Taxation Law and Policy Issues Assignment Sample

• Subject Name : Taxation Law

Understanding of Relevant Taxation Law and Policy Issues 

Contents

Introduction:

Question 1: Brief description of Fact:

Decision at 1^st Instance:

Why did Full Federal Court Judges Disagree?.

Prospects of any proposed appeal to the High Court:

Questions # 02:

Capital Gain Calculation:

If Enid inherited it from her aunt, Sophia on February 12, 1999:

Part B: Brief description:

Introduction:

The FFC (Full Federal Court) reversed the decision, by majority in Greig v FC of T [2018] ATC 20-662 FCA 1084 and revised decision allowed the taxpayer to deduct for share losses of $11.85 m including the legal charges and fees incurred by disposing the shares he held. Considering the facts, decision of taxpayer to litigate was surprising in first instance and it was more surprising when taxpayer appealed to Full Court after first decision against him, most surprising fact is fact now he has been successful.

Question 1: Brief description of Fact:

A corporate executive, the taxpayer invested on advice of stockbrokers and financial advisors in share market and purchased millions of dollars of shares during January 2008 to April 2014 and involve transactions of sales and purchase of Nexus Energy Limited’s shares. Nexus however failed and was placed into administration and resulted into the losses for taxpayer. The taxpayer claimed for the deduction of mentioned losses and legal fees incurred against legal expenses after the further advice (Beebeejaun, 2018). The taxpayer argued that all other share transactions were according to the profit target strategy and losses were incurred in transactions related to the Nexus shares in producing or gaining assessable income or commercial transactions, or business operations or carrying on a business.

Decision at 1^st Instance:

The taxpayer’s arguments were rejected at first instance by the Thawley J and had made the adverse findings as suggesting by the evidences of taxpayer that there exist inconsistency between contemporaneous evidence and oral testimony and he tried to exaggerate different business elements (Beebeejaun, 2018). The Thawley J found his much of oral evidences irrelevant based on the tests whether the operations of business existed and are focusing on the objective considerations or are based on the subjective intentions that taxpayer would have.

As per the assessment of court of law, therefore little variation between transactions for other shares and the transactions made to acquire the shares of Nexus therefore cannot be claimed in capital account as almost all transactions were executed under the agency agreement between taxpayer and his financial brokers and advisors and objectively, therefore was no business found. It was identified that there was no formally written business plan, separate records, methodologies and/or any sort of documentation which would support the existence of separate business dealing with the shares of Nexus. The profit making purpose, however was clear with the substantially invested capital and this was not transforming the acquisition of shares, other than the investments.

The judge, in addition to the findings related to existence of business also rejected the arguments from taxpayer about loss being deductible from commercial transactions or business operations entered into the profit making purpose as per Myer Principle. Regardless the ways and arguments taxpayer used in order to characterize the acquisitions, judge was not convinced and persuaded anything else instead the investment within which the taxpayer had projection of earning profits and capital gains. This expectation or hope would be unable to color the acquisition as commercial transaction or business operation. The major and basic consideration was that whether the Myer principle would be applied to the situation related to taxpayer who would not in the business. The court of law admitted and endorsed that it is not required to have business organization for eligibility of Myer principle but there are some different consideration to determine whether the initial transaction made would have been stamped with the commercial charter.

Why did Full Federal Court Judges Disagree?

Before considering the appeal by the Full Court, initial was to decide whether Myer principle is allowing the taxpayer to deduct the loss commercial transaction or business operation, entered into in order to make profits. The decision of first instance was disagreed by the Justices Kenny and Steward and mentioned that the shares of Nexus were not purchased for commercial transaction or business purpose but the shares were purchased in order to make profit in short run and as there was no profit realized but if the taxpayer would realize some profit, the gain would not be considered as realization of capital asset or as a windfall. They also realized the artificiality in separating and distinguishing the transactions of Nexus’ shares from the other investment made, therefore they treated the transactions by the taxpayer as revenue account.

The judges acknowledge and endorsed the definition of business operation given by the Parsons and according to the Parsons’ opinion this was an exclusive consideration and mentioned that the property is acquired as commercial transaction or business operation if the activities made to acquire that asset or property are with the intentions to make profit. Therefore the Full Court suggested that therefore would be some doubt that the taxpayer would act as a business purpose while acquiring the shares of Nexus to earn profit on sale of these shares therefore the shares acquired would fall under the commercial transaction or business operations.

Different facts considered and factors identified by the Justice Steward include:

• The losses on shares could not be characterized really as arising and coming from isolated trade of all the shares.
• There exists no rule which confirms that the shares are held on capital account.
• The way in which transaction has been characterized by the taxpayer is irrelevant largely.
• There was no notion provided which aids the decision that whether transaction made was of commercial or of private nature.
• Shares would be held in capital account if are acquired by the individual with an intention to earn dividend and for longer period of time otherwise would be placed in revenue account.

Different evidences acquired in order to support the decision and conclusion i.e. any loss deductible and profit assessable, include:

• There was an intention to make profit at the time when each share was acquired from sale of shares.
• Sophisticated plan exist over therefore to generate the cash profit within time span of 4 to 5 years.
• Taxpayer acquired the shares in some systematic ways and fashion and made 64 transactions to acquire.
• Extensive participation from taxpayer either personally or though the employees/agents in generating value.
• The taxpayer used his business experience and knowledge and
• The taxpayer acted as a business personal.

Justice Derrington, however had different opinion from the majority and emphasized on requirements that identification of business or commercial character of transaction as existing at the same time as intention of profit generation. In this case the transactions were totally based on the intention to purchase the shares was purely profit making, purchasing the shares, holding them for a while and sell them when prices of shares increased in market and then sells at higher price to earn capital gain. Transaction therefore had no business or commercial characteristics and qualities. The element of commercial or business transaction coexists at the same time when any asset or property is acquired with an intention to make profit. But the business operations or transaction must involve anticipated or contemplated actions of steps even if then would be identified in broad terms as it is the quality of those actions and steps, giving the transaction its business or commercial character.

Prospects of any proposed appeal to the High Court:

If the parties are wishing to appeal from a judgment of the FC (Federal Court) to HC (High Court) are required to file the special leave application with the HC. Different prospects of any proposed appeal to the High Court in the event the Commissioner appeals and is granted special leave to appeal under Federal Court of Australia Act 1976 include that court does not consider any sort of new information of evidence, not presented in the original hearing and proceedings (exceptions for special circumstances is there), would not call the witnesses to provide evidences again, required to read all necessary and relevant documents which parties filed for the original case and would read relevant parts of transcript from original case and has to listen argument from both the parties of appeal.

Questions 02:

Given Information:

Purchase date = 12 February, 1999

Death date = 17 November, 2015

Disposed date = 27 November, 2017

Acquisition Cost = $ 250,000

Market Value at time of Death = $ 450,000

Sales Price = $ 550,000

Capital Gain Calculation:

Capital Gain = Disposal value – Market Value at the time of Death

= 550,000 – 450,000

= $100,000

Therefore the capital gain to be included in Pamela’s assessable income in respect of the disposal of the above property is $100,000.

If Enid inherited it from her aunt, Sophia on February 12, 1999:

In case if the Enid inherited that house/property instead of buying it on February, 1999, the answer and response to part i above would not change due to the fact that capital gain is calculated as difference between market value of property at time of death and the amount received on date of disposal of the asset/property under the Income Tax Assessment Act 1997, sections 102-20. Therefore the cost at which Enid acquired the property (whether she paid at that time or inherited) doesn’t matter in calculation of capital gain for Pamela to be include in her assessable income.

Part B: Brief Description:

On October 2018, Edwin disposed of the tax consultancy practice for significant capital gain, owned since 2005 And sold for $4 million, turnover $1.85 million during year 2017/2018 and also have 45 percent share in Edwin Pty Ltd (EPL). During 2017/18 EPL has turnover of $200,000 and share of Edwin in EPL is valued at $450,000 and he borrowed $250,000 to purchase his share. He also has large piece of land was valued at $1.2 million at the date Edwin disposed of the practice (Marshall, Smith and Armstrong, 2006).

In Australian income tax laws, in addition to the GST, rollovers and exemptions are more widely available and generally there are four different types of concessions, allowing the individual to disregard of defer some or whole amount of capital gain on disposal of active asset or services in a small business (Cheng, Hooper, and Davey, 2000).

1. 15 Year Exemption – In this case if the business and services being provided have been continuously owned for 15 years and individual is retiring or being incapacitated permanently, then he/she won’t have an assessable capital gain on disposable of asset o services being provided.
2. 50 percent Active Asset Reduction – The capital gain on an active asset can be reduced to 50 percent in addition to 50 percent discount on capital gain if individual own that particular asset for at least one year or more (Cheng et al., 2000).
3. Retirement Exemption – Capital gains earned through sale of assets and disposing services are exempted up to the lifetime lime of $0.5 million and the exempt amount must have to be paid into the retirement saving account or complying super fund if the individual is below age of 55 years.
4. Rollover – The capital gain’s all or part can be differ for two years or more in case if an individual acquire a replacement asset or has incurred expenses on improvement of asset.

Edwin would enjoy these concessions when any of the following conditions are met and/or applied:

• The aggregative annual turnover of the business being run is less than $ 2 million.
• The disposed asset(s) must be closely connected to the small business.
• Net assets of no more than $ 6 million are held by the individual excluding the assets for personal use for example home, etc. to the extent that these personal assets are not being used to produce the income.

Some other eligibility conditions required to be met in order to qualify for concessions and other conditions that Edwin must meet to make him eligible for concessions specifically when the shares are disposed in firm or units in trust (Lanis and Richardson, 2013).

In case of Edwin, he has share in EPL and still not disposed it of therefore he would not be able to apply for the concessions. Secondly, he has personal assets of worth more than $ 6 million other than personal assets like piece of land and that piece of land would not be used for generating revenues. Thirdly as for as the concessions on capital gain earned by the Edwin on disposal of practice, he received $ 4 million and earned $1.85 million during year 2017/18, he would be unable to apply for any of these four concessions mentioned earlier due to the fact that he owned that practice services since July 2005 and disposed it of during October 2018 therefore time span is less than 15 years, not eligible for 15 year concession. Secondly, he would also be unable to apply for 50 percent asset concession ( and Quince, 1988).

However, he can apply for the retirement exemption on capital gains from disposal of assets and services are exempted to the lifetime of $ 500,000 but he would have to pay the amount in retirement saving account of complying super fund if he would have age less than 55 years (Lanis and Richardson, 2013).

The point at which capital gain or capital loss is making is the time when an individual enter into the contract to dispose of some assets instead when individual settle. Therefore Edwin has to report the capital gain in returns for 2018/19. CGT is applied on all the Australian residents anywhere in the world.

References:

Beebeejaun, A. (2018), "The Anti-Avoidance Provisions of the Mauritius Income Tax Act 1995: Lessons from UK and Australia", International Journal of Law and Management, Vol. 60 No. 5, pp. 1223-1232.

Cheng, A., Hooper, K. and Davey, H. (2000), "A Capital Gains Tax for New Zealand: A Comparative Study of the UK and Australian Models", Asian Review of Accounting, Vol. 8 No. 2, pp. 43-59.

Lanis, R. and Richardson, G. (2013), "Corporate social responsibility and tax aggressiveness: a test of legitimacy theory", Accounting, Auditing & Accountability Journal, Vol. 26 No. 1, pp. 75-100.

Lansbury, R.D. and Quince, A. (1988), "Management and Professional Employees in Large Scale Organisations: An Australian Study", Employee Relations, Vol. 10 No. 5, pp. 2-55.

Marshall, R., Smith, M. and Armstrong, R. (2006), "The impact of audit risk, materiality and severity on ethical decision making: An analysis of the perceptions of tax agents in Australia", Managerial Auditing Journal, Vol. 21 No. 5, pp. 497-519.

McCredie, B. and Sadiq, K. (2019), "CSR and tax: a study in the transition from an ‘aggregate’ to ‘real entity’ view of corporations", Pacific Accounting Review, Vol. 31 No. 4, pp. 553-573.

Passant, J. (2014), "The Minerals Resource Rent Tax: The Australian Labor Party and the continuity of change", Accounting Research Journal, Vol. 27 No. 1, pp. 19-36.

Rothengatter, M.R. (2005), "Social networks and tax (non‐)compliance in a multicultural nation: Emerging themes from a focus‐group study among ethnic minorities in Australia", International Journal of Entrepreneurial Behavior & Research, Vol. 11 No. 4, pp. 280-314.

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