Taxation Law Assignment: Analysis Based on Australian Tax Theory, Practice & Law

Question

Task: The questions to be answered in the taxation law assignment are:
Week 6
Mason is a car painter with Melbourne Collision Repair Centre. Mason studying BPA and his employer pays for his course fees at Holmes Institute costing Mason $12,000. Also, Mason lives in a unit apartment in Brisbane, which is provided to him by Melbourne Collision Repair Centre as his employer as fringe benefit. The market value rent for the apartment is $500 per week, and Mason pays $100 of rent per week for the apartment.

Required: Advise the FBT consequences of Mason’s remuneration package.
Week 7
Alex is a carpenter who purchased a vacant block of land in Sydney on 1 October 1980. On 1 September 1986, Alex built a house on the land. At the time, the land was valued at $110,000 and the cost of construction was $100,000. Immediately, after the construction finished, the property has been rented out. On 1 March 2019, Alex sold the property at auction for $1,400,000. Required:

With reference to relevant legislation/case law, determine:
a) Alex’s net capital gain or net capital loss for the year ended 30 June 2019 using both Discount method and Indexation method.
b) How would your answer to a) differ if the owner of the property was a company instead of Alex?
Week 8 Bowens Pty Ltd is a building materials supplier in Victoria. Bowens Pty Ltd has an annual turnover of $24 million, and works under the accrual method of accounting. Bowens Pty Ltd purchases concrete mixer for $660 each from Builder’s Choice Pty Ltd, a company in Geelong with an annual turnover of around $21 million, and works under the accrual method of accounting. Bowens Pty Ltd plans to sell the concrete mixers at a 200% mark?up to its customers. In October last year it purchased 110 concrete mixers but in December they discovered that 12 of the concrete mixers were faulty and subsequently returned these faulty concrete mixers to the manufacturer, obtaining a full refund. Assume both apply the accrual method of accounting. Required: With reference to relevant laws, discuss the GST consequences of this arrangement for both Bowens Pty Ltd and Builder’s Choice Pty Ltd.

Week 9
Due to COVID?19 impact, HI Co becomes insolvent and placed into voluntary liquidation by its directors. Dissolve liquidators have been appointed as the company liquidators. On the winding up of the HI Co, Dissolve liquidators have started distributions and Paul as ex?shareholder of HI Co received $7,200 from the liquidators, which was inclusive of $3,000 unfranked dividend pursuant to the provision of Income Tax Assessment Act 1963, section 47(1). This distribution to Paul was from his $4,000 investment in the shares of HI Co on 2nd February 2019. Required: With reference to relevant provisions of ITAA 97 and ITAA 36, critically analyze the tax consequences of the above scenario for Paul.

Week 10
Stephen and his cousin Alex started an equal partnership business, Euca Sanitizers, motivated by the increase in the recent demand for hand sanitizers during the COVID?19 pandemic. Stephen lives in Sydney and is an Australian resident for tax purposes. Alex however, is resident of New Zealand and is a foreign resident for tax purposes in Australia. On 30 June 2020, Euca Sanitizers partnership net income is $300,000, 60% of this income is generated from selling hand sanitizers to Australian retailers and 40% comes outside Australia from sale of hand sanitizers to New Zealand retailers.

Required:
With reference to relevant provisions of ITAA 97/ITAA 36, discuss how the partnership income is taxed.

Answer

Answer-1 (Week 6)
As per ITAA, where an employer provides a benefit to his employee for which he does not pay any consideration in cash or pays a much lesser consideration, then such a benefit categorises under Fringe Benefit. In the given scenario of taxation law assignment, Mason’s employer Melbourne Collision Repair Centre provides Mason with two fringe benefits- course fees of Mason worth $12000 and rental house to Mason at a rent of $100 per week which otherwise would have been costing Mason around $500 per week. The consequences of FBT on Mason’s remuneration package shall be that the fringe benefits shall be reported in Mason’s Payment Summary for the year. Those fringe benefits whose value exceeds $2000 in a year are to be reported in Payment summary of the employee. For calculating the value of the fringe benefits, the difference in the value provided and the value calculated as per market rates are treated as fringe benefits and then multiplied by a lower gross-up rate. Similar interpretation was held in the case of Commissioner of Taxation v Qantas Airways Limited [2014] FCAFC 168. For the year ended 30th June 2020, the lower gross-up rate is 1.8868. Hence, the Fringe Benefits of Mason shall be grossed up using this rate and will be reported in Payment Summary as FBT consequence.

Answer-2 (Week 7)

a) Calculation of Capital Gain of Alex for the year ended 30th June 2019:

Using discount method
Sale proceeds of Vacant Land $ 1400000
Less: Purchase price $110000
Less: Cost of House Construction $100000 $210000
Net Sales Proceeds $1190000
Less: 50% discount as per Discount method $595000
Net Taxable Capital Gain $595000

Using indexation method
Under this method, indexation factors are applied to the cost base. Indexation factor is calculated as under:

CPI for relevant quarter in which event happened but restricted to the year 1999/ CPI for a quarter of incurring expenditure (ATO 2012)
Now, for indexation of the purchase price, indexation factor= CPI for March 1999/CPI for October 1985 as 1980 rates are not available =68.7/40.5= 1.696

Revised Cost of Purchase using Indexation Rate= $110000*1.696= $186560
Now, for indexation of construction cost, indexation factor= CPI for March 1999/CPI for September 1986 when the house was completed =68.7/39.7= 1.730
Revised Cost of House Construction using Indexation Rate= $100000*1.730= $173000

Capital Gain using Indexation Method:
Sales Proceeds of Land $1400000
Less : Total revised costs ($186560 + $173000) $359560
Capital Gain on Land $1040440

b) In case if the owner of the property was a company, the discount rate method will not be available to the company as it is available to trusts, individuals and superannuation entities. An exception to this rule is that the insurance companies or societies that are into insurance providing services can claim the benefit of the discount method (Mather 2013).

Indexation method shall apply to the company if it is not a listed investment company as it fulfils the other two eligibility criteria-holding asset for more than 12 months and acquiring asset before 21st September 1999.

Answer-3 (Week 8)
As per Division 9 of “A New Tax System (Goods & Service Tax) Act 1999”, when a taxpayer is involved in purchasing a capital good for reselling it, then such a good becomes an item of sale and is not considered as a capital asset. In such a case, the seller of such goods needs to obtain GST registration. Here, as both the companies are having a good turnover, we shall assume that they both already have GST registrations.
In the given case, Bowens Pty Ltd. had purchased 110 Concrete Mixers in October for sale to its customers from Builder's Choice Pty Ltd. but due to some technical faults, the company returned 21 Concrete Mixers in December. As both the companies follow the accrual basis of accounting, they both had accounted for the said transaction along with the effect of GST. The seller may have created a liability of payment of GST and the buyer may have taken a GST input credit in its books of accounts, hence both the parties shall make adjustments.

For Bowens Pty Ltd- the company had taken GST input credit for the purchase of goods and thus the same has to be reversed as per Sec 9-15 of GST Act. For the reversal, the company shall make an increasing adjustment in the activity statement that will be prepared for the relevant period which is December. The GST credit is reversed on the number of goods that have been returned to the supplier.

For Builder's Choice Pty Ltd.- as the company has sold goods to Bowens, it had increased its liability to pay GST on such goods as per Sec 9-15 of GST Act. But as the goods on which GST was paid have been returned to Builder’s Choice, the company is entitled to claim the GST Credit on such returned goods as he has made full refund to the customer. In such a case, the next activity statement shall be adjusted and will reflect the GST Credit. Also, the supplier company shall issue an adjustment note to the Bowens Pty Ltd. for the amount of refund made.

Similar instance has been observed in the case of Interchase Corporation Ltd v ACN 010 087 573 Pty Ltd and Ors [2000] QSC 013
These adjustments are done so that the GST on sale and purchase of goods can be adjusted. If GST on returned goods is not reversed in seller or buyer books, then there shall be differences in their outstanding balances while performing reconciliation of accounts. Hence, this is very important to adjust GST in the books of accounts of both the parties when the return of goods is involved and the whole amount is refunded by the seller.

Answer-4 (Week 9)
When a company undergoes voluntary liquidation, the company appoints a liquidator to distribute the proceeds from the disposal of assets of the company to the external and internal creditors and debt holders of the company (Mongrain & Wilson 2018) and a similar instance was held in the case of Feng v GMS Fulfilment Services Limited [2004] NSWSC 855 and McIntrye v Eastern Prosperity Investments Pty Ltd (No. 6) [2005] FCA 155. These include shareholders who have invested their money in the form of shares of the company. In the given case, HI Co. has become insolvent and appointed Dissolve Liquidators to distribute to the stakeholders. Paul is an ex-shareholder and has received $7200 including $3000 as an unfranked dividend. The investment was done in February 2019 by Paul. Hence, the tenure of holding the shares has been short-term. The gain or loss that he shall receive from the disposal of the shares shall be the difference between the amount invested and amount recovered including dividend (ATO 2019).

Paul has invested $4000 in shares of HI and has received $7200 at the time of liquidation which includes $3000 as an unfranked dividend. As per section 46 of ITAA, 1936, the un-franked dividend received on liquidation is taxable. The remaining amount $4200 ($7200- $3000) shall be treated as an amount received from the sale of shares which were purchased for $4000. Hence, the difference of $200 shall be treated as short term capital gain on shares and taxed accordingly as per Section 104-5 of ITAA 1997. The amount of $4200 shall be considered as notional sales proceeds from shares held in the company and the notional cost of acquisition shall be taken as $4000 at which Paul has purchased the shares in the company. The dividend that Paul has received shall be considered as liquidating dividend which the company pays after payment of the stakeholders (Black 2019). Hence, the $ 200 capital gain shall be shown by the shareholder Paul in his tax return and shall be taxed as per the capital gain taxation rules of ITAA, 1997 and ITAA, 1936.

Answer-5 (Week 10)
As per ITAA 97, a partnership firm is an association of persons where the business is carried on as partners of business earn income jointly. A partnership firm is considered as a separate taxable entity and is required to file a tax return every year. Partners have to pay tax on the profits from the partnership firm and can claim losses from the firm and disclose in their tax returns. In case the firm has a non-resident partner, then he shall not be taxed on the income share of the firm that pertains to the income generated outside Australia (Nethercott, Richardson & Devos 2013).

In the given case, Stephen is an Australian citizen and Alex is a non-resident for taxation purposes. As per the relevant rules of ITAA 97 & ITAA 36, the partnership firm has to include in its taxable income all the income earned during the year which includes foreign income. Hence, the firm shall be liable to pay taxes on total income of $300000 and the partners shall be liable for taxes in the manner explained above after claiming all the allowable deductions. 40% of the income shall be treated as foreign income and be disclosed in the tax returns accordingly. The interpretation can be linked to the case of Wang v Rong [2015] NSWSC 1419.

References
ATO 2012, Consumer price Index rates, viewed 12 June 2020,
https://www.ato.gov.au/Rates/Consumer-price-index/
ATO 2019, Capital gains Tax 2019, viewed 12 June 2020,
https://www.ato.gov.au/General/Capital-gains-tax/
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed 12 June 2020, https://www.realestate.com.au/advice/what-is-capital-gains-tax/
Mather, P., C.A 2013, What's up in fringe benefits tax? Taxation law assignment Charter, vol. 84, no. 2, pp. 54-55, viewed 12 June 2020, https://search.proquest.com/docview/1326778408?accountid=30552

Mongrain, S. and Wilson, J.D 2018, Tax competition with heterogeneous capital mobility. Journal of Public Economics, vol. 167, pp. 177-189.

Nethercott, L., Richardson, G.,& Devos,K 2013, Australian Taxation Study Manual, Oxford university Press