Taxation For Business Acquisitions: Input Tax Credits Eligibility Explained

Eligibility for Input Tax Credits on Business Acquisitions

Describe about the Taxation for Business Acquisitions.

Discuss whether input tax credits would be available for the following acquisitions:

the purchase of books by a bookshop from a publisher

In this case, the input tax credit would be available, since the owner of the bookshop has purchased the books for selling the same to the customers. Hence, input tax credit is available in this acquisition, as the selling price does not include GST.

the purchase of beef by a hamburger restaurant from a butcher

The input tax credits could not be applied for this purchase of beef, as per “Paragraph 38-4(1) (b) of the GST supplies act”. This is because the beef is extracted from the butcher for consumption of human beings.

the purchase of a computer by a doctor for use in preparing his surgery’s accounts

This is an input tax credit, since the price at which the doctor has purchased the computer already includes GST.

the purchase of pipes by a plumber for use in repairing a sewer at a client’s home

The purchase of pipes could not be categorised under input tax credit, although the purchase includes GST price. This is because using an equipment for the purpose of sewerage is exempted from tax.

the purchase of a set of law reports by a solicitor

This purchase of law reports could be classified as input tax credit, since it already includes the GST price at the time of purchase.

the purchase of shares in a company listed on the ASX by an investor

The purchase of shares of an ASX listed company by an investor come under input tax credit. Although, the GST price is not included in purchase, it is financial supply, which is available under input tax credit.

the payment of brokerage fees to a stockbroker by a share investor

The brokerage fees fall under the financial supply, which is GST free and hence, the input tax credit is applicable in this case.

the purchase of a car by an employer used to provide a fringe benefit to an employee

This could not be categorised under input tax credit, since an employer has purchased the car to provide fringe benefits to its employee. Fringe benefit tax could not be categorised under input tax credit as per the Australian taxation law.

the purchase of a new home unit from a developer by a home owner, and

Income from Various Sources

The input tax credit could be applied in case of the purchase of a new home unit according to “GST Act (s9-15)”. This section depicts that input tax credit in Australia could be applied to goods supply and transactions arising out of property or real estate.

the payment of fees to an electrician by a lessor of a residential property to repair faulty wiring that a tenant has complained about.

This is not an instance, in which input tax credit could be applied, since the fees are paid for repairing the residential property and not for commercial use.

Even though there have been no monetary payments as consideration for repairing work, the GST shall be computed on $220. This is due to the fact that under GSTR 2001/6 non monetary considerations are treated at par with monetary consideration in terms of determining GST. Thereby, regular GST rate of 10% shall be applicable for the $220 of soft drink paid to Sam by Ted.

The salary and performance bonus earned by an employee comes under income.

The tip falls under the definition of income for taxation purposes.

Interest arising from bank deposit is considered as income.

The rent received from such a source shall be treated as income.

This will not be included as a part of assessable income.

Since the points have been received owing to work related travel thereby the same shall not form part of assessable income.

The gift will not be considered income as the gift would have been provided even if the person was not employed by the close friend.

The proceeds from sale of goodwill shall be treated as income.

Such proceeds shall be taken as income.

The consideration received by the employee shall be considered as tax free.

The reimbursement shall not form part of income.

Cash prizes received from winning or competition in a quiz show falls under income.

The gambling winnings are not to be included under income.

Proceeds from such sale of old furniture are not to be included as income.

Such profit shall form part of income and will be subjected to capital gains

This shall be included as part of assessable income owing to intention of insurance company to make profit.

Such amount can be held as income owing to the fact that the mining company is abstaining from mining for a consideration.

Capital Gain on Shares sold by a resident

The amount received cannot be considered as income.

The following holiday shall be considered as income owing to the fact that the holiday package has been received owing to business activities.

The return of funds cannot be considered as income.

The payment has been made as prize money and thereby falls under income.

Capital Gain on Shares sold by a resident
Particulars	$
Sales of shares in A Co.	6000
Sales of shares in B Co.	6000
	12000
Cost price of shares (5000*2)	10000
	2000
Discount @ 50%	1000
A. Capital Gain from sale of shares held in A & B Co	1000
Sale of shares in C Co.	4000
Cost of shares in C Co.	5000
B. Capital Loss from sale of shares	1000
Net Capital Gain (A-B)	NIL

 

Gains on sale of shares are not subject to tax for nonresident individuals unless such shares are deemed to be taxable Australian property (TAP). Unless the shareholders holds excess of 10% of all shares in the company or 50% of market value of assets related to the company can be construed to be Australian Real Property.

Particulars	Discounted Method	Indexation Method
	Amount (in $)	Amount (in $)	Amount (in $)	Amount (in $)
a) Sale of Holiday Home :
Consideration of Sales		800,000		800,000.0
Less : Property Cost Base	100,000		148,043.5
Legal Fees related to Sales (Exclusive of GST)	1,100		1,100.0
Commission of Real Estate Agent	9,900		9,900.0
Stamp Duty	2,000		3,033.1
Legal Fees pertaining to Purchase	1,000		1,516.6
Construction Cost of Garage	20,000	134,000	24,448.4	188,041.5
Capital Gain on Sale		666,000		611,958.5
Less : Exemption on Capital Gain @ 50%		333,000
Taxable Capital Gain (A)		333,000		611,958.5
Less : Previous Year Capital Loss		10,000		10,000.0
Net Taxable Capital Gain		323,000		601,958.5

Table: Computations of Taxable Capital G Fred

(Source: As created by the author)

In case the loss arose from selling of antique vase, such loss cannot be adjusted against the computed capital gain.

Answer to question 10:

Taxable Value of Fringe Benefit on Car= (Purchase price of car*Statutory Rate*Days of usage)/365 –Employee Contribution

Computation of Fringe Benefit Taxation on Car
Particulars	$
Purchase Cost of Car	50,000
Kilometer Travelled	16,000
Statutory Rate based upon Km travelled	20%
Days of Usage by Employee	183
Contributions made by  the employee	1000
FBT on the Car	4013.699

The Porsche given by his employer shall fall under Car Benefit.

Further, the fringe benefit tax as regards to the Porsche shall be applicable in case the Porsche given by Terry’s employer tends to be either:

1. a sedan, or
2. has a carrying capacity of less than 1 ton, or
3. Can carry fewer than 9 passengers

In this case Terry is provided with a free housing accommodation, it comes under housing benefit.

Computation of Fringe Benefit Taxation on Loan
Particulars	$
A. Loan amount	1,000,000
B. Use of Funds for Income Producing Purposes Exempt (40%)	400,000
C. Amount available for FBT Purposes	600,000
D. Actual Interest Rate	1%
E. Benchmark Interest Rate	5.65%
F. Actual Interest Paid (C*D)	6000
G. Notional Interest Paid (C*E)	33900
Taxable Value (G-F)	27900

If the interest is payable only at the end of 3 years, which exceeds the time limit for payment every six months, a separate loan has to be arrived at which shall be interest free in respect of the unpaid interest.

In case Brian is released from payment of loan a debt waiver fringe benefit shall arise.

3: When payment is received from a company other than in the form of dividend, Capital Gain event takes place when the payment is made.

Tony’s cost base of shares shall be reduced by $7 for each share in X Co.

Therefore, when Tony sells the shares at $ 20 each, the cost base of the shares shall be reduced to $3 (10-7). Thereby, the income for capital gain purposes shall stand as follows:

Particulars	Number	$
Number of shares	1000
Cost of Acquiring shares		10
Received from company		7
Cost base per share		3
overall cost base		3000
Received from sale of shares		20000
Income taxable under capital gain		17000

 

In case payment made by the company stands at $13
	$
Capital Gain arising from payment made the company	3000
Sale proceeds from sales of shares	20000
Income Taxable Under Capital Gain	23000

In case of cancellation of shares there shall be no capital gain on $ 7 per shares as such cost are below $ 10 base price. However, in case of payment made at $13 per shares, total taxable income under capital gain shall stand at $3000.

 Under section 44 of the ITA Act, the dividends declared and subsequently provided by a company tend to be included in the assessable income of the shareholders. Further, the dividends that are to be applied in Dividend Reinvestment Plans are to be included under the assessable income. Further, Sandy because of being a resident is required to disclose such incomes under their income tax returns.

Under Regulation 11(2), ABC Co is required to furnish details as regards to dividends exceeding $100 paid to a single recipient shareholder. The total dividend paid to Sandy does not exceed $100. Thereby, the details regarding name, address and amount of dividend paid by her are not to be included in disclosure statements by ABC Co.

Therefore, the $100 received by Sandy as dividend and which were subsequently applied towards ABC’s dividend reinvestment plan are to be treated under assessable income.

References and Bibliography:

Asic.gov.au. (2016). Cancellation of shares | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/for-business/running-a-company/shares/cancellation-of-shares/ [Accessed 20 Oct. 2016].

Ato.gov.au. (2016). Capital gains on Australian assets. [online] Available at: https://www.ato.gov.au/Individuals/International-tax-for-individuals/Investing-in-Australia/Capital-gains-on-Australian-assets/ [Accessed 20 Oct. 2016].

Ato.gov.au. (2016). CGT on foreign residents, temporary residents and changing residency. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/International-issues/CGT-on-foreign-residents,-temporary-residents-and-changing-residency/ [Accessed 20 Oct. 2016].

Ato.gov.au. (2016). Home page. [online] Available at: https://www.ato.gov.au/ [Accessed 20 Oct. 2016].

Austlii.edu.au. (2016). INCOME TAX ASSESSMENT ACT 1997. [online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/ [Accessed 20 Oct. 2016].

Law.ato.gov.au. (2016). CR 2013/68 – Income tax: cancellation of shares in Tower Limited (As at 4 September 2013). [online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=CLR/CR201368/NAT/ATO/00001 [Accessed 20 Oct. 2016].

Lowtax.net. (2016). Lowtax – Global Tax & Business Portal | Related Information – Individual Non-Resident Taxation in Australia. [online] Available at: https://www.lowtax.net/information/australia/australia-individual-non-resident-taxation.html [Accessed 20 Oct. 2016].