Finance Taxation Assignment: Capital Gains, Loans, and Property

This assignment provides comprehensive solutions to various taxation problems. The first solution addresses capital gains tax, determining its applicability based on asset holding periods and personal utilization. The second solution focuses on concessional loans, calculating the tax implications of fringe benefits arising from below-market interest rates. The third solution examines property rental, outlining the tax treatment of profits, losses, and the division of responsibilities between partners. The fourth solution delves into tax minimization strategies, referencing legal precedents and the right of individuals to manage their accounts to reduce tax burdens, provided it is within the legal framework. Finally, the fifth solution analyzes the tax implications of a timber sale, differentiating between revenue and capital receipts based on the nature of the transaction.

TAXATION

Taxation
Answer – 1
Eric purchased few assets where the tenure was not provided. This gives a clear indication that the assets have
been kept under hold below 12 months. When it comes to the concept of capital gain tax it comes to the
forefront that capital gain is applicable when the time span goes ahead 12 months. Hence, from the matter it can
be ensured that the time limit remained below 12 months hence, the application of tax does not come to the
forefront. For the implementation of capital gain tax, it is important that the time limit must be beyond 18
months.
Net capital gain or loss (Calculation)
 Assets for personal utilization
The purchase of assets has been done for self-utilization. However, the sale of such assets does not attract the
concept of capital gain because for the amount of the assets exceeds $10000. In this scenario, it needs to be
noted that a home theatre was purchased by Eric for an amount of $12000 and hence is free from the clutches of
capital gain tax (Kenny et. al, 2017). Since the assets are acquired for the purpose of personal utilization it does
not attract capital gain tax.
 Collectibles
Even in this scenario, the assets are purchased for self-utilization and hence, not taken under the ambit of the
capital gain tax. As per the section of the capital gain tax if the value of the assets exceeds $500 then it is not
considered under the capital gain tax. The following assets were acquired like painting for $9000, antique chair
for $3000 and antique vase costing $2000 (Latimer, 2012).
 Investment
The investment comes under the ambit of the capital gain tax as the investment pertains to a reputed company
and it did for the purpose of appreciating the wealth. Since it is an investment it will attract capital gain tax.
Capital gain is computed by subtraction of the base cost of assets from the capital proceeds 9Woellner et. al,
2017).
Particulars Cost of assets Proceeds from
assets
Net Capital
Gain/Loss
Home Sound System 12,000 11000 (1000)
2

Taxation
Painting 9,000 1000 (8000)
Antique Vase 2,000 3000 1000
Antique Chair 3,000 1000 (2000)
Listed company’s shares 5,000 20000 15000
Total Net capital gain=
5000
Footnotes:
 When assets are stored and are purchased of an amount exceeding $10000 then they are under the ambit
of the capital gain tax.
 The assets that are kept under storage by Eric exceeded $500 and hence considered for capital gain.
Answer – 2
In this case, Brain took a loan of $1 million that attracted an interest rate of 1% and payable each month with
the total payment in a span of three years. It needs to be noted that the interest rate chargeable to Brain is less
than the interest rates that can be defined as the loan (fringe benefit). It is a concessional loan because the loan
is lower than the interest rate prevailing in the market. It is important that the computation of tax on loan fringe
benefit must be done if the interest rate of the current scenario is considered. When the loan was provided to
Brain, the rate of interest stood at 6.5% that needs to be considered to know the tax benefit (Nethercott et.al,
2013).
Computation of tax on the loan fringe benefit
The interest offered on the loan should be deducted from the interest rate that prevailed to compute the tax.
Therefore, the total value will not consider the interest in the loan.
Interest on loan (Actual interest rate) = $1000000* 1% = 10000
3

Taxation
Statutory interest rate (loan interest) = =$1000000*5.65% = 56500
Therefore, the value of tax $56,500 - $10,000 = $46,500
Considering the 40% of the loan is invested in offers.
Tax deductible interest = $56,500 * 40% = $22,600.
Amount of Tax deductible interest = $10,000*40%= $4000
It needs to be noted that the final taxable value must be deducted from the imaginary interest = $22,600 - $4000
= $18,600.
The calculation of final taxable amount = $46,500 - $18,600 = $27,900.
If the interest of the loan fringe benefit is paid after the tenure of the loan and not in monthly EMIS then the
loan tenure will be computed from the tenure till the date when the interest is billed, hence, if Brian is left by
the bank for the payment of the interest on loan then the computation will follow the mechanism above. The
noteworthy difference will remain in the fact that the interest rate will be rejected (Pratt & Kulsrud, 2013).
Answer 3
It was decided by Jack and Jill that to take a property on rent by taking a loan. It was concluded that the profit
distribution coming from the particular business will be distributed in a way that his wife Jill will be offered
90% of it while Jack will only be presented with 10%. It is also written in the agreement that all the losses
occurred in the business will be the responsibility of Jack. A loss of $10000 was spotted last year in the business
and it is fully the responsibility of Jack to pay it off. The losses occurred will be deducted from Jack’s income
and the profit he has gained during the business. This will be helpful in the deduction of tax. If it is found that
Jack has no income source, then the losses will be carried forward to the next month (Saunders, 2015).
Profit and loss are the two situations which will arise if the couple decides to sell off the property.
If profit arises through the business, then the gaining’s should be separately divided as in accordance with the
agreement which clearly highlights a dominating value of 90% of Jill over the minor 10% of Jack. By the usage
of this profit, it is possible for Jack to settle off the losses of the past year. It might also be seen that the business
has been in a loss as a whole and thus the full loss shall be borne by Jack. All these losses can be settled from
4

Taxation
Jack’s income and if he’s not having ones then the losses can be carried forward to the next year to be deducted
from some supplementary sources.
All this explains that Jack can have a possibility to settle all the losses of the past year by the gain arisen from
selling the property. But if the above statement fails and profit changes to loss then Jack will have to bear the
full loss aroused. Jill has no relation to the payment of losses of the company. All this states that Jill cannot be
affected by the tax valid on the loss while it will surely affect Jack as he has to record the same in his book of
accounts.
Answer-4
All entities or individual possess a fundamental and legal right to manage his business account in a manner to
an extent to minimize the tax on their total income. Tax Authorities in the state revenue department is not
necessarily obliged to increase the tax payable by the assessee even if he finds some provisioning so long as it
has been done within the framework of legal provisions. The proposition was well-established in the judgment
of case IRC v Duke of Westminster (1936) AC 1. The proposition will be applied so long as the taxpayer or an
entity manage his books of accounts in accordance with the rules and regulations laid down in the income tax
rules and can be established in the court of law (Kobestky, 2005). The principle set up by the rivalry between
IRC and Duke of Westminster [1936] AC 1 was as follows:
It is the right of every person to intelligently decrease the tax amount payable in such a way that it is minimum
in value and this all can be done by deliberately altering the accounting data and the investments carried out.
Till date the procedures carried out by the person is legal, the procedures are valid and no question can be asked
in accordance with the steps followed not by the Commissioners of Inland Revenue also. But a major uphold of
this right is that the steps followed by a person should be legally aligned with the laws and rules put up in
accordance with the income tax rules made by the higher courts (Hopewell, 2012).
So long as the books of accounts are compiled and the documents in relation to detail entries in the books are
furnished by the taxpayer are genuine in nature, then the judiciary shall not consider every document based on
concealed evidence on the following propositions:
5

Taxation
a. All the entities or the individual possess the right to keep his books of accounts, in
accordance with the law, to maintain in such a manner to reduce the burden of the tax
payable to the government (Kenny, 2016).
b. When the authorities found no mistakes in the books of accounts and there is no deviation
in keeping the records in an authentic manner, then no additional tax liability will be
imposed (Kenny, 2016).
c. So long as the transactions are within the framework of law and established in the system
no one can challenge that the significance of the transaction contrasts with as described
by the taxpayer in his submission (Fullerton et. al, 2017)
Although this regulation was not altered over the years new laws had come into existence, the
significance of the said law has lost its merit in current juncture, as because the approach of
scrutinizing the boos of accounts are been differentiated.
Still, the regulation has some importance in the current scenario. Any transaction in the books of
accounts which is in the interest in helping in running the business smoothly in accordance with the
law without avoiding any taxes than it is precisely impeccable in doing so. The rule holds merit so long
as it restricts the entities from manipulating the figures and allows the entities or individual to carry out
the business within the framework of law (Fullerton et. al, 2017). Take the example, when a business
entity is suffering from huge losses and is unable to pay off its debt, it can take steps to write off its
fixed assets at the current value in the balance sheet, even if the entity does not hold any authentic
document to prove the transaction. But in case of the entity involved in manipulation and suppress vital
information’s from the stakeholders, then the law will take its own course and bar the entity from
manipulating with the facts (Sadiq et. al, 2017).
Answer-5
Bill in his possession owns a big parcel of land having lots of long pine trees, he wants to utilize the
land for sheep farming, so he must remove the whole lot of pine trees from the land. For every 100
meters of timber from the trees, he shall receive $1000 from a timber company. Here the question
arises that whether any tax on receipt arises in the deal as the quantum of the amount in the deal is not
ascertained in the selling of the timber. Therefore, the money received can be considered as revenue
receipt derived from the sale of timber by Bill from Timber Company. Accordingly, by treating the
6

Taxation
amount as revenue receipt in the accounts by Bill, there shall be no capital gain tax is applicable in this
transaction (Woellner et. al, 2017).
In another scenario, when Bill agrees to sell its rights to a timber company to cut the trees and remove
the timber from the land for a lump sum amount of $ 50000, then this transaction shall be treated as
capital receipt because firstly he had agreed to sell his right to cut the trees from his land and secondly
the deal is on a fixed onetime payment from the company. Therefore, it shall be considered as capital
receipt and accordingly liable to pay capital gain taxes (Woellner et. al, 2017).
In conclusion, in both the scenario, Bill shall get the money. Firstly, by selling his trees in trenches,
where he gets small but regular payment which comes under revenue receipt attracts a normal rate of
taxes. Whereas, in the second case he agrees to give to give away his rights for a fixed amount of
$50000, which may be treated as the selling of an asset leading to attract capital gain tax.
7

Taxation
References
Fullerton, I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax Handbook
Tax Return Edition 2017, Thomson Reuters: Australia
Kenny, B. V 2016, Australian Tax 2016, Thomson Reuters (Professional) Australia Limited
Kenny, P, Blissenden, M, & Villios, S 2017, Australian Tax 2017, Thomson Reuters: Australia
Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press
Latimer, P 2012, Australian Business Law 2012, 31st ed, Sydney, NSW: CCH Australia Limited.
Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 17 September 2017,
www.zdnet.com.au.
Nethercott, L, Richardson, G & Devos,K. 2013, Australian Taxation Study Manual, Sydney.
Pratt, J. W & Kulsrud, W N 2013, Federal Taxation, Oxford university press.
Sadiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting, A 2017,
Principles of Taxation Law 2017, Law book Australia
Saunders, C 2015, The Australian Constitution, Carlton: Constitutional Centenary Foundation
Woellner, R, Barkoczy, S, Murphy, S, Evans, C & Pinto, D 2017, Australian taxation law 2017,
Oxford University Press Australia
8

Taxation
9