country
$20 Bonus + 25% OFF
Securing Higher Grades Costing Your Pocket? Book Your Assignment at The Lowest Price Now!

Case Study Of Brown And Steele

tag 0 Download10 Pages / 2,493 Words tag Add in library Click this icon and make it bookmark in your library to refer it later. GOT IT

Question:

Discuss deductibility under S 8-1. Relevant Case-brown 's Case and Steele Case.
 
 

Answer:

Introduction

In the given case Taite Moneybags and his business colleague Aramis Lotsamoney were planning to start a business. Both these people are resident of UK for tax purposes.  Both these people have plans of starting a business relating to land development activities. They are planning to set up a company who will borrow money as per the company structure and they will send the money with hundred percent owned subsidiary at commercial rates. The subsidiary company will use the money to buy land and we'll subdivide those and will sell the subdivided land to the general public. They are planning to invest the initial 2 years of planning and the next coming 5 years for carrying out the company's business operation. The subsidiary company in return will pay interest to the parent company for the loan that the parent company has given them for carrying out the business operations along with dividend for the 100% shareholding held by the parent company. As per the business model of a company, the parent company will sell the subsidiary company to a least competent tender applicant and has a plan of the purchasing the same in 2 to 3 years at a lower price.  The business model that has been put in place by the management required huge initial investment. Further, the subsidiary that has been sold will let to losses as the interest amount have to be paid and the loans will not be paid off letting to only the necessary loan commitment will be paid. These losses will be carried out till the repurchased subsidiary will turn out to be profitable. (Gov.UK, 2017)

Permanent Establishment

If a person who is a resident of some other country is operating in Australia and at the same time any person who is a resident in Australia and is operating a business in overseas is impacted by the double taxation treaty which has been taken place among the government of both the countries. If a person resident in some other country is doing business in Australia and is working in Australia and his country in which he is resident has a tax treaty with Australia, then, in that case, he is required to get himself registered with the tax authorities of the country. As per the provision of Australian tax laws, the permanent establishment plays a vital role in determining the taxability of a company. A permanent resident refers to a place from where the business has been wholly or partially being carried out by the business house. Further, a permanent residence includes sales outlet, branches, factories, place of management etc. If a person is a resident of a country who has a tax treaty with Australia then any income that has been generated from a business which has a permanent establishment in Australia will be taxed as per the provision of Australian tax act. In this case, it is important that the income that has been generated from the business is carried out through the help of permanent establishment in Australia itself. Any other type of business income will not be taxable in Australia. In the given case, UK and Australia has an income tax treaty and a double taxation avoidance agreement among themselves as a result of which any income that has been generated through the help of permanent establishment will be taxed in Australia considering the provision of the Australian tax laws. As per the provision of the Australian tax laws any asset that has been owned by the tax payer in relation to the above business will be subject to the Australian capital gain tax that will be levied on the tax assessee at times when the asset is sold or disposed of. (Anon, 2008)

 


Thus, considering the above facts, it is evident that the establishment of permanent establishment is important in determining the tax liability of the tax payer especially a company in Australia. Thus, Taite Moneybags and his business colleague Aramis Lotsamoney were a resident of UK but any income that has been earned by them in Australia via carrying out of business will be taxable as per the income tax laws of the country.

Deductibility of Interest Expenses & Relevant Case Laws

In the given case, as per the business model of the company, the parent company was planning to give a loan to its subsidiary company at commercial rates. The amount of interest that has been paid by the subsidiary company to the parent company will be treated as interest expense in the books of the subsidiary company. From the perspective of the income tax, as per section 8-1 of the income tax assessment act 1997, an expense that has been incurred by the assessee in producing or gaining the assessable income will be allowed as deduction or further the same has been incurred for the purpose of the carrying out the business which in return will be used for generating income. (ATO, 2017)

As per the case law “FC of TV Total holding (Australia) PTY LTD”, the tax payer was a wholly owned subsidiary company of Compgnie Francaise Des  Petroles (CFP) which is a French company. The tax payer holds all the shares in Total Australia Limited (TAL). Later in the year 1968, the taxpayer transferred 50% of the shares in TAL to Total Boral Ltd which is also 50% owned by the tax payer. Further, in the year 1972, the taxpayer purchased the balance 50% stake in the TAL limited. TAL was engaged in carrying out the business of selling and marketing of petroleum products. The taxpayer in order to carry out the above operations has borrowed $23 million from its parent company. This amount was borrowed at an interest rate of 3% and further lent the same to Tal at an interest rate of 7% and with a note that the interest amount has been charged by the parent company  (taxpayer) only at times when TAL was not fully owned by the taxpayer, else the same was interest free. The income tax commission n this case has denied the carry forward of the losses by stating that there has been no direct nexus that exists between the income producing activities and the making interest-free loans to TAL. The commission was of the opinion that the interest-free loan has been made by the taxpayer with an intention to make the company profitable and then sell the shares of the company at a higher price. The federal court, in this case, decided that the taxpayer is entitled to claim a deduction for the interest amount that it has paid to his parent company which it has further let out to TAL interest-free. It has further been guided by the notion that the interest-free loan has been provided by the taxpayer to TAL with an intention to make TAL profitable and make it commercially feasible to pay a dividend to the taxpayer. (Northrop and Fisher JJ concurring). Thus, in this case, it was later on decided that the amount of interest that has been paid by the taxpayer to its parent company was important for the derivation of the company and thus meet out all the tests of section 51 of the Act. Thus, in this case, the commissioner contention for the interest-free loan relation to the business activities was put aside by the court. (ATO, 2017)

 


Further for the purpose of determining the deductibility of the interest expenses, there is certain ruling in place. In case law (Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613, FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52, and Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 (Steele)), it was determined that the deductibility of the interest expense is determined based on the examination of the purpose of the borrowing and the use for which these funds are been put. Further, in the above case law, it has been decided that interest paid prior to generation of the assessable income will be considered as spending in relation to the producing the assessable income in the following circumstances:

  • The interest expense has not been incurred to soon.
  • The interest expenses are not domestic or private.
  • The planning phase before commencing the actual operation is not too long considering the nature of business the company is engaged with.

On the other hand, in the above case law, it was provided that in case any interest expense has been incurred after the income earning activities are ceased, it is evident that the same has not been incurred in relation to producing the assessable income of that period or any future period, then, in that case, the interest expenses will not be allowed as a deduction. Further, if by any means, the taxpayer is able to justify that the even after the cessation of the earning activities will arise again and will let to an extension for which the debt was originally being incurred. In this case, the refinancing of the loan will have no impact in determining the taxability of the interest expense.

In the given case, Taite Moneybags and his business colleague Aramis Lotsamoney were planning set up a company. The company will borrow money as per the company structure and they will grant a loan to its 100% owned subsidiary company at commercial rates. The subsidiary company is engaged in carrying out the business of land development activities. After a period of 7 years, the subsidiary company will be sold and through refinancing the same will be purchased again after 2-3 years.  In the initial 2 years, the subsidiary company was operating in the planning phase. This planning phase was important considering the nature of business the subsidiary company was engaged in. Further, in light of the above case laws, the planning phase before commencing the actual operation is not too long considering the nature of business the company is engaged with. Considering the provision of the case law, in this case, it is evident that the interest expenses that have been incurred prior to commencing of the operations are relevant and the period of 2 years is also not too long considering the land development business of the company.

 


The interest expense that has been incurred by the subsidiary during the life of the land development activities will be allowed as normal deduction being the same is related to the income earning activities of the company.

On the other hand the interest expense that has been incurred by the company after the sale of the business will also be allowed as deduction considering the fact that the taxpayer is able to justify that the even after the ceastion of the earning activities will arise again and will let to an extension for which the debt was originally being incurred. Thus, considering the fact, that the business of the subsidiary company will be taken over again in the next 2-3 years as per the agreed business model, thus the interest expense during the period will also be allowed as deduction. As discussed above, the refinancing does not have any impact on the interest deductibility.

In the given case, the subsidiary company is expected to repurchase the shares that have been sold at the lower price at which the same has been sold. Further, the losses in relation to the interest expense that has been borne by the company during the period of sale and repurchase of the business will be allowed as deduction. Considering the fact, that the business of the subsidiary company will be taken over again in the next 2-3 years as per the agreed business model, thus the interest expense during the period will also be allowed as deduction.

Capital Gain tax

Capital gain arises when the capital asset is sold at a price higher than its purchase cost. There may be capital loss sometimes when the capital asset is sold at a lower price than the purchase price. This form of income is totally different from the ordinary income. The tax payer cannot set off capital losses from the ordinary income. For the purpose of calculating the capital gain/loss, the cost that has been incurred in making necessary improvements in the capital asset and further cost that has been incurred for making the sale will become part of the purchase cost.

In the given case the subsidiary company has been engaged in the business of land development activities. Thus, considering the nature of business of the company the land will be considered as a trading stock. As per the provision of Australian tax laws, the land, in this case, will not be considered as a Capital Asset. Thus, in this case, the sale of land by the subsidiary will be exempt from the purview of capital gain tax.

 

Business Risk

The business model that has been presented by Taite Moneybags and his business colleague Aramis Lotsamoney are subject to some business risk. The first and foremost is the change in the tax ruling that in greater terms may impact the taxability of the company. Currently, the tax ruling is in favor of the company but the same might get impacted by any law which in long run is not beneficial for the company. The management strategies will help the company in managing the risk. Further, from the perspective of the management, they are required to document the sale and purchase price of the land effectively. Further, all the documents that are required to be maintained in relation to the sale and purchase of the business/shares should be in place and should be duly verified by some professional expert.

 

Bibliography

Anon., 2008. Northrop v Thorsen. [Online] Available at: https://www.courts.state.ny.us/Reporter/3dseries/2007/2007_10124.htm [Accessed 4 Aug 2017].

ATO, 2016. Foreign residents doing business in Australia. [Online] Available at: https://www.ato.gov.au/business/international-tax-for-business/foreign-residents-doing-business-in-australia/ [Accessed 4 Aug 2017].

ATO, 2016. Tax on income and capital gains. [Online] Available at: https://www.ato.gov.au/Business/International-tax-for-business/Foreign-residents-doing-business-in-Australia/Tax-on-income-and-capital-gains/#permanentestablishment [Accessed 5 aug 2017].

ATO, 2017. Taxation Ruling TR 2004/4. [Online] Available at: https://www.ato.gov.au/law/view/document?DocID=TXR/TR20044/NAT/ATO/00001 [Accessed 4 Aug 2017].

ATO, n.d. INCOME TAX ASSESSMENT ACT 1997. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=PAC/19970038/8-1 [Accessed 4 Aug 2017].

ATO, n.d. TR 2002/5, Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936?. [Online] Available at: https://law.ato.gov.au/atolaw/print.htm?DocID=TXR%2FTR20025%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=20161207000001-99991231235959 [Accessed 4 Aug 2017].

EY, 2014. Doing business in Australia. [Online] Available at: https://www.ey.com/Publication/vwLUAssets/Doing_Business_in_Australia_and_Australian_tax_landscape/$FILE/EY-doing-business-guide-australia.pdf [Accessed 4 Aug 2017].

GOV.UK, 2012. Australia: tax treaties. [Online] Available at: https://www.gov.uk/government/publications/australia-tax-treaties [Accessed 4 Aug 2017].

Download Sample

Get 100% money back after download, simply upload your unique content* of similar no. of pages or more. We verify your content and once successfully verified 100% value credited to your wallet within 7 days.

Upload Unique Document

Document Under Evaluation

Get Credits into Your Wallet

*The content must not be available online or in our existing Database to qualify as unique.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2018). Case Study Of Brown And Steele. Retrieved from https://myassignmenthelp.com/free-samples/case-study-of-brown-and-steele.

"Case Study Of Brown And Steele." My Assignment Help, 2018, https://myassignmenthelp.com/free-samples/case-study-of-brown-and-steele.

My Assignment Help (2018) Case Study Of Brown And Steele [Online]. Available from: https://myassignmenthelp.com/free-samples/case-study-of-brown-and-steele
[Accessed 13 August 2020].

My Assignment Help. 'Case Study Of Brown And Steele' (My Assignment Help, 2018) <https://myassignmenthelp.com/free-samples/case-study-of-brown-and-steele> accessed 13 August 2020.

My Assignment Help. Case Study Of Brown And Steele [Internet]. My Assignment Help. 2018 [cited 13 August 2020]. Available from: https://myassignmenthelp.com/free-samples/case-study-of-brown-and-steele.


MyAssignmenthelp.com boasts a pool of 3000+ experts from different backgrounds, who are solely dedicated to providing premier quality assignment help. Due to the diversity in our expert team, we are capable of providing academic assistance in more than 100 subjects. Some of our popular services include math assignment help, economic assignment help, accounting assignment help, statistics assignment help, law assignment help and more at a reasonable price.

Latest Tax Samples

LAW2465 Singapore Taxation

Download : 0 | Pages : 7
  • Course Code: LAW2465
  • University: Royal Melbourne Institute Of Technology
  • Country: Australia

Answer: Introduction:  The most common principles of the ordinary and the statutory income is that it is considered in the taxpayer’s assessable earnings. The ordinary earnings under “sec 6-5, ITAA 1997” are held assessable for tax when the taxpayer successfully establishes the nexus with the payment received for services. But in terms of statutory income it is not so necessary. Assessing the nature of receipts for...

Read More arrow Tags: Singapore 33 Taxation Other 

ACCT3016 Taxation Law

Download : 1 | Pages : 3

Answer: The given question pertains to the tax treatment for income earned by Andrew Smith, a lawyer in sole practice, for the income year ending 30th June, 2019. Income earned/received in current year: In the given case, a major decision is selection of a method of determination of income earned by the assessee. Relevant provisions: There are two methods for determination of income, i.e. earnings method and receipts method (Section 6...

Read More arrow Tags: Australia 33 taxation law Other 

BUS303 Taxation 4

Download : 0 | Pages : 9
  • Course Code: BUS303
  • University: Murdoch University
  • Country: Australia

Answer: Introduction Mark Lewis works in a luxury cruise liner that travels within the Mediterranean Sea. His main tax is received from income tax although he has other sources of income such as the rent income from his rented farmhouse which he subleases through Airbnb. This is lease income that comes from the farmhouse that he sublets. Additionally, Mark Lewis also has been breeding cattle in Australia or his retirement preparation. He owns...

Read More arrow Tags: Singapore 33 Australia Taxation Law Other 

TLAW603 Taxation Law 2

Download : 0 | Pages : 4

Answers: Introduction Taxation is a very important component in any government. Through taxation, a country can earn a good amount of income which will spend in undertaking its various developmental projects among other key businesses. It is now very important for every entity to submit its taxes without evading or even avoiding whichever the circumstances. This is because it will enable the government to run its activities to improve the eco...

Read More arrow Tags: Australia Wollongong 33 taxatation law Kent Institute Australia 

BLO2206 Taxation Law And Practice 2

Download : 0 | Pages : 9
  • Course Code: BLO2206
  • University: Victoria University
  • Country: Australia

Answer: Private & Confidential To Herbie Smith Advisors Consultant & Co 85 Smiths Villa Native Heights Dear Herbie We look forward to respond to your recent meeting, messages and telephone conversation. We are attaching the advice in respect to the matters sought by you in relation to the assessment of small business entity. Scope: The main objective or scope of the current letter of advice is to give the taxpayer with a valua...

Read More arrow Tags: Australia Waterways 33 Taxation Law And Practice Victoria University 
Next
watch

Save Time & improve Grade

Just share Requriment and get customize Solution.

question
We will use e-mail only for:

arrow Communication regarding your orders

arrow To send you invoices, and other billing info

arrow To provide you with information of offers and other benefits

1,384,929

Orders

4.9/5

Overall Rating

5,086

Experts

Our Amazing Features

delivery

On Time Delivery

Our writers make sure that all orders are submitted, prior to the deadline.

work

Plagiarism Free Work

Using reliable plagiarism detection software, Turnitin.com.We only provide customized 100 percent original papers.

time

24 X 7 Live Help

Feel free to contact our assignment writing services any time via phone, email or live chat.

subject

Services For All Subjects

Our writers can provide you professional writing assistance on any subject at any level.

price

Best Price Guarantee

Our best price guarantee ensures that the features we offer cannot be matched by any of the competitors.

Our Experts

Assignment writing guide
student rating student rating student rating student rating student rating 5/5

285 Order Completed

99% Response Time

Eugene Baranowski

MBA in Supply Chain

London, United Kingdom

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

529 Order Completed

95% Response Time

Ivan Blank

PhD in Functional Human Biology

Wellington, New Zealand

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

2109 Order Completed

99% Response Time

Emma Zhong

Ph.D in Project Management with Specialization in Project Communications Management

Singapore, Singapore

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

647 Order Completed

98% Response Time

Adlina Han

Masters in Marketing with Specialization in Branding

Singapore, Singapore

Hire Me

FREE Tools

plagiarism

Plagiarism Checker

Get all your documents checked for plagiarism or duplicacy with us.

essay

Essay Typer

Get different kinds of essays typed in minutes with clicks.

edit

GPA Calculator

Calculate your semester grades and cumulative GPa with our GPA Calculator.

referencing

Chemical Equation Balancer

Balance any chemical equation in minutes just by entering the formula.

calculator

Word Counter & Page Calculator

Calculate the number of words and number of pages of all your academic documents.

Refer Just 5 Friends to Earn More than $2000

Check your estimated earning as per your ability

1

1

1

Your Approx Earning

Live Review

Our Mission Client Satisfaction

Awesome work. Awesome response time. Very thorough & clear. Love the results I get with MAH!

flag

User Id: 383727 - 31 Jul 2020

Australia

student rating student rating student rating student rating student rating

Work was done in a timely manner took it through grammarly checked for plagiarism very well satisfied

flag

User Id: 463334 - 31 Jul 2020

Australia

student rating student rating student rating student rating student rating

Great work for the short notice given. Thank you for never disappointing and helping out.

flag

User Id: 194216 - 31 Jul 2020

Australia

student rating student rating student rating student rating student rating

I received a full point on the assignment. Thank you for all the help with the assignment.

flag

User Id: 411395 - 31 Jul 2020

Australia

student rating student rating student rating student rating student rating
callback request mobile
Have any Query?