HI6028 Taxation Theory, Practice And Law

Question:

Question 1

Eric bought the following assets in the last 12 month: an antique vase for $2,000, an antique chair for $3,000, a painting for $9,000 and a home-sound system ($12,000). He also purchased shares in a company listed for $5,000.

He sold the following assets last week: an antique vase ($3,000), an antique armchair (for $1,000), a painting (11,000), a sound system (11,000), and shares (20,000.

Calculate his net capital gain (or loss) for the year.

Question 2

Brian is a bank director.

His employer gave him a $1m three-year loan as part of his remuneration package. It had a special interest of 1% per year and was payable in monthly instalments.

The loan was approved on the 1st of April 2016.

Brian borrowed 40% for income-producing purposes, and he met all of his obligations with respect to interest payments.

Calculate the FBT year 2016/17 taxable value for this fringe benefit.

Is your answer different if you were only able to pay the interest at the end rather than in monthly installments?

What would happen to Brian if the bank allowed him to pay off the interest?

Question 3

Jack, an architect and Jill, a wife and housewife, borrowed money to purchase a rental home as joint tenants.

The agreement provided Jack with 10% of the property’s profit and Jill with 90%.

Jack can claim 100% of any property loss.

Last year, there was a loss in the amount of $10,000.

How is this loss calculated for tax purposes?

What would Jack and Jill do if they decide to sell the property? How would they account for any capital gain/loss?

Question 4

What principle was established in IRC [1936] AC 1

What is the relevance of this principle in Australia today?

Question 5

Bill owns large tracts of land that are home to many tall pine trees.

Bill wants the land cleared so that he can graze his sheep.

He finds out that a logging firm is willing to pay him $1,000 per 100 metres of timber they can take off his land.

Leave aside capital gains tax concerns and advise Bill about whether he would have to pay a fee for receipts from this arrangement.

Would you have a different answer if Bill were only paid $50,000 to give the logging firm the right of removing as much timber from your land as they wanted?

Answer:

This question is about the computation of Eric’s net capital gain or loss for a specific year.

Section 108-20 (ITAA 1997) describes how to determine capital gain or loss from the sale of assets.

Sections 108-10 of ITAA97 and Sections 108-20 (ITAA 1997) are two laws that regulate the calculation of net loss or gains (Brigham et. al. 2015).

The year-end net capital loss calculation

Particulars

Dollars

Loss on Antique Chair Sales

Loss on the sale of Paintings

Selling Antique Vases at a Lower Price: Less Profit

Total Collectable loss can be carried forward

Description of assets

Cost Base

Capital proceeds

Capital gains

Painting

You can purchase shares in a company that is listed

The year’s net capital gains are computed

Particulars

Dollars

Stocks are sold for gains

Selling of a sound system has caused a loss in excess of $ 1000 which cannot be used to set off under section 108-20 ITAA 1977.

The loss incurred through the sale of shares resulted in collectible damages that cannot be offset by gains attributable under the same section.

The current profit from the sale of ordinary shares has been realized in the current year with no deductions (Mumford 2017).

Eric has a calculated capital gain of $ 15000.

Eric can’t offset losses resulting from collectibles because he has made a profit by disposing of ordinary assets.

This scenario deals with computing fringe benefit tax according to TR 93/6 taxation rulings.

Financial institutions often plan to offset loan account according to the taxation rulings of T 93/6 (Howieson and al., 2014).

This offset is called an interest offset agreement.

Clients incur some interest, for which structuring products is necessary.

Clients are not liable for income tax payments on the profits from these accounts.

Brian will not be responsible for income tax payments as per TR 93/6 Taxation Rulings. If the bank repays interest, Brian will not be liable.

Brain will be exempted from interest payments if the bank releases him.

Taxable value of fringe benefits for loans

Brian has recorded the 2016/17 year in his books

Calculation of statutory interest rate and actual interest rate

Statutory rate

Actual rate

Particulars

Dollars

Dollars

Maximum Loan Amount

FBT Amount 40% Business Use

5.65% Statutory Interest Rate

(Amount x Statutory rate x (Amount x Actual rate x 12 x 60% Business Use)

Taxable value for the loan fringe benefit

FBT upon the repayment of interest at loan end

Statutory rate

Actual rate

Particulars

Dollars

Dollars

Maximum Loan Amount

FBT, 40% business use

5.65% Statutory Interest Rate

(Amount x Statutory rate – (Amount x Actual rate) x 60% of business use

Taxable value for the loan fringe benefit

Taxation rulings TR93/32 discuss generated loss or divisionary income arising in rental property from co owners.

Taxation rulings determine the taxable position of co owners.

This is a case in which Jack and Jill are the taxable owners of rental property.

90% of property is eligible to Jill while the rest is available to Jack.

Rental property co-ownership is treated as one partnership for income tax purposes.

The rental property co-ownership in this instance is treated as one partnership. On the other hand, it is considered to be one partnership for the purposes if income tax calculations are satisfied.

Rental property ownership and the division of partnership losses and gains helps to manage income lost from rental properties.

Jack and Jill co-own rental property for income tax purposes. This is why universal law prohibits such co-ownership from being considered partnership.

The general law does not allow rental property coownership to be considered partnership. According to TR 92/32 taxation rulings, it is not.

A partnership agreement does not affect the property’s shared loss or income.

Joint renters’ co-ownership of property between Jack and Jill is allowed.

As it is not part of a partnership, Jack and Jill should share joint ownership and equality.

IRC v Duke of Westminster [1936] AC. This is the definition of tax avoidance.

The given case demonstrates that taxation allowance can be ordered by any individual whose affairs are permitted to be ordered.

If the amount of tax to be assigned is less than this, and if you are trying to avoid tax, it is not recommended as this will weaken the case and make the law more complicated.

WT Ramsay and IRC principles used the citation as an example.

Because they were arranged artificially, transactions in this case are not commercial.

The perfect value to be applied for transactions was imposition of tax.

Principle in Australia depicts success when the results are achieved.

They might not pay more tax in such a situation.

This situation is contemporary in that Bill has a large amount of land and several pine trees.

Bill was using the land to graze sheep’s.

Bill found a logging business that would pay $ 1000 per 100m of timber.

Taxation ruling 95/6 discusses the implications of income tax on forestry activities.

Timber sales are subject to income tax that is restricted by rulings.

Because the tax payer is engaged in forestry activities, income assessment is necessary.

According to subsection 6 (1), the Income Tax Assessment Act 1936, tax payers are involved in forestry operations.

According to subsection 6 (1) of the Income Tax Assessment Act 1936, primary production refers to the planting of trees in forests.

As Bill was engaged in primary forest production, he is considered to be a basic producer according to the Income Tax Assessment Act 36.

Premium forest operations, such as tress plantation, are not subject to tax. Taxpayers do not need to worry about this.

The business assets that are sold may be partial or full.

To reduce the amount of wood being harvested, tax payers will be paid a lump sum payment of $ 500000.

The amount will then be treated as royalties.

The tax payer has the right to determine how much fell timber is received on land. This is in accordance with section 26 (f), receipts of royalties.

This situation will prevent Bill from allowing trade in forest operations.

The purpose of tax payers planting trees is not to make profits.

Bill receives such amounts under section 26(f). They combine assessable income and royalties.

According to sub section 6 (1), the ITAA 1997, any income from cutting timber will be considered taxable income.

Reference List

Financial management: Theory and practice.

Who should teach what?

Australian perceptions on the roles played by universities and the practice of education in professional accounting education.

Journal of Accounting Education, 32(3). 259-275.

Taxing culture: towards a theory for tax collection law.

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