HI6028 Taxation Theory, Practices and Law: A Comprehensive Report

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HI6028 Taxation Theory, Practices and Law
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Contents
Introduction..............................................................................................................................................3
Q1.............................................................................................................................................................4
Q2.............................................................................................................................................................6
Q3.............................................................................................................................................................8
Conclusion...............................................................................................................................................9
References..............................................................................................................................................10
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Introduction
As per the taxation, policy tax is imposed over every identity whether it is an individual or
company. Tax is imposed over their earning whether it is in the form of salary or wages or
whether it is the profit earned by the company (Robin, 2019). ATO performs its activities as
per the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997. Individual
pay taxes at progressive rates whereas company pay tax at a flat rate of 30% (Robin, 2019).
Capital gain taxes imposed over the gain amount earned with the sale of capital assets. Tax
paid by the individual and companies generate revenues for the government that helps in
meeting their schedule expenses (Robin, 2019). The federal government of Australia collects
the taxes from their public with the help of Australian Taxation office. Any income earned by
the individual such as interest on loan, income received under contract and others.
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Q1.
Capital gain: -
The revenue arises with the disposal of an asset is termed as a capital gain. If any deficit
earned with the sale then it is termed as a capital loss. When an asset holds for more than one
year then it termed as a long-term capital asset (Sadiq, 2019). The positive difference
between the sales price and purchase price shows capital gain whereas negative difference
termed as a capital loss (Sadiq, 2019).
On 20th September 1985 Capital gain tax was introduced in Australia. As per this provision,
the purchase date of the asset is after the provision date is only eligible for CGT. And if the
purchase date is before the provision date then it got a title of Pre-CGT (Sadiq, 2019).
Collectibles are such objects that get purchased by an individual without any intention of
profit making. Their prior intention to make personal use of it. The objects that get included
for collectibles list such as jewelry, arts, pictures, sculptures, stamps, etc. The individual
sometimes sold them due to money requirement and if they attain capital gain then they need
to pay capital gain tax over it (Sadiq, 2019). If the amount of purchase of collectible is up-to
$500 then it is not included for tax calculation. Individual taxpayers get an advantage in this
case as they need not pay taxes after the sale of collectible and earn profits from it. If there is
any loss attained by the individual over the sale of collectible then that loss it adjusted against
capital gain from capital gain only. It didn’t get utilized against any other capital gain.
Helen individual taxpayers sold some of the collectibles throughout the year to support her
financial requirements for her business. At different dates, she sold out the objects and
against the sale she got some amount which she uses in her business. The amount earned with
the sale can be utilized for calculating capital gain tax or not is discussed below.
Antique Impressionism Painting: - In February 1985 Father of Helen brought it at the price of
$4000 and she sold it out on 1st December 2018 at a price of $12000. As per the tenure, the
asset is termed as a long-term asset but due to its purchase date, it gets excluded from the
calculation of capital gain tax.
Historical Sculpture: - In December 1993 this sculpture was brought by paying $5,500 and on
the date 1st January 2018 she sold it against the amount of $6000. She attains a gain amount
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of $500. But the provision states that if the amount is up to $500 then it is not included for
capital gain tax calculation.
Antique Jewellery: - In October 1987 this piece of Antique Jewellery was purchased by
paying $14,000 and sold by her on 20th March 2018 and receive $13000 against it. She got a
negative balance with the sale of antique jewelry which is termed as a capital loss for her.
The amount of loss is of ($1000). And she uses it for reducing capital gain tax.
Picture: - In March 1987 her mother brought it by paying $470. Helen sold it out and get
$5000 against it on 1st July 2018. She attains capital gain amount from this but then also she
is not liable to pay tax over it because ATO provision of collectibles states that if the
purchase price of the collectible is up-to $500 then taxpayers need not to include it for
calculation of CGT.
Helen makes use of this loss to reduce the capital gain from the sale of collectibles. Her total
loss if of $1000 and the gain amount is of $500. Her net loss is of $500 which she carried
forward to next year to set off against gain amount from collectibles.
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Q2.
Taxation system-imposed taxes at different tax rates over individuals and these are
progressive rates (Morgan, & Castelyn, 2018). The highest tax rate on which individual pay
taxes as per their income is 45%. With the increase in the taxable amount, there is an increase
in the tax rate. Individual get income from different sources. The most common source of
income is salary or wages earned by the individual (Morgan, & Castelyn, 2018). It is also a
major source of revenue generation for the federal government. As per ITAA 1936 and
ITAA, 1997 individual got a limit on which they need not pay taxes. That limit is $18200 and
after that tax rates are progressive with the increase in income earned (Morgan, & Castelyn,
2018).
The Eco Books Ltd. contact Barbara to write a book on economics principles. She got that
contract because she is Economist researcher and commentator by profession and having an
adequate level of knowledge related to her field. But having all the aspects she didn’t write
any book as of now but then also she shows her consent to write the book. The contract states
that with the book publishing she got the money against the book she writes down.
The contract price which she got after the publishing of the book is $13400 as she transfers
the copyright towards the book to the company after completing the book. There are various
other items that are related to the book such as its manuscript and interview manuscript. She
charges some money against them and renders it to Eco Books Ltd. She got an amount of
$4350 against the manuscript prepared for book and amount of $3200 against interview
manuscript. She prepared interview manuscript as she gathers some information with the help
of interviews. After transferring the copyrights these items didn’t seem useful to her due to
which she sold them out to Eco Books Ltd.
The total income generated for her with this contract is of $20, 950 in which it includes the
contract price of $13400 which she received after the publication of the book and $4350 for
its manuscript and $3200 for interview manuscript. As there is no other information provided
it is considered that she earns only $20950 in the year. Her assessable income is $20950 out
of which $18200 is deducted as it is an exemption limit provided by the ATO. Now the net
taxable income is $2750 which is taxable at the rate of 19% (tax rate) and 2% of Medicare
levy is also charged.
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Tax amount that needs to be pay by the Barbara is of $577.5.
Calculation of tax amount
Net taxable income - $2750
Tax rate (including Medicare levy of 2%) – 21%
Tax amount = net taxable income * tax rate
= $2750 * 21% = 577.5
Detailed calculation Include: -
Tax amount and Medicare levy will be calculated separately
Net taxable income: - $2750
Tax rate: - 19%
Medicare Levy: - 2%
Tax amount: - $2750 * 19% = $522.5
Medicare levy amount - $2750 * 2% = $55.
Alternative scenario
Barbara makes use of her knowledge and experience gained in her profession of economist
researcher and commentator in writing the book. For this purpose, she makes use of her free
time and writes the book. Her intention is to sell it out after some time and with this, she kept
the book and other related documents. After some time she contacted by the company named
as Eco Books Ltd. for selling the book. She accepts the offer made by the company and sold
the book to them. She also gives them related documents in the form of manuscripts. Before
and after this transaction there is no relation between them and this is a one-time transaction.
Company get a book with this transaction and paid an adequate amount for its acquisition.
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Q3.
When an individual pay interest on loan then he becomes eligible for getting a deduction at
the time of calculating taxable income (Taylor, 2018). If an individual received interest on the
money then that amount is included in the taxable income and get taxed. ATO include the
interest on the loan (if paid) as a deduction allowed for individuals while tax calculation and
if received then considered as an income for the individual which is taxable (Taylor, 2018).
Patrick seems that his son David require some financial help in his business and for this
reason, he lent him some assistance by paying him the amount of $52000. Patrick and David
agreed over some points according to which the tenure of the loan will be 5 years and at the
end of 5 years, David needs to pay $58000 as a whole. Patrick also insists David to not to pay
any kind of interest. This loan transaction doesn’t attain any security deposit from David side
nor any contract or agreement made between them. All the terms and conditions were made
verbally between them. There is a difference between the borrowed amount by David and the
amount repaid by him to Patrick. The difference of $6000 is considered as notional interest as
there is no such rate fixed by them, although Patrick refuses to take interest on the amount
given.
As the 2nd year got completed David repay the loan amount to his dad. The sum which he
repaid to Patrick is $60,600. There is a difference of $2600 in the amount on which they
agreed. The agreed amount which needs to repay was $58000 and the amount received by
Patrick at the end of 2nd year is $60,000. David repays 5% (of the loan amount) more to his
dad against the money usage.
In total, his dad gets the total notional interest of $8600 from David against the loan he paid
to him. David got the deduction of $8600 while calculating taxable income as he paid interest
amount. The tax rate at which tax charged over interest amount is 10%. So the tax amount
will be $860.
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Conclusion
This report concludes that income earned by the individual get taxable after reducing the
exempt limit from the assessable income. Exemption limit is provided as a relaxation to the
individual. Income from capital gain with the sale of collectibles gets calculated for the
purpose of capital gain tax. Before imposing tax over the revenue earned with the sale of
collectibles need to be checked the eligibility criteria. Individual also pay taxes over the
contract amount which is received at the completion of terms and conditions. When
individual pay interest on loan then he is allowed to get a deduction for the same amount.
And if individual receive interest on loan then he is liable to pay taxes over the income
received.
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References
Morgan, A., & Castelyn, D. (2018). Taxation Education in Secondary Schools. J.
Australasian Tax Tchrs. Ass'n, 13, 307.
Robin, H. (2019). Australian Taxation Law 2019. Oxford University Press.
Sadiq, K. (2019). Australian Taxation Law Cases 2019. Thomson Reuters.
Taylor, M. (2018). Model of the Australian tax and transfer system.
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