Question 1
Issue
Eric has undertaken certain transactions and in relation of these, the capital gains implications need to be outlined.
Rule
The capital gain regulations for the different class of assets are highlighted below.
Collectibles
The capital gains on these items tend to be considered only when the buying price exceeds $ 500. Additional provision is that the capital losses cannot be adjusted against other class capital gains. Hence, these are adjusted against same class capital gains and till the time of such gains availability, the losses would be carried forward (Woellner, 2014).
Personal Use Assets
The capital gains tend to be considered only when the underlying acquisition price exceeds $ 10,000. Also, an imperative aspect is that the capital losses are ignored and considered (Barkoczy, 2017).
Share Sale
The capital gains on share sale are subject to CGT and any unadjusted losses would be carried forward. Long term gains can avail discount (50%) in line with s. 115-25 (CCH, 2013).
Collectible
There are three assets under this class and all of these have a procurement price exceeding $ 500 which implies that CGT would be applicable.
Personal Use Assets
The said asset that falls under this category is sound system. Considering the given data, it is apparent that a capital loss of $1,000 (i.e. 12000-11000) is incurred which would not be considered and no CGT implications in the present or future.
Share Sale
A capital gain would be made on the disposal of share as the sale price i.e. $ 20,000 is higher than the buying price i.e. $ 5,000. Hence, a short term capital gain of $ 15,000 is realised.
Conclusion
CGT for the given year would be imposed on the taxable capital gains amounting to $ 15,000.
Issue
The issue is to find the fringe benefits implication of the present situation where the employee is Brian and employer is bank.
Rule
Any non-cash benefits provided on the part of employer to their employee would be categorized as fringe benefits. In loan fringe benefits, the employer issues loan either at zero interest or at cheaper rate of interest. Any interest rate would be called cheaper rate when it is lower than the interest rate set by Reserve Bank of Australia. The fringe benefits tax liability would be payable by the employer only (Barkoczy, 2017).
Question 2
Tax deduction can be claim by the employer, when the employee has utilized the loan income to derive assessable income (Gilders et. al., 2016).
Conclusion
The fringe benefits taxable amount is $51,718.06. This amount would become higher when the employer Bank has decided to take the interest on the loan at the end of loan period. Further, the taxable amount would be highest when the employer Bank has decided not to take any interest on the loan amount (CCH, 2013).
Issue
In accordance to the relevant details of the agreement and transaction, determine the potential breakup of any capital or revenue loss that could potentially arise.
For people who are engaged in business, the partnership relationship would arise on the satisfaction of the following conditions (Woellner, 2014).
- There must exist the ‘carrying on of a business activity’. This will not be necessarily linked to continuation of the underlying activity and even single transactions may qualify if the other conditions are met.
- The “in common” aspect of the business needs to be maintained. A corollary of this is that the partners would have equal share in not only the realised profits but also the incurred losses
Applicable Case Law: Re Ruddock (1879) 5 VLR (IP & M) 51
- The profit motive needs to be a predominant driver of business activities.
In wake of the relevant law outlined, the given facts are to be analysed. The first condition seems to be met as by purchasing the property and aiming to sell the same, a business activity involving a single transaction does exist. The second condition where “in common” aspects need to be considered seems to be met as the underlying property is co-owned by both and also the loan taken is joint. The third condition is also met as the prime purpose of purchase of property is for selling the same. Thereby, Jim and Jack are bound by partnership.
Therefore as partners, the share in both profits and losses need to be the same notwithstanding any contrary understanding in this regards. This for any revenue loss, Jim would have to absorb 90% of the losses since she is the beneficiary of 90% profits as well. Also, this understanding would also be extended in case of capital losses where partnership essentially passes on the losses to individual partners and thereby in the same ratio; capital losses would also be absorbed.
Conclusion
The conclusion drawn from above that is that 90% of loss (revenue or capital) is absorbed by Jill and the remaining by Jack notwithstanding the agreement between them.
Issue
The central principle that IRC v Duke of Westminster case highlighted needs to be stated, along with present day significance in Australian context.
Question 3
The mentioned case reflected on the principle of tax avoidance that exists as a right for the taxpayers whereby they can make arrangements for lowering tax paid. In consideration of this right, the tax statute implemented at that time (such as ITAA 1936) did not contain any clauses which shunned tax avoidance. However, as time went on, the abuse of this weakness increased and hence amendment was made in 1981 as anti-avoidance clauses were inserted in ITAA 1936. The tax statutes which have been released afterwards already have the same (CCH, 2013).
Other measures have also been taken in this context as the choice principle has been propagated. The objective of this is to communicate to the taxpayers that they deploy the concessions that the tax authorities have provided but they must not look at creative arrangements which seek to exploit the tax laws to lower the tax liability (Deutsch et. al., 2016). Also, the promoter of these schemes are now penalised as the system has been introduced in 2006 and hence the abuse ever since has reduced (Barkoczy, 2017).
Conclusion
The tax avoidance principle is available to the taxpayers, but the authorities have taken measures to prevent abuse of these.
Issue
The major issue is to comment on the nature of the income derived from right to fell timber operation.
Rule
The royalty amount derived on the account of right to fell timber would result in assessable income for taxpayer under section 26 (f) of ITAA 1936 (Woellner, 2014). The main factors associated with assessable income through right to fell timber are shown below (Sadiq et. al., 2016).
- Royalty income would be assessable irrespective of the fact that landlord is involved in the forest operation or not.
- As per Stanton vThe Federal Commissioner of Taxation (1955) 92 CLR 630 case, the fixed lump-sum income would not be considered under assessable income of the taxpayer.
- As per McCauley vThe Federal Commissioner of Taxation (1944) 69 CLR 235 case, the royalty amount that has been derived based on the quantity of timber extracted would be termed as assessable income of taxpayer.
Based on the given case facts, it can be seen that Bill is the concerned owner who want sto use the land for sheep grazing. The land has many pine trees and hence, he has hired a company to extract timber. When he receives a fixed lump-sum amount of $50,000, then the nature of the income is not assessable as the proceeds are capital in nature. However, the case when he receives $1000 per 100 meter of timber extracted, then it is noticeable that the royalty amount has revenue nature. Therefore, the income would be taken as assessable income.
Conclusion
The fixed income of $50,000 would not be assessable income of Bill. However, the income derived based on the quantity of timber extracted would be assessable income and hence, would be taxed.
References
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed., North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
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