Tax Implications Of A ‘Tree Change’ To A Farming Lifestyle

Selling of Main Residence

From the current scenario, it is found that Amy and Ben were living and working in Melbourne house. They sold off their Melbourne home and bought a house in central Victoria. As stated by the Australian taxation office an individual can generally claim exemption for their main residence from the capital gains tax (Woellneret al. 2013). In order to obtain exemption, the property must have to be dwelling in nature and the person must have lived in it. As evident from the current scenario that Amy and Ben were using the house of Melbourne as their dwelling residence before selling it off and purchasing a house in Central Victoria.

Amy is a practicing locum doctor and as stated under the principle doctor and locum doctor of Australian Medical Association standard a tax instalment deductions should be made from the locum’s pay. As evident from the case study Amy received fee from the service imparted and as stated under the subsection 221 A (1) of the Australian Medical Association payments that is received by the locum in the form of salary or wages within the meaning of the subsection shall be held for tax instalment deductions (Barkoczy 2016).

It is necessary to understand the difference between the hobby and the business for the purpose of taxation. If an individual is currently undertaking an activity or intended to commence the business activities it is necessary to understand whether an individual’s activity constitute business or hobby (Taylor and Richardson 2013). Unlike the hobby, a business has the reporting requirements in the form of declaring income that is earned and claiming expenditure. As held under the Evans v. Federal Commissioner of Taxation 89 ATC 4540 the taxpayer has been for several years followed the interest in horse racing and stated betting as the hobby and the taxpayer hobby exceeded his losses for the previous year.

The federal court ruled that Evans activities did not constituted business and his winnings from horse betting would not be held for assessment. The facts obtained from the case stated that the taxpayer did not carried the business of betting and he did not even followed any system of betting but placed betting in accordance with the guiding principles (Saad 2014). Therefore, the indicators should be considered in combination as the whole and the business activities depends on large or general impression that is gained.

The current scenario is based on the determination of whether or not the activities of Amy and Ben constituted business or hobby. As evident from the case study, it is understood that Amy and Ben had a few hectors of land and began growing vegetables. The even underwent course on organic farming and discovered a surplus production. The case study highlights that every Sunday ben opened a stall and sold their excess produce to local supermarket and suppliers on regular basis.

As stated under the taxation rulings of TR 97/11, an individual carrying on the activities that might be described in the form of primary production in the ITAA 1997 (Faccio and Xu 2015). According the subsection 995-1 (1) of the ITAA 1997 the activities of Amy and Ben represented cultivation or propagating of vegetables and should be treated as business activities. The activity of Amy and Ben was repetitive in nature and had regularity as the excess produce were sold to the local supplier in the local market.

Distinguishing Hobby vs Business

Subsection 995-1 (1) of the ITAA 1997 the business as the activity which is of same kind and had carried on the identical manner in relation to that of the ordinary trade (Chaturvedi 2015). As evident, the taxpayer both Amy and Ben does not intend to derive all his or her income from the primary production activity since they are employed in their occupation and profession. Nevertheless, it is important to consider that the activities of production amounts to carrying on of a business and income derived from activities attracts tax liability.

Bartering consists of direct exchange of goods or services form other goods or services without making the reference of money or monetary value. As evident from the case study, it is understood that Amy and Ben decided to set up the Barter system in their area and engaged in the activities of barter. On one event Sahara agreed to provide the service of hairdressing at her home and 15 to 20 barts were credited for exchange of goods or service with equitable value. Therefore, as defined under the taxation rulings of 2668 barter transactions are held for assessment and deductible for the purpose of income tax to the same degree in the form of other cash or credit transactions (King 2016).

When an entity being the member of the trade exchange performs the activities of taxable sale to another member, it attracts tax liability along with the GST as well. The case study evidently states that Amy and Ben formed a barter entity and made taxable sales to Sahara in the form of trade exchange being debited to the account of recipient. As the general rule, the Barter transactions will be held for assessment for income tax purpose along with the GST.   

The following circumstances determines that whether the amount derived by Abby is ordinary income and assessable under section 6-5 or assessable under section 15-15. Section 15.15 of the ITAA 1997 states that an individual’s assessable income consists of the profit derived from carrying or carrying out of the profit-making scheme (Russell 2016). As evident from the case study, Abby sold the land for $650,000 and derived from such selling activities.

According to the section 15.15 Abby acquired the property before 20 September 1985 with the intention of making profit by sale and his assessable income would include the profit derived from selling of land. When the taxpayer sold or disposes the property by virtue of any proceedings the provision of this previously mentioned section is deemed to have been acquired by the taxpayer with the objective of profit making(Millar and Moon 2016). Therefore, the amount derived by Abby will be considered for assessment under section 15-15 of the income tax assessment act 1997.

Computation of Capital Gains Tax of Land

Assumptions:

The following amounts that are included because they form the direct cost of the property are as follows;

Amount included

1. Stamp duty
2. Legal cost of conveyance
3. Water and council rates
4. Establishment fee for interest on bank loan
5. Development application fee that was paid to the local council
6. Architectural fees
7. Building materials
8. Abby’s labour hour

The following cost are excluded since they do not form the part of direct cost to land

Amount Excluded:

1. Legal fees arising out of appeal against the council
2. Valuation cost

Computation of Capital Gains of Property

Assuming cost base 600,000:

Reference List:

Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. The American Economic Review, 105(5), pp.38-42.

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

Chaturvedi, K.N., 2015. 014_Income-Tax Law.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.

King, A., 2016. Mid market focus: The new attribution tax regime for MITs: Part 2. Taxation in Australia, 51(1), p.12.

Millar, R. and Moon, L., 2016. Designing a Simple and Fraud-Proof Tax System: Australia.

Russell, T., 2016. Trust beneficiaries and exemptions from CGT: reflections on the Oswal litigation. Taxation in Australia, 51(6), p.296.

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

Tanzi, V., 2014. Inflation, indexation and interest income taxation. PSL Quarterly Review, 29(116).

Taylor, G., and Richardson, G. 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2013. Australian taxation law. CCH Australia.

Yinger, J., Bloom, H.S. and Boersch-Supan, A., 2016. Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier.

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