your-organisation/in-detail/income-tax/mutuality-and-taxable-income/?page=13
[Accessed on 20 May 2018]
Campbell, S., 2018. Personal liability of a trustee to tax on trust income: Part
2. Taxation in Australia, 53(6), p.322.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an
alternative way forward. Austl. Tax F., 30, p.735.
iknow.cch.com.au, 2019. SPI POWERNET PTY LTD & ANOR v FC of T [2014].
Available at:
https://iknow.cch.com.au/document/atagUio2330574sl477303936/federal-court-of-
australia-25-march-2014-spi-powernet-pty-ltd-anor-v-fc-of-t [Accessed on 20 May
2018]
legislation.gov.au, 2019. Copyright Act 1968. Available at:
https://www.legislation.gov.au/Details/C2017C00180 [Accessed on 20 May 2018]
legislation.gov.au, 2019. Income Tax Assessment Act 1936. Available at:
https://www.legislation.gov.au/Details/C2017C00121 [Accessed on 20 May 2018]
legislation.gov.au, 2019. Income Tax Assessment Act 1997. Available at:
https://www.legislation.gov.au/Details/C2019C00049 [Accessed on 20 May 2018]
O’Connell, A., 2017. Australia. In Capital Gains Taxation. Cheltenham: Edward Elgar
Publishing.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian
Taxation Law 2016. OUP Catalogue.
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