HI6028 Taxation Theory, Practice and Law: Case Studies

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HI6028 – Taxation, Theory Practice and Law

Contents
Introduction..............................................................................................................................................3
Question 1................................................................................................................................................4
Question 2................................................................................................................................................7
Question 3................................................................................................................................................9
Conclusion.............................................................................................................................................11
References..............................................................................................................................................12

Introduction
Australian federal Government impose income tax over individuals as well as companies.
Major source of revenue generation for Australian government is Income tax. ATO or
Australian Taxation Office collect the income tax from the tax payers on behalf of their
federal government (Taylor, and Richardson, 2013). Income tax is gathered under two
statutes such as “Income Tax Assessment Act 1936” and “Income Tax Assessment Act 1997”
(ATO. 2019). For individual tax payers there are three categories over which tax is applicable
such as personal earnings (it includes salary and wages), business income (profit from owned
business) and capital gain (which arise with the sale of capital asset) (ATO. 2019).
Individuals get charged income tax as per the slab rate decided between 0% to 45% adding
2% medical levy. On the other hand, tax is charged on capital gain only when it is realised
(ATO. 2019). And if the individual hold that particular asset for more than 1 year then
individual get a deduction of 50% in the taxable capital gain amount (ATO. 2019).

Question 1.
Capital gain tax was introduced by the Hawke Labour Government on 20th September 1985
(ATO. 2019). It is not separated from the income tax and net capital gain are included in
individual’s total taxable amount (ATO. 2019). The assets which was purchased before or on
20th September 1985 is considered as pre-CGT assets. There is an exemption provided in
capital gain tax for the collectables like if the purchase price of collectables is lesser than
$500 then such collectables get exempted from the tax calculation (ATO. 2019). Collectables
include stamps, art, jewellery and many more. Collectables are put into separate categories
due to which if there is any loss with the sale of collectables then it can be set off with the
gain of collectable only, other capital gains can’t get utilised to set off the capital loss of
collectables (ATO. 2019). If there is a non-CGT asset but if substantial changes made into it
then it loses its non-CGT tag and considered for CGT like if major changes made in building.
Capital loss occurred from the sale of personal asset then it can’t be set off against the capital
gain (ATO. 2019).
Helen an individual need funds to support her business and for this purpose she sold out some
of her collectables. Her collectables include impressionism painting which was brought by
her father, sculpture, piece of antique Jewellery and picture which was brought by her
mother. But out of these items it is not necessary that all of them are eligible for capital gain
taxation. Purchase date of collectables helps in identifying whether it is long-term or short-
term assets.
Evaluation of long-term or short-term asset
Item Purchase date Sale date Long-term/short-
term
Impressionism February 1985 December 2018 Long term asset
Sculpture December 1993 January 2018 Long term asset
Piece of Jewellery October 1987 March 2018 Long term asset
Picture March 1987 July 2018 Long term asset
As per the difference in the period between purchase date and selling date shows that all the
collectables are long term asset.
Checking the eligibility of assets: -

Item name Purchase date of
item
Status Description
Impressionism
painting
February 1985 Pre-CGT It was purchased
before 20th
September 1985 due
to which it is tagged
as Pre-CGT.
Sculpture December 1993 CGT It was purchased
after 20th September
1985 due to which it
is tagged as CGT as
it will be considered
for the calculation of
capital gain tax.
Antique Jewellery
Piece
October 1987 CGT It was purchased
after 20th September
1985 due to which it
is tagged as CGT as
it will be considered
for the calculation of
capital gain tax.
Picture March 1987 CGT (But
exempted)
It was purchased
after 20th September
1985 due to which it
is tagged as CGT but
its purchase price
was $470 which is
lower than
prescribed limit.
There are various methods to calculate the capital gain tax like indexing method, discounted
method and average method. But among these three indexing methods is most accurate as it
includes the CPI that helps in getting most accurate capital gain or loss. By indexing the rise
in price over the period due to inflation get removed.
Indexing method formula = (purchase price * indexing rate for the month of purchase)/
indexing rate for the month of sale
Name of items
Purchase
price (A)
($)
CPI of
purchase
month (B) ($)
CPI of
sale
month
(C.) ($)
Indexing
amount
[(A*B)/C] ($)
Sculpture 5500 112.6 61.2 10119.28
Antique piece
of Jewellery 14000 112.6 47.6 33117.65

Below is the calculation of capital gain/loss
Name of item
Sale price
(A)
amount
in AUD
Indexed
amount (B)
Amount in
AUD
Capital Gain/Loss
(A-B) amount in
AUD
Sculpture 6000 10,119.28 -4,119.28
Antique piece of
jewellery 13,000 33,117.65 -20,117.65
Total 19000 43,236.93 -24,236.93
The calculation shows that Helen get a capital loss of total amount -$24,236.93. This amount
is set off against the capital gain attained with the sale of collectables only. This loss amount
is carrying forward to next year.

Question 2.
Personal income tax is also termed as progressive tax (ATO. 2019). Resident individual tax
payer get a free threshold of $18,200. And highest rate of tax is 45%. Medicare levy of 2% is
also imposed along with the tax (ATO. 2019). It was introduced by the Hawke Labour
Government in Feb 1984 (ATO. 2019).
Barbara get an offer of writing book from The Eco Books Ltd. over “Principles of
Economist”. Although she didn’t write any book till now but then also, she accepts the offer
made to her. She has an adequate knowledge as she is economist researcher and
commentator. The income generated in this transaction for Barbara falls under personal
income and get taxable under ITAA 1997. Whether she sold out the book copyright, whether
she sale manuscript of book or interview manuscript, all of them fall under personal income
and utilised for calculating tax.
Revenue Item Amount ($)
Copyright of book 13,400
manuscript of Book 4,350
Interview manuscript 3,200
Total revenue (A) 20,950
Less: - Exempt limit (B) 18,200
Taxable income (C.) 2,750
Tax rate (D) 19%
Medicare Levy (E.) 2%
Tax amount C * (D + E) 577.5
Barbara earned income of $20,950 out of which $18,200 get deducted as the annual
exemption limit. Her net taxable revenue (as per the given information) under ITAA 1997 is
$2,750. Over this amount tax rate of 21% is applicable (it includes 19% tax rate as per
income tax rate slab and 2% of Medicare levy). The tax amount which comes after applying
tax rate is $577.5. She is liable to pay tax over the income earned.
Second Case scenario: -
If Barbara write down the book in her free time and there is no contract signed by Barbara
with The Eco Books Ltd. then in this case both of them are not eligible for any kind of

deduction. For company The Eco Books Ltd. this transaction was deemed as normal
organisational transaction and they didn’t get deduction facility over the purchase of the
copyright of book. The revenue generated with the sale of different things (copyright,
manuscript of book and interview manuscript) didn’t fall under personal income and can’t
utilised for the calculation of tax amount.

Question 3.
David runs a business and to support he needs some funds. He got a loan of $52,000 from his
dad (Patrick). They both make a mutual agreement that at the time of repayment of loan
David will pay $58,000 after a period of five years. But in all these facts they didn’t decide
any rate over which interest need to charged. So, to calculate the notional interest amount the
sum of loan paid get divided from the sum of loan repayment. By doing this the sum of
$6000 is left which can be considered as the notional interest amount. Further David repays
his debt with the completion of two years only. He re-paid the loan amount along with 5% up
value. It means David makes an interest payment of $2,600 to his dad. The actual amount of
loan repayment includes the loan amount plus 5% of loan amount as an interest which comes
$54,600. Patrick avail the deduction facility for two years only. As per the initial agreement
the loan amount will be paid in 5 years due to which it is considered that Patrick will avail the
deduction facility of 1/5th of total amount every year. In First year, he gets deduct 1/5th of total
amount which is $10,400 but in the end of second year David repays whole amount. With this
fact he avails remaining 4/5th amount and interest amount together in the second year only.
Calculation of Notional interest
Items
Amount
($)
Loan amount given to David (A) 52,000
Agreed repayment (B) 58000
Notional interest (A-B) 6000
Calculation of actual interest paid
Items
Amount
($)
Loan amount given to David (A) 52,000
Loan repayment (B) 54,600
Actual interest paid (A-B) 2,600
Deduction allowed

In the first year Patrick get deduction allowed of 1/5th of the total amount which is $10,400.
In second year, he gets allowed of remaining amount which is $41,600 and $2,600 (interest
amount).

Conclusion
In the end it is concluded that it is not necessary that every-time with the sale of capital assets
individual attain capital gain only, some time they may attain capital losses. Losses occurred
with the sale of the collectables will be set off with the capital gain earned by the sale of
collectables only. Personal income like salaries get taxed after deduction of the exempted
limit.

References
 ATO. 2019. Capital gains tax. [Online]. ATO. Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed on: 17th May 2019] ATO. 2019. Interest on loans. [Online] ATO. Available at:
https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Rent/?page=10
[Accessed on: 17th May 2019] ATO. 2019. Personal services income. [Online] ATO. Available at:
https://www.ato.gov.au/Business/Personal-services-income/ [Accessed on: 17th May
2019]
 Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax
avoidance structures: Evidence from Australian firms. Journal of International
Accounting, Auditing and Taxation, 22(1), pp.12-25.