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LAWS5065 Taxation Law : Income Tax Assessment Act

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1. Discuss whether the following amounts are assessable.  Include references to any relevant provisions in the ITAA 1997 or ITAA 1936.

  1. A car valued at $15,000, given as a prize to a depositor of a building society.  The competition was open to all those who could maintain a minimum balance of $10,000 for the year.

  2. An exchange gain (not of an income character) of $1 million made by a large industrial company on repayment of long-term loans.
  3. A travel allowance of $4,500 (paid at 45 cents per kilometre 10,000 km travel) paid to an employee by an employer because the employee was carrying out tasks required by the employer.

2: In your hurry to get to a tax lecture, you park your car poorly and, in the process, badly damage the Vice Chancellor’s car.  As the accident is clearly your fault and you do not have any insurance, you agree to meet the costs of any necessary repairs.  After obtaining three quotes, the Vice Chancellor informs you that the cost will be $2,000, which you pay to her when the work is complete.

Required: Is it possible that this transaction could have any Capital Gains tax implications for the Vice Chancellor?

3: Mr & Mrs Martin each hold two shares in a family company.  The company was established in 1980 for the purposes of conducting a retail business premises in Bendigo.  The Martins have twins (a boy and a girl) who will turn 18 on 1 July.  Present plans are for each of the twins to receive one of the shares in the family company with Mr Martin transferring one of his shares to his son and Mrs Martin transferring one of her shares to her daughter.

1. What capital gains issues, if any, arise?  How would your answer differ if, instead of the above share transfer arrangement, the share transfer occurred on Mr Martin’s death, one share being transferred to each of his children? (Mrs Martin would retain both of her shares).

 2. What are the implications for the family company if the Martins are considering:

  • Buying vacant land in Bendigo; or
  • Buying a retail business (operating through leased premises) in Queensland

Assume that in each case it is the family company that will acquire the assets and that within five years both assets would be sold.  Also assume that the shareholders would want to participate in any gains which accrued.

Answer:

1.1.The ordinary income and statutory income does not include prizes that are received from competition or lottery as per the ATO ID 2002/664. Therefore, it can be said that the section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 does not include the prize received as an assessable income. The section 26 AJ of the Income Tax Assessment Act 1936 provides that the prize that has been received from an investment related lottery should be included in the assessable income. In the investment related lottery the chance of winning the prize, arise due to the investment that is held by the taxpayer with an investment body. The benefits or prize received from the lotteries that have been organized by the banks, credit Union, building society or any other investment in our body should be treated as an assessable income (Saad, 2014). In the current case, a car of value $15000 is own as prize by the depositor of the building society. In the competition, it was mandatory to maintain a minimum balance of $10000. Based on the discussion above it can be said that it is a prize that is received from investment related lottery. Therefore, it can be said that the value of car should be included in the assessable income under section 26 JA of the Income Tax Assessment Act 1936. The time at which the tax is payable depends on the nature of the prize. That means if the prize is received in cash then it is immediately taxable. On the other hand, if the prize is received as an asset then it is taxable at the time of capital gain on disposal of asset. In this case, the prize received is a car so it will be taxable at the time of its disposal (Birt et al., 2014).

1. 2. The assessable income should include the Forex realization gains that are made from Forex related transactions as per section 775-15 of the Income Tax Assessment Act 1997. The fluctuation in foreign exchange rate results in Forex realization gain. This gain made from the fluctuation of foreign exchange rate should be included in the assessable income (Tran-Nam et al., 2014). In the current case, the fluctuation of exchange rate has resulted in an exchange gain of $1 million on the repayment of long-term loan. The exchange gain should be included in the assessable income as Forex realization gain as per section 775-15 of the Income Tax Assessment Act.

2. The value of compensation, allowances, benefits, gratuities and bonuses of premiums that are provided to the employee by the employer should be included in the assessable income as per section 15-2 of the Income Tax Assessment Act 1997. The employer gives the travel allowances to the employee for covering the incidental expenses that is necessary for performing the duties. In the current case, the employer has paid travel allowances for carrying out the duties. The amount of travelling allowances that is received by an employee should be included in the assessable income as a part of salary. Based on the above discussion it can be said that assessable income includes travel allowances (Evans et al., 2015).

3.The capital gain is the excess amount received from the disposal of a capital gain tax asset over the cost of acquisition of that asset as per section 100-35 of the Income Tax Assessment Act 1997. It is provided under section 100-20 of the Income Tax assessment Act 1997 that the capital gain or loss arises only if it is a capital gain tax asset. In section, 100-25 of the Income Tax Assessment Act 1997 it is provided that there is a list of capital gain tax assets on disposal of which the capital gain or loss takes place. In section 118-5 of the Income Tax Assessment Act 1997, it is provided that the capital gain or loss that is made from the disposal of car should be disregarded. In this case, it can be said that the expenses incurred for repairing the car of vice chancellor is not a capital gain tax event and hence capital gain tax is not applicable (Braithwaite, 2017).

3.1. The list of capital gain tax asset is provided under section 100-25 of the Income Tax Assessment Act 1997. In the list, it is provided that the shares is a part of the capital gain tax asset. That means capital gain tax event includes selling of shares so any gain made from the disposal of shares should be included in the assessable income. In the current scenario, the parents transfer the shares of the family company to the children (Taylor & Richardson, 2013). The transfer of shares is a capital gain tax event so the capital gain or loss made from the transfer of shares should be included in the assessable income. The business was incorporated before the application of capital gain tax that is prior to September 1985. Therefore, it can be said that the capital gain tax should not be applied on selling of shares as it was purchased before the application of capital gain tax. However, there is an exception to the exemption that this exemption is not applied to the shares that are purchase prior to the application of capital gain tax asset. That means the shares transferred by Mr & Mrs Martin to their children is subject to the capital gain tax asset. In this case, the shares that are inherited as the portion of the deceased estate should be included as a normal capital gain tax asset. The shares that have been purchased prior to the application of capital gain tax asset should be valued at the market price on the day of the death of the holder of share.  In the current scenario, if the shares are transferred to the son and daughter after the death of Mr. Martin then the share should be valued at the market price on the day of death of Mr. Martin. In this case, the capital gain tax will be required to be paid at the time of disposal of the shares. That means capital gain tax event will happen at the time of sale and not inheritance of shares (Kucukvar et al., 2014)

2. a) The section 100-25 of the Income Tax Assessment Act 1997 provides that the vacant land that has been acquired by the business should be treated as capital gain tax asset. The section 102-5 of the Income Tax Assessment Act 1997 provides that capital gain or loss arising from the sale of vacant land should be included in as an assessable income. 

b) The business is not included within the meaning of capital gain tax asset. The income that is derived from the purchase of the business should be included under section 6-5 of the Income Tax Assessment Act 1997 as an ordinary income. In the current scenario, the family business has purchased a retail business (Richardson et al., 2013). Therefore, income derived from the retail business should be treated as ordinary income. In case the business is sold then the amount received from the sale of asset should be treated as capital gain.

Reference:

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J., & Janson, P. (2014). Accounting: Business Reporting for Decision Making 5e.

Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Evans, C., Minas, J., & Lim, Y. (2015). Taxing personal capital gains in Australia: an alternative way forward.

Kucukvar, M., Egilmez, G., & Tatari, O. (2014). Sustainability assessment of US final consumption and investments: triple-bottom-line input–output analysis. Journal of Cleaner Production, 81, 234-243.

Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), 68-88.

Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.

Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.

Tran-Nam, B., Evans, C., & Lignier, P. (2014). Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, 137.

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