Capital Taxation and Its Applicability

In The Described Scenario Eric Was Engaged In Purchase And Sale Of Various Capital Assets By Considering Those Transactions Computation Of Capital Taxation is done in this part.

In accordance with the capital taxation provisions of Australia different method is applicable on the basis of holding period of asset(Faccioand Xu, 2015). Description and condition of its applicability is as follows:

• Indexation and discounting method: One of these methods is applied if assesse hold capital assets for more than twelve months.
• Other method: This method is applied if assesse hold capital assets for less than twelve months(Jacob, 2016).

 In the present case other method will be applied as it is clearly provided that assets are purchased and sold in previous 12 month thus it is obvious that holding of each asset will be less than 12 months. Computation of capital gain for tax is as follows:

Asset	Purchase cost Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Sales price	Calculation Sales-purchase cost	Net Amount
Capital gain
Antique Vase	$2,000.00	$3,000.00	$3,000.00-$2,000.00	$1,000.00
Shares	$5,000.00	$20,000.00	$20,000.00-$5,000.00	$15,000.00
				$16,000.00
Capital Loss
Antique chair	$3,000.00	$1,000.00	$1,000.00-$3,000.00	-$2,000.00
Painting	$9,000.00	$1,000.00	$1,000.00-$9,000.00	-$8,000.00
Sound system	$12,000.00	$11,000.00	$11,000.00-$12,000.00	-$1,000.00
				-$11,000.00
Net Capital gain	Total Capital gain – Total Capital loss $16,000.00–$11,000.00	$5,000.00

Brian is recruited as an executive in a banking institution. Coming to his remuneration package, Brian’s employer offered him a 3 year loan of total amount of $1m as well with a special rate of interest of 1% per annum and must be paid in monthly basis. On the date 1 April 2016 the loan was offered, brain made use of 40 percent of its borrowed funds for the purpose of income generation and meet all its requirements as per the interest payments. Present question is focused on computation Loan Fringe Benefits provided to Brian by considering the given case facts.

Fringe benefits act as an important part in the business and it can use as a means of attracting experienced and superior staff. Conversely, if company is providing fringe benefits to their staff, then it is must get self-awareness regarding their own obligations of tax(Woellner and et.al, 2016). Fringe Benefits Tax or FBT is amount to be paid as tax by the employers, purposefully for the benefit of employee, by replacing wages and salaries. This tax payable is a separated part and is measured on the tax value of the FBT provided(Pearceand Pinto, 2015). By considering the provisions of fringe benefit tax on loan on special rate tax is to be provided on difference amount of tax rate charged and statutory interest rate. According to Australian Taxation Office;Benchmark Interest Rates for Loan Fringe Benefits is 5.65% for 2016.

Calculation for taxable amount for Brian for the provided Loan Fringe Benefits is as follows:

Step	Particulars	Calculation	Amount
1	Interest payable by Brain as per Loan Fringe Benefits	$1,000,000.00*1%	$10,000.00
2	Interest payable by Brain as per statutory interest rate	$1,000,000.00*5.65%	$56,500.00
3	Taxable value of loan fringe benefit	Step 2 – Step 1 $56,500.00-$10,000.00	$46,500.00

As per computation taxable amount is $46,500.00 and taxable amount will not be affected even only 40% is used for income producing purpose.

Taxability will not be affected even if interest payment is made end of the loan instead of monthly

Calculation of Capital Gain for Tax

In case where Brian is exempted from paying interest then taxable amount will be $56,500.00.

In the described case situation; Jack is an architect and his wife (housewife) had purchased a rental property in which they both are joint tenants. For this transaction; an agreement is formed according to which Jack take 10% of profit and remaining will be allocated to Jill. However, in case of loss Jack will be bear entire amount. In present year there is loss of $10,000.00Thus present case is based on evaluation of loss allocation for the purpose of taxation and consequence of capital gain or loss in case where property is sold by Jack and Jill.

According to the provisions of TR 93/32 “Income Tax: rental property – division of net loss or income between partner”, proportion considered by partners in business is valid for computation of taxation either there is profit or loss(Hemmingsand Tuske, 2015). However, there are certain exception to this rule according to which joint ownership will be considered as partnership for tax purposes only if individuals are carrying business. In case of agreement is done merely the purpose of tax then loss will not be apportioned as per agreement formed by partners(Gregory, 2016). This provision also states that joint owner of rental property are not partners thus their agreement does not have impact on computation of taxation.

By applying provisions TR 93/32 “Income Tax: rental property – division of net loss or income between partner” in the given case it can be said that partnership of Jack and Jill is merely for the purpose of tax evasion and they are not carrying business thus their agreement will not be applicable for computation of tax and loss will be allocate in 50:50. Similar provision will be applicable in situation where property is sold by Jack and Jill for treatment of capital gain or loss.

According to the give case scenario, a gardener was employed by The Duke of Westminster who was paid from the Duke’s substantial post-tax income. With an intention to reduce tax, liability, Duke stopped paying wages to gardener; however, the Duke drew up a covenant agreeing to pay an equivalent amount (Likhovski, 2006). As per the laws of tax applicable at that time, Duke was eligible to claim a deduction so that tax liability and surtax can be reduced.

The facts revealed that Inland Revenue Commissioners (IRC) lost their case against the Duke. This case was of tax avoidance, which has been a main issue in the Australia nowadays. In the words of Lord Tomlin, an individual is entitled to order his affairs, for the purpose of tax attaching under the appropriate Acts, which are less than it. In case the person is successful in ordering them so as of secure tax result. Nonetheless, the case was of ungrateful the Commissioners of Inland Revenue or the fellow tax-payers is too clever, but he is not allowed to pay an increased tax (Hayward, 2014). 

Taxation on Loan Fringe Benefits

This tactic adopted in the case might attract others who are seeking to avoid tax legally through making complex structures; but the case has become very weak after subsequent cases in which courts have make decisions while reviewing overall effect. For an example, “Ramsay principle” established by court is a restrictive approach taken against such frauds (Simpson, 2005). According to this principle, in case a transaction is a pre-arranged artificial step that is served for no commercial purpose rather than saving tax than a legal action could be taken.

The case discussed in the above section reveals that tax avoidance is significantly allowable if it follows the statute laws. In respect to the case of Duke of Westminster’s, the basic principle of the format of deed can dramatically reduce the liability of Duke, in case, avoidance of tax is approved. Furthermore, it is also justified if the claims are made for a single year or as an annual payment made.

However, it can be worthy to say that if the company uses any device to support the reduction of taxable profit then it is not permissible. The courts and the Tribunals can also consider that the fiscal jurisprudence of Australia are now changed and the principle of Duke of Westminster [1936] AC 1are not going to be applied. Tax planning is intended in respect with avoidance of tax which is to be struck down by the court and the principles are not applicable.

According to the given case scenario, Bill is the owner of a large parcel of land and the land is full of tall pine trees, However, Bill now intends to use the land for grazing sheep. It requires cleaning the land. As a deal he found a logging company which is ready to pay him $1,000 for every 100 metres of timber taken from land. Now the issue is whether Bill would be assessed on the receipts from this arrangement or not. What if when logging company offers a lump sum of $50,000 for granting the right to remove as much timber as required from his land, in this situation what the action will be.

Situation 1: Standing timber’s disposal, and not related to regular business course

The universal rule of taxation under TR 95/, in a case a taxpayer owns ant property for the disposal of timber; however, the plants must be planted for a reason of sale. This will impact the value of those trees is to be included in the assessable income of the taxpayer. The guidelines are stated in subsection 36(1). Nonetheless, the situation is applicable at the time when disposal will take place (Schofield, 2008). The other situation occurs when taxpayer operates the business of forest operation, while in the present case taxpayer is running the business and not any single disposal made through a regular business course. The key aspect of such things required is that trees must comprise of total asset of business.

As per the mentioned deed not a single tree is disposable with the sale of a land’s or it’s right. Furthermore, Subsection 36(1) is not going to be applied in case the trees are planted on leased land and in the second case if lessee doesn’t contain entire ownership on trees that were planted of leased property (Feldman, Katuš?ák and Kawano, 2016).

The law stated that if a tax payer is operating a business of forest operation may sell all the standing timber through offering a right of removing the standing timber, in case there is not any right against cutting the standing timber. As per the subsection 25(1), the gains earned through selling timber re included in assessable income.

The regulatory provisions stated as per subsection of 36(1) and 25(1) of TR 95, it can be stated that Bill will entitled to pay tax in bother the cases, If receives $1000 the income will be assessed as per the section 36(1) and in case a lump sum amount is paid so the amount is taxable according to subsection 25(1).

References

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Feldman, N.E., Katuš?ák, P. and Kawano, L., 2016. Taxpayer confusion: Evidence from the child tax credit. The American Economic Review, 106(3), pp.807-835.

Gregory, C., 2016. Public law in the age of statutes: Essays in honour of Dennis Pearce [Book Review]. Bar News: The Journal of the NSW Bar Association, (Winter 2016), p.60.

Hayward, R. ed., 2014. Valuation: principles into practice. Taylor & Francis.

Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.

Jacob, M., 2016. Tax regimes and capital gains realizations. European Accounting Review, pp.1-21.

Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster. Sage

Pearce, P. and Pinto, D., 2015. An evaluation of the case for a congestion tax in Australia. The Tax Specialist, 18(4), pp.146-153.

Schofield, R., 2008. Taxation under the early Tudors 1485-1547. John Wiley & Sons.

Simpson, E., 2005. The Ramsay Principle: A Curious Incident of Judicial Reticence?. British Tax Review, 4, p.358.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.