HI6028 Taxation Theory, Practice and Law: A Comprehensive Report

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HI6028 Taxation Theory, Practice and Law
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Contents
Introduction..............................................................................................................................................3
Q1.............................................................................................................................................................4
Q2.............................................................................................................................................................6
Q3.............................................................................................................................................................8
Conclusion.............................................................................................................................................10
References..............................................................................................................................................11
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Introduction
Tax is that portion of the amount that needs to be paid to the government. With the help of
tax, the amount of government meets out the expenditure related to their public services (De
Silva, et. al., 2018). Individual share some amount of their salary or profit with the
government that amount termed as tax amount. No one is happy while paying tax and in
order to give some relaxation to the individuals Australian Taxation office provide a tax-free
limit of AUD 18200. Amount of $18200 is considered as tax allowance as individual need
not to pay any kind of tax over the earned income till $18200 (De Silva, et. al., 2018). ATO
also impose taxation on the capital gain, other incomes like income from interest on the loan
(if individual lent loan to someone and enjoy interest amount) and others. Although
individual paying interest gets a deduction in taxable income. Below report includes the
discussion of capital gain collectibles, personal income service and interest on the loan
(Wenzel, 2019). The financial year of Australia runs from 1st July to 30th June.
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Q1.
Capital gain: - The sum of amount which is realized with the sale of a capital asset and the
difference amount between purchase cost and sale cost remain positive. It means the selling
price is more than the purchase price. In the case when the amount of purchase price is higher
than selling price then the amount received is called a capital loss (Wenzel, 2019). ATO
introduces provision related to capital gain tax in the year 20th December 1985 and stated that
all the assets which get purchased after 20th December 1985 need to pay taxes when they
yield capital gain on their sale. And for the assets that get purchased before this date is termed
as Pre-CGT and get exempted from the calculation of capital gain tax (Wenzel, 2019).
Collectables: - These are such assets that get purchased by the individual for their personal
usage. The capital gain received with the sale of collectibles gets taxable under capital gain
tax provision. But if there is capital loss then it will be utilized for lowering the capital gain
amount from the collectibles only (Wood, Daley, & Parsonage, 2018). They also carry
forward the capital loss to settle down with future profits. There are various assets that
considered as collectibles such as jewellery, paintings, art, sculptures, stamps, and others.
There was a provision introduced related to collectibles on 16th December 1995 and as per
this provision, CGT will not be imposed over the collectibles which were brought before this
date (Wood, Daley, & Parsonage, 2018).
As per the information stated in the case study provided Helen runs a business of fashion
designing. She needs liquid funds for her business activities and due to the financial
requirement, she sold out some of the collectibles. She sold out them one by one and on
different dates but all of them are considered for evaluating capital gain from their sales.
Below table helps in checking the eligibility criteria of collectibles sold by the Helen such as:
-
Name of
collectible
Purchased date
and amount
Sale date and
amount
Eligibility and description
Antique
impressionism
painting
Purchased in
Feb 1985 at a
cost of $4000
Sold out on 1st
December 2018
at a price of
This transaction is not eligible for CGT
purpose as it was purchased well before
the provision date of collectibles as well
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$12000. as CGT. As per the provision it gets the
title of Pre-CGT.
Historical
Sculpture
Purchased in
Dec 1993 at a
cost of $5500
Sold out on 1st
Jan 2018 at a
price of $6000
This transaction is exempt from the
calculation of the capital gain tax as the
amount of capital gain is $500. The
provision states that if the amount of
profit is equal or lower than $500 then
that will not be included for tax
calculation purpose.
Antique
Jewellery piece
Purchased in
Oct 1987 at a
cost of $14000
Sold out on 20th
March 2018 at a
price of $13000
This transaction is not eligible for tax
calculation purpose as Helen got a loss
of $1000 with the sale of the jewelry
piece. She makes use of this capital loss
in lowering her capital gain from
collectibles only.
Picture Purchased in
March 1987 at a
cost of $470
Sold out on 1st
July 2018 at a
price of $5000
This transaction is exempted from the
CGT as the purchase price of the
picture was $470. Provision of
collectibles states that if the purchased
price of the collectible is lower than or
equal to $500 then that collectible item
is not included for CGT purpose.
Helen got a total capital loss of $500 ($500 capital gain with the sale of Sculpture and -$1000
capital loss with the sale of Jewellery).
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Q2.
Income tax is charged over the income earned by the individual. ATO's provisions charge tax
at progressive rates from 0-45% and it gets termed as a progressive tax. To get the taxable
income individual total up his income earned and deductions allowed (Wood, Daley, &
Parsonage, 2018). After that, all the deductions get deducted from the gross income. ATO
imposed 0-45% taxes along with 2% medical levy over the individual taxable income.
Personal service income is that income which was earned by the individual by putting their
personal skills or efforts (Wood, Daley, & Parsonage, 2018). PSI examples make the
inclusion of financial professionals, engineers, and others. Professional services help them in
getting personal service income as for meeting their professional services they make use of
their personal skills and efforts. With the help of their personal skills and efforts individual
complete their assigned tasks and in against they get paid (Wood, Daley, & Parsonage, 2018).
The amount which received is considered as PSI and get taxable as per the tax rates.
Barbara is an individual and she is an economist researcher and commentator. As per her
profession, she attains knowledge and information related to economics. Eco Books Ltd.
present a contract in front of her in which she needs to write a book on “Principles of
Economics”. Before receiving this contract, she didn’t write any book but on the basis of her
experience and the knowledge she attained. She agreed to write the book for Eco Books Ltd.
The contract price which will be paid by Eco Books Ltd. is $13000. She utilizes her
knowledge and put adequate effort and complete the book.
With the completion of the book, she transfers the copyright of the book to the name of the
company and gets the payment of $13400. With the transfer of copyright, she also sold out
two things which are book manuscript and interview manuscript at the price of $4350 and
$3200 respectively. Both manuscripts helped a lot in the completion of the book as with the
help of both she gathered adequate information. As per this contractual transaction she earns
a total income of $20950. This income is considered as Personal Service Income as she
makes use of her skill under legal contract as per her profession.
It is the net assessable income which is available for taxation purpose. In order to get the net
taxable amount, exemption limit of $18200 get deducted from net assessable income
$20,950. The net taxable income is $2750. After deducting the exemption limit the rate at
which tax calculated is 19% with an addition of 2% as a Medicare levy. So, Barbara needs to
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pay taxes at a rate of 21%. Her tax amount is $577.50 in which $522.5 is tax amount and $55
is Medicare levy.
The solution as per the alternative scenario: -
The alternative scenario states that Barbara writes a book on Principles of Economics with
the use of her knowledge. She also gathers some information with the use of interview and
for this purpose, she prepares interview manuscripts. She completes the book in her free time
and put it for selling purpose. Later on, she gets to know that Eco Books Ltd. have interest in
her book and want to purchase it. She gets paid against the sale of the book, it's manuscript,
and interview manuscript. But the income earned through this transaction is not considered
for PSI. It is because she didn’t use her skills to provide services to Eco Books Ltd.
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Q3.
Individual took financial liability from different sources and for a different purpose. During
the loan period individual pay interest against its usage. ATO allowed the individuals to make
use of interest amount paid for deduction purpose (Hoopes, Robinson, & Slemrod, 2018). It
reduced their overall tax liability. When an individual pay loan to someone then he might
charge interest over it. Then in such a situation individual pay taxes over the interest earned
(Hoopes, Robinson, & Slemrod, 2018). David starts a business and for its smooth running, he
requires financial assistance. Patrick who is his dad provide financial assistance to him to
meet out his financial requirements. In the form of financial assistance, David got $52000
from his dad. But he owns a financial liability of $58000 as he needs to pay that amount to
his father with the completion of 5 years. Patrick refuses to get interested in loan amount
from his son. David makes adequate use of the loan amount to run his business and after the
tenure of 2 years, he pays off his financial liability. While returning the loan to his dad he
pays an additional amount (5% of the loan amount).
In total the interest amount received by Patrick is of $8600. As Patrick demands to repay
$58000 and David shows his consent over it. So, he paid $52000 plus $6000 additional
(agreed by David) and $2600 (additional 5% while repayment of the loan). The additional
amount of $8600 can be considered as interest amount paid by David to Patrick. But there
was no agreement or contract signed by them and David gets the loan without any security.
While calculating the total taxable amount he deducts the interest amount to lower down his
tax liability.
On the other hand, Patrick who received the interest amount needs to pay the tax over it as
per the ATO provisions. The interest rate at which he needs to pay tax is 10% and he also
needs to pay a levy of 2% over the total amount he received from David.
Calculation of tax amount on interest received
$8600 * 10%= 860
The tax paid on interest amount will be $860
Levy of 2% on the total amount received by Patrick
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$60600 * 2% = 1212
The total tax amount which is going to be paid by Patrick is $2072.
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Conclusion
At the end of the report, it is concluded that the provision of collectibles capital gain was
imposed on 16th December 1995 and capital gain provision was imposed on 20th December
1985. To calculate capital gain tax on collectibles it is necessary to fulfill the criteria of both
provisions. Individual pay taxes over their earned income and with the amount of tax
government manage their expenditures. When an individual sold out their capital assets then
they need to pay taxes over it if they attain capital gain from it. Income received in the form
of interest is also taxable and get considered while calculating total taxable income for
taxation purpose.
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References
De Silva, A., Glover, J., Narayanan, V., Nguyen, T., & Westberg, K. (2018). Current issues
with trusts and the tax system.
Hoopes, J. L., Robinson, L., & Slemrod, J. (2018). Public tax-return disclosure. Journal of
Accounting and Economics, 66(1), 142-162.
Wenzel, M. (2019). Misperceptions of social norms about tax compliance (2): A field
experiment. Centre for Tax System Integrity (CTSI), Research School of Social Sciences,
The Australian National University.
Wood, D., Daley, J., & Parsonage, H. (2018). Submission to the Senate Economics
Legislation Committee inquiry into the Treasury Laws Amendment (Personal Income Tax
Plan) Bill 2018
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