Case Study One
The following separate scenarios require your advice as indicated:
Pierre is qualified chef and a citizen of France. He has always lived and worked in his home town of Paris. Pierre was offered a full-time position as a pastry chef at an exclusive Melbourne hotel for a period of 2 months to cover the Christmas holiday season. Pierre signed the contract of employment before he left France. Pierre is not married and has no dependants or family ties in Paris. Pierre moved out of his apartment in Paris and placed all his belongings in storage.
Due to Pierre's world renowned experience, the Melbourne hotel offered Pierre the use of a fully furnished apartment at another property owned by their group at no expense during his stay. Pierre arrived in Melbourne on 1 December 2013 and finished working at the hotel on 31 March 2014 after gaining a 2 month extension on his contract. Pierre stayed on in Australia for a holiday until the end of April 2014 before returning to Paris. Pierre lived in the Melbourne apartment for the whole length of his stay.
During the income tax year ended 30 June 2014, Pierre earned interest on a French bank account of $1,500 (EUR); salary and wages from his work in France prior to November 2013 $30,000 (EUR); and salary and wage income from his Melbourne job of $27,500 (AUD). Pierre had PAYG of $4,200 deducted from the Australian salary.
Discuss with reference to legislation, case law and/or rulings (where relevant) whether Pierre would be considered a resident of Australia for tax purposes for the income year ended 30 June 2014. Based on this conclusion and discussing the source of income principles, state which amounts would be included in his assessable income for the year.
At the beginning of the 2014 income year, Carl and Jill set up an eBay account to sell unwanted personal items from their garden shed. Setting up the account was free. During the period July 2013 through to November 2013, their total sales were $4,200 and this all related to second hand personal items sold below cost.
Carl and Jill discovered through this process there was a large market for garden tools. Carl and Jill have therefore begun to source foreign made garden tools and sell this through their eBay account.
Carl and Jill have spent $27,000 during the income year acquiring stock. Some of the stock is sold exactly as it was purchased, whereas some stock is modified through the addition of ergonomic handles for older gardeners. All listings are made with a minimum bid price of 150./0 of the cost price. Up to 30 June 2014 Carl and Jill have made total sales of $31,500 in relation to gardening tools. Carl and Jill have also received total postage income of $4,000. The total cost of postage to customers was $3,000.
Carl currently has a full-time job as a carpenter and Jill works part-time in an accounting firm. All income received from sales of gardening tools is currently being put back into purchasing new stock. Jill is also working on a website which will launch in January 2015. The website will allow Carl and Jill to sell their stock directly online without the need for eBay auctions.
1. Discuss with reference to appropriate legislation, case law and/or rulings whether Carl and Jill are carrying on a business for taxation law purposes in either the 2014 or 2015 income years.
2. Ignoring your answer in (1), assuming Jill and Carl are carrying on a business for taxation law purposes; provide advice as to whether the cash or accruals basis of accounting should be used.
Eddie is a semi-retired mechanical engineer. Throughout his working life he always worked on new inventions at his home workshop. Eddie's specialty is solar powered farm equipment. Eddie's prototype was almost complete when the Global Financial Crisis hit and he ran out of money to continue building and testing the machine. His intention had been to begin either manufacturing the equipment or enter into licence agreements (for royalty income) once the designs were completed and certifying them.
Fortunately for Eddie, after an appearance with his design on a television program, he was approached by a manufacturing company to purchase his prototype and working designs. Eddie was paid a lump transferring all designs, prototypes, past drawings and in-progress drawings to the company. The agreement also stated that Eddie would provide knowledge and input into the ongoing design process and any new designs for a period of 12 months. There was to be no additional remuneration for Eddie's time in working with the company, simply the lump sum payment. Eddie was also given 10% of the shares in the company (market value of $100,000) in exchange for entering into the agreement.
As a result of entering into the agreement, Eddie transferred all existing patents into the name of the manufacturing company.
Discuss with reference to appropriate legislation, case law and/or rulings whether either the lump sum or the shares are ordinary income to Eddie in the 2014 income year. You should provide brief comment about whether there is likely to be any CGT consequences.
Case Study Two
As a result of a fire in January 2014, the downstairs kitchen area of Toni's rental property in Brisbane was damaged. Toni's rental property was tenanted at the time of the fire; however it has been vacant since that time while repairs are being carried out. Toni has had the following expenses up until 30 June 2014 in relation to the rental property;
Replacement of all kitchen cupboards and bench tops at a cost of $14,000. The old kitchen cupboards were damaged from the fire and the old bench tops were not able to be used on the new cupboards. However, all other aspects of the replacement were of a similar design and with similar materials to the old kitchen. Toni made two payments in relation to the installation of the kitchen. The first payment was $7,000 on 1 March 2014 and the second final payment of $7,000 was made on 20 June 2014. The kitchen was fully installed and completed on 1 June 2014.
Replacement of the downstairs rear entry door. As a result of the fire damage the door would not close properly. The cost of the replacement door was $850 including installation and was paid on 1 April 2014. The old door was a plain solid timber door, whereas the new door included some decorative stained glass at the top. Toni also took the opportunity to add a security screen to the door at an additional cost of $1,800.
Discuss with reference to appropriate (and most relevant) legislation, case law and/or rulings whether the rental property expenses are deductible in the 2014 income year. For the purpose of this discussion you can assume Toni is not covered by insurance for this type of event.
Karen carries on a bakery business in Toowoomba where she sells directly to the public and also supplies restaurants making deliveries in her delivery truck. Karen is a small business entity. Karen had the following outgoings in the year ended 30 June 2014:
1. One of Karen's customers, Mrs Smith swallowed a small metal object that was in one of the cakes that Toni sold to Mrs Smith. Mrs Smith sued Karen for damages and Karen paid $6,000 to Mrs Smith on 16 April 2014. Karen paid her own legal costs of $5,000 related to legal advice on the claim on 12 April 2014.
2. Karen is married to Adam; and Karen borrowed $50,000 from the National Bank and purchased shares in Adam's name and he will get the dividends. Karen paid interest of $2,000 on the loan for the bank in the year ended 30 June 2014.
3. Karen paid $6,800 in child care expenses during the year to put her daughter in child care to enable Karen to carry on her business.
4. Karen paid for the cost of food and accommodation being $150 for staying overnight at the Novotel Hotel in Brisbane while attending a baking and catering conference.
Based on this information what amount can Karen claim as a tax deduction under s 8-1 Income Tax Assessment Act 1997 for the year ended 30 June 2014? Support your discussion with reference to appropriate authority.
Oliver carries on a computer repair business, employing 3 qualified IT technicians, where he repairs computer hardware and networks which have been damaged by computer viruses. At 30 June 2014 he provides the following information in relation to her trade debtors/accounts receivable:
1. Oliver estimates that around 10% of his trade debtors ($4,800) will not pay him for work done and invoiced. The 10% is based on Oliver's experience of bad debts in the past. Total debtors at 30 June 2014 were $48,000.
2. Oliver has identified that ABC Pty Ltd, who owes him $2,300 for computer repairs, has just been made insolvent. Oliver made a written note on 27 June 2014 that he considers that he will not receive any amount from ABC Pty Ltd. Oliver has not removed ABC Pty Ltd from the trade debtor balance at 30 June 2014.
3. Oliver had written off a debt of $1,700 as bad in the 2013 year. The debtor, William O'Conner, had told Oliver that he could never pay the money and that he did not have any assets. Fortunately for William he received $20,000 from a win at the casino, and paid Oliver the $1,700 owing on 13 April 2014.
Based on this information what amount can Oliver claim as a tax deduction for the year ended 30 June 2014? Will he have to include any amount in assessable income? Support your discussion with reference to appropriate authority.
Case Study Three
Paula is a resident of Australia for tax purposes and has informed you of the following transactions which occurred during the income year ended 30 June 2014. Paula also informs you that she has carried forward capital losses from the 2012 year of $4,000. This loss relates to the sale of shares. Additionally she has a $700 carried forward capital loss from the 2009 income year in relation to the sale of an antique.
Vacant Land and House
Paula purchased a vacant block of land in Brisbane QLD on 1 October 1984 for $87,000 for investment purposes. On 1 July 2012 Paula subdivided the land into two equal allotments at a cost of $40,000. At the time of the sub-division the total land area had a market value of $230,000. The total cost of council rates and other maintenance fees incurred on the vacant land up until 1 July 2012 was $27,000. On 1 January 2013, Paula entered into a contract with a builder to build a house on one of the blocks of land. The construction commenced on 1 February 2013. The total cost of construction of the house was $320,000 and the construction was completed on 1 August 2013.
After the construction was completed, the new home was rented out to tenants immediately. Paula entered into a contract on 1 January 2014 to sell the new home (with tenants) for $620,000. Information provided by the local Council indicates that at the time of the sale, the relevant land was valued at $345,000. During the period the property was rented out Paula incurred $1,200 in council rates and fees and $7,000 in interest on a loan taken out for construction of the house.
On 1 June 2014 Paula entered into another contract to sell the remaining vacant block of land for $405,000. Settlement took place on 1 August 2014. Paula incurred $3,800 in council rates and maintenance fees during the period 1 July 2012 through to the sale of the land.
Paula acquired 1,000 shares in XYZ Ltd on 1 November 2007 at a cost of $7,500. She also incurred $450 in brokerage fees at the time of purchase. On 1 March 2014, she also acquired an additional 2,000 shares in XYZ Ltd from her Grandmother's estate. Her Grandmother died on 1 February 2014 when the shares had a market value of $11 each. Her Grandmother had acquired the shares on 1 July 2000 at a total cost of $6,000. Paula sold all 3,000 shares on 1 June 2014 for $45,000. She incurred $900 in brokerage fees and transfer costs at the time of sale.
Advise Paula as to her net capital gain included in assessable income for the income year ended 30 June 2014 as a result of the above transactions. Perform calculations of any relevant capital gains and support calculations and discussions with legislation and/or cases where relevant.
Case Study Four
Jerry (aged 50) is considering selling his bookshop/cafe business and using the profits to start a new business in a different industry. Jerry has a purchaser who is interested in the business and has advised them that his asking price is $1,100,000 but that he is willing to negotiate. Jerry has calculated this asking price as follows;
Fittings and Fixtures
- All values stated above are market values.
- Jerry has advised that Fittings and Fixtures have an adjusted value (written down value) of $120,000.
- Trading stock is valued at a cost of $150,000 in the financial accounts.
- The building premises were purchased on 1 July 2010 for $375,000 and have a current market value of $500,000.
- Jerry started the business himself on 1 July 2005 from leased premises.
Jerry is concerned about the tax consequences on the sale of his business and has asked for your advice. As stated, Jerry wishes to purchase a new business in a different industry with the profits from the sale.
Jerry is not married and his only other assets are his own home which was purchased in 2002 and has a market value of $750,000 and a parcel of shares purchased in 2005 with a market value of $28,000.
You are required to prepare a letter of advice to Jerry regarding the likely tax consequences on the sale of each of his business assets should the sale go ahead as stated above.
You should comment on any further information you would require to provide more detailed advice. You should also comment briefly on any concessions that might be available to Jerry.
Case Study One
Residential Status of an individual is the most important factor for determining the taxable income of the individual. There are various provisions relating to the Residential status of an individual in Australia.
The key point here is whether the Individual is resident of Australia for taxation purposes. The assessee can be Resident of Australia in any other manner but in order to tax a particular income in Australia, he/she should be a Resident for Taxation purpose. As per the section 6(1) of the Australian Taxation law(Income Tax Assessment Act 1936), an individual is resident in Australia if he/she satisfies any of the following tests:
1. a) Primary test or the resides test is related to the residence of the individual in Australia. If the individual is residing in Australia then he will be resident in Australia for taxation purposes. This provision has some exclusions. Here exclusions means the cases where the individual is not residing in Australia but still will be deemed as residing in Australia. The circumstances are:
• The trade and commerce establishment outside Australia can be excused.
• The agreement and the scope of the activity in Australia.
• If the personal effects are kept in Australia
• The reasons of employment
• Bank Account maintenance and the tasks performed in Australia.
• The business is established, set up and running in Australia and the assessee is going outside the country because of the business reasons.
b) Permanent Home test: This is also called domicile test and is satisfied when the assessee is having a permanent home in Australia. Here the commissioner must be satisfied and can me enquiry for satisfaction. If the commissioner founds that the individual is having a permanent dwelling outside India, then he won’t be called a resident of Australia for taxation purposes.
c) Another important test is the number of days the person is residing in Australia. If the individual is resident of Australia for more than 183 days then he will be a Resident of Australia. Here also there is an exception. If the commissioner is satisfied that the permanent intention of the person is to live outside Australia then this test is not satisfied even if the individual is residing in Australia for more than 183 days.
d) Employee under Superannuation Act 1976: It is also called as Deemed Residency Test. It says that an individual who is an eligible employee under the Superannuation Act 1976 is deemed as resident of Australia for taxation purposes. Along with the individual the spouse of the individual and the child who is less than 16 year of age, shall be regarded as resident. (TAX n.d.)
Now when an Individual becomes a non resident in Australia for taxation purposes, then source basis principles comes into picture. The rules are as follows:
The Individual income shall be partially taxed in Australia in relation to the service performed in Australia if all the following conditions are satisfied:
- Contract for services are signed in Australia
- The services are performed in Australia
- There is an express or implied contract.
- The payment is made in the Currency of Australia
- At least one party is resident of Australia.
In the given case Pierre is a qualified chef and he is permanently residing in Paris (outside Australia). He is a citizen of France. He came to Australia for employment purposes. His intention is to permanently live outside Australia. Here we can see that any of the conditions are not satisfied. Also the individual is residing in Australia for employment reasons only. Therefore Pierre fails to satisfy any of the 3 tests mentioned earlier and thus he won’t be called as Resident of Australia for Taxation purposes.
The individual is not resident of Australia for taxation purposes for the income year ended 30.06.2014. Thus only the amount which has accrued or arisen in Australia shall be added in computing the taxable income of Pierre. In this case the Income source based conditions are satisfied and the source of income shall be partially taxed because all the conditions are satisfied.
Salary and Wage Income in Australia = $30000(AUD)
Less: PAYG Deductions = $4200(AUD)
Net Assessable Income = $23300(AUD)
Note: Non residents are not required to pay any Medicare Levy.
Reference to Case Law: ATO ID 2002/81 (Non»-«resident» in receipt of Australian sourced employment income 2002)
Issue- Tax Implications Of Running Business Online
The provisions relating to running a business online are to be focussed on to comment whether or not the activity of selling personal goods amounts to business. As per the Australian Taxation laws, the selling or personal effects upto $10000 does not lead to capital gain income. Also a business involves recurring purchase and sale by the assessee. If the activities of purchase and sale are of non recurring in nature and the assessee is not having any intention to purchase and sale and run the business, then the activity is said to be non recurring for that period. On the other hand if the activity is now intentionally made, both purchase and sale are affected continuously then it is said to be business. In this case it does not make any sense whether the goods are your personal effect or not. The main idea is the recurring purchase and sale and the Business motive. Tax cannot be avoided merely on the point of having a small business. If the activity is a business then the taxation rules will be applied.
Here, it is given that the Carl and Jill are selling some personal items from their garden shed by opening an account with ebay website and selling them below cost just to dispose the old items. This activity is merely a sale of personal items. It does not involve any purchase or sale. Also the sale of items is below the cost of the product.
July 2013 to November 2013: In this period the sale is made of the personal items sold below cost just for the sake of disposal. There is not recurring purchase and sale by the dealer. The sale amount being $4200
After November 2013 : In this period of the year the assessee is now intentionally purchasing the stock from other people or local market and thus it involves intentional activities of purchase and sale by the assessee. In this case the assessee has spent $27000 for acquiring the stock and sold this at a profit of 150% over the cost. Total Sales here is $31500.
In 2015: The assessee carl is now introducing all money from his full time job in the business and purchasing stock out of this money. On the other hand jill is working on the development of the website such that they can sell the goods on their own now. This involves clear business motive.
For the period July 2013 to November 2013, the assessee is not carrying on any business. Thus no business income or loss shall arise. Also there will be no capital gain or loss for the sale of personal items.
From December 2013 onwards, the business activity is going on and thus there would be a Business income or loss for the purchase and sale of the goods.
Sales Proceeds : $31500
Purchase of stock : $27000
Net Income : $4500
Postage Income : $1000(4000-3000)
Total Business Income = $4500+$1000=$5500
From January 2015 the situation would be same as in the last part. The activities are of business nature and thus business income shall arise.
As per the Australian taxation law the method of accounting can be cash basis or accrual basis depending on the turnover of the business. In case the turnover of the business is less than $2 million then the assessee is required to follow cash or accrual basis as per the requirement of the individual. On the other hand the assessee is ought to follow the accrual basis when the turnover of the business is greater than $2 million. In this case since the turnover is below $2 million the assessee can follow either of the methods. (Government n.d.)
Issue- Capital Gains Implications
Firstly we should summarise the points mentioned in the case give.
• Eddie is a semi retired mechanical engineer.
• He has invented a new prototype at home.
• His intentions are to either start the manufacturing or entering onto the licence with any other company in exchange of the royalty income.
• The assessee is in receipt of lump sum consideration from the company amounting to $650000 during the year 2014. The patents are fully transferred to the company.
• The assessee is in discharge of extra service of providing knowledge and assistance to the company on the manufacturing and invention of the prototype.
• An additional consideration of 10% shares (market value $100000) is also received by him.
• All existing patents are transferred to the company.
Under Australian taxation laws the payments received in connection patents, copyrights etc are treated as royalty only if these are in nature of the payments in connection with the use of the patents. The royalty income arises when the exclusive rights are still with the assessee. On the other hand if assessee is selling the patent for a lump sum then the same will be regarded as the Capital receipt and thus would not be taxable here.
In the given case the assessee is receiving a Lump Sum for the sale of the patent of $650000 will be a capital receipt and thus will be untaxed. However any other consideration than cash like shares, then that amount shall be a capital receipt also.
This amount will not be treated as cost while the assessee is selling the asset later on. Hence the cost of the shares received shall be nil. (Toby Eggleston 2007)
In case of capital gain part the same should be untaxed since the cost of the patent is indeterminable and hence the amount shall be in nature of the capital receipt.
Case Study Two
Issue- Allow ability of Expenses On rental property
As per the relevant provisions of the Australian Tax laws the rental property expenses are allowable only when they are directly related with the rental property. Another important thing here to note is the point when the expenses are incurred. Whether the expenses are incurred before the period when the property is rented i.e when the intention to use the property for rental purposes or the expenses is incurred before such intention arises? It is also relevant to note that the expenses directly related to the capital part of the property shall be treated as capital receipt. And this expenses of capital nature shall be added to the cost of the property and is not allowable as a claimable expenditure.
In the given case the assessee (Toni) is having a rental property but is vacant because of the fire reasons. The intention of the asseessee was to lent the property on rent but the same could not be made because of the fire which broke out in January 2014. The payment schedule is not a determining factor for the allowability of the expenses. The intention of the assessee should be there. Actual renting of the property is not to be checked. If a basic part of the property is being repaired and the same is a necessity for effecting the renting of the property then the same shall be allowed for tax purposes. The repairs must be in relation to the wear and tear of the property. Otherwise the expense would be a capital in nature.
The following expenses incurred:
a) Replace cost of the kitchen Cupboards amounting to $14000 shall be disallowed and added to the cost of the asset since it is not a normal wear and tear, it is related with capital part of the house.
b) Another expense was incurred in relation to the replace of the downstairs entry door. This is an essential expenditure. So amount of $850 shall be allowable as a revenue expenditure.
c) Adding of an extra security system in the house is a capital expenditure, since the same is not related with the incurring of the expenditure necessary for the purpose of giving the property on rental. So this expenditure of $1800 shall be added to the cost of the asset and will be taken into consideration while calculating the capital gain or loss on the disposal of the property.
d) Since the assessee is not covered by insurance then any insurance expenses are also not deductible. If the assessee was covered under insurance then the insurance expenses would have been allowable. (Inc n.d.)
The date of payment may be delayed. The important things here to remember is the incurring of the expenditure. If the expenditure is incurred then the dedcution can be claimed even if the payment is not made.
Issue- Deduction of Expenses
As per the provisions of the section 8-1 of the Income Tax Assessment Act 1997, the following expenses will be allowable as deduction in a particular year:
a) the expenses must be related with the income directly.
b) personal expenses are disallowed.
c) child care care expenses are disallowed.
It is relevant to quote that the expense must not be claimed elsewhere while computing the income of the assessee.
Now we should consider each and every case one by one.
1. One of the karen’s customer had swallowed some metal piece found in the cake which were sold by the assessee to Mrs smith(customer) and the customer sued for a damage of $6000. The same was paid by the assessee. another legal expenses was incurred for this purpose. So in this case the damage payment of $6000 shall be allowable as it is a normal business expenditure. On the other hand legal expense incurred of $5000 for the purpose of taking some legal advice on the damage expenses is also allowable expenditure.
2. Karen has taken loan from a bank and paid interest expenses of $2000. The loan is taken solely for the purpose of the investment in shares and securities in name of her husband Adam. In this case since the entire dividend income is not taxable. Thus the interest expenses incurred for this purpose shall be fully disallowed as the interest expense is incurred in relation to an income which is exempt and section 8-1 specifically disallows expenditure in connection with the exempt income.
3. Karen paid child care expenses for maintaining the child. The amount of $6800 paid for this service shall be disallowed as it is not directly related with the business of the assessee. A contrary view here is taken by Tax Institute of Australia which says child care expenditure must be allowed so that more and more people join work. (Australia 2014)
4. Karen visited a conference of catering and baking for the purpose of business. There the expense incurred on food and accommodation was $150. The same is directly related with the business of the assessee and this will be allowed as deduction from the business income of the current year. (H & R Block tax accountants n.d.)
Issue- Bad Debt Allowance Expenses
As per the provisions of the 63(1)(b) of the Income Tax Assessment Act 1936, the bad debt is an allowable expenditure. As per the provisions of this section the following points should be focused on the allowability of the bad debts:
• The debt should be present in the books of account. This means that some amount must be due to be received by the assessee.
• The debtor must have been declared as insolvent in order to assume that the debt is now bad.
• There must be close nexus between the debts incurred and the business of the assessee. Here this implies that the expense must be related to the business of the assessee.
• The debt should be included in the income of the assessee earlier. (Government 1992)
Application & Conclusions
Now we shall discuss each case separately.
1. In the first case Oliver has made a claim that 10% of the debtors are said to be bad solely because of the reason that the assessee has experience with that debtor regarding the non payment of the dues. This claim is nothing but a provision for bad debt. A provision for bad debt is not allowed as allowable expenditure. Only actual bad debts or the circumstances showing the actual bad debts like insolvency, death etc shall be considered as valid points for claiming a debt as bad one. Thus the amount of $4800 shall be disallowed in the year 2014.
2. ABC Pty Ltd is made insolvent and thus cannot pay any amount to the assessee. But there is no written declaration received from the party. Here the insolvency of the customer is a valid point to claim the deduction for the bad debt. The fact that the assessee has not removed the debtor from his books is irrelevant and the entire expenditure shall be allowed as bad debt deduction amounting to $2300.
3. In this case a bad debt was claimed as deduction in the last year 2013 amounting to $1700. Now in the year 2014, the debtor paid the debt which was declared as bad. The amount received shall be taxable as business income of the assessee, since it is related with the business of the assessee and previously was declared as bad and disallowed. The amount of $1700 shall be taxable as ordinary business income.
The total deduction is $2300 and the income to be included is $1700. So, the net deduction amount is $600.
Case Study Three
Firstly we need to summarize every point.
1. Paula is a resident of Australia for taxation purposes for the year ended 30.06.2014.
2. Brought Forward Capital Loss on sale of shares of the year 2012 is $4000
3. Brought Forward Capital Loss on sale of antique of the year 2009 is $700
4. Vacant block of land purchased on 01.10.1984 for investment $87000. On 01.07.2012 the land was divided into two blocks @ $20000 per block. The market price at that time was $230000 of the total area. Other Costs incurred are $27000.
Now the cost of each block being :
Cost of the total land = $87000(to be ignored)
Division costs = $40000
Other Expenses = $27000
Total cost = $67000.
Since the land was purchased before 20.09.1985, therefore the assets shall not be hit by the provisions of the Capital Gain tax and is not added to the cost as well. the amount incurred for the purchase of the asset is a capital expenditure.
Now $67000 is the cost for the two blocks. The cost of each block is $33500.
Now the assessee entered into a contract with the building to construct a house on 1 block and the cost in this case is $320000.
Sale consideration for the sold house = $620000
Cost of the house(including the block cost) = $33500+$320000= $353500.
Capital gain of $266500 will be there. Since the house is used for sale only there will be now exemption from capital for this part. The information relating to the market price of the house at the time of the sale of the house is irrelevant here.
Another block of Land was sold on 01.06.2014 for $405000.
Cost of the block was $33500
Add: council rates and fees = $1200
Interest on Loan = $7000
Other charges = $3800
Total Cost = $45500
Capital Gain amount comes to $359500.
We need to check when the assets are acquired. The date of acquisition is after 1999 that is 2007 and 2000. So the assessee should calculate the income as per the normal way by deducting the sale consideration and the cost base of the assets.
Cost of the shares = $7500
Brokerage = $450
Grandmother’s share = 2000 shares @11 per share = $22000
Total Cost of 3000 shares = $29950
Sale Consideration = $45000
Expenses on transfer = $900
Net Sale Consideration = $44100
Capital Gain on sale of shares = $44100-$29950 = $14150
Capital Loss on shares for the year 2012 = $4000
Net capital gain on shares = $10150
The capital loss carried forward on the antique shall be allowed from the house sale income.
Net Capital Gain sale of house = $266500-$700 = $265800
Total Capital Gain taxable during the year = $265800+$10150+$359500 = $635450 (help and Guidance 2011)
Case Study Four
If an assessee sells his running business then it is utmost essential for him to get in touch with a tax consultant and value the assets properly in adavance such that the tax burden is not much on him. The tax planning is the most essential part of selling a business. If a proper tax planning is not made then there are chances of higher tax payments and much more. So it is better to have a clear understanding of the Australian taxation Laws in order to have the best out it.
The following consequences may arise:
1) Goods and Service tax on sale of a going business does not arise but on sale of that capital asset shall arise.
2) capital gain tax will be there for sale of the capital assets.
Now we should consider each and every point given in the question.
Asking Price = $1100000
Fixtures and Fittings = 125000
Trading stock = 295000
Premises = 500000
Total = $1100000
For furniture the adjusting value should be used in place of the asking price. $120000 shall be taken in place of 125000.
The cost of the stock is irrelevant for decision making.
Calculation of the capital gain
Sale cosideration = 500000
Cost = 375000
Capital Gain = $125000
Sale consideration = 295000
Cost of the stock = 150000
Capital Gain = $145000
Sale Consideration = 125000
Cost of the asset = 120000
Capital Gain = $5000
Goodwill capital Gain = $180000
Total Capital Gain = $180000+145000+5000+125000 = $455000
Letter of Advice
Dear, Mr. Jerry
Re: Income Tax Advice for Sale of Business
Hope you are doing well. This letter is an advice regarding some of the tax consequence which you might face and are also desired to know the benefit which you will get from sale of the business. In this regard I would like to inform you that the Australian government has made various income Tax provision regarding the individual selling his small Business. Australian government provides various exemption to the seller of the small business. I am writing the some of the provision which might be useful for you in selling your business and get rid from the capital gain tax or in reducing your capital gain Tax liability.
Australian government provide capital gain concession to individual on the following small business
- To the sole proprietor or individual
- Partners of the partnership firm, and
- A trust or a company
The Concession provided by the Australian government will reduce the capital gain tax liability on sale of the business asset which has been used by the assesses in earning the business income and the said income is consider by the assessee in his assessable income. For claiming the exemption one must satisfy the basic condition of the capital gain concession for small business along with any additional condition depending upon the individual case. As per Income Tax Act of Australia one can apply as many concession or deduction as he can till the tax liability be NIL.
A capital gain arising from the sale of the depreciating asset is exempt if the same has been completely used for the income generating purpose.
There are basically Four small business CGT concession Availiable
- 15 Year Exemption for Small Business
- Retirement Exemption for small Business
- 50% Active Asset reduction Exemption for small Business, and
- Small Business rollover
However, to avail the above mentioned Exemption the tax payer must be owner of the small business and satisfy the following criteria
- It has a annual turnover of not more than $2 million, and
- The value of asset is also not more than $6 million excluding any superannuation benefit and the family home.
One of the major important condition for availing exemption is that the asset sold must passes the active asset test. The Test state that the Asset must be used in business for half of its life for a maximum 0f 7.5 years.
This Exemption entitled the business owner to disregard its capital gain. For Availing this exemption the asset must be owned for 15 years and age of the tax payer must be over 55 years and he is selling his business because of his permanent retirement. Since you are not above 55 years therefore, this is not applicable to you.
- Small Business retirement Exemption
This concession also allows the tax payer to disregard with the capital gain on the asset. Under this concession the total capital gain that can be disregarded is subject to the lifetime limit of $ 500,000. This Concession does not mandate the tax payer to be 55 years old or to hold asset for 15 years. This Concession require the tax payer who is less than 55 years to contribute the gain disregarded into is superannuation as a cap contribution to Capital gain Tax. However, this contribution will reduce the life time cap amount.
- 50% deduction on Small Business
This Concession allows the tax payer to claim deduction of 50% on its capital gain unless other method has been adopted by the taxpayer in his return. The concession is available both to trust and individual.
This concession allows the tax payer to defer its capital gain tax liability by rolling over the amount in
- Acquiring new Asset or,
- Improvement of the current asset
However, to avail this concession one should meet the basic criteria. Further one this concession has been chosen general capital gain tax concession and 50% deduction is not applicable.
Hope you have satisfy with the above advice. Best of Luck. Good Bless!
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