Ha 3042 Taxation Law And Assessment Answers

The following are the current year details of Angelo's income. expenses and the foreign tax he paid. All of Angelo's foreign income amounts have been convened to Australian dollars. 
Johnny and Leon are adult partners in a business selling sporting goods. 
The partnership records, excluding GST, for the current income year.

Question 1

As per the general deduction in income tax assessment act 1997 - SECT 8.1, the income that is incurred in gaining or producing from current business’s accessible income can be deducted, however, the amount  which is unavoidably incurred in carrying on a  business for the purpose of gaining or producing assessable income is also subtracted from income (Commonwealth Consolidated Acts, 2017). Nonetheless, the act shows that an individual cannot deduct loss or outgoing of capital or loss that is of capital nature.  Including this, any loss of private or domestic nature cannot be deducted. When an amount is incurred in relation to gaining or producing the exempted income of the business is not subtracted. Any losses or outgoings which can be deducted under the section of section 12-5 are termed as a general deduction.

Question 2

The case of Big Bank Limited can be resolved using an IRAC approach

Issue

According to the given case scenario, Big Bank Limited operates at the national platform with more than 50 branches and the company has recently registered for GST. As per the information, the company is budgeted to spend $ 1650000 including GST on advertisement campaign. A part of this amount was allocated to television advertising campaign that is promoting Big Bank home and contents to the general advertisement, including this $100000 was allocated to general advertisement campaign. The advertisement consultants have issued their tax invoice for $1650000, so the issue is whether the company can claim input tax credit with respect to its advertising expenditure of $1650000.      

Regulation

The guidelines of GST reveal that individual can claim GST credits in case of fulfilling the following four conditions.  The foremost condition is that if a business intends to purchase solely or partly in carrying company’s operations and the purchase does not relate to carrying input-taxed supplies (Warren, Harding and Lloyd, 2005). Furthermore, the purchase price must include GST.  The company should provide or should be liable to offer payment for the items that have been purchased.  As per the last condition, a business must have tax invoice from the supplier, and the purchase limit of the supplier should not more than $82.50.

The case given herewith can be analysed using the guidelines of section 11-15. The guidelines are showing that an individual is claiming input tax credits or a person who makes claims for a whole range of business overhead costs, while undoubtedly acquired for general enterprise purposes.  The organisation is also entitled to claim input tax credits in a situation where business acquisition can be linked to potentiality, and as opposed to the fact of taxable supplies (Rametse and Pope, 2002).  In such case, credit is available in full, and costs were natural in connection with the takeover and business assets receipts. .However, such assets must be subsequently deployed post-takeover then they are fully conjectural. 

The similar situation has arisen in the case given in C& E Commrs v/s UBAF Bank Ltd; however, it has not presented any problem under this statutory test. In such case, UBAF Bank has acquired 3 leasing companies through initially acquiring share capital then it was subsequently transferred to the bank’s leasing businesses (Martin, 2001). At the time when the Bank sought out to deduct upfront the input tax that was charged on it, in the use of some professional services associated with the acquisitions, then English Customs Department has denied the claim by wording that the services obtained bore no relation to the taxable leasing outputs of to UBAF. However, these services were claimed to be related to the acquisition by UBAF of the shares and businesses of some of the companies. These companies were the part of the general expansion of UAF's holdings. Nonetheless, some of the credits were allowable, but most of them were not till the UBAF Bank made taxable supplies. When the case was transferred to the English Court of Appeal, the authority has rejected the Customs Department’s position, on the basis of various intermediate steps in the transaction. At the time when the business was analysed at the ground of commercial, there was little doubt that the acquisitions could be demonstrated as a link to future taxable outputs by UBAF (Martin, 2001). 

Applicability

The above-discussed regulation is applied to the case of Big Bank limited. At the time when Bank has launched home and contents insurance policies, it was forecasted that home and contents insurance policies would constitute 2% of entire enterprise and rest 98% of its enterprise is made up its traditional loans and deposits facilities business. The budgeted expenditure includes GST as advertising expenditure of $1650000 includes GST;      therefore, it satisfies the guidelines of GST. Both the advertisement expenses are related to business expenses, in respective of business categorization, thus, conditions are satisfied. As home and contents insurance policies are expected to 2% of entire enterprise and rest 98% are related to traditional loans and deposits facilities business. Thus both are considered as business expenses and company can claim for input tax credit.

Thus, Big Bank is fulfilling all the guidelines given in latest regulation in GST; therefore, this bank is entitled to input tax credit.

Question 3

If an individual has measurable proceeds from aboard, then they must state this into their income tax return to Australia. If an individual has made payment of foreign tax in any other country, then they are allowed to foreign income tax offset of Australia, which will provide aid to dual taxation (Thampapillai, 2016).  These rules are applicable for proceeds years that began on following the date of 1 July 2008. Up to 30 June 2008, various rules are applicable for the periods of income. 

An individual can declare a tax balance regarding the foreign tax they made payment on their income, earning or profits (inclusive of capital nature gains), which will comprise of their measurable Australian income (Cao and et al., 2015). However, in certain circumstances, offsets are contingent to a limit.

An individual can claim foreign income tax offset  in their returns of income tax.

While claiming, offset by amount $1,000 or less than this, the individual is required to file the real amount of paid foreign income tax, which will be measurable to an offset.

If individual claims more than $1,000 of a foreign income tax offset, then it is must work upon their limit to foreign income tax offset (Long, Campbell and Kelshaw., 2016)

Before making the calculation of the total net income, one has to convert all their deductions from foreign income and the payment of tax made to Australian dollars (Lang, 2014).

By considering these provisions calculations of Angelo’s foreign tax offset is enumerated as below (Australian Government, 2017)

Step 1: Statement showing calculation of tax payable

Working note

Step 2 Calculation of income tax if income from foreign sources has not been added:

Working note

Angelo’s assessable income will not be inclusive of the following foreign degree income and expenses:

Such expenses are overlooked. These expenses are related to the amount, inclusive in Angelo’s assessable income by which there will be payment of foreign income tax, given that the tax counts to her offset of foreign income, any of the expense regarding to other amounts of Non Australian which are the assessable income’s part (excluding of deduction in debts).

The debt deduction of amount concerning UK dividend and interest on income are jot overlooked as Angelo didn’t contained a permanent establishment on abroad. Neither will be the deduction regarding the gift to the recipient of deductible gift overlooked, as it was not related to the Step 2 amount of excluded measurable income.

Step 3 Take away the result of step 2 from step 1

=$12937-$5140

=$7797

However paid by her is $4,400 so this will be Angelo’s foreign income tax offset limit. The difference of amount between the offset limit and paid amount regarding the foreign income cannot be carried forward or refunded to a future financial year.

Question 4

In situation a partnership firm does not pay income taxes then it must place a tax return on partnership stating all earned income and all subtracted expenditures (Kenyon and van der Eng, 2014).  In addition to it also represents the distribution of P&L among partners. Each and every partner should assert their own share in the profit and loss in the business in their personal tax return, either they received the income or not (Pearce and Pinto, 2015). For the purpose of CGT (capital gains tax), all partners hold a percentage of each asset of CGT and then computes capital profit and loss on their asset share.

Table 1: Statement showing taxable income for partnership business

(Source: Commonwealth Consolidated Acts, 2017)

Notes

 

Australian Government, 2017. Goods and services tax (GST). Available at < https://www.ato.gov.au/Business/Business-activity-statements-(BAS)/Goods-and-services-tax-(GST)/ > [Accessed from 11^th September 2017]

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.

Commonwealth Consolidated Acts, 2017. INCOME TAX ASSESSMENT ACT 1997 - SECT 8.1 General deductions. Available at < https://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s8.1.html>. [Accessed on 9^th September 2017]

Kenyon, D. and van der Eng, P., 2014. 6. Australia and Latin America: Shared experiences and prospects for a new partnership. Australia and Latin America, p.141.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia. St Mark's Review, (235), p.94.

Martin, D., 2001. Input Tax Credits - The Core Mechanism of GST. Available at < https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/June_2001,_Sound_Education_in_GST,_Input_Tax_Credits___The_Core_Mechanism_of_GST.html> [Accessed from 11^th September 2017]

Pearce, P. and Pinto, D., 2015. An evaluation of the case for a congestion tax in Australia. The Tax Specialist, 18(4), pp.146-153.

Rametse, N. and Pope, J., 2002. Start-up tax compliance costs of the GST: Empirical evidence from Western Australian small businesses. Austl. Tax F., 17, p.407.

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Thampapillai, D.J., 2016. Foreign Employment Income and Double Tax Avoidance Agreement: Australia's Possible Governance Failure. Browser Download This Paper.

Vann, R.J., 2016. Hybrid Entities in Australia: Resource Capital Fund III LP Case.

Warren, N., Harding, A. and Lloyd, R., 2005. GST and the changing incidence of Australian taxes: 1994-95 to 2001-02. eJournal of Tax Research, 3(1), pp.114-45.