Comprehensive Analysis of Australian Taxation Law for Mechel Pty Ltd

This report provides a comprehensive analysis of Australian Taxation Law, focusing on the tax implications for Mechel Pty Ltd. The report addresses key areas such as the tax treatment of stock, the amortization of distribution rights, and depreciation of vehicles and storage facilities. It delves into the eligibility for various deductions, including administration expenses like council rates, electricity, and telephone costs. Furthermore, the report examines the Capital Gains Tax (CGT) consequences of a potential business sale, highlighting the complexities that arise when a business operates from a residential property. The conclusion emphasizes the importance of adhering to taxation rules and the difficulties related to CGT in such scenarios. The report is supported by relevant references to Australian tax legislation and academic sources.

Australian Taxation
Law

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Advising Mechel's Directors on the tax treatment of matters covered in Notes 1 to 4...............1
TASK 2............................................................................................................................................3
Advising Mechel's Directors on the tax issues and eligibility for various deductions ...............3
TASK 3............................................................................................................................................4
CGT consequences.......................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Tax Laws are an integral part of an economy's legal matters. It is an area of legal study
that is concerned with the statutory policies formulated by a government to regulate various
financial transactions. This report gives an account of various deductions relating to expenses,
consequences of Capital gain Tax and tax treatments of various items considered while
calculating taxable income of Mechel Pty Ltd.
TASK 1
Advising Mechel's Directors on the tax treatment of matters covered in Notes 1 to 4.
Mechel Pty Ltd. Is company which is operating business in Australia and it provides
online mail order services. It has two employees John and Betty and both of them are
shareholders and directors of the organisation. The operate all the business activities from their
resident1. They have asked for advice from a tax officer in which they are willing to know about
some tax treatments.
Note 1: In this part they have asked about tax treatment of stock:
Calculation of total stock:
Particulars Amount
Opening stock 11000
Add: purchase during the year 90000
101000
Less: less closing stock 7000
Total stock 94000
The above table shows total stock of the company which is around 94000 dollar.
According to ITAA act 1997 section 70-40 subsection 328-295 (1) opening value of current
year's stock should be equal to closing stock of previous year. If the company is not having any
stock at the end of last year then for present year the amount of stock will be zero. The act also
1 Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian
Tax Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School
of Social Sciences, The Australian National University.
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states that companies much account for changes if the difference between opening and closing
stock is more than 5000 dollars.
Difference of opening and closing stock of Mechel Pty Ltd.
= Opening stock- closing stock
= 11000-7000
= 4000
As the difference is 4000 which is lower than 5000 it means that company do not have to
account the changes.
Note 2: An amount of 100000 dollars is being paid by Mechel Pty Ltd. To Novo Ltd. as
the fee for exclusive distribution rights for products on 1 July 2012. It has been proposed by
organisation that this amount will be amortised for a period of 5 years which means 20000 per
year. According to accounting years the applied amortisation is as follows:
Year Amortised
Amount
Remaining
balance
2012-13 0 100000
2013-14 20000 80000
2014-15 20000 60000
2015-16 20000 40000
2016-17 20000 20000
2017-18 20000 0
2018-19 0
At the end of 2017-18 all the amount of rights are being amortised which means in
current year no value is shown by the company in its accounts and for tax purpose there will be
no treatment for this note.
Note 3: According to taxation rules of Australian governments that a depreciation of 19%
will be applied on a new vehicle during the first year but from second year this rate will be
around 15%. John and Betty both are having separate cars. John is using it for business purpose
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but Betty uses it 50% for business purpose and 50% for personal use 2. Calculation of
depreciation for both of them is as follows:
Calculation for John:
Particulars Amount
Cost of car 5200
Less: Depreciation @15% 780
Taxable value 4420
Calculation for Betty:
Particulars Amount
Cost of car 5200
Less: (Depreciation @15%)-50% 390
Taxable value 4810
Total taxable amount of John's car is 4420 and for Betty it will be 4810. Depreciation
amount of Betty is 390 because car is being used by her for personal use also which is not
allowed to deduct from business asset.
Note 4: Depreciation of storage facility is allowed because it is used for business purpose
so that amount of 1200 can be deducted from book value of storage. According to Australian
taxation system if a building or a small part of it is used for business purpose then the whole
amount if depreciation is deductible from book value3.
TASK 2
Advising Mechel's Directors on the tax issues and eligibility for various deductions
In the context of given case scenario, the administration expenses for the year ended on
June 30 amount to $15,000. Administration expenses are those indirect expenses that are
2 Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag
GmbH.
3 Middleton, T., 2015. Banning, disqualification and licensing powers: ACCC, APRA,
ASIC and the ATO–regulatory overlap, penalty privilege and law reform. Company and
Securities Law Journal. 33. pp.555-580.
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incurred by a business for undertaking activities which are not directly related to the process of
manufacturing, production or sale. However they are related to the business as a whole and
include salaries of employees that help in improving the overall efficiency of the enterprise. For
Mechel, administration expenses include Council Rates, Electricity and Telephone Expenses that
are worth $2500, $3000 and $1500 respectively.
Council Rates:
Council Rates are deductible under the local government rate levy for the period in which
the property is rented or is available for such a purpose. Based on the legal status of the business
and an individual, Mechel shall be eligible for this deduction. As the company has been
conducting its business in a 7-room residence in which one of 3 bedroom is set aside as an office,
it can be assumed to be rented. Hence, $2500 would be fully deductible for Mechel. If the
business pays such rates on a later date than when it was actually due, the business would be
liable to pay interest charges regarding the same. However, these late interest charges are eligible
for claim as a tax deduction. Also, the organisations including Mechel, must take note of
knowing the exact amount of council rate to be paid4. As a wrong claim on such deductions
would be heavily penalized by the Australian Taxation Office under Income Tax Assessment
Act, 1997.
Electricity and Telephone:
An Electricity Expense is usually named as 'Running Expenses' under the ITAA 1997.
Such expenses are incurred for increasingly using utilities such as gas, electricity and telephone.
In order to claim deductions for such items, Mechel would need to calculate the portion of such
expenditure incurred on its part. Mechel can only do so if their claim is reasonable and excludes
any personal expense. For using electricity, the basis of calculation would be anything other than
the floor area which would be required to be documented by the claimant.
As far as Telephone Usage is concerned, Mechel can claim deductions on the calls as
well as rental costs. However, Mechel cannot claim charges incurred on the installation of
landlines as they would come under the head of Capital Expenses instead of Running Expense.
Also, only those expenses which are related to the business calls or form the part of the rental
costs shall be eligible for tax deduction.
4 Rogers, N. and Maloney, M., 2014. The Australian wild law judgment
project. Alternative Law Journal. 39(3). pp.172-175.
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TASK 3
CGT consequences
Oz-Mart approached to Mechel to buy the business. If Mechel Pty Ltd accepts their offer,
it would result in transfer of liabilities as well as assets to Oz-Mart. As Mechel is working from
its own residential premises, selling off its business would mean selling off John and Betty's
personal property to Oz-Mart. This would result in losing not only their business but also their
accommodation making it difficult for them to relocate. As far as Capital Gain Tax (CGT) is
concerned, sale of personal assets and those related to business have different treatments under
the given head. Thus, it will be difficult for them to ascertain the actual amount eligible for
deductions as well as taxation under the concerned heads5. Also, if the directors choose to accept
the offer made by Oz-Mart Ltd., such a complex transaction would require a highly efficient Tax
Advisor which would also be an added expense for John and Betty.
CONCLUSION
From the above project report it has been concluded that it is vital for business entities to
follow all the taxation related rules in order to operate business properly. If a business is operated
from a residential properly and then some other party offer to buy the business then it will create
various CGT difficulties from owners. One of then is that they have to sale whole property and it
will be more difficult for them to segregate the capital gain for their business and their residential
property.
5 Woellner, R. and et.al., 2016. Australian Taxation Law 2016. OUP Catalogue.
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