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Taxation Law

  • As per the Australian Taxation Office (ATO), one can claim benefits on the trading of shares as an investment such as franking credit rebates and deductions on trading-related costs. Investors will be taxed differently as if could occur losses than it is deducted from capital gains only. If one can satisfy the ATO's definition of share trader than he can claim any gains from the market as personal income and any losses as a tax deduction. Casual investors cannot claim such deductions and have to pay CGT (Capital gain tax) and if any profits made after the 30 June then it will be taxed in the following year only. The one needs to pay tax on the sale of shares as a capital gain tax during the year. Dividends also included in the total taxable income for the year. One may not need to pay tax until it sells its shares. If one sells shares before 30 June then the profits will be included in the same year else it would be included in the next year. If any profits are made in the shares then it would be included in the total taxable income. Long term investors will gain more benefits than short term investors. If one holds shares for more than 12 months than only 50% will be taxed as profit from the sale of those shares. If you buy and sell within the same financial year, your total profits are included as taxable income. Franking credits will stop dividend payment from being taxed twice and shareholders can claim as the tax refund depending on his marginal tax rates.

One is satisfying the conditions of share trading plan if he does the following-

  1. You carry out analyses of future investments.
  2. You look at the market to identify areas of potential gain.
  3. You decide to buy or hold shares based on future value.

The share trader assessable income will include money from the sale of shares and share dividend and the cost of buying and selling can be claimed as a tax deduction.

As per the given case study, Dan and Judith jointly purchased a share in the BHP ltd on 20 June 2016 and they received the franked dividend of $28000 each year over the past 3 years.

  • If we will consider the situation at 30 June 2019 it is quite clear that if they do not sell the shares than they will be having the profit of the difference between the purchase price and the market value at 30 June 2019 i.e.(120000-110000)=$10000 and after indexation it will be (10000*0.6325=$6325) and after medical levy and surcharge and eligible offset of franked dividend, it is ($6325 +2%+1%=6514.75-84000=(77485.25) i.e. refundable and same situation on 30 June 2020 depends on the market value of shares.
  • If we consider the situation it sells the shares on 30 June 2019 and reacquires the same on 30 June 2019 than applying the above law it is clear that they fall in the ambit of share trading plan as decided to sell the share and buy again based on the future value of the shares hence the profits which are made to them on selling and purchasing will be wholly included in the assessable income and therefore no franking dividend claim will be provided to them as they sell the same before 30 June 2019 hence will be liable to tax the profits in the same year. They will be having the profit of the difference between the purchase price and the market value at 30 June 2019 i.e. (120000-110000) =$10000 and after indexation, it will be (10000*0.6325=$6325) and after medical levy and surcharge i.e. ($6325 +2%+1%=6514.75). As the Long term investors will gain more benefits than short term investors. If one holds shares for more than 12 months than only 50% will be taxed as profit from the sale of those shares but they are not the investors but falls in the ambit of share trading plan and hence will be liable to 100% tax on profits in the same year, not 50%.
  • If we consider the situation that they sell a share at 1 July 2019 and reacquire them on 1 July 2019 than the profits will be taxed in the next year, not in the current financial year they will be having the profit of the difference between the purchase price and the market value at 30 June 2019 i.e.(121000-110000)=$11000 and after indexation it will be (11000*0.6325=$6957.5) and after medical levy and surcharge it will be ($6957.5 +2%+%=$7166.225) and there will be franking credits to be provided as they fall in the share trading plan and not in investors part and hence assessable to be taxed in the next year.

So the best option is to not sell the share as in that case they will refund else in both the above options they will be taxed[1].

  • (a) As per the Australian Taxation Office (ATO), if rents the property he has to keep records from the start, record expenses that can be claimed as a deduction, have to check if any instalment has to be paid throughout the year and to declare all the related rental incomes in his income tax return and have to consider all the capital gains tax when he will sell the property. If one is having investment property that isn't rented or available for rent, one cannot claim deductions. One can claim a deduction for the rental property expenses for the period for which the property is rented. If the property is held for private and business purposes than claim the deduction of the portion of any expenses that relate to the income-producing use. Rental expenses that can be claimed in the same income year such as interest on loans, council rates, and water rates and repairs, and maintenance. Depreciation can be claimed for several years. One can only claim rental expenses if rented out the property and have genuine intention to earn income from the property[2].

When one sells his rental property he makes the capital gain or losses. A capital gain or loss is the differentiation of what it cost you to purchase and improve the property (the cost base) and the amount receives when one dispose of it. If one makes the capital gain he will be liable to CGT and if there are capital losses then he can carry forward and deduct it in later years. The cost base of property covers the amount paid along with incidental costs like legal fees and stamp duty. One must include all the rental income in the tax return. However, GST does not apply to rental property income. One cannot claim credits of GST included in cost related to the rental such repair maintenance expenses on the premises[3].

As per the given case, applying the law to the case it is quite clear that Dan has rented property which he has purchased in July 2019 and has the intention to sell it in July 2022. He has the option of two suitable alternatives to property.

Property 1: Annual rental income $ 31000

  • Annual maintenance fees $4500
  • Annual council & water rates $3000
  • Annual interest on $400,000 mortgage $24000
  • Depreciation( 7000/4) $1750
  • Construction cost $47000

Net rental loss $(49250)

 Property 2: Annual rental income $31000

  • Annual maintenance fees $4500
  • Annual council & water rates $3000
  • Annual interest on $400,000 mortgage $24000
  • Depreciation (29000/10) $2900
  • Construction cost $230000

Net rental loss $(233400)

So from the above estimate, it is clear that from the second property there is more loss as compared to first. So Dan will prefer the first property.

  • Net capital gain on sale in July 2022 –

Property 1: Expected selling price $700000

- Purchase price (including stamp duty & legal costs) $627000 Net capital gain $73000

Property 2: Expected selling price $700000

- Purchase price (including stamp duty & legal costs) $810000 Net capital loss $(110000)

Hence the capital gain of $73000 in property 1 is more than the capital loss of $110000 in property2.

  • Property 2 will minimize Dan's total taxable income from the investment as the first property has occurred capital gain and in property 1 he has to pay capital gain tax. So from 2 property he can claim the set off of losses. So 2 property will minimize his tax liability.
  • As per the Australian Taxation Office (ATO), When the tax and other obligations of persons start it will depend on the business structure, the impact of the structure the tax liability of the individual i.e. tax as well as legal both and the location of one's business.

 The sole trader is an individual who runs the business, it is the simplest and the cheapest form of business structure. One is individually responsible for his business. As a sole trader he has to file his tax return, register for GST if his turnover is $75000 or more, claims deductions regarding the personal super contributions.

A partnership firm is an association of people who divide income and losses between them. It is inexpensive, partnership agreement helps in the reduction of disputes. In this control, income and losses are shared, the partnership does not have to pay income tax but its partners have to file the same in their return, each and every partner have to pay tax on their own of the profits of the partnership firm at his own eligible rate and claim tax offset[4].

The company is a legal entity with high administration cost and have to comply with additional reporting requirements. The company must apply for the tax file number (TFN) and company return is filed annually.

Trust can be set up but it is expensive as the formal deed is necessary which prescribes how the trust will operate. The trustee is appointed to take care of the trust assets and operations of the trust. The profits of the trust will be divided among the beneficiaries of the trust. Trust has to lodge its income tax return annually whether trust pays tax or not is determined how the income of the trust is distributed among the beneficiaries. IF the trust divides its income to the beneficiaries who are adult then trust will not pay taxes each beneficiaries will pay tax on his own and not by trust. If trust accumulates the income of the trust then the trustee is assessed on such income and will be liable to pay the highest individual tax rate.

As per the given case, Dan Murphy is considering to change the business structure from a sole trader to another form. In sole trader they will be liable at their individual tax rate and in the partnership firm their profit sharing will be shared and in the private company it will taxed at the flat rate percentage and in case of trust beneficiaries will be liable to tax.

 The best suitable form for him will be a partnership as it has many advantages over any other form in this his profits sharing ratio will be equal to his wife as they both have income net of deduction $160000 which they share equally and there are no compliances regarding different return filing of the firm and the most that he may be eligible for the small business tax offset which is not available in any other form. In other forms, there are many compliances regarding returns and controlling power.

So the best suitable option for Dan Murphy is to for the partnership firm with his wife sharing equal profit sharing ratio with fewer compliances as compared to other forms where there are many compliances. So he should form a partnership firm to minimize his total tax liability on his income.

Case Study 2

  • As per the concept of ETP tax offset by the Australian Taxation Office (ATO), employees have been paid payments which are taxed ETP (Employee termination payment) is one of them. The following payments are included in the Employee termination payment. Some of them are-
  • Employee termination payment includes gratuities and severance pays but not include accrued annual leaves or genuine redundancy payments.
  • Accrued annual and long service leave also not to be included in the Employee termination payment but may be taxed at the concessional tax rate.

Employee termination payment is taxed at a concessional rate up to a certain limit and cap depends upon the types of payment. Payment must be made within the 12 months of termination to qualify as an Employee termination payment and to be taxed at a concessional rate. If it received after 12 months then the payment may be included in the assessable income of the recipient and would be taxed at a marginal rate[5].

As in the given case Inder Muller received the following payments from his employer but will only the income of gross salary from the 1st of July 2018 to 30th of May 2019 of $57000 will be taxed and else all payments like genuine redundancy payments, unused annual leave, and unused long service leave will not be liable to tax as these are excluded from the Employee termination payment and the tax will be paid at a concessional rate if it is payment is made within 12 months else it will be included in the income of Inder Muller and taxed at marginal rates.

  • The Super will be taxed in the following situations-
  • One is having the preservation age.
  • When one gets payment in a lump sum.
  • Whether the money in the account is tax-free or taxable.

The above factors determine whether one pays tax on the withdrawals or will get the offset that reduces the payment of tax. The taxable component taxed or untaxed element depends on whether it has paid from taxed or untaxed sources. Untaxed element is paid by public sector funds. The provider pays tax on super at 15 %. The super is the 'taxed element' of your taxable super. If payer has not paid tax on taxable super then the amount is untaxed element of the taxable super of the person accounts. One cannot choose to withdraw only the tax-free element of super unless the total amount is tax-free. If it is a taxed element of taxable component and is a lump sum than the tax rate will be including medical levy i.e. marginal tax rate or 17% whichever is lower and if the same is an untaxed element of taxable component and is in lump sum than tax rate would be 32% or marginal tax rate whichever is lower. One has not to pay tax on the tax-free component if he withdraws as a lump sum or receives a defined benefit income stream where he is in between preservation age and 60 years age and which is not the death benefit stream[6].

As in the given case, Inder is having a superannuation fund that is valued at $ 582000 which is further divided into tax-free component, element untaxed in the fund, element taxed in the fund. The tax consequences of withdrawing from the superannuation fund before his retirement will be liable to tax consequences. As applying the above law the tax-free component will be not eligible to tax but the given element untaxed in the fund will be levied tax at the marginal rate or 32% whichever is lower and taxed element will be levied at the marginal rate or 17% whichever is lower. Hence the same will be consequences if he withdraws before the retirement including all the options available to him.

  • Small business entity concept applies on four .i.e. Individuals form partnership firmor a company or trust form which
  • Carries on the business, and
  • Having an aggregated turnover of less than $10 million in the previous year, or
  • The aggregate turnover for the current year is likely to be less than $10 million.

Aggregate turnover refers to annual turnover along with the annual turnover of any business which is connected to you. One should be eligible for a Small business entity if his aggregated turnover of the previous year is less than $10 million or in the current year it is expected to be less than $10 million than it will be a Small business entity for the current year.

If one is in the business there are various concessions available from 1 July 2016 based on the turnover. Some of them are[7].

  • PAYG instalment concessions will be available to Small business entities.
  • One can claim the portion of GST credit on a purchase, in proportion in which he uses it in the business. The changes will either increase the amount of GST or one is liable to pay or reduce the GST refund for the tax period.
  • If one wants to pay GST in instalments, one can pay the quarterly amount and report his actual GST information in the annual report. One may elect this reporting method when one carries business with an aggregated turnover of less than $10million or does not carry any business but GST turnover is $2million or less.
  • The GST reporting technique one can use base on the GST turnover and other reporting compliances.
  • The small business entity is having the fringe benefits tax concessions. From 1 April 2017, the turnover for FBT concession rise to $10 million, this turnover will apply to most concessions except –
  • The small business income tax offset which has a $5million turnover threshold.
  • The CGT concessions will have to be a $2 million turnover threshold.

Applying the given law to the case study it is quite clear that Belinda's news agency business falls in the small business entity as her business turnover is $5million which is less than the limit of $10million. Hence her business is eligible for the SBE (Small business entity). Hence all the concessions which are available to the Small business entity will be given to Belinda’s news agency business and she will be eligible for the input tax credit of GST paid on the photocopy machine of $5500 from the day when she uses that machine i.e. from 1 March 2019 and also she is eligible for the ITC of the motor vehicle as she uses solely for the business purpose only. Hence she can claim ITC on both motor vehicle and photocopy machine and the above tax concessions will be also be given as the tax benefit to Belinda's business as she falls in the small business entity.

References for Residential Rental Properties

[1] Australian Taxation Officer. (n.d). Shareholding as investor or share trading as business. Retrieved from

https://www.ato.gov.au/general/capital-gains-tax/shares,-units-and-similar-investments/shareholding-as-investor-or-share-trading-as-business-/

 [1] Australian Taxation Officer. (n.d). Residential rental properties. Retrieved from https://www.ato.gov.au/General/property/residential-rental-properties/

[1] Australian Taxation Officer. (n.d). CGT when selling your rental property. Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Sale-of-property-and-other-CGT-events/CGT-when-selling-your-rental-property/

Australian Taxation Officer. (n.d). Choosing your business structure. Retrieved from https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-your-business-structure/

Australian Taxation Officer. (n.d). Taxation of termination payments. Retrieved from https://www.ato.gov.au/Business/Your-workers/In-detail/Taxation-of-termination-payments/

[1] Australian Taxation Officer. (n.d). Withdrawing your super and paying tax. Retrieved from https://www.ato.gov.au/individuals/super/in-detail/withdrawing-and-using-your-super/withdrawing-your-super-and-paying-tax/

Australian Taxation Officer. (n.d). Small business entity concessions. Retrieved from https://www.ato.gov.au/business/small-business-entity-concessions/

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