Taxation Law Assignment: Case Scenarios Based on Taxation Theory, Practice & Law

Question

Task: The questions to be answered in this taxation law assignment are:

Question 1:
Mason is a car painter with Melbourne Collision Repair Centre. Mason studying BPA and his employer pays for his course fees at Holmes Institute costing Mason $12,000. Also, Mason lives in a unit apartment in Brisbane, which is provided to him by Melbourne Collision Repair Centre as his employer as fringe benefit. The market value rent for the apartment is $500 per week, and Mason pays $100 of rent per week for the apartment.

Required:
Advise the FBT consequences of Mason’s remuneration package.

Question 2:
Alex is a carpenter who purchased a vacant block of land in Sydney on 1 October 1980. On 1 September 1986, Alex built a house on the land. At the time, the land was valued at $110,000 and the cost of construction was $100,000. Immediately, after the construction finished, the property has been rented out. On 1 March 2019, Alex sold the property at auction for $1,400,000.

Required:
With reference to relevant legislation/case law, determine:

a) Alex’s net capital gain or net capital loss for the year ended 30 June 2019 using both Discount method and Indexation method.

b) How would your answer to a) differ if the owner of the property was a company instead of Alex?

Question 3:
Bowens Pty Ltd is a building material supplier in Victoria. Bowens Pty Ltd has an annual turnover of $24 million, and works under the accrual method of accounting. Bowens Pty Ltd purchases concrete mixer for $660 each from Builder’s Choice Pty Ltd, a company in Geelong with an annual turnover of around $21 million, and works under the accrual method of accounting. Bowens Pty Ltd plans to sell the concrete mixers at a 200% mark-up to its customers. In October last year it purchased 220 concrete mixers but in December they discovered that 12 of the concrete mixers were faulty and subsequently returned these faulty concrete mixers to the manufacturer, obtaining a full refund. Assume both apply the accrual method of accounting.

Required:
With reference to relevant laws, discuss the GST consequences of this arrangement for both Bowens Pty Ltd and Builder’s Choice Pty Ltd.

Question 4:
Due to COVID-19 impact, Watson Co becomes insolvent and placed into voluntary liquidation by its directors. Dissolve liquidators have been appointed as the company liquidators. On the winding up of the Watson Co, Dissolve liquidators have started distributions and Paul as ex-shareholder of Watson Co received $7,200 from the liquidators, which was inclusive of $3,000 unfranked dividend pursuant to the provision of Income Tax Assessment Act 1963, selection 47(1). This distribution to Paul was from his $4,000 investment in the shared of Watson Co on 2nd February 2019.

Required:
With reference to relevant provisions of ITAA 97 and ITAA 36, critically analyze the tax consequences of the above scenario for Paul.

Question 5:
Steve and his cousin Alex started an equal partnership business, Euca Sanitizers, motivated by the increase in the recent demand for hand sanitizers during the COVID-19 pandemic. Steve lives in Sydney and is an Australian resident for tax purposes. Alex however, is resident of New Zealand and is a foreign resident for tax purpose in Australia. On 30 June 2020, Euca Sanitizers partnership net income is $300,000, 60% of this income is generated from selling hand sanitizers to Australian retailers and 40% comers outside Australia from sale of hand sanitizers to New Zealand retailers.

Required:
With reference to relevant provisions of ITAA 97/ITAA 36, discuss how the partnership income is taxed.

Answer

Answer 1
As per the tax provisions with regards to Fringe Benefits Tax (FBT) reviewed in this taxation law assignment, in every financial year, the employer must pay FBT based on the taxation value of Fringe benefits, Ato.gov.au(2020). Furthermore, if the taxation value of an employee exceeds $2000, then the employer is also liable to highlight information in the payment details about fringe benefits, Woellner et al. (2016).

Based on the provided scenario, as fringe benefits for the BPA course fees of Mason, Melbourne collision repair centre pays $12,000. This amount would be considered as the fringe benefits as the course is not related to the employment of Mason. Additionally, accommodation is also provided for $100 rent per week while the market value is $500 per week.

Hence, the annual fringe benefits are-

52*($500 - $100) + $12000= $32800;

In the case of GST credit is not provided by the employer which is similar in the case of Mason, 1.8868 gross-up rates will be regarded.

Fringe benefits (Taxation value)= 1.8868* $32800= $61887.04;

Hence, the FBT= 47%* $61,887.04= $29087; (The FBT rate is evaluated as 47%)

Due to the FBT of $29087, $61887.04 should be added to the salary package cost of Mason. Hence, Mason's employer is liable to pay $61887.04 for each financial year.

Answer 2
a) Based on ITAA 1997, section 110-25(2), the base cost of the CGT asset would be paid based on the market value of the asset CGT, Legislation.gov.au (2020). Likewise, section 110-25(5) also highlights that expenditure for preserving the CGT asset would be added in the base cost. For Alex, to increase the market value and renting the property, the total base cost of $210000 (Land +Construction) was invested. In the year 2019, 1st March, the property was sold at $1400000 and was held for more than twelve months. Therefore, based on the sale of the property, capital gain (CG) would be payable.

Discounted method calculation for net capital gain

Hence, the net capital gain after the discount factor is $595000.

Indexation method calculation for Net Capital Gain-
This method is applicable based on two conditions: acquiring of assets before 21st September 1999 and holding the asset for more than 12 months, Legislation.gov.au (2020). Alex has fulfilled the two conditions explicitly.

CPI of 43.2 is evaluated for the year 1986, September quarter;

Hence, indexed cost is 43.2* $210000= $9072000

b) In case a company is not an investment firm, then it is liable to pay capital gain for the disposal of assets that are not utilized for businesses, as per provisions of income tax act on CG, Barkoczy (2016). For a company, only the indexation method is applicable for the evaluation of net capital gains or losses that are paid during income tax returns. On the contrary, the discounted method is not applicable as a 50% discount is offered on capital gains.

Net capital loss or gain of a company

Answer 3
Concerning the provided scenario, 110 concrete mixers for $660 each (including GST) was purchased by Bowens Ltd from Builder’s Choice Pty Ltd in October. Including 10% GST, $72600 was paid by Bowens in total.

Total GST amount= 10/100 * 72600= $6600

Irrespective of cash received or not, both the companies are liable to pay GST for the same month when the transaction occurred, based on the accrual method, Braithwaite (2017).Companies attaining annual turnover more than $20 million, are liable to GST return monthly highlighting GST input credits and liability respectively for the particular month, based on GST law provision. Bowens would have $6600 input GST credit for October and Builder’s would have $6600 GST liability which has to be paid to the Government.

On the contrary, in December, it has been comprehended by Bowens that the purchases made in October included around 12 faulty concrete mixers. Those were returned to Builder’s while a full refund was claimed and paid simultaneously for the same. Based on the adjustment particulars of GST legislation, Division 19-B highlights adjustment of credits to product returned or recalled to the supplier and GST payments adjustment as well.

Additionally, subdivision 19B, 19-40suggests that adjustment in GST made earlier to the taxation period, increasing or decreasing adjustments has to be significantly made in the month of adjustment, Legislation.gov.au (2020). Likewise, subdivision 19A, 19-10 explicitly suggests that adjustment events or particulars should be included based on the return or recall of goods to the supplier for a product or part that has been supplied, irrespective of the change in ownership.

In December, Bowens returned 12 concrete mixers to Builder’s along with GST considerable is $720. Likewise, in the activity statement, both Builder’s and Bowens have to make necessary adjustments in GST events due to the return of the mixers. Hence, Builder’s would make decreasing GST adjustments in December for claiming $720 back as it has been paid in October and provide an appropriate adjustment summary to Bowens. Furthermore, Bowens would have to pay back GST credit of $720 by increasing GST adjustments in the net GST for December which makes the company liable to pay the increased amount.

Answer 4
Concerning Income Tax Act, 1936, section 44, if a company pays dividends from its profit then such amount must be added to the shareholder’s assessable income, Legislation.gov.au(2020). Specifically, the first instance highlights that during liquidation, the distribution made by the liquidator cannot be paid from the company’s profit. On the contrary, section 47 (1) highlights that income derived during the distribution of liquidator is referredto as a deemed dividend by the shareholders. Hence, it will be integrated into the shareholder’s assessable income.

Furthermore, during liquidation or a company being winded up, the shares of the shareholders are automatically cancelled. The distribution of liquidator will drive CGT events C2 that can result in capital losses or gains. Hence, the full amount of the distribution of liquidators must be integrated with regards to cancelled shares. Additionally, the base cost of the company’s shares being liquidates should be the amount paid for the shares as well as other extra costs paid, Thuronyi & Brooks (2016).

Based on ITAA 1997, section 118-20, the amount of CG with regards to the cancellation of the shares is decreased by the distribution amount received by the shareholder concerning the Income Tax Act, 1936, section 47, i.e., any deemed dividend attained, Legislation.gov.au(2020). In the case of Paul, receivable of $7200 along with $4200 shares and $3000 unfranked dividends held by him. The total cost paid by Paul is $4000. Hence, with regards to the highlighted provisions, Paul entails $200 of CG or capital gain based on the received capital of ($7200- $4000)= $3000, which is comparatively less received in the form of dividends.

Answer 5
Concerning Income Tax Act 1936, section 91 of the act highlights that a registered partnership firm in Australia is not liable to pay tax because the taxes are paid by the partners and are passed through entities based on the share of income, Legislation.gov.au (2020). Additionally, for every partnership firm, the returns are only furnished for the same. On the other hand, based on section 92, the income of a partner should integrate each income derived from the partnership firm that is earned outside and inside Australia.

The Australian resident is liable to pay taxes on global income amount as the person is a partner in the partnership firm. However, international tax payments for income received outside Australia are offered with a tax offset as well. Non-residents of Australia are liable only to furnish tax returns but not taxed for income attained in Australia, Bentley (2016).

Base.d. ..o.n. the provided scenario, the total income of the partnership is accounted for by $300000 in which $180000 (60%) has been generated in Australia and the rest amount of $120000 has been generated in New Zealand. Likewise, Alex and Steve are 50-50 partners. Alex is not liable to pay any income tax for his share in the partnership and income being non-resident but must furnish return explicitly. His income is $90000. On the other hand, Steve is liable to pay taxes on his share of income of $150000 being a resident. Steve can be offered with a tax offset for the income gained from New Zealand

References
Legislation.gov.au.(2020).Income Tax Assessment Act 1997. Retrieved 23 June 2020, from https://www.legislation.gov.au/Details/C2017C00336/Controls

Legislation.gov.au.(2020). A New Tax System (Goods and Services Tax) Act 1999. (2020). Retrieved 22 June 2020, from https://www.legislation.gov.au/Details/C2014C00008

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Thuronyi, V., & Brooks, K. (2016). Comparative tax law. Taxation law assignment Kluwer Law International BV.

Bentley, D. (2016). Taypayer Rights in Australia Twenty years after the Introduction of the Taxpayers' Charter. eJTR, 14, 291.

Income Tax Assessment Act 1936. Retrieved 23 June 2020, from https://www.legislation.gov.au/Details/C2017C00242/Controls/

Ato.gov.au.(2020).Calculating your FBT. Retrieved 23 June 2020, from https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/calculating-your-fbt/