Taxation Theory, Practice & Law: A Comprehensive Report

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Taxation Theory, Practice & Law
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Table of Contents
Executive Summary:........................................................................................................................3
Question 1:.......................................................................................................................................4
(a):................................................................................................................................................4
(b):................................................................................................................................................5
(c):................................................................................................................................................6
(d):................................................................................................................................................7
Question 2:.......................................................................................................................................9
Question 3:.....................................................................................................................................11
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Executive Summary:
This assessment is based on the capital gain taxation regulations that are imposed by the
Australian government. It will centre the focus on different situations that are related to the
events of capital gain and present the applicability of different clauses for the correct
determination of tax liability. This report will be based on three taxation problems and prepared
to provide a detailed description of the PSI, Capital gain and other taxation rules. Through the
study of this assessment, the learner will be able to understand the complexities of taxation
regulations appropriately.
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Question 1:
Capital gain is a tax obligation in Australia that is required to be paid by the individual and
corporations. It arises when a capital asset is sold by an individual or corporation. Following are
some factors which decide the amount of capital gain.
 Date of purchase:
Purchase date plays a crucial role in the determination of tax obligation. For example, an asset
that was acquired originally before 1999, the taxpayer can avail the benefit of indexation to
reduce the tax liability.
 Nature of the asset:
Nature of asset is another vital point that makes a significant impact on the tax liability of capital
gain. There are several items which are exempted from taxation while some capital assets are
taxed with a reduced rate. For example, sell of residential house is exempted from a tax
obligation (ATO, 2019).
 Type of taxpayer:
Under the capital gain regulations, different rates of tax are applicable for a different type of
taxpayers. For example, companies are liable to pay 30% tax on incomes while individual should
tax with a rate of 15%.
(a):
As per the provided case, an antique painting has been sold by the Helen for 12000 which was
acquired by Helen’s father. According to the capital gain regulations, a collectable or antique
item which was acquired for more than 500 will be taxable, and tax will be paid by the seller. All
the assets which fall in the category of capital assets are exempted from the obligation of capital
gain tax. There are certain things which are exempted from the tax, and some of them are below:
 Main residence of taxpayer.
 Motorcycle, Car and depreciating assets (ATO, 2019).
 Capital assets that were assimilated before 20-9- 1985.
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An asset that has been sold by the Helen was acquired by the father of Helen in Feb 1985. In the
light of the above stated regulations, it can be said that asset sold by the Helen will be exempted
from the obligation of capital gain tax.
(b):
As per the CGT rules, assets that are held for more than 12 months is required to be considered a
long-term asset and discount method can be utilised to determine tax liability. If an asset is
acquired before septum-1999, index method can be utilised by the Taxpayer to determine the tax
liability (ATO, 2019). Sculpture sold by the Helen in 2018 was purchased in 1993, so it will
consider as long term asset and taxable in the hands of Helen. As it was acquired before Sep-
1999, indexation or Discount model can be utilised by the Helen to determine the net obligation
of capital gain:
Discount method
Particulars Amount
Sale value 6000
Less:
Purchase value 5500
Capital gain 500
Less:
Discount (50% of profit) 250
Taxable value of capital gain 250
Index method
Particulars Amount
Sale value 6000
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Index factor of September 1999 (A) 68.7
Index factor of Purchasing year (B) 61.2
Indexation factor (A/B) 1.12
Cost of purchase 5500
Index cost of acquisition 6174.02
Taxable value -174.02
From the above calculations, it is identified that utilisation of discount method is showing higher
obligation of capital gain while indexation is indicating a CGT loss. As both methods can be
utilised by the Helen, the index method should be selected.
(c):
Jewellery acquired by the Hellen in 1987 in14000 has been sold for $13,000. Thus, the loss has
been faced by the taxpayer and deduction of the same can be claimed against other CGT events.
Here, Jewellery was held for more than 12 months so it will be considered as Long-term asset
and index benefit can be availed by the taxpayer (ATO, 2019). Index cost of acquisition will be
as below:
Index method
Particulars Amount
Acquisition Value 13000
Index factor of September 1999 (A) 68.7
Index factor of Purchasing year (B) 47.6
Indexation factor (A/B) 1.44
Index cost of acquisition 18762.61
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Amount of capital loss will be:
Particulars Amount
Sale price 13000.00
Less
Index cost of acquisition 18762.61
Loss -5762.61
(d):
The picture sold by the Helen is falling in the definition of collectables, so CGT rules related
with collectables will be applicable here. According to the exemption regulations of CGT rules,
Sale of some specific assets do not attract any CGT liability. Following are some examples of
exempted assets:
 Main residence of the taxpayer.
 Car, motorcycle and similar vehicle used for personal purpose (ATO, 2019).
 Collectables purchased for 500 $ or less.
In the current case, asset sold by the Helen was acquired in 1987 through a payment of $ 470, so
it is eligible for the exemption stated under CGT regulations. Thus, the capital gain arising on the
sale of a picture is not a taxable gain.
Determination of Total taxable CGT:
Particulars Amount
Profit on the sale of the painting 0.00
Profit on the sale of historical sculpture -174.02
Profit on the sale of antique jewellery -5762.61
Profit on the sale of the picture 0
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Total Taxable CGT -5936.62
From the above evaluation, it is identified that a loss of $ 5936 is arising for the Helen due to the
sale of capital assets. It can be carry-forwarded under some specific rules to adjust against future
capital gains. It should be considered that loss of CGT event is only adjustable with the profits of
CGT event so adjustment against other incomes will not be available for the Helen.
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Question 2:
The present problem is related to PSI regulations in which Significant amount has been gained
by the Barbara through rendering Personal services. Ass per provided information, Barbara
agreed to write a book for a publishing house. Book writing is not the profession for the Barbara
so it will not be included as the professional services and income will be taxed under the
regulations of “Personal service income” (ATO, 2019). In this condition, income gained by the
Barbara will be taxed as per slab rates, and additional medical levy of2% will require to be paid.
Following table is showing the computation of taxable income of Barbara:
Particulars Amount
Copyright Sale 13,400
Manuscript Sale of 4,350
interview and other 3,200
Total 20,950
Exemption (Basic) 18,200
Balance Amount 2,750
Basic tax 523
Medicare levy 55
Total Tax Payable 578
An income that has been received by the Barbara from publishing house is the part of services
that were delivered by the Taxpayer through personal skills. Additionally, significant amounts
have been received by Taxpayer from the sale of manuscript and interviews and, the same will
be taxed under the PSI regulations.
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As per given condition, Barbara has an ongoing contract with Eco Books to write a book for
them. Emittance of the contract is indicating that the relation of employer and employee existed,
so income is required to be taxed under the provisions of PSI as whole provided services were
related to personal skills. Under the PSI regulations, the taxpayer is liable to pay tax according
to the regulations of `PSI Act if more than 50% part of total income is the result of personal
skills and efforts.
In another condition, Barbara and Bookhouse do not have any personal contract or agreement of
employment. Here, a book written by the Barbara is not resulted of employer-employee relations
but whole income has been generated through the utilisation of personal skills so regulations of
personal income will be applicable (Business, 2018). In this situation, additional benefits and
perquisites will not be available for the Barbara, and whole income will be taxable.
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Question 3:
The current situation is related to the provision of gifting and problem will be solved through the
application of income tax regulations of the Australian government. Initially, Amount of $
52000 was provided by the Patrick to his son against a total repayment of $ 58000 which was
made after five years. In this situation, David (Patrick’s son) has to pay interest of $ 6000 along
with the principal amount of $52000 after five years (ATO, 2019). As per ATO regulations, a
person can provide loan to other without a formal agreement so amount provided by the Patrick
to David will not be considered as the gift and it would be considered a normal transaction.
Here, Interest of $ 6000 will be deductible business cost for the David and taxable for the Patrick
in receiving a year.
Later, Patrick agreed to forgive the loan of $ 52000 which will attract the ATO regulations of
gifting. As per the Gifting regulations, Forgive a loan will be considered as the gift event which
not attracts any tax liability (DHS, 2019).
After two years, David repaid the whole amount to Patrick along with an additional 5% amount
of total borrowing. In this situation, regulations of interest income will be applicable. The
amount received by the Patrick will be taxable under the head of other income while David will
be able to claim a business deduction of such additional payment (DHS, 2019).
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Reference
 ATO, 2019. CGT assets and exemptions. [online] Ato.gov.au. Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed 1
May 2019].
 ATO, 2019. Funding and finance. [online] Ato.gov.au. Available at:
https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Tax-governance/
Funding-and-finance/ [Accessed 1 May 2019].
 ATO, 2019. The indexation method of calculating your capital gain. [online] Ato.gov.au.
Available at: https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-
gain-or-loss/Working-out-your-capital-gain/The-indexation-method-of-calculating-your-
capital-gain/ [Accessed 1 May 2019].
 ATO, 2019. Working out if the PSI rules apply. [online] Ato.gov.au. Available at:
https://www.ato.gov.au/business/personal-services-income/working-out-if-the-psi-rules-
apply/ [Accessed 1 May 2019].
 Business, 2018. Personal services income (PSI). [online] Business.gov.au. Available at:
https://www.business.gov.au/finance/taxation/personal-services-income [Accessed 1 May
2019].
 Cleartax, 2019. Capital Gains Tax - Long Term Capital Gains & Short Term Capital Gains.
[online] Cleartax.in. Available at: https://cleartax.in/s/capital-gains-income [Accessed 1 May
2019].
 DHS, 2019. Gifting - Australian Government Department of Human Services. [online]
Humanservices.gov.au. Available at:
https://www.humanservices.gov.au/individuals/enablers/gifting [Accessed 1 May 2019].
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