Law5230 Taxation Law To Analysis Assessment Answers

2. CGT Small Business Concessions – discuss and critically evaluate the Small Business CGT Concession regime in Australia. You should include a discussion of the overall policy objectives and your evaluation of whether regime currently meets these objectives or whether further amendments are necessary.

3. Division 7A (treatment of private company loans) - discuss and critically evaluate Division 7A as a specific anti-avoidance provision. You should include a discussion of the overall policy objectives and your evaluation of whether the Division currently meets these objectives or whether further amendments are necessary.

4. Part IVA Amendments – The general anti-avoidance provisions were recently amended. Discuss and critically evaluate the policy reason for these amendments and whether they are likely to meet these objectives or not.

5. Negative Gearing – discuss and critically evaluate the extent to which tax deductible negative gearing impacts upon savings and investment decisions. Your paper should clearly outline what is meant by negative gearing from a tax perspective and how the Australian tax system treats negatively geared investments. You should include an evaluation of whether negative gearing from a tax perspective should be removed.

6. Another tax technical or tax policy topic of your choice. Must be approved by course examiner

Answer

Part A

Analysis of Marzena’s assessable income for the sale of property

According to the regulations of Australian Taxation System, it can be said that the profit or loss incurred on sale of property is required to be included in the assessable income under the sources of capital gain tax. As per the standards of ITAA 36/97, an asset acquired since the introduction of capital gain that is September 20, 1985, sale of property is subject to capital gain tax (Ato.gov.au 2017). Further, in assessability of income from the sale of property depends on the sale of property during the taxation year. As per the principles of ITAA 36 if a taxpayer sells the property with the intention of earning profit from the sale of property during the ordinary course of business, then the amount of profit shall be included in the assessable income. The amount of profit derived from the sale of property with the intention of earning profit is considered as an ordinary income within the meaning of section 6 ITAA 36 (Ato.gov.au 2017).

In the present case, Marzena owned 7 blocks of land as on 1 July 2016 that were acquired on July 1 2012 for a value of $72,000. Further, Marzena acquired 10 blocks of land in Brisbane during the year ended on 30 June 2017, with the intention of sale of blocks at profit. Under the rulings of The Myer Emporium Ltd v FC of T (1987) 163 CLR 199, it has been contended that the transactions entered during the ordinary course of business would be considered as ordinary income and will be included in the assessable income. In case of Blockey v FC of T (1923) 31 CLR, it has been noted that the income derived from the isolated transaction was an assessable income since it had been entered during the ordinary course of business (Gupta, Mills and Towery 2014). Therefore, Marzena will have assessable income during the year 30 June 2017 for the sale of property since the Marzena acquired the property with the intention of earning profit even if the sale has been made to the her brother. In addition, sale of entire separate block shall also be included in the ordinary income under section 6, ITAA 36 since the acquisition has been made within the same block with the intention of earning profit. The purpose of building the office block was to conduct business activities and to attract potential customers but due to restrictions, she had to sell the block. As the transactions involve income derived from ordinary course of business, the profit shall be included in the assessable income under section 6, ITAA 36.

References List 

Ato.gov.au. 2017. Home page. [online] Available at: https://www.ato.gov.au [Accessed 1 Apr. 2017].

Australian Public Service Commission, 2013. Capability review: Australian Taxation Office. Canberra: Commonwealth of Australia.

Gupta, S., Mills, L.F. and Towery, E.M., 2014. The effect of mandatory financial statement disclosures of tax uncertainty on tax reporting and collections: The case of FIN 48 and multistate tax avoidance. The Journal of the American Taxation Association, 36(2), pp.203-229.

Analysis of Toowoomba Drilling’s account for income on cash or accrual basis

As per the regulation of Australian Taxation Office, business organizations are entitled to use accounting method on cash basis or on accrual basis to record the business income for the financial year. It has been provided that the business organizations with aggregate turnover amounted to $2 million or less can use either cash method or accrual method to record the business incomes (Ato.gov.au 2017). As per the taxation rulings under Income Tax Assessment Act 1997, the business organizations can use the cash accounting method to recognize income if the company is small entity as well as the current turnover of GST for the period of past 12 months is $2 million or less (Libby, Rennekamp and Seybert 2015).

Considering the decided case of Firstenberg v FC of T 76 ATC 4141 (1976) 6 ATR 297, the ruling was considered about the accounting method for recognizing income of the assessee as per section 6-5 ITAA 97. The court contended that the organization was required to adopt the appropriate method to recognize income by considering the regulations of section 6-5 as well as the factors of receipts method (DeBacker, Evans and Phillips 2015).

Accordingly, in the given situation, Toowoomba Drilling has been a medium sized business with a turnover amounted to $1.5 million with the number of employees 12 tradespersons and 5 administrative staff. In addition, it has been observed that the value of equipments that the company uses is around $20 million.

Considering the value of turnover of the company, it can be said that as the value is less than $2 million, Toowoomba Drilling can be considered as small and medium sized business (Guner, Kaygusuz and Ventura 2014). In this case, turnover of the company is less than $2 million; therefore, it can use cash accounting method to recognize income.

Identification of State Government funding as ordinary or statutory income as well as its determination in the income year 2017

As per the Australian Taxation System, ordinary income defined under section 6- 5(1), ITAA 97 ordinary income of the organization is assessable in the taxable income of the assessee. It states that the type of income that constitutes within the meaning of income under common law, is considered as ordinary income (Ato.gov.au 2017). In addition, income derived from property in terms of rent, dividends or interest as well as income from business activities under retail sales or farming is considered as ordinary income (Ato.gov.au 2017).

Moreover, statutory incomes refer to the income other than the concept of ordinary income, which are particularly included in the assessable income of the taxpayer. As per the regulations under section, 10- 15 ITAA 97, income derived from the imputation credit or bad debt recoveries constitutes statutory income (Ato.gov.au 2017). Income derived from the capital gains as net income together with the incomes received under barter transactions are considered as statutory income.

In case of Pipecoaters Pty Ltd v FC of T 90 ATC 4413 (1990) 21 ATR 1, the court held that the amount received by the taxpayer as an amount from subsidy to reload the capital amount of the payee (Reforms, Kleven and Schultz 2014). In the present case, it has been given that Toowoomba Drilling had received grant amounted to $550,000 from the State Government for the purpose of acquiring new machinery to build new railway. Accordingly, the amount of grant will be derived in the income year of 2017 since; the amount has been received in the financial year 2017.

Reference list 

Ato.gov.au. 2017. Home page. [online] Available at: https://www.ato.gov.au [Accessed 1 Apr. 2017].

Australian Public Service Commission, 2013. Capability review: Australian Taxation Office. Canberra: Commonwealth of Australia

DeBacker, J., Evans, R.W. and Phillips, K.L., 2015. Macroeconomic effects of a 10% cut in statutory marginal income tax rates on ordinary income (No. 867069). American Enterprise Institute.

Guner, N., Kaygusuz, R. and Ventura, G., 2014. Income taxation of US households: Facts and parametric estimates. Review of Economic Dynamics, 17(4), pp.559-581.

Libby, R., Rennekamp, K.M. and Seybert, N., 2015. Regulation and the interdependent roles of managers, auditors, and directors in earnings management and accounting choice. Accounting, Organizations and Society, 47, pp.25-42.

Part-B - Work-related allowable deductions

Introduction

Butler (2013) stated that in order to create revenue for the government, individual residing in the nation or the country has to pay tax. It is evident that not every individual has to pay equal tax and the reason behind charging higher tax to those with higher income is to provide benefit to the lower-income citizens. In Australia also, taxes are collected for the reason of revenue collection for nation’s development and is categorized under three major sources- personal earnings, income from capital gain and other sources (Harding and Scott 2015). The personal earning resembles the income earned by an individual as a form of salary from any professional organization; while, income from capital gain signifies the income attained by an individual by selling some personal assets like estate belongings. Moreover, the income from other sources is describes as the income that can be obtained by selling some of their personal belongings in auction or from charity while staying in other nation. All these tax is evaluated by the government of Australia according to the act of Income Tax Assessment Act 1997 (ITAA 97) (Joseph 2013). Buchanan and Consett (2016) stated that the prime reason for applying tax legislation is to perform necessary deduction on respective expenses. Tax deduction is also known as “adjusted gross income”, lowers the taxpayer’s overall tax liability, and is only implemented if it satisfies the good taxation system principles on the income earned by an individual.

In this section, the Australia’s deduction regime for individual taxpayers will be critically evaluated by providing sufficient evidences. The primary aim of this discussion is to satisfy the principles of a good tax system. The discussion of the assessment illustrates the principles of good tax system complying with the fairness of tax liability. Moreover, the deduction system in New Zealand will also be carried out in comparison to Australia’s deduction system.

Discussion

Description of Tax system

In Australia, the taxes are taken from individual and companies through the Australian Taxation Office by federal government (Buchanan and Consett 2016). Amendment (2016) states that these taxes has to paid by these sources to all level of government like  local, state, and federal governments. There are many types of taxes in Australia - personal income taxes, goods and services taxes, corporate taxes, property taxes and excise taxes. Thus, it can be clearly noticeable that these taxes are taken from the income earned either by business or by selling some belongings after adjusting the necessary deductions on expenses or exemptions based on the Taxation of Australia. Moreover, Harding and Scott (2015) mentions that the amount paid by the individual as a tax, 45% while 67% of the amount is taken by federal government. Other government tiers take the rest 55% to 33% of the remaining amount of tax.

The calculation of the tax on theincome attained by an individual is started calculating from the calendar date of from July 1 of the present year and ends to June 30 of the next year. Broderick (2014) moreover mentioned that individuals have to pay extra tax in other services like Medicare levy that is also calculated on taxable income. Taken for instance, In Australia, individuals have to pay 2%Medicare levy additional to their tax.

Description of Australia’s deduction regime

Athanasiou (2015) depict that taxpayers can apply for tax reduction or deduction on their total payables tax that are directly linked with the income earned. Thus, while paying or filing for the tax, these individual claims these deduction on their tax to the Australian Government. However, these deductions will only be allowed if all the work- related deductions are fulfilled by the taxpayers and are described below:

• The payable income they are getting should be spend by them and should not be reimbursed from any other sources like official organizations or government.
• The total expense that is claim for deduction while filing for tax should from taxpayer’s job
• As an evidence, taxpayers must have to paper/e-paper documents subjected to certain exceptions

Sadiq and Marsden (2013) highlight the concept of ‘schedule A’ that is solely formulated for “ordinary and necessary expenditures” and is used for determining job related expenses. Taxpayers can easily itemize their expense in this way so that they can claim a deduction in their total tax amount. Moreover, Broderick (2014) underlined on other scenario, where professional organization provides the facility to their employee to reimburse some of their expense, and in case, they did not reimbursed those amount, they can claim that deduction from their tax by following the ITAA principles. However, these reimbursed amounts should have to be more than 2% of total payable tax amount (Amendment 2016). Taken as an example, if an individual have to pay a tax of AUD$ 100,000 then for claiming work- related deductions, the required expense must have to more than AUD$ 20,000. Some of the expenses that can be considered to qualify for the deduction are listed below:

• Legal allowances that is provided to individual for job continuation
• Education allowances that is provided for job-trainings
• Travel allowances as a professional purpose for attending office
• License allowance for professional or occupational tax
• Depreciation allowance for equipment and technology used in the workplace
• Uniform allowances on complying with the work related clothes expenses

Description of good tax system principles or canons

Geljic et al. (2016) stated that a tax system is said to be good, if the tax system is fair as per as the formulated legislations, simple to understand and easy in maintaining transparency and adequacy. It results in better foreign investment or trade opportunities, education system and foreign investment so that the nation can develop with prosperity (Athanasiou 2015). There are some of principles of good tax system:

• Canon of equality
• Canon of certainty
• Canon of convenience
• Canon of economy

In the context of principle of equality, Asher (2016) depicts that the tax an individual pay depending on their income and thus the taxable amount is not same for all the people. Another prime benefit of a good tax system is that all the details of the taxable amount are recorded and hence free from unpredictable taxes levied on their wages.

The principle that is mentioned here is the principle of equality. According to this principle depending upon the earning capability of a person, they have to pay tax on that. The government of Australia or any nation imposes these tax amounts in such a way that if a person have high payment, they are liable to pay higher tax amount. Moreover, these values are also based on “diminishing marginal utility” assumption. The government imposes a certain rate on their basic pay depending on which these people have to pay tax.

The next canon is the principle of certainty that signifies that the tax amount that is to be paid by a taxpayer is not random or illogical but is a certain entity. It is recommended by experts that the taxable amount and the approach though which these payments are made ought to be clear and ethical. Moreover, the amount must have to be fixed by the income tax authorities arbitrarily. Pearce and Hodgson (2015) argue that if a system has lack in their certainty, the reason might be that they encourage corruption in the tax administration. Thus, it is crucial for these laws to be certain and accurate so that every individual can follow the listed regulations.

The principle of convenience is the next canon that is followed in taxation, which resembles that a convenient time should also be followed. This convenience time can be aligned with the opportune of the contributor and the sum, time and/manner of payment of a tax have to be appropriate (Saunders and Wong 2013). In Australia, also the tax department provides clear information about the concept on time of paying the tax (Saunders and Wong 2013). It is also mentioned that, if an individual is not able to pay the full tax once at a time, they are eligible to pay it in installments but this rule should also be clearly explained by the taxation department. Thus, it can be said that in order to avoid the unpredictable levy of taxable sources, taxes should be present in time.

The last canon represents the scenario, where government uses simple rules on taxation, as they have to implement the money for the betterment of the society. Saunders and Wong (2013) states that the government has to spend money on the amount they levied during the tax for doing well to the society. So, if these spending costs are higher than the levied cost, there will be in use for collecting tax and hence tax amount should be simple for achieving economy in the tax collection.

Good tax principle and Australia’s deduction regime

As per the rules of Australian Taxation Office, a certain amount on the payable salary has to be given for tax that can be claimed later. Thus, any taxation related legislation or regulations must have to follow principles of good tax system that is simple in its terms and follows all the fairness principle. Thus, government should design these deductions in such a way, that an individual can started planning for paying their tax after receiving their salary that can be claimed. Exampling a scenario of the fact that the conventional clothing is not often allowed for allowable deduction, and can be related with the case of Edwards v. FCT (1994) 49 FCR 318, where the expenses on protective cloths are not allowed for allowable deduction. According to the Australian legislation, expenses on work related clothes or uniform must have to comply with the allowable deduction under section 8-1 of the TR 95/14 ITAA97 (Law.ato.gov.au 2016). In addition to that deductible allowances can be claimed of the purpose of the manufacturing of certain products is solely for organizational purpose and should not be used for private purpose. Taken for example of “Lunney v. FCT (1958) 100 CLR 478”, Lunney can only claim the deductible allowance if the expense relates with the work or profession (Diaz 2012). Thus, it can be said that the work activities and the cash outflow must have to be relatable with each other and Lunney have to provide the evidence in connection in order to claim the deductions following the current legislation of TR 95/14 ITAA97.

In accordance with the Australian taxation law, it can be said that they follow every requirement and all their taxation laws are simple. However, an individual have to generate evidences that the expenses required to manufacturing such products should have a professional reason. It is also evident and explained by Breheny (2014) that, the claim of taxable income can only be made on the total revenue earned and the capital expense shall not be claimed. As mentioned earlier, these claims needs evidence, so it is important to maintain all the bills and documents while making any expenses so that these amount can be claimed while paying the tax. Slavickiene and Savickiene (2013) argues that even though the tax system of Australia is simple to understand and follow, Australia’s deduction regime suffers from some adversity related to the work- related deduction regulations. This can be exemplified by the normal procedure of the knowing all the tax system and their procedure, so that an individual can clearly differentiate between their revenue expenses and capital expenses and claim deduction for revenue income and not on the capital expense. However, not all individual are aware of the taxation laws and thus, it become difficult for them to understand proper taxation legislation and procedures. Moreover, a taxpayer has to follow the rule of ITAA 97. They should be aware of the use of equipment, rate and method of depreciation. Gilding and Glezos (2014) stated that this would help them to identify the depreciation deduction on work- related equipment. Another adversity arises when individuals have to follows the schedule formulated by ITAA that is the concept of block of plant and equipment rates that makes it difficult for the people to identify the accurate rate of the tax that they have to pay.  

New Zealand deduction system Vs Australian deduction system

Inland Revenue Department collects taxes in the New Zealand from the people intends to pay tax not only from their business income but also from their business income. However, the capital income is not liable and considered for paying tax except for some intangible asset. Douglas et al. (2014) furthermore explained that for claiming work- related deduction under Inland Revenue, an individual have to satisfy all the legislation proposed by New Zealand’s taxation office. These satisfactions of the maintenance of the law can be seen if the capita used in the business or professional reason. However, an individual or organization cannot claim a contradicting law also present that is depreciation, goods and service tax charges and other costs even though tease expenses directly related with the business and helps in generating business revenues.

In addition to that, if we compare the taxation legislation of both of the countries that is Australia and New Zealand, the claiming rules of work- related deductions is similar and follows same basic principle. There taxation law states that the tax amount can be claimed on the expenses that are used for the business purpose. Exemplifying the scenario that the expenses of the travel for the business purpose can be claimed if proper evidences like travel tickets and bills can be generated while filing for the tax. However, travelling in the local areas for the pre and post business purpose cannot be claimed for work- related deductions.

Marriott (2013) highlighted some of the difference that is present in the tax paying procedure of Australia and that of the New Zealand. These differences rely due to the difference sources and governing bodies for the deduction on work- related expenses. New Zealand does not have taxation legislation on the capital expenses or amount and thus, it cannot be claimed for tax deduction while in Australia, concept of capital gain taxation is present. Thus, Australian taxpayers have to provide tax on capital gain. In addition to that, concept of liability of provisional tax is imposed on individual’s earning in New Zealand. A taxpayer is eligible for this legislation if the outstanding tax amount for that person is above $2,500 (Marriott 2013). This concept is not entertained in Australia; however, there is a facility for paying tax in installment emphasizing the objective to pay the full tax in the destined year and no outstanding tax amount will remain for the next year. In New Zealand, if the inflation rate goes high, individuals can claim “in- work tax credit”. The difference with the Australian taxation legislation is that they do not any concept of in- work tax credit tax deduction as the main motive of the nation is the development of the economy and thus, eligible individual have to pay tax irrespective of high inflation rate.

Conclusion

Thus, it can be concluded from the entire discussion that, in Australia, the taxation legislations and the regulation have to be clear, simple and fair so that taxpayer can understand the tax rate and other information. However, an individual can claim deductions on their income that they have earned from business and should follow policies on deductions. These deductions can only be claimed if the person can show or generate evidences for the expense that is used for the business purpose throughout the year in order to verify the work- related expenses. It is also expected that the tax laws and regulations shows simplicity and fairness from all the four canon of the good taxation system that are equality, convenience, certainty and economy. However, it is also noted that even though there are all possible simplicity in maintaining a good taxation system, it is suffering from adversities that makes an individual difficult to identify the rate of their tax. While following appropriate taxation rulings of ITAA 97,revenue expenses and capital expenses are taxable based on different principles and laws that are cumbersome for taxpayers to attain knowledge in all perspectives.

Moreover, some differences with the New Zealand Taxation law with Australian taxation law are carried out in the discussion. This section highlighted that there are some identical characteristics of the taxation laws for both the nations like maintainace of documents and bills for the business expense that can be claimed for tax deduction while filing tax. In New Zealand, tax is only payable for revenue amount and not on the capital amount; however, in Australia taxpayer have to pay tax both for the capital and revue expenses. In addition to that, the concept of concept of liability of provisional tax is only maintained in New Zealand. An individual is eligible in this context of the outstanding tax amount on the person in more than $2,500.There is not concept of paying tax in New Zealand; while, this facility is  provided in Australia. Lastly, it is also concluded that individuals can claim “in- work tax credit” in New Zealand if the inflation rate goes high in the nation but this facility id absent in Australian taxation legislation. Australian tax department emphasizes more on the betterment of the nation and thus tax deduction allowances can never be omitted. This is also concluded that these differences in taxation system are due to different sources and governing bodies for the deduction on work- related expenses.

Reference List 

Amendment, S.L., 2016. September–what happened in tax?.Small.

Asher, A., 2016. The justice of Australian tax and redistribution in 2016.St Mark's Review, (235), p.28.

Athanasiou, A., 2015. Acounting for tax: A tale of two rulings or: How I learned to stop worrying and love uncertainty. Taxation in Australia, 49(9), p.560.

Breheny, S., 2014.The state of fundamental legal rights in Australia.

Broderick, P., 2014. SMSFs, trusts and property development: Part 1. Taxation in Australia, 49(6), p.340.

Buchanan, R. and Consett, E., 2016. Section 974-80 ITAA97: the current state of play. Tax Specialist, 19(5), p.217.

Butler, D., 2013. Superanuation: Excess contributions tax. Taxation in Australia, 47(7), p.450.

Diaz, D., 2012. Is section 8-1 (2)(b) inoperative?. Revenue Law Journal,

Douglas, H., Bartlett, F., Luker, T. and Hunter, R. eds., 2014. Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing.

Geljic, S., Koustas, H. and Burke, D., 2016. Small business restructure roll-over. Taxation in Australia, 50(7), p.404.

Gilding, M. and Glezos, L., 2014. Inheritance taxes in Australia: a matter of indifference, not taboo. Australian Journal of Social Issues, 49(1), p.23.

Harding, C. and Scott, P., 2015. Part IVA and consolidated groups: Grazing on uncertainty. Taxation in Australia, 50(3), p.132.

Joseph, S., 2013. Income tax and environmental provisions-Green gold or lead weight?.Journal of the Australasian Tax Teachers Association, 8(1), p.169.

Law.ato.gov.au., 2016. TR 97/12 - Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear (As at 17 August 2011). [online] Available at: https://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR9712/NAT/ATO/00001 [Accessed 30 Dec. 2016].

Marriott, L., 2013. Justice and the justice system: A comparison of tax evasion and welfare fraud in Australia and New Zealand. Griffith Law Review, 22(2), pp.403-429.

Pearce, P. and Hodgson, H., 2015. Promoting smart travel through tax policy.Tax Specialist, 19(1), p.2.

Sadiq, K. and Marsden, S.J., 2013. The CGT small business concessions: recent evidence from the perspective of the tax practitioner.

Saunders, P. and Wong, M., 2013.Examining Australian attitudes to inequality and redistribution. The Journal of Australian Political Economy, (71), p.51.

Slavickiene, A. and Savickien?, J., 2013. Assessment of the principles of family holding taxation.Intelektin?ekonomika, (7 (1)), pp.86-100.