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Payment of tax is very important as it boosts the state revenue. Revenue realized by the state from taxes is usually used for developments and infrastructures in the state. Under the Income Tax Assessment Act (ITAA) 1997, incomes are taxable. Taxpayers are required to pay tax as when due and file tax return with the Australian Taxation Office (ATO), each year. The ATO is the statutory body empowered to be in charge of tax collection.
In Australia, tax is a mandatory payment imposed by the government on individuals, companies or other entities, through the instrument of law. Both Australian residents and non residents are required to pay taxes, depending on the sources of their income. Generally, companies that are residents in Australia are required to pay tax on the incomes, they generated around the globe, why non- resident companies are required to pay taxes on the incomes, they generated from Australia in a relevant year.
In the case of F.C. of T. v. Applegate1, for the purpose income tax, the court had to determine whether a tax payer was a resident of Australia or not. The taxpayer domiciled in Australia was sent by his employer, a Firm of Solicitors, to start up a branch in Villa, New Hebrides. The time for his assignment was not specified but was identified to be for a long time. The taxpayer argued that the salaries he received in Villa were not subject to income tax in Australia, having received same from aside Australia. Both the Supreme Court of New South Wale and the Full Court of the Federal Court of Australia held that the taxpayer had a permanent place of abode outside Australia. Thus, he was not regarded as an Australian resident for the purpose of tax for that year.
Considering the termination of the agency contract between ABC Ltd and the Indian Shipping Company and ABC Ltd taking in the money as a part of deferred revenue, it would be important to factor in the consequences based on the taxation of deferred revenue. The judgment passed in the matter of “Arthur Murray (Arthur Murray (NSW) Pty Ltd v FC of T (1965)” is relevant in this regard. 2 the case was also cited as part of a recent ruling TR2014/1. The normal position of that a taxpayer would benefit from in the case of would be the occurrence of a recoverable debt. However, the normal position was disregarded in the Arthur Murray case when considering the application to the prepayments for a number of dance lessons. The context of the receipt was taken into consideration, which superseded the principle of normal position. The judgement held that the income would be derived in a current manner, where the revenue would correlate with the provision of the dance classes.
Receipts at the start of the arrangements would not be considered. Similarly, the nature and the context of the contractual arrangements between ABC Ltd and Indian Shipping Ltd would have to be considered prior to determining the tax consequences of the $4 million received by ABC Ltd in lieu of termination of the agency contract and obtaining the deferred revenue. Provided it is found that the practise of transferring benefits between the companies manifested in a deferred manner, the entirety of the $4 million would be considered within the assessable income for ABC Ltd. similarly, if the context was found to be related to deriving the income in a current manner as in the Arthur Murray case, the $4 million collected as deferred revenue would not be considered as impositions on ABC Ltd. for taxation purposes.
Section 40 of TR 98/1 would also be important in this regard, which highlights the importance of receivability in terms of a receipt. The judgement passed in Carden’s case is also important in this context, as it led to the establishment of incomes received during the year of income would constitute components within the assessable income.3 It was reliant of the cash basis of the accounting system, where only the transactions that were carried out during the period of reporting and the receipts for the same would be considered towards the imposition of income tax liabilities. The principle of dividend imputation would be applied in terms of the taxation rate, which would amount to 30%.
Considering that the agency agreement would come into effect on 1st August, 1993, the tax consequences for ABC Ltd would primarily come under the purviews of ITAA1936 and ITAA1997. The entirety of the amount in terms of the $4 million received as consideration due to the termination of the agency agreement would come under the liability of a tax consequence for ABC Ltd. The concept of ordinary income has been depicted to comprise of regularity, connections with activities undertaken by the taxpayer and comes in to the recipient. In terms of the $4 million received by ABC Ltd, while the amount fulfils the contexts of regularity and coming in to the recipient, it does not fulfil the context of being connected to the activities of the shipping activities were stopped post the termination of the agency agreement. The amount would therefore, be considered as statutory income for the purpose of determining the tax imposition on ABC Ltd.
Section 6.10 of the Income Tax Assessment Act 1997 puts forward that amounts that are not considered as part of the ordinary income but come to be included within the assessable income as defined within Sections 6-5 as statutory income. It is important to note that amounts that are not objected to as being part of the assessable income typically witness a discrepancy in terms of the distinction between ordinary and statutory statuses. The $4 million received by ABC Ltd as a consideration from the Indian Shipping company would be held as statutory income in the context of it not having any correlation to the activities of the entity. The area of distinction is relatively clouded in terms of considering incomes as statutory and ordinary due to the implicit mentions within ITAA97. The tax consequences would be similar in terms of the rate o taxation, but would differ in terms of the definition of the consideration as being part of the statutory income or the assessable income. As the taxpayer ABC Ltd has already received the benefits from the payment, the sum would inherently be imposed with a tax liability.
It is also important to note that subclause 6-5 is differently phrased when compared to subclause 6-10(3). While the former uses the term derived, the latter does not rely on the term due to the incidence of various timing tests for statutory incomes that usually differ from those entailed within the adjustment of ordinary incomes.
The defective drafting within ITAA36 comes to the forefront in this regard, where the derivation of the income has been correlated to the amount becoming an income prior to derivation in the context of calculating the assessable income. However, the provisions in ITAA97 bring about a sense of clarity in this regard, where the new provisions are applicable to both statutory and ordinary incomes irrespective of their nature of derivation and incidence. The only exemption would be the non receipt of the income by the receiver, which in the case of ABC Ltd would not be applicable since the Indian Shipping company had paid the $4 million without any questions. While it was established later that the amount constituted only 60% of the profits, the remaining unpaid amount in terms of the 40% would not come under any tax consequence since the taxpayer ABC Ltd had not received it.
In Australia, Capital Gain Tax (CGT) first came into existence in 1985 and it applies to acquired assets, except expressly exempted. At presence, it is the Income Tax Assessment Act, 1997 that regulates CGT. ATO refers to CGT as the gain or loss on asset at the point of purchase and dispensation. In other words, a capital gain or loss is the difference in between cost of purchase of asset and the profit made or loss incurred at the time it is sold or disposed of. Thus, CGT is required to be paid on income as part of income tax assessment for the related income year. You are required to pay CGT on the profit you made from sale of asset which includes real property or other properties sold which are not expressly excluded from taxation. For example, CGT is not levied on individual residential home, personal car or other personal items purchased at the amount less than $10,000; dispensation or sale of asset gotten before 20/9/1985; depreciating asset that has been used for the purpose of tax. E.t.c.
Loss on capital is not to be taxed and could be carried forward to offset gains on capital in the future. It does not however mean that such capital loss can be used to offset tax on other incomes, which are taxable.
Capital gains are only subject to tax at the year of realization. This means that CGT applies to every income or profit, you realize from any asset you sold or disposed of in a particular pear.
In calculating CGT, one needs to be knowledgeable about the applicable formula. The general CGT formula includes as follows:
i. Removal of the cost of acquisition or purchase from the income realized from sale and whatever that is left is known as the gross capital gain;
ii. Removal or deduction of all capital cost incurred during purchase, possession and sale;
iii. Removal or deduction of entitled discounts from the proceeds realized from sale. For example, an Australian resident, whose capital gain is taxable, is entitled to 50% discount. The discount is however subject to certain conditions; discount is only available for the sale of asset held for 12 months and above before sale, otherwise the full amount of CGT will be levied on the capital gain. For self super funds, discount of 33.3%.
On the other hand, companies’ capital gain is levied on a flat rate of 30% or 27.5%, depending on the company’s annual turnover.
In order to determine whether ABC Ltd. is at gain or loss; or whether it overestimated or underestimated its profit, it is important to adopt the above formula.
Purchased Price $ 1.33 Million
Cost of Building $ 5 Million
Sale Price $11 Million
Profit $ 4.58 Million
For the purpose of tax, to arrive at a correct gross capital gain, the ABC Ltd. needs to add the cost of purchase of the property to the cost of building and subtract the result from the price of sale and whatever amount is left, is the company’s profit liable to be taxed.
Purchased price: $10, 33000 +
Cost of building: $5 000,000 = 60, 33000
Sale price: $11,000,000-
$60, 33000 = $4967000
Therefore the correct capital gain from the sale of the property is $4967000, not $4858000.
From the calculation above, it can be said that ABC Ltd. underestimated its profit realized from the sale of the property at $11,000,000. Thus, I advise that the company to re-calculate its capital gain and if the company is to adopt my findings, the appropriate capital gain to add to its assessable income for the year 2020 of the sale of the property, is $4967000 and the company is to pay %30 at flat rate.
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