Taxation And Capital Gain Legal Solution For John Volkler And Carlton

Assessable Income Solution for John Volkler

John Volkler is a South African resident who specialises in assaying the value of diamonds. In 2017, he signed a contract in Johannesburg with the Norfolk Diamond Company to work for that company’s head office in Johannesburg and to visit its various branch offices throughout the world. He spent two months in the company’s Sydney office assaying the value of diamonds from 1 July to 1 September.

During this period, he stayed in a motel paid by the company. His salary, equivalent to $9,000 for the two months, was paid directly into his Johannesburg bank account by the parent South African company. Later John successfully applied for a continuing job position in the company’s Sydney office, and was transferred to the position on 1 October 2017. John was accompanied by his wife and child to Australia. They decided not to sell their house in Johannesburg and chose to rent it out for $1,500 per month. The Norfolk Diamond Company offered John the following remuneration package:

• Salary of $110,000 per annum;
• Payment of child’s school fees $15,000;
• Laptop computer provided $1,899;
• Professional development allowance $750 per annum;
• All expenses include GST where applicable.

Determine what amounts will form part of John’s assessable income for the 2017/18 taxation year. Fully explain your answer. If you feel you need further information to be able to adequately answer the question, indicate what information you require and why it is required.

Solution to PART A 

The solution has been provided here-in-under. Further an analysis of each items has been provided as notes to the solution:

During the year under consideration, Mr. John Walker a south African citizen who came to Australia for 2 months and later settled permanently for the year under consideration. In the first step, it shall be worthwhile to determine the residential status of Mr. John.

In terms of Section 6(1) of the Act [1]or Australian Income Tax Act as amended various years and under the important rulings to determine residency for tax purpose, various tests have been defined to determine the residency of an individual.

The primary test encompasses a resides test wherein one need to assess whether one resides in Australia under a permanent nature with a full intent or not. If this test is not satisfied , other tests need to be looked upon for determining the residency of an individual

If you fail to satisfy the first test, then other three statutory tests need to be taken into consideration for determining residency:-

• Domicile Test: Under this test, one needs to analyse whether one has a permanent abode in the form of a house, bungalow owned by him/ her in Australia. If the individual satisfies this test, he shall be treated as resident of Australia and his worldwide income shall be taxable in Australia.

• 183-days Test: The second test is the simplest step wherein you count the no of days of stay of an individual in any part of the country. If the stay during the year exceeds 183 days then the individual is considered as tax resident of Australia and accordingly his pan world income is taxable.

• Superannuation test: Under the third test, one needs to harp on whether common wealth government employees who are treated as resident of Australia for tax purpose if they are working for Australian overseas.

If any of the three tests specified above, an individual is considered as tax resident of Australia and is required to pay tax under the Act.

Since, Mr. John satisfies the above test. His pan world income shall be taxable in Australia and he shall be considered as Australian Tax resident for the concerned year.

Treatment of Assessable Income

• Salaries: Salaries[2] received from employer are chargeable to tax under the Income Tax Assessment Act, 1997. Further, the employer gets the deduction for the same as expense in his / her return.

• Payment of child’s school fees:[3] Payment of child’s school fees by the employer is treated as fringe benefit under the Australian Income Assessment Act and the same is taxable in the hands of the employer at a predefined rate. Further, employee is required to report the same in his tax return as Fringe Benefits received from employer.

• Laptop computer: The same has been provided for official purpose and has been assumed to be used for official purpose and hence shall not be treated as assessable income of Mr. John. Further, employer shall be able to take GST credits of the same and shall depreciation on the asset over a period of 4 years under Australian rax act.

• Professional development allowance: The same shall not be treated as income of the individual as the said has been paid as training of the employee and it is a part of training imparted by the employer to make one fit for the job. Further, employer shall be able to claim GST credits for the same.

• Rent receipt in South Africa shall be taxable in Australia as pan income of a resident is taxable in Australia.

Information further required 

• No information about taxability of rent receipt in South Africa;
• Expenses incurred towards earning those rent;
• Bank interest;
• Other income in South Africa

PART B

Carlton is an accountant that purchased a vacant block of land in North Melbourne and built a house on the land twenty years ago. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 August of the current tax year, Carlton sold the property at auction for $1,200,000.

• What are Carlton’s net capital gain or net capital loss for the year ended 30 June of the current tax year;
• How would your answer to (a) differ if Carlton sold the property to his daughter for $200,000;
• How would your answer to (a) differ if the owner of the property was a company instead of an individual?

Solution to PART B (a)

In terms of Australian Subdivision 115A and 115B of ITAA97[4], there are primarily three methods for computation of capital gain tax income for an individual resident of Australia. The same has been detailed here-in-below:-

• Indexation Method[5]: This method of computation is levied on assets purchased after September, 1985 when capital gain tax was actually introduced under the Australian Income Tax system. Further, it has a sunset clause of 21^st September 1999.
• Applicability:

• Individual and companies both;
• Asset must be held for more than 12 months;
• Asset must be purchased before 21^st September, 1999.

• Discount Metho[6]d: This method of computation is levied on assets purchased after September, 1985 when capital gain tax was actually introduced under the Australian Income Tax system. This method has not sunset clause as on date.

• Individual and not on companies;
• Asset must be held for more than 12 months;
• 50% discount is applicable for residents;
• Not applicable on D category events.
• Other Method[7]: The same is applicable when asset are held for less than 12 months.

Further, Capital Gain is not taxable on disposal of residential dwelling.

In the concerned case, Mr. Carlton an accountant purchased a vacant plot back in 1997 and disposed the same in current fiscal year. The asset has been held for more than 12 months and hence two methods of computation of taxability under the head capital gain are applicable, In the first method, the indexation has been done from 1^st quarter of September, 1997 to last quarter of December, 1999 and correspondingly the indexed value of acquisition stands at AUD 15,54,471 and capital gain income comes to AUD 10,45,529/- Further, when discounting method is applied the capital gain income comes to AUD 5,25,000/- which shall be in the interest of Mr. Carlton and hence discounting method shall be applied. Further, since the property was rented and never residentially dwelled, the same cannot be exempted from capital gain tax liability.

Solution to PART B (b)

In terms of Australian Income Tax when an individual gifts any property to his /her relative at a valuation which is lower than the value of property or fair market value. The fair market value shall be taxable in the hands of the seller. Further, the said income shall be taxable in the year in which such property has been transferred by the transferor. Further, all the aforesaid explanation shall hold good in the present scenario.

Assumption the fair market value of the property is AUD 12,00,000/- and hence the same has been treated as fair value of property.There is no difference in the tax treatment and taxable income from part B(a) 

Solution to PART B (c)

In the third scenario, the property has been disposed by a company rather than an individual. Under the said circumstance, the benefit of discounting method shall not be applicable as it is not applicable in companies. Further, other method shall not be applicable as the holding period exceeds 12 months. Thus, the first method shall be applicable and the indexation has been done from 1^st quarter of September, 1997 to last quarter of December, 1999 and correspondingly the indexed value of acquisition stands at AUD 15,54,471 and capital gain income comes to AUD 10,45,529/-

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