LAW5230 Taxation Law-Income Tax Assessment Act 1997

Issue

The main issues in the above case are –

•    How Susie will treat her overall royalty income that she will earn from the Malaysian government for the development of the new product?
•    In case no products are sold, what will be the treatment of the royalty that Susie will receive from the government of Malaysia in her books of account? What will be the overall tax implications of the same kind of treatment of taxes?

Sections applied

Section 6(c)

Section 15-20

TR 93/12

TR 2008/7

Section 25(1)(b)

Application

If the assessee is including any royalty in the assessable income, than he has to pay taxes on the same. The royalty income is subjected to a withholding tax of 30 percent as per997. Income Tax Assessment Act 1 As per Income tax Assessment act 1936 royalty is defined as an income that a person owns owing to its technical know how and knowledge  It is mostly reduced by calculating the total amount of taxes for payment.  It is mostly reduced under the tax treaty that the government has with other tax payers. The double taxation agreements between the nations also affect the total amount of taxes that the assessee pays for the income that it earns from some other country.Judgement in respect of the same was passed under the Tech Mahindra Limited case. As per the judgement of this case, profits raised in one enterprise is taxable in one state, in which the income has aroused, as per the double taxation agreement.It may be in any form possible.

 The essence of royalty was described as per the relevant case law Stanton v.F.C. of T.(1955) The term royalty will cover the total lump sum consideration that an individual receives in lieu of the sale of exclusive rights of developing or manufacturing a product. The income that is covered by the royalty head will include the transfer of exclusive rights in case of a patent or a trademark to develop and use the same. It will also include the development of any patent model software and then sell the same for use to some other company. The sale of technical know-how is also covered under the definition of royalty

. As per the Australian Taxation policy, if any resident is earning a certain amount of royalty income for any product that is sold by him, then the same will be included in his assessable income but the assessee will have file a return to show the same.

The main obligation of the receiving party is just to file the return if the total amount of royalty received is net of the total tax withheld by the other party. As per the taxation rules, the company that is paying the tax will be withheld an amount that is equal to 30 percent of the total taxes of the total amount of royalty paid to the other party and the same should be deposited to the government. It is important that the assessee should have a permanent place of business and should be a resident of the Australian Government. In normal cases, the payee is required to withhold a tax rate of 30 percent. However if the there is any taxation treaties between the countries then the tax withholding rate will be as decided as per that. If it is seen that any person has not deposited the requisite amount that was held, then a penalty will be there. The same was also proclaimed in the 2005 case of McDermott Industries (Aust) Pty Ltd. The double taxation avoidance agreement is based on the concept of permanent establishment. In case of Susie, the permanent establishment is in Australia, thus the income will be taxed in that country.

In the given case, we see that Susie, who has developed an amazing product in her laboratory, has sold the use of the same to the Malaysian company. The company is paying royalty income to Susie and for every product that the company will eventually sell; Susie will receive an income of $40 per marrow. Now the point is how Susie will treat the same in her books of account. The Malaysian company will deduct 30 percent of the withholding tax on the royalty income and then make the payment, in case there is no agreement between the two parties. In case there is an agreement, then payment will be at the decided rates.

In case the company is not able to sell any kind of mower in the current year, the company will only pay the total amount of royalty and the same will be credited to Susie and will be reflected in her books of account and in the return that she will file. In case the company is able to sell 200 mowers, then for each mower, Susie will receive a total amount of $40, the same shall be treated as royalty income, and the total amount will be (200*40= 8000).  The same shall be taxable as capital gains in the hands of the company and in the case of Susie; it will be treated as royalty income, which she is earning for the software that was developed by her.

Conclusion

Hence, in the above case, it can be stated that whatever royalty income Susie will earn will be net of the withholding tax and the same should be presented in her tax report that she will file to the government. Even if the company is not selling any mower, the company is using the rights of the technical know-how for the development of the mowers; hence it will be taxable as royalty income payable in the hands of the Malaysia Company. For any kind of products that the company sale, and for which Susie is receiving an amount, will be treated as the royalty income.

Issue

The company is winding up and is paying the workmen their compensation, so whether the company is entitled to receive deductions on the same. What will be the tax implications in the hands of the company?

Sections applied

Section 292.5

Section 47

TR 2004/18

TR 2011/6

Ananda Marga Pracaraka Samgha Ltd v Tomar

WDR Delaware Corporation v Hydrox Holdings Pty Ltd

Application

In the given case, as per ITAA sec 292.5, we see that Waterside Pty Ltd is a big ship building company. The company is lately incurring losses, so the company has decided to wind up the business. The company has sold all its assets and has formed a new company known as Waterside Investments Pty Ltd. The new company is paying the workmen their dues for the winding up. The main point of an argument is that whether the company will be allowed the deductions on the total amount that the company is paying to the workers as stated in the case of Robson & Ors v Commissioner of Taxation, that is realted to dissolution of incorporated associations. In the case of calculation of the business income, certain items are allowed and certain items are disallowed  As per section 47 of the ITAA 1936, the items that are directly related to the business are allowed, and those that are not connected are not allowed in the course of winding up. The main problem that the company is facing is that whether while calculation of tax, the compensation that the company is paying to the workers will be allowed or not. The provisions of winding up have been explained in the case of WDR Delaware Corporation v Hydrox Holdings Pty Ltd.

Winding up can occur because of many reasons. And payment of the workmen dues also depands on these factors.If we do a deep analysis, we can ascertain that the compensation that the company will pay to its workers will not be allowed, as this income is not directly related to the business of the company. As per the ruling of the court, in case of the Ananda Marga Pracaraka Samgha Ltd v Tomar , when winding up is on just and equitable ground. It is necessary for the liquidators and the directors, that there must be compliance with statutory provisions. Thus, the workmen dues must be paid. It is also the responsibility of the company , that they have to pay the dues and taxes of the old company. The judgement is passed in the case of Commissioner of Taxation v Bruton Holdings Pty Limited. The liqidators are entitled to pay indemnification and other costs. The workmens must receive their dues on time. The company is responsible for the same. It is the duty that the minority groups are given their dues on time.

Conclusion

Hence, we can state that the company will not be allowed any deductions in the total amount that the company is paying to the workers under the provisions of the income tax assessment act. The company will have to pay taxes on the same, and on the amount of deductions will be allowed. The company is bearing this expense for some another company, even though they are very closely related, it will not be allowed any deductions on the same. Thus the new company has to pay the taxes on the payment made, and cannot take benefits.

The Corporate tax cut does not change the financial position of an Australian investor. It just makes investors pay more of the personal income tax, thanks to the dividend imputation system of the economy. It is because of this that the investors are paying more taxes because they are receiving less tax credit to offset the same (Eccleston & Mellor 2017)

In the federal budget of 2016, the Australian government introduced the tax cut scheme.  As per that, it was decided that the small and medium businesses that are having a turnover less than Australian $10million, would be required to pay a company tax of 27.5% in the initial stage.  Over the time, this limit will exceed. In 2017-2018, it will be Australian $25million, and in 2018-2019 it will be Australian $50million, and finally in 2020 it will be Australian $100million (Merz, Overesch & Wamser 2017)

The main reason behind the overall changes is that this scheme will promote the companies to provide more and more jobs to the people.  It will help in increasing the economic growth because the companies will be having the benefit of the new tax scheme.  It is expected that with these changes, the economy will prosper and there will be huge demands. However, the scenario is not as present as proclaimed.  This will also increase the total amount of personal income tax that the individuals are paying, as they will be receiving less amount of credit to offset the total amount of corporate tax that they pay. In other words, the individual share in the profit of the company is taxed only once. For whatever the company is paying, the investors will get franking credit in place of the same.

In addition, the individuals to reduce their personal tax liability can use these credits. (Jacob & Michaely 2017) Therefore, even if the tax cut scheme is beneficial to the other companies and from the other aspects of the economy. It is not favourable for the Australian investor because they have to pay their personal taxes at the same rate and will be receiving less of the franking credit because of which they will now have to pay more of taxes. If the companies are paying fewer taxes than they can save whatever they earn. However, the main point here is that the companies are not saving and the surplus is paid back to the shareholders and thus the personal income tax is getting affected. So they have to pay more taxes on their overall income (Chen, Karabarbounis & Neiman 2017.

As per various research reports, cutting down the corporate taxes of the Australian companies will lead to an increase of 0.8 percent in the overall Australian GNI.It can also be stated that since the foreigners are paying less of taxes because of the reduction of the corporate taxes, the total flow of the GDP from the economy increases by 0.8 percent. The government has also stated that this new scheme has been released to prevent the companies from shifting their area of operations in countries that have lower taxation limit.

However if we go through research this reduction in the total a taxes has not been a very attractive scenario for the multinational companies. They are still paying the same amount of tax with little or no reduction (Shin 2017).  Because of the structure of the new tax system, the foreign investors are getting the benefits and the local investors are suffering because of the same. In Australia, less than 30 percent businesses are owned by some foreign countries. Most of the businesses are small and medium and are owned wholly by Australian citizens (Howard, Pancak & Shackelford 2016).

  One more argument to support the proposed wage cut is that it is helping the workers to grow. Most of the benefits will flow to the workers; however, the point is that the total amount of the proposed benefit is offset by the negative impact on the Australian investors. It is because of all this that the investors have reduced and this has affected the overall investment in the economy. As per the dividend, imputation scheme the total amount of dividends that the investors receive is credited to the total tax that is paid by the company (Young & Pagliari 2017) .This reduces the chances of the income being taxed twice. First by the company. And then as personal income when the total income are distributed to the shareholders as dividend. The workers pay the bulk of the taxes so in the entire scheme the workers will be benefited (Glenn & Angeline 2017).

However, the investors will suffer, as it will lead them to pay more of the personal taxes. Thus, it is important that the government should try to make the necessary changes, so that the tax burden is reduced not just superficially but also economically. It must be beneficial to promote more of investment so that the government will grow, and the economy will prosper (Swank 2016).Thus we see that the above statement stated in the question holds good. The economy will not benefit from the new scheme, because if the corporate taxes are being reduced, the personal taxes that the investors have to pay are being increased.

It has also affected the living standard of the people, because investment is the key driver of the overall economy. If there is reduction in the total amount of investment how will the economy progress. The investors have to pay more taxes if they invest in these companies, because of the dividend imputation scheme they are not getting the benefits of the credit that they previously received owning to their investment in the corporate. If the economy has to progress, the government needs to make changes such that the investors are motivated to invest more amount in the companies (Ljungqvist, Zhang & Zuo 2017).

It should see that there is less flow of income to the foreign shores so that the overall GDP rate is maintained playable with the current forces of the economic development. This cutting of the corporate taxes is done to promote more of foreign investment because companies will like to invest in the economy where there is less amount of taxation. However going through the development process we see that these companies are not benefiting, hence instead of increment in the investment, there is depreciation. If people have to pay more of the personal taxes, why will they invest in such countries? This is the main point because of which this tax-cutting scheme has been widely criticised.  So we see that the statement that cutting of the corporation taxes is doing no good to the economy because people have to pay more of personal taxes if not corporation tax (Chang, Chen & Chen 2017).

It is just a superficial assumptions and assurance by the government that this policy will reduce the overall taxes. The main taxpayers are the small and medium sized business that is entirely based in Australia, and they are the ones who are suffering because of this taxation policy. Hence, it is needed that the government changes this system so that they are more of investors willing to invest, so that the progress of the economy is not hampered by the development of more foreign companies and less of homegrown companies. All this will only lead to flow of income to the foreign investors and do no good to the companies that are based and operating in Australia (Mukherjee, Singh & Žaldokas 2017).

References

Chang, CW, Chen, MC & Chen, VY 2017, 'Are Corporate Tax Reductions Real Benefits under Imputation Systems?', European Accounting Review, vol 26, no. 2, pp. 215-237.

Chen, P, Karabarbounis, L & Neiman, B 2017, 'The global rise of corporate saving', Journal of Monetary Economics, vol 89, pp. 1-19.

Eccleston, R,KR & Mellor, P, 2017, Intergovernmental financial relations in an age of austerity: implications for the future of federalism, Edward Elgar, Northampton, USA.

Glenn, O & Angeline, Y 2017, 'Alternative assets insights: The future of stapled structures', Taxation in Australia , vol 51, no. 11, pp. 635-637.

Howard, M, Pancak, KA & Shackelford, DA 2016, 'Taxes, Investors, and Managers: Exploring the Taxation of Foreign Investors in U.S. REITs', The Journal of the American Taxation Association, vol 38, no. 2, pp. 1-19.

Jacob, M & Michaely, R 2017, 'Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts', The Review of Financial Studies, hhx041.

Ljungqvist, A, Zhang, L & Zuo, L 2017, 'Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking', Journal of Accounting Research, vol 55, no. 3, pp. 669-707.

Merz, J, Overesch, M & Wamser, G 2017, 'The location of financial sector FDI: Tax and regulation policy', Journal of Banking & Finance, vol 78, pp. 14-26.

Mukherjee, A, Singh, M & Žaldokas, A 2017, 'Do corporate taxes hinder innovation', Journal of Financial Economics, vol 124, no. 1, pp. 195-221.

Shin, MJ 2017, 'Partisanship, Tax Policy, and Corporate Profit-Shifting in a Globalized World Economy', Comparative Political Studies.

Swank, D 2016, 'Taxing choices: international competition, domestic institutions and the transformation of corporate tax policy', Journal of European Public Policy , vol 23, no. 4.

Young, K & Pagliari, S 2017, 'Capital united? Business unity in regulatory politics and the special place of finance', Regulation and Governance, vol 11, no. 1, pp. 3-23.