HI6028 Taxation Theory Practice and Law-Cost of Acquisition

Over the last 12 months, Eric acquired the following assets: an antique vase (for $2,000), an antique chair (for $3,000), a painting (for $9,000), a home sound system (for $12,000), and shares in a listed company (for $5,000). Last week he sold these assets as follows: antique vase (for $3,000), antique chair (for $1,000), painting (for $1,000), sound system (for $11,000) and shares (for $20,000). Calculate his net capital gain or net capital loss for the year.

Brian is a bank executive. As part of his remuneration package, his employer provided him with a three-year loan of $1m at a special interest rate of 1% pa (payable in monthly instalments). The loan was provided on 1 April 2016. Brian used 40% of the borrowed funds for income-producing purposes and met all his obligations in relation to the interest payments. Calculate the taxable value of this fringe benefit for the 2016/17 FBT year. Would your answer be different if the interest was only payable at the end of the loan rather than in monthly instalments What would happen if the bank released Brian from repaying the interest on the loan

Jack (an architect) and his wife Jill (a housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Jack is entitled to 10% of the profits from the property and Jill is entitled to 90% of the profits from the property. The agreement also provided that if the property generates a loss, Jack is entitled to 100% of the loss. Last year a loss of $10,000 arose. How is this loss allocated for tax purposes If Jack and Jill decide to sell the property, how would they be required to account for any capital gain or capital loss

What principle was established in IRC v Duke of Westminster [1936] AC 1 How relevant is that principle today in Australia

Bill owns a large parcel of land on which there are many tall pine trees. Bill intends to use the land for grazing sheep and therefore wants to have it cleared. He discovers that a logging company is prepared to pay him $1,000 for every 100 metres of timber they can take from his land. Leaving aside any capital gains tax issues, advise Bill as to whether he would be assessed on the receipts from this arrangement. Would your answer be different if he was simply paid a lump sum of $50,000 for granting the logging company a right to remove as much timber as required from his land.

Issue

In the given situation, Eric has purchased and transferred following assets at the following price in last 12 months:

The issue is to compute capital tax for Eric by considering above transactions.

Provision

As per Australian taxation provisions, in order to compute capital gain or loss for a particular transaction, it is very important to determine holding period of an asset. According to the law; if the holding period of an asset is equal to or more than 12 months then “Indexation Method” is used to determine capital gain and if the holding period of an asset is less than 12 months then “Other Method” will be used to compute capital gain (Working out your capital gain, 2017). In this method taxable amount is computed by reducing Cost of Acquisition from Sales Consideration.

Application

In the above case, Eric has holding period of fewer than 12 months hence other method will be used to compute gain or loss.

Table 1: Statement showing computation of net capital gain

Conclusion

Capital Gain amounts to $15,000 for Eric. All the losses are compensated from a number of profits earned by him.

Issue

In the present case, Brian is an employee of the bank and in perquisite, he obtains a loan of $1m at a special interest rate of 1% p.a. and the same would be payable in monthly instalments. From the above loan, 40% of the amount was used to produce another income. From the above-stated transactions issue is to determine the taxable income in the hands of Brian and consequence if he paid entire interest at the end of tenure while repayment of the loan and if his liability of payment of interest is relinquished by the bank.

Provision

According to the rules of Australian taxation provisions, fringe benefits provided by the employer are liable to be taxed. Australian taxation provisions contain particular rules for valuation of fringe benefits for each type of benefit (Reportable fringe benefits – facts for employees, 2016). In the event of loan, Fringe benefit takes place where less interest or no interest is charged on loan. Valuation of benefit in the event of loan is the difference between interest rate charged and statutory interest rate. Statutory Rate of interest for 2016 is 5.65%.

Application

In the present case, Brian was provided with a loan at a special rate so same will be considered a fringe benefit on which tax is to be paid. By applying the above rule computation of taxable amount for the Brian is as follows:

Table 2: Statement showing computation of taxable fringe benefit

Conclusion

It doesn’t make any difference of what amount is invested for producing another income or how the repayments were made so entire difference will be taxable, i.e. $46500. Further; the taxable amount will remain unaltered from the fact that entire interest will be paid at the end of tenure during repayment of the loan. In other cases where no interest would have charged by the bank than $56500 would have been a taxable fringe benefit.

Issue

In the present case; Jack and her spouse Jill purchased a rental property from the funds which were borrowed as joint tenants. For this, they had a written agreement among themselves which states that profits will be shared in proportionate of 1:9 whereas loss won’t be shared. All the losses if accrued will be borne by the husband itself. Last year there was a loss of $10000, so this case deals with the tax treatment of accrued loss. In this case study first issue is tax implication of loss and second issue is tax implications when the property would be transferred.

Provision

According to the law rental income and expenses are divided among the co-owners varies depending on whether co-owners are joint tenant or tenants in common or there is a partnership among them for carrying out rental property business. If the co-owners are joint tenant then income and expenses would be attributed in the proportionate of 1:1 because they both hold an equal interest in the property but if they are tenants in common than they both hold an unequal interest in the property then in that case revenues and expenses will be apportioned the ration of their interest in the property (Tax Ruling TR 93/32. Income tax: rental property – division of net income or loss between co-owners, 2017). However cited does not apply when an individual does not carry business on a regular basis or are joint tenants in the rental property.

Application

In the present case, Jack and her wife purchased a rental property as a joint tenant and further they decided to share the profits from the rental property in the ration of 9:1 and total losses will be borne by jack. Jack and Jill both have an equal interest in the property since they have purchased it as a joint tenant. Hence, in this case, Jack is not entitled to claim the total loss. Both Jack and Jill will equally attribute the loss to themselves.

Conclusion

Jack is not entitled to claim the total loss. Further; same provisions will be applied for allocation of capital gain or loss when the property would be transferred

Case facts

In this cited case, Duke of Westminster was providing a salary of $3 per week to his gardener, after that duke and his gardener mutually agreed that duke would make payment of equivalent amount instead of salary or wages (Bloom, 2015). As per the law applied for the tax year, gardener’s wage must not increase the deduction of tax; however, the contract significantly decreased Duke’s liability to a certain level.

Developed tax principal

In accordance with the case, the principle declared that:

All individuals possess the right/authority to supervise their personal affairs in order that the tax goes to the minimum level and reduce the liability upon tax.

Relevance in present tax case laws

The proposed case stated that the tax evasion could only be practised if there is the introduction of statue law and the act of general covalent principle that reduces the liability of Duke if it is permitted and agrees to make payment on a yearly basis. Additionally, it is declared that any business entity adopts any of the tool is totally responsible for the tax profit reduction or is not permissible (Evans, 2015). Hence, courts must keep a constant eye on the common economic states and jurisprudence to meet the commitment regarding tax planning, purposely for tax evasion. Ultimately, courts should not overlook such cases and declared this principle as irrelevant and null.

Issue

Bill has a large piece of land. There are many huge and tall pine trees on that land. Bill wants to clear the land as his intention was to use it for grazing of sheep. A logging company was ready to pay a good amount of $1,000 for every 100 metres of timber that it will take away from his land. Thus; the issue is to determine the taxability of amount received in against of providing timber and tax implication if he gets lump sum amount of $50,000 for granting the right to the logging company for removal as much timber as required by them from his land.

Provision

According to point 22 of provision TR 95/6; timber sold by an individual is taxable even if it is in the non-ordinary course of business (Poore, 2013). Assessability of such income is under section 36-1. In Similar ruling, it has been stated that if right is sold by an individual for removal of timber, then income earned will be under section 25-1.  

Application

Conclusion

By applying cited provisions, it can be said income from timber will taxable either it is in the form of $1,000 for every 100 metres of timber or Lump sum amount of $50,000 for granting the right to the logging company. However, Assessability of income will be in the different section.

References

Books and Journals

Bloom, D., 2015. Tax avoidance-a view from the dark side. Melb. UL Rev., 39, p.950.

Evans, S., 2015. It's' Clean Hands' Again: The Dirtiness of Not Paying Tax Considered in the Supreme Court.

Poore, D., 2013. No timber without trees: sustainability in the tropical forest. Routledge.

Online

Reportable fringe benefits – facts for employees. 2016. [Online]. Retrieved from < https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail / Employees/Reportable-fringe-benefits---facts-for-employees/>.

Tax Ruling TR 93/32. Income tax: rental property – division of net income or loss between co-owners. 2017. [Online]. Retrieved from <https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9332/NAT/ATO/00001#P24>.

Working out your capital gain. 2017. [Online]. Retrieved from < https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/>.