Free Paper Sample for Students: Taxation Law and Practice

The income tax Act of 1997 and the Income-tax assessment Amendment (Capital gains act) 1986 were introduced to provide a guideline on taxation for individuals, businesses and companies included. The Income tax act, for instance, clarifies on how income should be reported for tax purposes and what should be factored in as assessable revenue and exempt earnings. The capital gains act plays a significant role in tax issues related to the sale or transfer of property. The income tax Act stipulates that tax should be paid by 20th of the next month after reporting.

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Part A

Issues

1) Status of residence

2) Foreign income

3) Fringe benefits

4) Goods and service tax

Rule

Residents and non- residents are subject to income tax. However, the types of taxes depend on the status of residency. A person is considered a permanent resident if he or she has stayed or is purposing to remain for more than six months within a particular tax year or has a permanent residence in Australia. According to division 6 of the income tax assessment act 1997, the assessable incomes for Australian residents include ordinary income which is derived either indirectly or directly from inside or outside Australia. The division also dictates that income is exempt from taxation if it is neither statutory nor ordinary income.

Foreign Income

Income tax has stipulated that permanent residents are taxed on global income. The rule applies on non-employment income that is realized outside Australia.

Fringe benefits

Fringe benefits are non-cash benefits that are provided by the employer. Examples of fringe benefits are housing, employer-student loan contributions, paid and non-paid vacation, retirement benefits and electronic gadgets for business purposes. Section 23L (1a) of the assessment Income-tax act 1997 expounds on fringe benefits that includes electronic devices as a fringe benefit exempted from fringe benefits tax.

Goods and services tax is levied on the sale of goods and services. The law requires that businesses register for the tax and be able to claim for credits. Goods and services tax is only applicable to businesses.

Application

The assessable income is made up of both statutory and ordinary income. John Volker can be termed as a temporary resident for the first two months while working for Norfolk Diamond Company. However, John later became a permanent resident as from 1st October when he was confirmed to continue the job. His actions were implied that he was to stay in Australia for a long time as he even moved with his family.

Volker is expected to stay in Australia for more than six months within the tax year of 2017-2018. 1st July to 30th June is more than six months and therefore surpasses the 183 minimum days. The employment salary earned in July and September, and that from October is all subject to taxation in Australia. The $ 9,000 paid directly to Johannesburg account is subject to tax in Australia. The money was earned. As a permanent resident, Volker's rental income of $1,500 per month as from October on his Johannesburg home is subject to tax in Australia.

Volker stayed in a motel for two months and was paid by Norfolk Diamond Company. The payment on behalf of Volker is fringe benefits and should not be factored in as assessable income for the current year. Laptop computer provided at $ 1,899 by the company is exempt from fringe benefits tax. The payment of all expenses including purchases of goods and services should not form part of assessable income. Goods and services tax is mostly associated with purchases for business purposes.

Conclusion

Volker's assessable income is $ 73,333.3 + $ 9,000 + $12,000= $ 94,333.3

The $ 73,333.3 is arrived at by allocating the $ 110,000 salary per annum as from October to 30th June. The $ 9,000 is the salary paid for the first two months, and the $ 12,000 is the rental income as from October to 30th June. All the fringe benefits are exempt from fringe benefits tax.

The question is silent on the payment of travel costs for John and his family from South Africa to Australia and would have given us more information as to what should form part of assessable income.

The total amount of all expenses that are being offered as a remuneration package should be provided. The amount would have enabled for the comparison with the reasonable allowance amount as set by the commissioner of tax.

Part B

a) Net capital gain or loss

Capital gain/loss= proceeds- cost base

$ 120,000- ($ 90,000 + $ 60,000+

$120,000- $150,000= -$30,000

Net capital loss of $30,000

Carlton will report a capital loss of $ 30,000 for the current tax year. The cost base is more than the sale proceeds leading to a loss. The cost base is the addition of the cost of construction and purchase of land. Section 160ZH of the capital gains tax acts defines cost base as the acquisition cost plus and any additional costs such as construction costs.

Issues

1) Time or year of which the property was purchased and sold

2) The purpose or use of the property

3) Capital gain or loss for the previous year

Rule

Year of Acquisition

The Capital gains act was amended in 1986 a part of the income tax assessment amendment. The Act dictates that assets bought after 1986 are subject to capital gain tax. Section 160A part c describes an asset as any form of property constructed or created, or otherwise to be owned without acquisition.

Use of Property

The tax Act specifies the asset that is tax exempt from the capital gain act. Property that is used solely for personal purposes is exempt from tax while those used to for business purpose is subject to capital gain tax.

Capital gain or loss for the previous year

Section 160ZC from part 1 to 3 expounds on net capital gains and losses. The question does not provide the gain or loss for the previous year and is therefore difficult to ascertain the net capital gain or loss for the current tax year.

Application

Year of Purchase

The house is subject to capital gain tax. The property was bought 20 years ago, 1998, which is after the Tax was introduced. The capital gain tax was added on 20th September 1985.

Use or Purpose

The property is subject to capital gain tax based on the purpose of use. Carlton used the property solely for business purpose as the property has been rented out since its construction. The property would have been exempted from capital gain tax if it was used as the principal residence.

Conclusion

The property is subject to capital gain tax, and therefore Carlton will report a capital loss of $ 30,000. The immediate previous year net capital tax gain or loss has not provided and thus cannot enable for an accurate computation of net gain or loss for the current year.

b) Sale to Daughter

The issues in this section are the use of the property and the market price of the assets at the period of purchase. The act stipulates that property, especially a house is subject to capital gain tax if it was not used as the principal place of residence. A sale of the property to relative factors in both the market value and the amount received. The property was solely for business purpose at the time of sale to daughter and is therefore subject to the capital gain tax. The sale proceeds in this case, however, will not be the $ 20,000 paid by the daughter. The sale proceeds will be the market rate of the assets at the period of sale. For instance, Carlton will register a capital gain if the market value is higher than the cost base and a capital loss if the market value of the property is lower than the cost base of $150,000. Sale of property to a relative that was used for business purposes is subject to capital gain tax.

c) The Owner as a Company

The issues under consideration are the ownership, residency and the continuity of the business. The Act stipulates that a company is subject to capital gain tax if the company has maintained ownership or control of the property substantially. The answer will be a net capital loss of $ 30,000. However, if previous capital gains and losses are factored in, then a company cannot deduct discounts on capital gains.