BA317 Taxation Law- Goods and Services

Part A

1. Examine the following items typically found in a company’s Profit and Loss Account. Which of them would be allowable deductions under s 8-1?

You should consider:

1. Is there a loss or outgoing?
2. Is it incurred?
3. Does it satisfy the positive parts of s 8-1?
4. Is it capital or private?

a) accrued wages;
b) advertising;
c) depreciation;
d) interest;
e) insurance of plant and equipment;
f) lease payments;
g) provision for long-service leave;
h) repairs;
i) staff training;
j) taxation expense

2. Identify which, if any, of the following are balancing adjustment events as defined in s 40-295:

(a) A depreciating asset is destroyed by fire;
(b) You start using a computer wholly for private purposes when you previously used the computer wholly for business purposes;
(c) You start holding an asset that was previously part of your trading stock for the purpose of gaining your assessable income;
(d) You start holding an asset for the purpose of gaining your exempt income when you previously held the asset for the purpose of gaining your assessable income;
(e) You, as lessee of a car that you used for business purposes, acquire legal ownership of the car at the expiration of the lease.

3. Yan is injured in an industrial accident and receives the following payments:

(a) Workers compensation: $500 × 8 weeks $4000
(b) Compensation for loss of little finger $5000
(c) Yan’s employer pays the cost of the ambulance $950
(d) Social security disability support pension 7 weeks $750

Part B

Advise Yan on how these items are treated for taxation purposes.

Pick an area of Taxation Law from the following list:

Capital Gains Tax,
Goods and Services Tax
Fringe Benefits Tax,
Small Business Concessions,

In relation to your chosen area of Taxation Law answer the following questions:

1. Discuss briefly this part of Taxation Law and its objective. Here you can include discussions of revenue raising; economic or community benefit, equity and efficiency amongst others.

2. Discuss briefly the history of this tax measure. Discuss any important amendments including any recent amendments.

3. How effective has this tax measure been in meeting its objectives? What if any changes would you suggest to the tax measure to better meet its objectives? Are you aware of any proposed changes?

Answers

Part A

1. a. Accrued wages – Wages accrued are in the nature of wages which are to payable within a period of time. If the entity follows accrual system of accounting, in that case, the amount accrued as well as paid through cash or bank are shown in the income statement of the company as a deductible expense under s 8-1 of ITAA 1997. Hence the Accrued wages are not deductible as an expense under s 8-1 as these have already been booked in the income statement (Goldberg, 2017). It is neither loss nor outgoing expense. It is not incurred and also does not satisfy positive parts of s 8-1. It is neither capital nor private but still is not deductible under s 8-1.

b. Advertising- This expense is deductible under s 8-1 as it is an expense incurred while carrying out the business activities for earning the assessable incomes. It is an outgoing expense and is incurred for business income. Also, it satisfies the positive parts i.e the relation with earning of business income and it is neither capital expense nor a private expense (Goldberg, 2017).

c. Depreciation is allowed as an expense but only allowed on plant and equipment actually used, or ready to be used, in producing assessable income. It is not a cash outgoing expense but is a kind of loss of wear and tear of assets which is booked as an expense in the income statement and the same is also deducted from the value of the fixed asset. Also, it satisfies the positive parts that are the relation with earning of business income and it is neither capital expense nor a private expense (Kenny, 2016).

d. Interest- The interest is allowed till 10% per annum for non-commercial loans or any mortgage interest but these should be only related to business. This expense is deductible under s 8-1 as it is an expense incurred while carrying out the business activities for earning the assessable incomes. It is an outgoing expense and is incurred for business income (Goldberg, 2017). Also, it satisfies the positive parts that are the relation with earning of business income and it is neither capital expense nor a private expense.

e. Insurance of plant and equipment is allowed as an expense but only allowed on plant and equipment actually used, or ready to be used, in producing assessable income. It is a cash outgoing expense which is booked as an expense in the income statement (Kenny, 2016). Also, it satisfies the positive parts that are the relation with earning of business income and it is neither capital expense nor a private expense (Assuming that the plant and machinery are not brand new here as the insurance of new plant purchased shall be capitalized along with its cost).

f. Lease payments are the allowable expense as long as the leased asset is used in producing the assessable income. It is an expense which is incurred and is cash outgoing expense which is booked as an expense in the income statement. Also, it satisfies the positive parts that are the relation with earning of business income and it is neither capital expense nor a private expense (Cane & Conaghan, 2009).

g. Provision for long-service leave is only a provision made for the payments to be made in future. Hence it cannot be allowed as an expense under s 8-1 as it is an accruing liability. It is neither cash outgoing nor loss. It has still not been incurred and is neither capital expense nor private (Cane & Conaghan, 2009).

h. Repairs are treated as a business expense but are considered to be allowable under s 25-10 of ITAA 1997 and not s 8-1 of ITAA 1997.

i. Staff Training Expense- It is an expense which is incurred and is cash outgoing expense which is booked as an expense in the income statement. Also, it satisfies the positive parts that are the relation with earning of business income and it is neither capital expense nor a private expense (Saunders, 2015).

j. Taxation expense- not allowed under s 8-1 as it is not an expense necessary to earn the assessable income.

2. As per Section 40-295(1), a "balancing adjustment event" occurs if the taxpayer or the assessee:

Has stopped holding an asset, or has stopped using an asset or stops its installation and never wants to use it again, or already has not used the asset and also decides not to use it in future (Cartwright, 2013). Other points such as interest in the asset, etc are fulfilled

(a) A depreciating asset is destroyed by fire- is a balancing adjustment event as the asset is not held by taxpayer anymore.

(b) Using a computer wholly for private purposes when it was previously used for business purposes - is a balancing adjustment event as the asset will not be used for business by taxpayer anymore and s 40-295 is for business expenses only.

(c) Holding an asset that was previously part of trading stock for the purpose of gaining the assessable income- not a balancing adjustment income.

(d) Holding an asset for the purpose of gaining exempt income when it was previously held for the purpose of gaining assessable income- it is a balancing adjustment income.

(e) the lessee of a car that used it for business purposes now acquires legal ownership of the car at the expiration of the lease- not a balancing adjustment event.

3. Any amount that is received as lost salaries or wages under income protection or due to accident or workers compensation for the accident etc. is to be declared by the taxpayer on his income tax return if the person receives lump sum payment or periodic payments or both. All such payments are tax-free but the relevant conditions attached to it must be fulfilled (Sadiq et. al, 2017).

Hence, the given payments by the employer to Yan will be tax-free as these payments are being received for compensation for loss of earning, medical treatment and supporting his nonearning capacity.

Part – B Goods and Services Tax

Introduction

Goods and Services Tax (GST) in Australia is charged on most products and services at a rate of 10%. Besides, such GST is levied on all transactions incurring in the process of production but thereafter, is refunded to all existing parties in such chain of production except the final consumer (ATO, 2017).

Goods and Services Tax & objective

The intention of the Howard Government to introduce this taxation law in the year 1999 was to enhance the tax base that was believed to be significantly biased towards the offering of services. However, this law commenced in the year 2000 by replacing the past federal sales tax (wholesale) system so that innumerable territory and state government duties, levies, and taxes can be phased out. Hence, GST is believed to be a revenue grab for the people as it assisted in replacing a raft of ineffective State nuisance levies and taxes that imposed heavy deadweight costs while raising minimum revenue (ATO, 2017). Further, this law also replaced the Wholesales Sales Tax, thereby playing a major role in minimizing the personal taxes of individuals. The distribution of high revenues to the State Government while focusing the costs of introducing a new level of tax assured that there remains very little incentive to ramp up the rate of such taxes.

History of the tax measure and amendments

In 1975, a GST type-tax was proposed but the Hawke Labor Government discarded a serious consumption tax proposal in 1985. However, the same was re-proposed by John Hewson in 1990 but he failed to persuade the Government and therefore, again this was considered very complicated by a skeptical electorate. Further, in 1996, the Liberals assured never to introduce such tax regime and endeavored to win the elections. However, John Howard fought in the 1998 elections with the theme of introducing GST as the major platform. He proposed the GST to replace all the sales taxes covering all the products and services pervasively. Even though Howard got elected, yet he encountered major losses of vote bank (Barkoczy, 2014). However, still, GST was enforced and is now regarded the best measure for ascertaining political failure or success in Australia.

Amendments in GST include applicability of the same in the supply of digital products like streaming or downloading of movies, games, etc and supply of imported services like professional or consultancy services by foreign entities to the consumers of Australia 9 Hutchens, 2017). Further, an entity must register for GST where the value of taxable supplies surpasses the threshold of GST registration amounting to AU$ 75000 (calculated on a 12-month rolling basis). Recent amendments include imported goods below AU$1000 not being subject to Australian import GST. This has been postponed until July 1, 2018.

Effectiveness of the tax measure

Critics argue that GST has been a regressive tax that possesses a pronounced influence on major low earners of income in comparison to the high earners. However, it has been witnessed that GST has played a key role in minimizing the state bank taxes, personal income taxes, fuel taxes, etc. The former treasurer of Australia has also claimed that after GST implementation, people were not paying additional taxes (Kirk, 2015). However, once the tax came into effect, negative economic growth was witnessed in Australia but with the due passage of time, it came to normal. Hence, even though GST emerged with few complications, it has been of immense benefit to the people, entities, and the government as a whole.

Proposed changes

Due to globalization and development of Australian economy, it is now high time to enhance the GST rate because the country heavily relies on personal and company income taxes to sustain 9 Nethercott et. al, 2013). Therefore, if the income tax cannot address the standard of living of people in Australia, then the purpose of GST as an effective tax regime is not fulfilled. Besides, media reports have depicted that many Australian people are willing to consider the enhancement of GST levels (Hutchens, 2017). Such situation is an excellent opportunity for the government but the same has not been implemented as of now.

References

ATO. (2017). Goods and service tax (GST). Accessed September 22, 2017 from https://www.ato.gov.au/Business/Business-activity-statements-(BAS)/Goods-and-services-tax-(GST)/

Barkoczy, S. (2014). Australian Tax. Adobe Digital Editions

Cane, P & Conaghan, J. (2009). The new oxford companion to law. Oxford university Press.

Cartwright, M. (2013). Death to the Australia Tax?. Accessed September 22, 2017 from https://www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/Tax-responsibilities

Goldberg, S.G. (2017). The Death of the Income Tax: A Progressive Consumption Tax and the Path to Fiscal Reform. Oxford Press.

Hutchens, G. (2017). Push to impose GST on all imported online goods breaches best-practice rules. Accessed September 22, 2017 from https://www.theguardian.com/australia-news/2017/apr/21/push-to-impose-gst-on-all-imported-online-goods-breaches-best-practice-rules

Kenny, B. V. (2016). Australian Tax 2016. Thomson Reuters (Professional) Australia Limited

Kirk, A. (2015). Australia treasurers meet to discuss GST. Accessed September 22, 2017 from https://www.abc.net.au/worldtoday/content/2006/s1605569.htm

Nethercott, L, Richardson, G & Devos,K. (2013). Australian Taxation Study Manual. Sydney.

Sadiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting, A. (2017). Principles of Taxation Law 2017. Law book Australia

Saunders, C. (2015). The Australian Constitution. Carlton: Constitutional Centenary Foundation

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