Impact Of Financial Distress Corporate Tax: Analysis Of Income And Capital Gain Tax

Analysis of Ordinary Income and Statutory Income

What Is The Impact Of Financial Distress Corporate Tax?

In the present case, the company has been in the business of renovations for the last 30 years. After that, it was faced with a downturn in the market and sought to look for new sources of income. Hence, it purchased old houses in the city, renovated them, and leased them out for high rents. In the current year that is for the current taxation-law year the company has reinstated its old functions and sold the assets held by it. Due to the sale of the assets held by the company, a huge profit was earned by the company[1]. Following is the analysis of the virus laws and regulations relating to the ordinary income and the capital gain tax prevalent in the country. After considering all the relevant provisions of the law applicable in the present scenario a conclusion is given in respect of the tax treatment that has to be initiated in respect to the present transaction of the company.

The income according to the accounting concept is known as the ordinary income. The meaning of the ordinary income is a lot dependent on the natural meaning of the words. In addition to that, it depends on the natural interpretation by the court[2]. The three attributes of an ordinary income are as follows:

1. The amount or a part of the total amount being classified as accrued in respect of the taxpayer due to the conduct of business by him.
2. The amount or part of the amount has accrued to the taxpayer from the services that have been rendered by him to some other entity.
3. The income that is to be classified is received as a compensation for foregoing an item that would have resulted to the inflow of income for the taxpayer presently or in the future.

There are other parameters too in relation to which the amount is measures so as to establish whether it is an income or not. They are as follows:

1. Is the amount to be classified has been actually received by the tax payer.
2. Is the nature of the income is to occur regularly or periodically.
3. Has the income accrued from the use of any asset?
4. Is the income a result of the compensation received for the loss of income earned by the taxpayer?
5. Is the amount or item received by the taxpayer convertible into cash or not.

As per the provisions of this section the income that are not ordinary income are termed as statutory income.

As per the provisions of this act, a CGT asset can be referred to as any kind of property and any legal or equitable right that cannot be termed as property. The section further goes onto kits out specific assets to avoid any sort of doubt in the future[3]. They are as follows:

1. A particular part of, or specific interest held in any asset that has been referred to in the sub section 1.
2. The goodwill of any entity along with any interest in it.
3. The interest held by the entity in the in an asset of the partnership.
4. Any sort of other interest in the partnership that was skipped by the paragraph (c).

Some of the examples of the capital assets as listed out by the entity are as follows:

• Land and buildings.
• The shares of any company and the units in any unit trust.
• The various options.
• The debts owed to the taxpayer.
• The right with the entity to enforce any contractual obligation.
• Any sort of foreign currency.

In addition to this, it has been specifically stated out that no asset shall be considered as a capital asset if the same has been acquired before 26^th of June 1992 and was not considered an asset for the purpose of former Part III A of the Income Tax Assessment Act 1936[4]. 

The income that is earned by the company in respect of the property acquired by it on lease falls under the purview of the ordinary income. The reason being as follows:

1. The amount of that is earned by the company in respect of the high rent from the properties is earned by the company by the conduct of a business[5].
2. The company has been able to receive the amount accrued to it in respect of the use of the asset by the lessee[6].
3. The amount received by the company is recurring in nature. In other words, the company receives the income from the source on a regular basis on not only during the happening of a particular event[7].
4. The income that is earned by the company in respect of the rent is accrued to it due to the use of its assets by the lessee.

Conditions of Ordinary Income

The profit that is earned by the company because of the sale of the houses owned by it does not satisfy any of the condition of the ordinary income and hence it is categories as statutory income[8].

It can be said that the property held by the company can be termed as capital asset as pert the provision of the section 108.5. The gain arising out of the sale of the capital assets held by the entity is termed as capital gain[9].

It can be concluded from the analysis that has been undertaken above in respect of this case that the rental income that was being previously earned by the company satisfies all the conditions of an ordinary income while the income or the gain that is earned by the company in respect of the sale of the asset held by the company does not fulfil any of the condition of the ordinary income and hence is to be treated as statutory income. It has to be noted that the assets held by the company has satisfied all the condition as specified in the section. Hence can be termed as capital assets, which have been sold by financial company.

The calculation and determination of Fringe benefit amount is determined by Fringe Benefit Tax Assessment Act 1986. The rules relating to the car fringe benefit is provided under Division 2 of the Act. There are two methods for determining the taxable value of car fringe benefit. The calculation based on the statutory formula method provided under section 9 of the act is provided below:

The taxpayer can choose any of the method for valuation whichever is lower. The Taxable value of $5314.96 will be selected as it is lower.

The loan fringe benefit is provided if loan is provided with low or no interest rate. The statutory interest rate is 5.25% for the year ended 31 March 2018. The taxable value of loan fringe benefit is the difference between the statutory rate and the actual rate[10]. The calculation of the loan fringe benefit

The section 40 of the act provides that property fringe benefit arises if the employer provides any property to the employee either for free or with a discount[11]. The calculation of the property fringe benefit is provided below:

Reference

Becker, Johannes, E. Reimer, and A. Rust. Klaus Vogel on Double Taxation Conventions. Kluwer Law International, 2015.

Burkhauser, Richard V., Markus H. Hahn, and Roger Wilkins. “Measuring top incomes using tax record data: A cautionary tale from Australia.” The Journal of Economic Inequality 13, no. 2 (2015): 181-205.

Evans, Chris, Philip Lignier, and Binh Tran-Nam. “The tax compliance costs of large corporations: An empirical inquiry and comparative analysis.” (2016).

Ferraro, Ruth. “Tax education: First graduands to receive GDATL.” Taxation in Australia 50, no. 10 (2016): 594.

Gunnarsson, Åsa, and Eva-Maria Svensson. Exploiting the limits of law: Swedish feminism and the challenge to pessimism. Routledge, 2016.

Hodgson, Helen, and Prafula Pearce. “TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1.” eJournal of Tax Research 13, no. 3 (2015): 819.

James, Simon, Adrian Sawyer, and Ian Wallschutzky. “Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom.” eJournal of Tax Research 13, no. 1 (2015): 280.

King, Alexander. “Mid market focus: The new attribution tax regime for MITs: Part 1.” Taxation in Australia 50, no. 10 (2016): 590.

Maurer, Ludmilla, Christian Port, Tom Roth, and John Walker. “A Brave New Post-BEPS World: New Double Tax Treaty Between Germany and Australia Implements BEPS Measures.” Intertax 45, no. 4 (2017): 310-321.

Mumford, Ann. Taxing culture: towards a theory of tax collection law. Routledge, 2017.

Richardson, G., Taylor, G., & Lanis, R. (2015). The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, 44-53.

Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order