HI6028 Taxation Theory, Practice & Law: Case Studies

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HI6028 - Taxation Theory Practice & Law
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Contents
Introduction..............................................................................................................................................3
Income tax Australia............................................................................................................................3
Question 1................................................................................................................................................4
Capital gain tax....................................................................................................................................4
Capital Gain Tax regarding antique impressionism painting..............................................................4
Capital Gain Tax regarding historical sculpture..................................................................................4
Capital Gain Tax regarding antique jewellery piece...........................................................................5
Capital Gain Tax regarding picture.....................................................................................................6
Questions 2:.............................................................................................................................................8
Personal tax..........................................................................................................................................8
Discuss Barbara ‘s income under the case scenario............................................................................8
Discuss Barbara ‘s income under the alternative scenario..................................................................9
Questions 3:...........................................................................................................................................10
Discuss the effect of these arrangement on the assessable income of Patrick...................................10
Conclusion.............................................................................................................................................12
References..............................................................................................................................................13
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Introduction
Income tax Australia
Australian income tax followed two statutes Income Tax Assessment Act 1936 (ITAA 1936)
and Income Tax Assessment Act 1997 (ITAA 1997) (Legislation, 2017). It is imposed over
individuals as well as organisations. Federal government is responsible for imposing income
tax over individuals and organisation but instead of federal government ATO or Australian
Taxation office (ATO. 2019). Progressive rates are charged over income tax for individuals
(Legislation, 2017). In order to get the taxable income for individual, their allowed
deductions get deducted from assessable income (ATO. 2019). Individual get assessable
income from different means and these means get subdivided into three segments like capital
gain (receipts with the sale capital asset), business income (profits) and personal income
(salary or the wages earned). Progressive rates for individual include 0% to 45% (Legislation,
2017).
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Question 1
Capital gain tax
In the September month of 1985 Hawke Labour government introduce capital gain tax (ATO.
2019). It is major part of the assessable income of individual and it is included while
calculating taxable income. Indexation is allowed over the capital asset purchase price to
reduce the effect of the inflation and other factors which increases the price for a period of
time (ATO. 2019). It helps in getting most accurate amount of capital gain. Individuals get
the deduction of the 50% while calculating capital gain tax.
Helen is running a business of fashion designer and needs funds. Due to this she sold out
Capital Gain Tax regarding antique impressionism painting
As per the information provided in the case scenario the purchase date of antique
impressionism painting was February 1985 and the purchase price were $4000. It got sold out
at the price of $12,000 in the year 2018 December month. But as per the ITAA 1997 capital
gain tax is applicable over capital assets which was purchased after 20th September 1985. Any
asset which is purchased before that date get termed as pre-CGT. With the effect of this fact
this transaction can’t be eligible for applying CGT. Although there is a capital gain with the
sale of the asset.
Capital Gain Tax regarding historical sculpture
Purchase date of historical sculpture was December 1993 and it was purchased as a price of
$5,500. It got sold in the year 2018 January month. It meets both the criteria of capital gain
taxation that include asset must purchase after 20th September 1985 and hold for 12 months or
more. Both of these criteria matched which makes it eligible for CGT calculation. For the
purpose of calculating CGT indexation method will be followed as it helps in getting most
accurate results. Indexation method is followed because it reduces the effect of the inflation
and other factors that rise the value and lower down the difference between the purchase and
sales price.
Formula under indexation method=
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(Purchase price * index rate for purchase quarter) / index rate for sale quarter
Purchase price of Sculpture = $5500
index rate for purchase quarter = 112.6
index rate for sales quarter = 61.2
calculation of indexing amount
= ($5500 * 112.6) / 61.2
= 619300 / 61.2
= 10119.28
Capital gain/ loss = sales amount – indexing amount
Sales amount = $6,000
Indexing amount = $10,119.28
Capital gain/ loss = $6000 - $10,119.28
Capital loss = -$4,119.28
Helen get the capital loss with the sale of Sculpture as per the indexing method.
Capital Gain Tax regarding antique jewellery piece
Antique jewellery piece was purchased in the year 1987 October month at a price of $14,000.
And it got sold out in the year 2018 by 20th March at a price of $13,000. This transaction also
meets out the set criteria for the eligibility of the CGT as it was purchase after 20th September
1985 as well as it was owned for more than 12 months. For the calculation of capital gain
indexation method is followed.
Formula under indexation method=
(Purchase price * index rate for purchase quarter) / index rate for sale quarter
Purchase price of antique piece of jewellery = $14,000
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index rate for purchase quarter = 112.6
index rate for sales quarter = 47.6
calculation of indexing amount
= ($14,000 * 112.6) / 47.6
= 1,576,400 / 47.6
= 33117.65
Capital gain/ loss = sales amount – indexing amount
Sales amount = $13,000
Indexing amount = $33,117.65
Capital gain/ loss = $13000 - $33,117.65
Capital loss = -$20,117.65
Helen get the capital loss with the sale of antique piece of jewellery as per the indexing
method.
Capital Gain Tax regarding picture
Helen’s mother makes purchases of picture in the year 1987 March month at the price of
$470. Helen sold out this picture in the year 2018 July month. The eligibility criteria for CGT
is met by this transaction as it was purchased after 20th September 1985 and hold for the
period more than 12 months. But then also it is not included for the purpose of the calculating
CGT as it falls under the exemption list on the basis of its purchase price. As per the
exemption list if the collectable having amount lesser than $500 then it is exempted from the
calculation of capital gain. So, there is no such calculation made to get the capital gain from
this transaction.
The calculation made in order to attain the capital gain/ loss it is observed that Helen suffers
handsome loss with the sale of capital assets. The total loss which she attained is of
$24,236.93.
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ITAA, 1997 allows to set off capital loss with the capital gain gained in next year. But with
this ITAA 1997 also stated that any capital loss occurred with the sale of collectables only set
off with the capital gain from the sale of collectables. According to this Helen is eligible to
carry forward the loss but entitled to set off the loss against capital gain attained from the sale
of collectables only.
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Questions 2:
Personal tax
Personal tax or it can term as progressive tax as it is charged with the help of progressive
rates (Business.gov. 2018). Individual pay the taxes as per the progressive tax rates
mentioned in slab. ITAA, 1997 provide exemption limit of $18,200 to their residents and
their maximum rates for income tax is 45% (Business.gov. 2018). With this Australian
resident are liable to pay the Medicare levy at a flat rate of 2% along with their income tax
(Professionalsaustralia. 2019).
Discuss Barbara ‘s income under the case scenario
The Eco Books Ltd. Offers the contract of writing a book over "Principles of Economics" to
Barbara who is economist researcher and commentator. The income earned by the Barbara is
considered as personal income and taxable under ITAA 1997. It is because contract between
Barbara and company results into professional relationship between them. She gets offer of
$13,000 against writing the book. Before this she never had an experience of writing book
but then also, she accepts the offer and write the book. With the completion of book, she gets
by the company as per the contract. She also sold out book copyright along with its
manuscript and interview manuscript which she gathered at the time of writing. She got
adequate amount against these items and all these included for the purpose of personal tax.
Calculation of personal tax
Description Amount in AUD
Sale receipts
A. Book copyrights $13,400
B. Book Manuscript $4,350
C. Interview Manuscript $3,200
Total sales receipts (A+B+C) $20,950
Less: - Exemption limit by ATO $18,200
Assessable income $2,750
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Discuss Barbara ‘s income under the alternative scenario
In the alternate scenario when Barbara and The Eco Books ltd. didn’t get into contract and
she wrote the book in her free time. In this case the amount received by her didn’t fall under
her personal income as it is not treated as salary or wage. On the other side, The Eco Books
ltd. didn’t eligible to get the deduction facility and this transaction deemed as one of their
organisational transaction that happen for one time only.
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Questions 3:
Discuss the effect of these arrangement on the assessable income of Patrick
David is running his business and to support the business activities her required some funds.
He got a loan of amounting $52000 from Patrick who is his dad. There is no such interest rate
over which they are agreed. But Patrick told that after 5 years when David pays the loan
amount then he will pay $58,000 instead of $52000. David agrees to pay that amount.
The difference amount among the loan received and loan repayment is considered as the
notional interest.
In between Patrick said that there is no need to pay the interest. David repay the loan amount
after the period of two years instead of the 5 year. He paid 5% more than the loan amount.
That amount considered as the interest amount paid by the David to Patrick.
As per the tenure decided for the loan Patrick is allowed to get the deduction for five equal
instalments. But loan is repaid within two years. So, Patrick's avail the deduction facility for
two years only. In first year, he avails the deduction for 1/5th of total amount but in next year
due to repayment of loan he avails remaining deduction in 2nd year only.
Calculation of Notional interest
= Agree Loan repayment amount – Loan amount paid
Loan amount paid = $52000
Agree Loan repayment amount = $58000
= $58000 - $52000
Notional interest amount =$6000
In Actual case scenario the amount of repayment and tenure is different. Like David repay the
loan amount 5% more than the loan amount which is $54,600. In this case the amount of
interest paid is changed.
Interest amount = repaid amount – loan amount
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= $54,600 - $52,000 = $2,600.
Interest amount which is paid by the David to his dad is $2,600.
Patrick get the deduction of $10,400 in the first year but due to repayment of loan he gets a
deduction of $44,200 in 2nd year. Patrick get an income of $2,600 as an interest on loan
received.
Patrick need to pay tax over the income earned by getting interest over the loan amount.
Assumption
Tax rate = 10%
Interest amount = $2600
Tax amount = $2600 * 10% = $260.
Tax amount paid by Patrick - $260.
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Conclusion
It is concluded that by normally deducting the purchase price from sales price an individual
gets the capital gain. It is because there are various factors that influence the price rise of the
asset such as inflation, etc. indexation method provides CPI (consumer price index) which
removes the effect of price rising factors and help in getting actual results. This method yields
capital gain as well as capital loss. Individual prefers this method as it reduces the risk of
increasing taxes. Helen gets the capital losses due to which she is not entitled for CGT but
eligible to set off the losses against the capital gain from collectables. Barbara get the
personal income in the form of income from company as well as receipts from the sale of
different rights. Patrick lent loan to his son David to enjoy the benefit of deduct for a period
of five years but David repays the loan in 2 years only.
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