Taxation Law Assignment: Analyzing Tax Implications for EEG Company

This assignment analyzes the tax implications for Exclusive Emerald Gems Pty Ltd (EEG), an Australian resident company. It addresses capital gains from the sale of business and residential premises, applying relevant sections of the ITAA 1997. The document also examines trading stock valuation, bad debts, annual leave payments, and the sale of depreciating assets and a vintage motor vehicle. Furthermore, the assignment considers the CGT implications for foreign tax residents regarding share sales. The analysis provides detailed calculations and interpretations of tax laws, offering advice on various transactions to ensure compliance and minimize tax liabilities. The solution references relevant tax statutes and rulings to support its conclusions, providing a comprehensive overview of EEG's tax obligations.

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Introduction
Exclusive Emerald Gems Pty Ltd or EEG is an Australian resident company which is
engaged into manufacturing of jewellery which is then sold directly to the retail stores. The
balance sheet of the company has been provided. Further, there are certain transactions that
have happened and particular tax advice needs to be tendered to the company underlining the
potential implications in light of the applicable tax statutes.
Discussion
(a)The company has decided to shift the business operations from July 1, 2017 and has sold
the business and the underlying capital gain implications need to be estimated for the
company. In the given case, there would be capital gains implications as the capital event
A1 has happened in line with s. 104-10 ITAA 1997 (Barkoczy, 2017).
For computation of the capital gains/(losses) on disposal of a particular asset, it is imperative
that in accordance with s. 110-25, the underlying cost base of the asset needs to be
determined. The cost base would not only consist of the acquisition cost but would also
consider the incidental costs related to buying and selling of asset, title maintaining, the
ownership costs along with the capital expenditure incurred for enhancing the value of the
asset (CCH, 2013).
Business Premises
Buying price of business premises = $ 1,310,000
Interest paid on loan related to acquisition of business premises (Cost of ownership) = $
165,000
Legal fees and agent fees (Incidental cost related to selling) = $ 45,000
Hence, total cost base of the business premises = 1310000 + 165000 + 45000 = $ 1,520,000
Selling price of business premises = $ 1,810,000
Hence, capital gains on disposal of business premises = 1810000 – 1520000 = $ 290,000
Residential Premises

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Buying price of residential premises = $ 550,000
Legal fees and agent fees (Incidental cost related to selling) = $ 12,000
Hence, total cost base of the business premises = 550000 + 12000 = $ 562,000
Selling price of residential premises = $ 670,000
Hence, capital gains on disposal of residential premises = 670000 – 562000 = $ 108,000
Net capital gains for 2017 = 290000 + 108000 – 115000 = $ 283,000
Thus, the company would have to pay CGT @30% on the capital gains of $ 283,000 for the
year ending on June 30, 2016.
(b)In relation to the valuation method deployed to represent the value of the trading stock,
three options are available in the form of cost, market value and replacement value and
any of these may be deployed by the taxpayer (s. 70-45).Also, in accordance with IT2670,
trading stock implies goods that the concerned taxpayer has the right to dispose off
irrespective of whether the title and physical possession exists or not (Gilders et. al.,
2016).
For the given situation, the taxable income can be maximised if the inventory valuation is
more due to which the amount reflected in cost of goods sold would be lesser. It is apparent
that the market value is the highest at $ 245,000 and hence this valuation method must be
deployed. Further, in relation to the stock from Malaysia, it is apparent that given the facts
even though physical possession and title possession is not confirmed, but still there is right
of disposal available with EEG and hence it is appropriate to consider the same as trading
stock or inventory as on June 30, 2017.
(c)For the writeoff in bad debts to the tune of $ 20,000 a deduction would be available under
s. 25-35 since the following four conditions are satisfied (Sadiq et. al., 2016).
 The debt was in existence
 The debt in actuality has gone bad
 The debt has been written off within the given income year

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 The debt contributed to EEG’s assessable income
For the doubtful debts to have a tax implication and be deducted, it is essential that it must be
first written off and only then s. 25-35 could potentially imply. Hence, no tax implications
arise at the present for the doubtful debts (CCH, 2013).
In relation to the annual leave payments, expenses to the tune of $ 155,000 would be
considered as deductible for tax purpose as per s. 8(1) ITAA 1997. The estimates are not
important, it is the amount incurred in a given income year that is essentially vital (Woellner,
2014).
d) It is known that the adjustable value of plant and machinery amount to $ 210,000
However, it was sold for $ 190,000
It is apparent that the termination value of the depreciating asset is lesser than the adjustable
value of the asset. Hence, there would be a loss which could be available as a capital
deduction that could be adjusted against any potential capital gains. However, it is
noteworthy that the same cannot be deductible directly for tax purposes as it is not an revenue
expense but rather a capital adjustment (Nethercott, Richardson and Devos, 2014).
Hence, capital gain deduction to the extent of $ 20,000 would be available.
e) It is apparent that in the given case, the vintage motor vehicle would be recognised as a
collectible and also the cost price of the car is more than $ 500. Hence, capital gains need to
be computed.
Cost price of the car = $50,000
Ownership Costs (Interest) = $ 1,500
Total cost base of the car (s. 110-25) = 50000 + 1500 = $ 51,500
Selling price of the car = $ 77,000
Hence, capital gains realised = 77000 – 51500 = $ 25,500
Also, in line with s. 115-25, owing to the individual taxpayer (Mrs. Smith) and long term
capital gains, 50% discount would be available.

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Thus, $12,750 would be the taxable amount for CGT application.
f) For foreign tax residents, CGT is applicable only if the underlying property is taxable in
Australia (s.855-10). Also, discount of 50% as per s. 115-115 is applicable for foreign
residents provided the acquisition of property was before May 8, 2012 and also 12 months
had elapsed as on that date (Barkoczy, 2017).
Shares in EEG – The couple has acquired shares in 2004 and hence for the capital gains
derived on the sale, the discount method would be applicable and the remaining gains would
be taxable in Australia despite the couple being foreign tax residents.
Motor Vehicle – For motor vehicle, no CGT is applicable irrespective of the underlying tax
residency and hence the details are not relevant.
Shares in ABC – For shares, assuming that these were purchased more than a year before
May 8 2012, the discount method would be applicable and 50% capital gains would be
exempted while the remaining would be levied CGT in Australia.
g) The implications of the share sale assuming foreign tax residency has already been
outlined above. Since, the couple has acquired shares in 2004 and hence for the capital gains
derived on the sale, the discount method would be applicable and the remaining gains would
be taxable in Australia despite the couple being foreign tax residents (Deutsch et. al., 2016).
Total buying price for the shares of one member = 100*100 = $ 10,000
Selling price for the shares of one member = 500*100 = $ 50,000
Hence, capital gains realised by one member = 50000 -10000 = $ 40,000
Further, as per s.115-115, 50% discount would be availed.
Thus, it is apparent that for each of the shareholders, a capital gains of $ 20,000 would arise
on which CGT would apply.
Conclusion

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Using the relevant tax statute along with the concerned tax rulings, the advice has been
provided to EEG and the owners in relation to the respective tax implications for the various
proposed transactions. It is expected that the same would be adhered to by the company and
requisite tax payments would be made on a timely basis to avoid any adverse consequences
in relation to winding up businesses and shifting to New Zealand.

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References
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed., North Ryde: CCH
Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax
handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation
law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia