Table of Contents

Week 7.

Week 8.

Week 9.

References.

Taxation Law - Week 7

a) Alex’s net capital gain or loss for the year ended 30th June 2019

Calculation of capital gain as per the Discount method

Sale Proceeds

 

$ 14,00,000

Less: Cost Base

   

Value of land

$ 1,10,000

 

Construction cost

$ 1,00,000

$ 2,10,000

     

Capital gain

 

$ 11,90,000

     

Less: 50% Discount

 

$ 5,95,000

     

Net Capital gain

 

$ 5,95,000

     

 

Calculation of capital gain as per the Indexation method

Sale Proceeds

 

$ 14,00,000

Less: Total Indexed Cost Base

   

 Indexed cost of land

   

110000*114.1/43.2

$ 2,90,532

 

Indexed Construction cost

   

100000*114.1/43.2

$ 2,64,120

$ 5,54,653

     
     

Capital gain

   
     
     

Net Capital gain

 

$ 8,45,347

     

b) If the owner of the property was a company instead of Alex, then the company would not be entitled to work out their Net Capital gain by using the Discount method because the discount method of calculation of capital gain is only available to an individual, complying super fund or trust. While the discount percentage available to individuals is 50%, the discount rate is 33.33% for trusts and individuals and there is no discount exemption for companies (ATO, n.d.b). Therefore, if the owner of the property was a company then it would not have the option to choose between the two methods – discount and indexation methods of calculation of capital gains and would have to use the Indexation method only to calculate their net capital gain (ATO, n.d.c).

Taxation Law - Week 8

As per the GST Rules of the Australian Taxation Office, every business entity is required to be registered for GST if its GST turnover is $ 75000 or more (ATO, n.d. e). Further, each business entity that has been registered for GST is required to charge GST o the sale of its products at the rate of 10 percent of the actual selling price of the GST exclusive of GST. Also, every buyer that is registered for GST is entitled to claim the credit of GST paid by them on purchases. The GST rules further provide that if there is a situation of a product recall or return of goods after their sale, both the seller and the buyer will have to record make adjustments in their activity statement for the corresponding amount of GST that relates to returned goods (ATO, n.d. d). As the seller would have previously paid GST on the sale of those goods, they will be entitled to make a decreasing adjustment in their next activity statement in relation to the same. Similarly, as the buyer would have claimed a GST credit for the amount of GST that was included in the purchase price of the goods that were later returned by them, they are required to make an increasing adjustment for the said amount of GST credit, in their next activity statement.

In this case, both the companies Bowens Pty Limited and Builders Choice Pty Ltd have an annual turnover of $24 million and $21 million respectively, which is greater than the threshold of $75000. Hence both the companies are required to be registered for GST. It is assumed that both the companies are already registered for GST, so Builders Choice Pty Ltd will be required to charge GST @ 10% of the selling price, on sale of every concrete mixer that they make to Bowens Pty Limited. Bowens Pty Limited will be entitled to claim the credit for GST that they pay on the purchases from Builders Choice and will also be required to charge GST from its customers on its sale price on the goods sold by it to its customers.

Further, Bowens Pty Limited will have to pay back the GST credit that it had claimed on those 12 concrete mixers that were returned by it to the Builders Choice and will have to record an increasing adjustment in its next activity statement. Similarly, Builders Choice Pty can claim the credit of GST it paid on the sale of 12 concrete mixers which were later returned by the customer and will have to record a decreasing adjustment in its next activity statement.

Taxation Law - Week 9

As per the section 47(1) of Income Tax Assessment Act of 1936, the part of the distributions that are made to shareholders of a company by the liquidator after the company has been put into liquidation, which are made from income earned by the company whether prior to entering into liquidation or during the course of liquidation shall be regarded as dividends paid to the shareholders by the company from the profits earned by it (AustLII, n.d.a) It must be noted that those distributions which are not the distribution of incomes but towards payment of capital shall not be included in the above definition of dividends as provided by section 47(1). In the given case, out of the total distributions of $7200 that have been received by Paul from the liquidators, upon liquidation of HI Co, the distribution of $3000 was towards unfranked dividends paid by the company from its income. Hence, the said amount of $3000 will be included in the assessable income of Paul under the category "Dividends" and as these are unfranked dividends, he would not be allowed to claim any franking credits on these dividends.

As per the capital gains rules of the ATO, the gain or loss made on investment into the shares upon the occurrence of a CGT event will have to be included in the assessable income of the assessee under the heading "capital gains" or if there is any loss, the same shall be eligible to be adjusted against current year capital gains or will be carried forward to future years (ATO, n.d. a). In this case, out of the total distributions of $ 7200 that were received by Paul, $ 4200 ($7000- $3000) represents distributions received toward the payment of capital, this event shall be regarded as a CGT event and the net capital gains made by Paul will be included in his taxable income. Paul will be entitled to claim the cost of investment into shares of $ 4000 as his cost base for the computation of capital gains on the shares held by him in Hi Co. He shall also be entitled to avail the CGT discount of 50% of capital gains as he has held the shares for more than 12 months (shares were purchased on 02.02.2019).

Taxation Law - Week 10

In Australia, a partnership firm is not required to not require to pay any tax on the profits earned by it, but its entire income is distributed to its partners who are required to pay tax on that income as per their individual tax rates. Also, as per section 92 of ITAA 1936, the assessable income of a partner from a partnership firm would include

  • that share of income from the partnership firm which is related to the period for which a partner was a resident
  • that share of income from the partnership firm which is related to the period for which a partner was not a resident of Australia, but the income of partnership was earned from sources in Australia (Australian Government, n.d.).

Thus, in consideration of the above provisions, the net income of $300000 earned by Euca Sanitizers partnership firm will be distributed equally among Stephen and Alex, and both of them shall be required to pay tax as per their individual tax rates applicable to them. Even though Alex is a foreign resident for tax purposes he shall still be liable to report his share of income from the partnership and pay tax on the same, as this income was earned by the partnership from sources in Australia.

References for Taxation Law

ATO. (n.d. a). Investments in a company in liquidation or administration. Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Shares,-units-and-similar-investments/Investments-in-a-company-in-liquidation-or-administration/

ATO. (n.d. b). The discount method of calculating your capital gain. Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-discount-method-of-calculating-your-capital-gain/#:~:text=Discount%20percentage&text=You%20can%20reduce%20the%20capital,and%20eligible%20life%20insurance%20companies.

ATO. (n.d. c). The indexation method of calculating your capital gain. Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-indexation-method-of-calculating-your-capital-gain/

ATO. (n.d. d). GST and product recalls. Retrieved from https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/GST-and-product-recalls/

ATO.(n.d. e). Registering for GST. Retrieved from https://www.ato.gov.au/Business/GST/Registering-for-GST/

AustLII .(n.d. b). Income Tax Assessment Act 1997-Sect 115.25. Retrieved from http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.25.html#:~:text=(1)%20To%20be%20a%20*,months%20before%20the%20CGT%20event.

AustLII. (n.d. a). Income Tax Assessment Act 1936-Sect 47. Retrieved from http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s47.html#:~:text=(1)%20Distributions%20to%20shareholders%20of,share%20capital%2C%20shall%2C%20for%20the

Australian Government. (n.d. a). Income Tax Assessment Act 1936- Sect 92. Retrieved from https://www.legislation.gov.au/Details/C2017C00242

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