Pacc6006 Taxatation Law-Capital Gain Functions Assessment Answers
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.
Answer:
Issue
In the given case description; Eric is engaged in acquiring and disposal of assets due to which he will be liable to pay tax on thenet capital gain. Therefore theissue of this question is thecomputation of taxable amount for net capital gain or loss by considering all transactions.
Regulations
As per capital gain taxation provisions of Australia; if holding period of capital assets is less than 12 months then thecomputation of taxable amount is done by making use of other method which is the easiest method (Harding, 2013). In this method; themere purchase price of anasset is deducted from sale amount, and taxable amount is determined.
Applicability
According to the case facts; other method will be applied as holding period of assets is not exceeding 12 months. Computation of taxable amount for Eric by applying this method is as follows:
|
Assets |
Purchase cost |
Sales price |
Loss or gain (Sales price- Purchase cost) |
|
Antique vase |
$2,000.00 |
$3,000.00 |
$1,000.00 (gain) |
|
Antique chair |
$3,000.00 |
$1,000.00 |
$2,000.00 (loss) |
|
Painting |
$9,000.00 |
$1,000.00 |
$8,000.00 (loss) |
|
Home sound system |
$12,000.00 |
$11,000.00 |
$1,000.00 (loss) |
|
Shares in a listed company |
$5,000.00 |
$20,000.00 |
$15,000.00 (gain) |
|
Net capital gain |
$5000.00 | ||
Conclusion
According to cited computation taxable amount for Eric is $5000.00.
Issue
Brian, a bank executive and was provided with the three-year loan of $1m at a special interest rate, i.e. 1% pa ( monthly instalments payable) as a part of his salary package. On 1 April 2016, the loan was provided to him. 40% of the funds borrowed were used for income generating purposes by Bill. Bill also met his interest payments obligations with these borrowed funds. Thusissue, in this case, is thecomputation of taxable amount by applying provisions of fringe benefits tax in Australia by considered all three situations.
Regulations
Fringe benefits are payable on non-monetary benefits provided by theemployer to anemployee in Australia. In thecontext of theloan; fringe benefits tax is payable on thedifferent amount of interest charged by theemployer and standard interest computed as per statutory rates (Woellner and et.al. 2016). For 2016 rate is 5.65%.
Applicability
By applicability of cited provisions; thetaxable amount for Brian.
Conclusion
Taxability if interest amount is paid in instalments
The taxable value of loan fringe benefit is $46,500.00.
Taxability if interest amount paid together
The taxable value of loan fringe benefit will be $46,500.00 as it will not be affected if interest is paid on monthly basis or in lump sum amount
Taxability if Brian get exempted from payment of interest by bank
The taxable value of loan fringe benefit will be $56,500.00 as in this case Brian is required pay 0% interest so entire statutory interest will be taxable amount.
Issue
Jack (an architect) and his wife Jill (a housewife) had taken a loanfor possession of therental property as joint tenants. Jack agreed for 10% of the profits and Jill agreed for 90% of the profits from the property for forming written agreement. It was also stated in the agreement that Jack is entitled to 100% of the loss if the property generates a loss. A huge loss of $10,000 aroused last year.Thus theissue is regarding theimpact of loss in thecomputation of taxation and consequence if theproperty is sold.
Regulations
According to Australian taxation provisions TR 93/32; terms of the partnership agreement is considered for taxation purpose only if the business is carried on a continuous basis (Mete, Dick and Moerman, 2010). Further; terms determined by joint owners of the rental property will not be considered for apportionment of tax losses and profits.
Applicability
In the cited case agreement of Jack and Jill is as follows:
|
|
Jack |
Jill |
|
Profit Ratio |
10% |
90% |
|
Ratio for distribution of loss |
100% |
Nil |
However, they are not carrying on business due to which terms of their agreement will not be applicable for computation of taxation.
Conclusion
Allocation of revenue loss
The loss occurred in the previous year will be allocated in the ratio of 1:1 asthey are not carrying on business due to which terms of their agreement will not be applicable for computation of taxation.
Allocation of capital gain or loss
Similar provisions will be applied for allocation of capital gain or loss among partners.
Case
The case herewith mentioned in the file is of tax avoidance with reference to Duke of Westminster's and IRC, in which The Duke of Westminster has employed a gardener who was offered with a salary from Duke's substantial post-tax income. However, the Duke has reduced tax liability through drew up a covenant instead of paying salary, with the similar amount. In this regard, Duke was entitled to claim a deduction thus tax liability and surtax were reduced (Likhovski, 2006). It can be justified that claims are made for a single year or as an annual payment made.
Principle established in IRC v Duke of Westminster [1936] AC 1
According to the guidelines of taxation, it is illegal to avoid tax but tin this case Inland Revenue Commissioners (IRC) would not be able to win the case against the Duke. The court has given words that an individual is allowed to order the affairs, in respect to the tax attached under appropriate Acts. Nonetheless, in this case the party was ungrateful and the fellow tax-payers were too clever, so they were not willing to pay taxes. This case is said to be a case in which people were seeking to avoid tax legally by making the tax structure more complex. However, the other principle like “Ramsay principle” that are established by court are said to be under a restrictive approach which are taken to reduce the cases of tax avoidance (Simpson, 2005). As per the laws of this principle, if transaction made by the party is pre-arranged artificial step and is operated for no commercial purpose than it would not be legally taken (Simpson, 2005)
Relevance of this principal in Australia
In the present scenario, the issue of tax avoidance has been increased in Australia, and many of companies are taking advantages of the above mentioned case and its relevance.
As in the case the liability of Duke is dramatically reduced for not paying salary just to avoid tax is approved. However, companies are taking advantages of avoiding and reducing taxable profit. The courts have considered that the fiscal jurisprudence of Australia have been changed and principle of Duke of Westminster [1936] AC are not applied, thus tax planers cannot stuck down to this and avoid artificial tax deductions.
Issue
The case scenario indicates the issue of assessing the receipts from a property and the tax applied on it. Bill, who is the owner of a land which is covered from pine trees, has an offer to use the land for grazing sheep. However, he is approached by a company with a deal to pay him $1,000 for every 100 metres of timber which is taken from the land. And the next deal is that the company is willing to pay lump sum of $50,000 for granting the right to remove as much timber as required from his land. The main issue faced by Bill is whether to pay taxes against the land against the amount earned in both the cases.
Legal provisions for taxation
Disposal of standing timber that is not related to regular business course
As per the taxation rules under TR 95/, taxpayer owns a property for the disposing of timber, nonetheless, the decision of planting trees is to be taken for the purpose of sale. The subsection 36(1) reveals the laws against disposal of timber and in other situation the owner must operates the business of forest operation. Furthermore, Subsection 36(1) says that trees are planted on leased provides entire ownership of leased plants (Likhovski, 2006). Subsection 36(1) and 25(1) of TR 95, are applied in the situation and Bill has to pay tax in bother the cases,
Rights disposal to standing timber
Tax payer is operating a business of forest operation should remove the standing timber, the case revealed against cutting the standing timber. The subsection 25(1), is applied to the case as the income is accessible from the regular business. The situation is applicable at the time when disposal will take place (Schofield, 2008).
Conclusion
However, subsection 36(1) and 25(1) of TR 95, are applied in the situation and Bill has to pay tax in bother the cases, whether he received $1000 the income the section 36(1) is applied and in case lump sum amount subsection 25(1) is applicable.
References
Harding, M., 2013. Taxation of dividend, interest, and capital gain income.
Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster. Sage
Mete, P., Dick, C. and Moerman, L., 2010. Creating institutional meaning: Accounting and taxation law perspectives of carbon permits. Critical Perspectives on Accounting, 21(7), pp.619-630.
Schofield, R., 2008. Taxation under the early Tudors 1485-1547. John Wiley & Sons.
Simpson, E., 2005. The Ramsay Principle: A Curious Incident of Judicial Reticence?. British Tax Review, 4, p.358.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
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