ACC304 Taxatation Law

John has always beena resident of Australia for tax purposes. In the 2016/2017 tax year, he disposed of the following properties:

1. A building he bought on 1 December 2009 for $200 000.  The building qualifies for capital works deductions at the rate of 2.5% a year.  The building was sold on 30 November 2016 for $300 000.

2. A house that he used as his main residence until 1 July 2009, at which time its market value was $350 000. He purchased the house on 1 July 1995 for $250 000. John rented the house before selling it for $700 000 on 1 July 2016.

3. A service station. John has acquired the vacant premises 1 July 2009for $750 000 and established the business on that date. He sold the business on 20 May 2017for a net consideration of $1 880 000. This was made up as follows:

Goodwill500 000

Shop and land1 480 000

Less debt taken over secured over stock(100 000)In addition, John received a further $20 000 for signing a contract not to open another business within a 10 km radius for the next five years.The turnover of the service station for the previous financial year was $540 000. He also has a 45% interest in a property development company which has assets of $5.4 million. His wife also has a 6% interest in that company.  The turnover of the property development 

Answers:

Answer to question 1

Computation of CGT of Building
Particulars	Amount ($)
Date of Asset Purchased	01-12-2009
Date of Asset Sold
Particulars	Amount ($)
Selling Price	300000
Purchase Price	200000
Add: Cost of Purchase and Ownership	5000
Adjusted purchase price of asset	205000
Capital Gains/Loss	95000
CGT Old Regime
Indexed Capital Gains/Loss	95000
Tax Payable under old regime (marginal tax rate x indexation factor x capital gains)	33455

A capital gains or capital loss on the asset represents the difference between the cost of purchase and the amount received on selling the asset. An individual’s pays the tax on the capital gains on the amount of capital gains derived. Hence, it forms the part of their income however an individual can use the same to reduce their capital gains in the same income year. Furthermore, if an individual’s capital losses exceeds beyond their capital gains in an income year an individual can carry the loss forward and deduct the same against the capitals gains in the future years.

From the following case study, it is evident that John had acquired a land in December 2009, which constitutes post CGT. This is because the assets acquired by were after the period of 20 September 1985 and this shall be subject to CGT for the taxable purpose. The computation of land is based under indexation method with marginal tax rate and indexation factors are considered. The net amount of tax payable from the sale of building shall be held liable for tax and the taxable amount is $33,455.     

Answer to question 2:

Computation of CGT of House
Particulars	Amount ($)
Selling Price	700000
Less: Cost of Sales	Nil
Adjusted Selling Price	700000
Purchase Price	250000
Add: Cost of Purchase and Ownership	0
Adjusted purchase price of asset	250000
Capital gains/Loss	450000
CGT Old Regime
Index Capital gains / Loss	443131
Tax Payable under old regime (marginal tax rate x indexation factor x capital gains)	202298

Answer to question 3:

Statement of Taxable Return
Particulars	Amount ($)
Date of asset Purchased	01-07-2009
Date of asset sold	20-05-2017
Selling Price	1880000
Less: Cost of Selling
Adjusted sale price	1880000
Purchase Price	750000
Add: Cost of Purchase and Ownership	0
Adjusted Purchase Price	750000
Capital Gains/Loss	1130000
CGT Old Regime
Index Capital gains / Loss	1130000
Tax Payable under old regime (marginal tax rate x indexation factor x capital gains)	548050
Current taxable Income	2450000
Assessable Income
Income from contract Signing	20000
Shares of property development	2430000
Total Assessable Income	2430000
Allowable Deductions	Nil
Total Taxable Income	2430000
Tax on Taxable Income	1066732
Medicare Levy	48600
Total Tax Payable	1115332

From the following situation, it is found that John had acquired a vacant block of land to carry out business activities and then selling the same. The taxation rulings 92/3 provides whether the profits generated from the isolated transactions are considered for income and hence assessable under subsection 25 (1) of the Income Tax Assessment Act 1936 (Morgan et al., 2016). In the current case, it is found that John was carrying on the business and was making profit from the transaction (Woellner et al., 2016). The profit is the income from the transaction in the course of the taxpayers business even though it is not within the ordinary course of business.

The taxpayer had entered into the transaction with the objective of making profit during the ordinary course of John’s business. As defined under the case of Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159 the owner of an the ordinary investment chooses to realise it in order to gain higher price for the amount at which it was acquired (Barkoczy et al., 2016). Hence, John had realised the asset and had made profit from it which would held assessable under subsection 25 (1) of the Income Tax Assessment Act 1936 (Barkoczy, 2016).

References and Bibliography:

Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role does it play in anti-phoenix activity?. INSOLVENCY LAW JOURNAL, 24(2), 127-140.

Auerbach, A. J., & Hassett, K. (2015). Capital taxation in the twenty-first century. The American Economic Review, 105(5), 38-42.

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Barkoczy, S., Nethercott, L., Devos, K., & Richardson, G. (2016). Foundations Student Tax Pack 3 2016. Oxford University Press Australia & New Zealand.

Braithwaite, V., & Braithwaite, J. (2016). Managing taxation compliance: The evolution of the ATO Compliance Model.

James, K. (2016). The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), 345-362.

Jones, S., & Rhoades-Catanach, S. (2013). Principles of Taxation for Business and Investment Planning, 2014 edition. McGraw-Hill Higher Education.

Morgan, A., Mortimer, C., & Pinto, D. (2016). A practical introduction to Australian taxation law 2016.

Robin & Barkoczy Woellner (Stephen & Murphy, Shirley Et Al). (2016). Australian Taxation Law 2016. Oxford University Press.

Tran-Nam, B., & Walpole, M. (2016). Tax disputes, litigation costs and access to tax justice. eJournal of Tax Research, 14(2), 319.

Vann, R. J. (2016). Hybrid Entities in Australia: Resource Capital Fund III LP Case.

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