Determining Permanent Establishment
The existing study considers the ascertainment of Taite and Aramisa is a British resident looking forward to perform the business of land development, whether or not they would be considered for assessment under the Permanent Establishment. The definition of Permanent Establishment stated under subsection 6 (1) of the Income Tax Assessment Act 1936 and it is implemented with the objective of ITAA 1997 and Schedule 1 of the Taxation Administration Act 1953 given that there is any different intention (Barkoczy, 2016). This ruling is implemented on person who are Australian resident and executes trading activities out of the country or is a non-resident of Australia carrying on business in Australia and searching direction on having place with the objective of subsection 6 (1) of the definition.
Since Taite and Aramis have planned to establish a parent company in Australia, place becomes the ingredients of permanence geographically and temporally. Hence, permanence in case of Taite and Aramis plan of setting up the business does not represent permanence. As held in Applegate v. FCT 78 ATC 4054 at 4060; (1978), permanence does not represent forever (Barkoczy et al., 2016). As an advisor, if Taite and Aramis operates at or all through the place regularly for more greater than six months that place will be considered as temporally permanent.
Permanent establishment plays a vital role in determining the assessable liability in international and domestic taxation law. It is first used in Australia for tax treaty formed with United Kingdom (Braithwaite, 2017). Permanent establishment is pivotal in assessing the Australian tax treaties representing a permanent position of trade through which a firm caries on trading activities either completely or partially.
On presumptuous that the assessable companies engaged are Australian occupant for taxation, Taxation Rulings TR 2004/4 considers the deductions for interest that is incurred earlier to or subsequent to the cessation of income activities. The deduction of interest in case of Taite and Aramis is determined on the assessment of borrowing and usage of the borrowed funds. With reference to Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 usually the objective of borrowing is determined on the usage of the borrowed funds. Interest outgoing is regarded as frequent expenses (Christie, 2015). The fact that borrowed funds can be used to acquire capital asset however does not symbolizes that outgoing of interest is based on capital account. The statutory issue concerning the current study of Taite and Aramis is whether the outgoing of interest occurred in the income producing activity or in state of affairs of second limb of the section 8-1 of the ITAA 1997. Citing the reference of Texas Company (Australasia) Limited v. FC of T (1940) 63 CLR 382 the tax system of Australia deems interest on borrowed funds to protect the capital in respect of the current income producing activities (Dunne et al., 2016). On arriving at the decision the interest expenses is understood as an outgoing that incurred in producing the assessable earnings.
The deduction of loss comprising of interest is stated under section 8-1 of the Income Tax Assessment Act 1997 is particularly dependent on satisfaction of the above stated statement. According to the TR 95/2 the expected loss or outgoing incurred by the taxpayer in achieving the assessable income of the assessor and loss does not symbolizes capital in nature (Faccio & Xu, 2015). The existing study of Taite and Aramis evidently demonstrates that whether or not the assessor incurred loss or outgoing, it complies with the requirement of section 8-1 based on information associated with the loss occurred by the assessor in query.
Role of Permanent Establishment in Determining Tax Liability in Australia
Citing the case of FC of T v. Smith 92 ATC 4380 as a reference interest on borrowing to finance the repayment of money that was advanced by the associate and users in the form of capital under a partnership firm will be regarded for deductions under subsection 51 (1). Interest on borrowed funds will be held liable for deductions with the purpose of generating assessable income (Fry, 2017). In the present study of Taite and Aramis while assessing the whether the interest is deductible sufficient considerations must be paid to the business context during which the funds was borrowed. On applying the decision of federal court in FC of T v. Roberts, interest on borrowing by the company may be regarded for deductions. It might under the circumstances where the borrowed funds put under use for refunding the reimbursement of share capital to the shareholders and the capital that is repaid was put into use as capital or working capital in the business conducted by the company with the objective of producing taxable income.
The court summarized the applicability of the principles regarding deductibility by referring to FC of T v. Riverside Road Pty Ltd 90 ATC 4567 under section 51 (1) of the Act. In assessing the deductibility of loss for Taite and Aramis due attentions must be paid on the objective surround the loss (Jacob, 2016). The present scenario meets the requirement of Taite and Aramis in fulfilling the requirement of section 8-1.
Capital gains tax can be defined as the tax which is paid on capital gain on annual income tax return. If a person acquires a land that is vacant for the personal purpose or with the objective of investment, it is regarded as capital asset and it is subjected to capital gains tax. Nevertheless, given a person purchases a land for using it in the form of business activity transacting in land it would be regarded as the trading stock. Land is generally treated as trading stock with the objective of income tax rather than considering it as the capital asset as Taite and Aramis were indulged in the operations of land dealing and holding the land for the purpose of resale (Kabinga, 2015). A single acquisition of land for development, subdivision and sale in the existing scenario would lead to sale being treated as trading stock. Proceeds from the land would be regarded in the form of ordinary income and will not be assessed as capital gain with associated cost shall be considered for deductions.
There are some types of business risk that is linked with this plan and they are as follows;
Increasing rate of interest leading to higher cost of holding:
The taxpayer should often take into the considerations the probability of increase in interest rates during the span of land development (Glendon et al., 2016). There are circumstances where land developers have fell in trap of rising rate of interest when they borrowed bigger amount of fund at lower interest rate.
Social change such as immigration and higher rate of interest leading to decrease in purchasing activity of purchaser and this may ultimately result in declining consumer demand.
Risk assessment methods:
Sensitivity analysis: One of the most methodical method of approaching risk evaluation is sensitivity analysis. Sensitivity analysis assist in the evaluation of impacts on profitability associated to valuable variables (Glendon et al., 2016). The purpose of sensitivity analysis is to analyse the combination of changes in developing variables to appraise the impact of outcome. The sensitivity analysis assist the appraiser in advancing from the recognition of range outcomes for the control variables by distributing the likelihood of each of these variables.
Reference List:
Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.
Barkoczy, S., Nethercott, L., Devos, K., & Richardson, G. (2016). Foundations Student Tax Pack 3 2016. Oxford University Press Australia & New Zealand.
Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Christie, M. (2015). Principles of Taxation Law 2015.
Dunne, J., Taylor, H., Batten, N., &Krapivensky, N. (2016). 2015 case review: High ATO success rate continues. Taxation in Australia, 50(10), 609.
Faccio, M., &Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), 277-300.
Fry, M. (2017). Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal, 57(1), 49-63.
Glendon, A. I., Clarke, S., & McKenna, E. (2016). Human safety and risk management. Crc Press.
Jacob, M. (2016). Tax regimes and capital gains realizations. European Accounting Review, 1-21.
Kabinga, M. (2015). Established principles of taxation. Tax justice & poverty.
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