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Assignment Sample Taxation Assignment

Downloads - 7 | Published :31st March 2016

Question 1:-

Issue

Hillary had received following income

  • She has received $10,000 to write story on her own life and same has been written by her without taking any assistance of the ghost writer
  • She earned $ 5000 for selling manuscript to the library
  • While climbing the mountain she had taken some photo graphs which were sold by her and realized $ 2000.

Our issue is to determine the liability of the income received in different nature as mentioned above

Answer:-

Application and discussion of lawe laws and Section

Section 6 (1) ITAA

TR 2639

According to section 6(1), the income is amounts as income from personal exertion.

  • Sum received as an employee or for providing any other services
  • Income received by carrying out the business whether jointly or alone.
  • Any amount received as subsidy to promote the businesses
  • The profits from sale of any property ,which were acquired basically for profit making  purpose

However following are the income which does not form part of income from personal exertion.

  • Interest received from any security or party which was not the ordinary business of the taxpayer
  • Dividends received from investment and rent receive from the property .

As per TR 2639, the level of personal skill used i execution of the work decides whether the income is considered as income from personal exertion or income from personal services . Where the income is received due to the act which involves more of personal skills and judgement such income are generally consider as income from personal service 

Analysis

Income received from writing story without the help of ghost writer , amount to exercise of her own judgement and personal skills are involved in that , it cannot be consider as income from the business or neither income received from employment . And hence we can say that income received of $ 10 000 will be taxable as income received from personal services and not from personal exertion. Incomes received of $ 5000 from sale of manuscript and of $2000 from sale of photographs are also consider as exercise of own skill. Which does not fall within the ambit of section 6(1)? And hence they will also form part of income received from personal service

Conclusion

It is to be noted that all the income received by the Hillary due to exercise of own judgement and persona skill. Neither those are income from business or income from employment; such incomes are in regular nature. However selling manuscript, selling photographs and writing story are not the business of the Hillary and hence all will amount to income from personal service.

The answer will remain same even if the Hillary write story for own satisfaction and letter on sale the same to the party

Question 2:-

Fact if the case

In the present case mother had given loan to his son of $ 40000 for period of 5 years . The same was given on the term of repayment after 5 years with extra $ 10,000. The loan was given without any formal agreement and on mutual consent basis. However, son had paid the full amount of loan in two years only with interest amount of $4 000, which comes to 5% per annum. IN addition to interest son had paid $ 10000 extra as agreed before.   The mother had requested for not payment of interest however son has paid the same.

Relevant laws and regulation

Section 6(5)

Section 6(10)

TR 1999/17

Answer:-

Discussion of above law

It is to be noted that assessable income of the taxpayer includes Ordinary income as  well as statutory income of the assessee . Section 6(5) of the ITAA 1997 defines the ordinary income as income received by Australian resident from all sources whether in Australia or outside Australia directly or indirectly. As per section 6(10) , statutory income are those income which are not ordinary income  and same will also be included in the assessable income of the taxpayer .

It is to be noted that any income received in the course of doing ordinary business will form part of ordinary income, however as far as income from capital gains cannot be included in ordinary income. So to sum up can say that the income which is not derived in the ordinary course of business will be taxable as statutory income.

Analysis

 It is to be noted that here the mother had granted loan of $ 40000 with 5 years of tenure with extra payment of $ 10,000. Here lending the money is not business of the mother and its not routine and hence th extra payment received by the son of $ 10000 after 2 years  be consider as statutory income as per section 6(1). As far as interest on loan is concern same is also not usual in nature as the interest amount was not decided at the time of giving loan , however as the son is paid on his will such income will be taxed  as statutory income .

So following is the realization to mother from his son loans after end of two years

  1. $ 4000 as an interest to loan for two years
  2. $ 10000 as extra payment for providing loan
  3. $40000 as repayment of principal amount tory income.
  4. Conclusion

It is to be noted that $ 14000 will be taxable as statutory income in the income tax return of the mother. Such income will be taxable in addition to other ordinary income if any received by the mother. To sum up i can say that as the above income of interest and extra payment for lending money cannot be consider as income from ordinary business and hence it will part of statutory income

Question 3:-

Facts of the case

Scott is an accountant by profession and he has purchased the vacated land on 2St October 1980. However on 1st September 1985 had planned to build the house on the same plot and he built the same. At the time of construction of the house the value of vacated land was $ 90000 and the cost of construction was $ 60000. Post construction of the property Scott given the same on rent. Now Scott has sold the property in current year for $ 8, 00,000. Now we need to discuss the liability for the same in different scenario as asked in case study

Answer:-

(a)

As per the section 104-10 of the ITAA 1997, if any capital assets are sold and the proceeds from such assets are more that or less than its reduced cost than capital gain or loss will be arise. Section 108-55(2) direct the calculation of the capital gain if capital assets are acquired before 20the  September 1985  and converted into building post 1985. Also as per section 114 any cost incurred against such property as discussed above before September 1999, the indexation will be allowed for such cost . However such assets should be held for more than 12 month of period.

According to section 108-55(2), capital gain or loss would be calculated as per this section if a capital asset purchased before 20th September 1985 is converted into a building after 20th September 1985. Indexation benefit is allowed as per section 114 for the costs incurred before 22nd September 1999. Apart from that, such kind of assets needs to be held by the person for more than 12 months. Also such assets are considering as separate assets as envisaged under section 108-55(2)

Section 115 of the ITAA, stipulates the discount method for calculation and as a result 50% of the capital gain is given as relief. the method is applicable in the case of individual. As far as any trust is concern the same rate is 33.33%. However when the capital gain is calculated as per discounted method benefit of indexation are not available.

Two methods for calculation of Capital gain

Taxpayer can choose any of the method to calculate the capital gain which benefits him or her maximum.

It is to be noted that as far as indexation method is concern, the same will be allowed on cost incurred by the tax payer in acquisition of  the assets and any other incidental cost incurred to repair , improve or further development. Such indexation are allowed to compensate the capital appreciation fetch due to inflation.

On the other side discount capital gain method does not allow any indexation, the difference of the cost purchased including any incidental expense and sold amount is consider as capital gain.  However 50% the gain are allowed as exemption. However to availa benefit of the same assets must be sold after 1990.

We will calculate the capital gain as per both method and will opt which is most appropriate for the taxpayer. Scott has sold the property in current year which is after 1999, he can pay tax on capital gain on any of the two method he wishes.

Computation of capital gain as per indexation method

Cost of land = $ 90000

Cost if Property = $ 60000

It is to be noted that the above two cost  is form part of cost and hence total cost of property is $ 1,50,000 , in the absence of information we assume that no improvement cost or development cost are incurred letter on

Indexation of the cost  = ( Cost of property )* CPI

                                     = (1,50,000) *68.7/43.2

                                     = $238452

Capital Gain = Sales consideration – Cost arrived after indexation

                      =8, 00,000- 2382452

                      =$ 561458

 

It is to be noted that$ 561458 will be taxable as assessable income if Scott goes for indexation method .

 

Computation of Capital Gain as per Discount method

 

 Capital Gain =  Sale consideration – Cost of the property

                      = 8,00,000- 1,50,000

                      = 6,50,000

Taxable Capital gain = 50% * Actual capital gain

                                  = 6,50,000*50%

                                    = $ 3,25,000

If we compare both option Scott is advised to go for discount method as he will save tax on  $ 236458 ( 561458-325000) .

(b)

If in the above case if the property is sold to the his daughter for $ 2,00,000 , the consequences will be as follow

It is to be noted that for calculating the capital gain the sale value should be fair market value , in the present case it is clear that the sale of property is done at too less price . Though the fair market value is not given from information of case $ 8,00,000 id the value which supposed to be realized from unrelated person.

We can say that though the sale of property is made at $ 2,00,000 , the capital gain will be calculated by taking sale proceeds of $ 80,0000 and as result the capital gain on valueof $ 3,25,000 will be paid by Scott as calculated in case 1. Here again availing indexation cost will not be benefited to the Scott.

(c)

The answer differs by following ways if the owner of the property is a company instead of an individual.

As discussed previously as per section 115, the benefit of indexation can be availed by the individual, superannuation entities and trust only.  It is to be noted that the taxable rate for different status of entity are different.

In the present case as we assumed that entity is company the benefit of discount method will not be available and company needs to pay tax on capital gain of $ $561458 as calculated in option 1 with the application of the indexation method.

Conclusion

  1. Scott is an individual and hence as per section 115 he can avail the benefit for paying tax on amount derived as capital gain from discounted method. And as we calculated above $ 3,25,000 is the capital gain amount on which tax is required to be paid
  2. While calculating the capital gain the sale value of the property is required to be taken as fair market value of the property . As in the present case fair market value is not given we have taken value offered by the unrelated party which is $ 800,000 as stated in option 1 and hence the taxation capital gain will remain same of $ 3,25,000.
  • In case of the company the indexation method is not available as per section 115 , and hence the taxable capital gain will be $ 561418 as per indexation method.

References

ANON, N.D., “What is income?”, Accessed on 19th August 2015, <https://www.ato.gov.au/General/Tax-terms/In-detail/Employment,-income---tax-returns/What-is-income-/>

ANON, N.D., “Personal Services Income”, Accessed on 19th August 2015, <http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1220&context=rlj>

ANON, N.D., “Income from personal exertion”, Accessed on 19th August 2015, <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html>

ANON, N.D., “Taxation ruling 2639”, Accessed on 19th August 2015, <http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2639/NAT/ATO/00001>

ANON, N.D., “TR 1999/17”, Accessed on 19th August 2015, <http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR199917/NAT/ATO/00001>

ANON, N.D., “TR 98/1”, Accessed on 19th August 2015, <http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR981/NAT/ATO/00001>

ANON, N.D., “Section 6-5 of ITAA 1997”, Accessed on 19th August 2015, <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html>

ANON, N.D., “Section 6-10 of ITAA 1997”, Accessed on 19th August 2015, <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.10.html>

ANON, N.D., “Section 108-55(1) of ITAA 1997”, Accessed on 19th August 2015, <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s108.55.html>

ANON, N.D., “Section 104-10 of ITAA 1997”, Accessed on 19th August 2015, <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.10.html>

 

[1] ITAA 1936

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