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ACC304-Tax Implication Case Study

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  • Course Code: ACC304
  • University: Kaplan Business School
  • Country: United States

Questions

Part 1

Starting a new life, Elwood arrived in Australia on 1 July 2017 with his wife and two children. Elwood and his family have been transferred to Australia for a minimum of 3-years. Elwood likes the low interest environment and purchases a home. He moves in immediately. He registers the telephone and electricity in his name. On 1 January 2018, he adds a new kitchen to the home at a cost of $20,000.
 
Inda, his wife started part-time employment as a sales manager. The children settle happily into the local school. Elwood rents out their former home in the United States and the rent is paid into an American account he can access from Australia. Elwood joins the local gym and becomes a member of the local Chess club. He attends regular meeting and is appointed President after a short period of time.
 
Inda is asked to work from home 2 days per week as the company is closing their Brisbane office. The company can no longer afford the commercial rent. Inda agrees reluctantly as she loved the work atmosphere.
 
Required
 
Elwood and Inda request that you provide them with tax advice in relation to their residency for taxation purposes. Students should quote legislation, appropriate rulings and cases. Marks will be awarded for the format of your business letter and appropriate use of language.

Part 2A Tax Return Information

Jake Smith is an Australian resident and also one of your clients. Jake has the following events during the year.
1. During the entire 2018 income year, Jake worked for MD & A Architects. Jake was provided with his PAYG Payment Summary for the period 1 July 2017 to 30 June 2018. Gross salary was $86,000. Payg tax withheld was $19,820.
 
2. Jake uses his car for work. Jake was reimbursed for 6,000 kilometers travelled during the year at 75 cents per kilometer. PAYG withholding of $1,500 was deducted during the year.
 
3. Jake earns interest of $100 during the year (gross). Jake did not provide the bank with his tax file number.
 
4. Jake received an unfranked divided of $3,500 on 18 June 2018. Jake participated in a dividend reinvestment scheme so that he received an additional 198 shares in the company.
 
5. Jake purchased 1,000 ANZ bank share on 1 March 2015 at $22 each. Brokerage costs on purchase were $50. Jake sold 500 ANZ bank shares on 1 June 2018 for $24 each. Brokerage costs on sale were $55.
 
6. On 12 May 2018, Jake sold his “cricket bat” collection. This consisted of 5 cricket bats that were signed by famous people. The great “Sahin Tendulkar” has signed one of the bats. Ricky pointing had signed one of the bats which was worth considerably less than  3 the bat signed by Tendulkar. Jake purchased the bats between 1999 and 2004 for a total cost of $2,600. He sells the entire collection for $900.
 
7. Jake failed to keep a log book but wishes to claim his Mazda 3 motor car if possible. Jake’s diary notes indicate he travelled 7,420 kilometers. Total car expenses including depreciation are $6,200. He estimates (has a guess) that his business percentage is 95 percent. Jake does not have a second motor car.
 
8. Jake owns a mobile phone which he uses for work. His mobile telephone call costs for the 2018 income year totalled $1,400. Jake estimates that 60% of these calls were workrelated. Jake failed to keep his receipts and can’t provide any material documentation.
 
9. On 1 May 2018, Jake paid the invoice which he received from his previous tax agent for the preparation and lodgement of his income tax return for last year. The tax agent's fee was $400.
 
10. Jake is not married and does not have health cover.
 
Advise Jake as to the tax implications of each of these 10 items and the impact it will have on his tax return. Students should quote sections of law where appropriate.

Part 2B

Jake while talking to a friend (Max) at a party is informed about a topic called “negative gearing”. Tax advantages were discussed so Jake is seeking your advice. He was also told about potential changes should there be a change in Government. In your own words, explain “negative gearing” to Jake and the potential changes that may occur. In your own words, students should discuss the potential tax benefits for someone earning $100 k per year. 
 
 

Answer:

Part 1

Letter of Advice

To

Elwood and Inda,

From Tax Consultant,

Date- 9th September 2018.

Sir and Madam,

The letter aims to draw an attention to the status of the residence that is based on the information provided by you. This is the information about the ‘Taxation ruling TR 98/17’ where the clarification is provided of the general meaning of the term residence under ‘subsection6 (1) of the ITAA 1936’ which exist in the explanation. The individuals whoever is entering in Australia along with them who are migrating here for positioning in business residence or employment contracts, the ruling is applicable to them. The residency positioning creates the evidences and chief element to determine the liability of the taxpayers to taxation. The “section 995-1 of the ITAA 1936” clarifies about the resident of Australia is the individual who is the inhabitant of Australia (Braithwaite 2017).

In accordance with the provided information, you are accompanied with your wife along with the children have moved on in Australia for a period of three years. You shifted in the house immediately after buying it. The electricity as well as the telephone was also registered in the name of yours’. The features for example while residing in Australia, the conduct of behaviour signifies aspects about determining the residential status is mentioned in “taxation ruling of TR 98/17”. The conduct of an individual comprises of the character and the quality which defines the individuals’ way in arranging the economic as well as the domestic affairs as a regular component commanding in lives. As per “Reid v The Commissioner of Inland Revenue (1926)” the commissioner held that presence nature and the span is to be considered in determining the place where the person is staying as well as the place where the individual is spending his part of life (Burkhauser et al. 2015).

The intention of the person along with his drive of residing in Australia helps to get the address of the individuals’ residence. Employment is a good purpose for residing in Australia. The next feature of the residency status which coincides is the location and the maintenance of the possessions. A house that is purchased with an electricity bill along with the telephone suggests about the home establishment in Australia (Saad 2014).

The next feature that relates you along with your wife Inda is that the Australian resident is your family presence and the ties of employment. As per “Peel v The Commissioners of Inland Revenue (1927)” the court judgement held an individual with an employment contract when enters Australia and the behaviour is maintained then it reflects that the individual is residing in. You are reflected as an Australian resident as you have bought a home as well as a telephone bill is registered in your name (Wilson 2018).  

Other than this, the it is provided by the ruling that the individuals way of living is represented by the living and the social arrangements and their interaction with their surroundings while staying in Australia and thus, their Australian residency is reflected including registering children in schools, community functions and joining sports. The information provided by you also mentions about the joining of chess club and local gym. Your spouse is working as a sales manager on part-time basis as well as the children are admitted in the schools. With reference to “section 995-1 of the ITAA 1936” Elwood and your wife Inda is considered as Australian resident. 

 


It is assumed that, these advices will help you for the purpose are served. As per “subsection 6 (1) of the ITAA 1936” both of you and your spouse Inda as considered as the Australian resident thus, is held taxable for generating income from the salary as well as rental property.

Thank you

Part 2A

Letter of Advice

To Jake,

From Tax Consultant,

Date 9th September2018,

Dear Jake,

Your Kind attention is to be drawn towards the information which is provided by you regarding the taxable income grounded on transactions.

  1. According to “section 6 of the ITAA 1936” the income which is earned from the personal efforts including the wages, salaries, gratuities and allowances which is gained from the services extracted by the employees. It is stated in the “Section 6-5 of the ITAA 1997” that the taxpayers receipts are constituted from the ordinary incomes. As per “Scott v CT (1935)” the court held that using mankind and ordinary senses the receipts are to be treated. The gross salary receipt that is received by you is to be added in the tax return from ordinary concepts in the form of income (Gordon 2018).
  2. As per ATO a person who receives car expense reimbursements is held as income, as well as reimbursements are included with tax return. The reimbursement amount which you received is held as income and for assessment is included in your tax return.
  3. A taxpayer earns an element of the character of income. Under section 6-5 of the ITAA 1997in ordinary concepts, the income receipt which you resulted from the bank account is preserved as income. Thus, the bank interest is included as ordinary income in your tax return for assessment (Berg and Davidson 2015).
  4. As per the statement of “Section 6(1) of the ITAA 1936”that the payment that is credited to you by an Australian resident company is the un-franked dividend which does not bears any franking credit involved with it. Thus, the unfranked dividend as per “section 44 (1) of the ITAA 1936” that you received is declared for assessment in the tax statement.
  5. From the sale of shares when the capital gain is reported then “A CGT event G1” The cost of the brokerage experienced by you is included in the cost base shares. Capital gains is reported as the evident from the auction of shares, which is included for assessment as ordinary income in your returned tax (Bentley 2016).
  6. Personal use assets as per “subdivision 108-C”is treated as assets that are non-collectable used aimed at the personal enjoyment purpose. Any capital loss or gains under “section 118-10(3)” created assets for the personal use is to be ignored whose cost base amounting of $10000. A loss that is acquired from a cricket bat that is autographed is considered as a loss for you thus, ignored.
  7. An individual in accordance to ATO can claim the expenses of motor vehicle aimed for business use. A report which mentions about 7420 kilometres of the whole travel in which 95% is devoted towards business. As a log book is not maintained by you, thus, deductions are limited till 5000 kilometres as the standard rate is 66 cents every kilometre (Borrego et al. 2015).
  8. Under “section 8-1 of the ITAA 1997” a taxpayer is permitted to claim deductions for travel expenses experienced in relation to work. As a telephone cos of $1400 is already reported by you, thus, is entitled for 60% of claim deductions for the telephone bill as 60% is linked for the work purpose of yours.
  9. A specific deduction can be claimed under “section 25-5” for the expenses that is suffered for the management of the tax affairs. An invoice is received which is paid by you from the prior agent of tax for lodging and preparing you returned tax. Thus, a claim deduction under “section 25-5 of the ITAA 1997”permitted to you (Krever and Mellor 2016).
  10. There is no health cover as you are unmarried and is liable of a levy surcharge of 0.1% for Medicare from your taxable income as this comes below the Tier 1 earner.

The total income tax liability is attached in this information. Thus, it is assumed that your purpose is served by this letter and thus looking ahead in serving you in the future.

Thank You.

Calculation of Taxable Income

Particulars

Amount

Amount

Gross Salary

 

$86,000.00

Interest from Bank

 

$100.00

Income from Dividend (unfranked)

 

$3,500.00

Proceed from sale of shares

$12,000.00

 

Add:

 

 

Brokerage cost

$500.00

 

Cost

$11,000.00

 

Add:

 

 

Brokerage cost

$50.00

 

Gross Capital gain

$1,450.00

 

Less:

 

 

CGT Discount @ 50%

$725.00

 

Net Capital Gain

 

$725.00

Reimbursement of car expenses

 

$4,500.00

Total Assessable Income

 

$94,825.00

Deductions

 

 

Tax Agent fees

$400.00

 

Mobile phone bill

$840.00

 

Total Allowable deduction

 

$1,240.00

Taxable Income

 

$93,585.00

Tax amount

 

$22,258.45

Add:

 

 

Medicare levy

 

$1,871.70

Medicare Levy surcharge

 

$935.85

Less:

 

 

PAYG

 

$21,320.00

Net Tax payable

 

$3,746.00

Part 2B

The regulation to produce the short to medium term losses from the expenses of tax-deductible is defined as the negative gearing which appears greater than the income that is invested. Thus, the tax payer is provided with the acquaintance of potential losses and gains. The regulations are popular among the tax payers as the losses of tax is sourced is generally decreased by further assessable income of the investors which benefits them in lowering the income tax bill annually (Gunnarsson and Svensson 2016).

The investors are provided with a current information regarding the negative gearing with concession of tax. The changes that takes place in the tax breaks will reduce the deductions of the negative gearing by 57.3% that proposes those investors whose income distribution is beyond 50% or those who possesses a stable income will carry on in receiving deductions by 100%.

The investors thus, are allowed in demanding deductions for any expenses for these future changes including the loan interest which helps to make income. A progressive rental deduction is witnessed by the negative probable changes for the investors and the less rich investors experience an important drop in the tax savings (Tan et al. 2016). The negative gearing rules that is the discount of the CGT tax is halved from the current 50% to 25% that happens because of the future changes, thus the negative gearing to the new charge dwelling is limited.

The investors are also earning potential tax benefits in the income year, the taxable income of which is 100k. An allowance of 2.5% is earned as a benefit by the taxpayer at a marginal tax rate of 30% under the division 43 where in the cost a proportionate reduction is provided to the taxpayer that subsequently happens as a smaller loss in capitals or a huge assessable gain in capital. 

 

References

Bentley, D., 2016. Taxpayer rights in Australia twenty years after the introduction of the Taxpayers' Charter. eJournal of Tax Research, 14(2), pp.291-318.

Berg, C. and Davidson, S., 2015. Submission to Treasury Consultation Into Exposure Draft of Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015. Institute of Public Affairs (Melbourne). Institute of Public Affairs.

Borrego, A.C., Loo, E.C., Mota Lopes, C.M. and Ferreira, C.M.S., 2015. Tax professionals' perception of tax system complexity: Some preliminary empirical evidence from Portugal. eJTR, 13, p.338.

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

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.

Gordon, R., 2018. Increasing use of tax-transparent entities by private groups due to BEPS. Tax Specialist, 21(4), p.136.

Gunnarsson, Å. and Svensson, E.M., 2016. Exploiting the limits of law: Swedish feminism and the challenge to pessimism. Routledge.

Krever, R. and Mellor, P., 2016. Australia, GAARs–A Key Element of Tax Systems in the Post-BEPS World.

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

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Wilson, A., 2018. Keeping on top of the ever-raising tax law. Taxation in Australia, 52(11), p.605.

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