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CLWM4100-Company A Resident Of Australia For Tax Purposes

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  • Course Code: CLWM4100
  • University: Kaplan Business School
  • Country: United States

Question:

Part 1- Starting a new business

Elwood has started a new business venture. He has started an international shipping company based in Singapore. There are 4 directors:
 
• Two are located in Singapore
• One is located in Monaco, and
• Elwood.
 
All the director’s meetings are held in Singapore and the annual general meeting is held in Monaco. The company’s main business is shipping containers between Sydney and Africa, via Singapore. The contracts are signed in Sydney on behalf of the company by Elwood. The company has a rotating Managing Director with the role changing every three months between the directors. The shares are held only by the directors and are held in equal proportion. Elwood would like to know:
Is the company a resident of Australia for tax purposes?

Part 2 – Sale of assets

Elwood has sold the following items

1. A car he bought 3 years ago for $65 000 and was used solely for his personal use was sold for $25 000. The book value of the car is $27500
 
2. Vacant land sold in June 2018 for $200,000 that had been bought by him on 21/3/1984 for $20,000. This is being paid in 10 instalments of $20 000, however the purchaser has declared bankruptcy and the last two instalments due next financial year will not be paid.
 
3. 10,000 shares in ABC Ltd sold in February 2017 for a total sale price of $175,000. Elwood bought
all the shares for long term investment purposes during November and December 1994 at a total
cost of $80,000.
 
4. An antique sold on 1 May 2018 for $15,000. Elwood bought the antique on 31 December 1989 at a cost of $5,000 for personal reasons.
 
5. Jewellery sold in July 2017 for $5,000. The jewellery was purchased for 29/09/09 for $20,000.
 
6. Shares in XYZ Ltd were sold on 1/10/2017 for $45000. These shares were purchased for long term investment purposes on 31/10/1998 for $41500.
 
7. Elwood has interests in many businesses. One particular business is a clothing store. This store imports a lot of clothing from overseas and is entitled to a concessional rate on the customs duty for a quota (a particular quantity) of protective clothing. However, this protective clothing was not selling well so Elwood sold the quota to another business for $50 000. The value of the quota at purchase 5 years ago was $25 000. Elwood also has to pay an annual fee of $5000 to renew the quota.
 
Advise Elwood as to the tax implications of each of these disposals and calculate any amounts required to be declared in his tax return.

Part 3 General deductions

Elwood is keenly promoting a car made in Fiji which runs on overproof alcohol. However, the Federal government has decided this is undesirable and has imposed a new, strict limit on the number of cars which can be imported. Elwood is Fijian and is hopping mad about this. He has launched a media campaign, costing $175 000, attacking this restriction and demanding its removal claiming it is an unfair restriction on his business structure and is undermining freedom of product choice.

Elwood has borrowed a significant amount of money to set up the structure to import the cars, buy and fit out showrooms and provide the after sales support for the cars. Elwood wishes to know whether the:

• interest on the loan, amounting to $250 000, will be deductible. He took the loan out after confirmation from both governments the importation could go ahead, however he did not have a showroom at this time. He acquired the showroom before the first cars arrived.

• costs of the media campaign are deductible.
 
 

Answer:

Part 1- Starting a new business

Section 6(1) ITAA 1936 highlights the three main tests for ascertaining if the underlying company is an Australian resident for tax purposes or not. These tests are mentioned as follows (Woellner, 2014).

Test 1: The place of incorporation of company ought to be Australia and not any foreign location.
Test 2: The company must have some business in Australia and the control of the voting power should be with Australian residents only.
Test 3: The company must have some business in Australia and also, the central location of key management must be within Australia only.
For the given company and the given case facts, the above tests are applied.

Test 1: The given company’s place of incorporation is Singapore and hence the incorporation test is not passed.

Test 2: The voting rights in the company are equally divided amongst the four directors and only one of these (i.e. Elwood) is an Australian resident. Hence, 75% or majority of voting rights are with foreign residents. Hence, the voting control test is not passed.

Test 3: It is apparent that the business of the company has to do with Australia since it concerns with movement of goods from Australia to Africa. However, in relation to the central control, when the directors are located in different geographical locations, then the place of meeting of directors is the place of central control. This is Singapore in this case which implies that management control is not located in Australia. Also, the position of managing director is not with Elwood on a permanent basis.

The conclusion from the above discussion is that the company is a foreign tax resident.

Part 2- Sale of Assets

1) Car is exempt from Capital Gains tax (s. 204-430 ITAA 1997) and thereby no CGT on the gains/ loss derived from car sale (Woellner, 2014). The proceeds from the sale of capital assets would be capital and hence non-assessable. No reporting on tax returns.

2) A pre-CGT asset is one which has been purchased before September 20, 1985 and such assets are exempt from CGT purview (s. 149-10 ITAA 1997). The land block is a pre-CGT asset and hence exempt from CGT implications (Sadiq et. al., 2016). The proceeds from the sale of capital assets would be capital and hence non-assessable. No reporting on tax returns.

3) The sale of shares amounts to disposal of capital assets in accordance with s, 104-5 ITAA 1997. Hence, capital gain can be computed by subtracting the cost base from the sales proceeds (CCH, 2013).

Shares have been purchased @ $ 80,000
Shares have been disposed @ $ 175,000
Hence, resultant capital gains = 175000 -80000 = $ 95,000
The above gains are long term using to holding period being in excess of a year and thereby 50% discount is applicable in accordance with ss.115-25(1) ITAA 1997.
Hence capital gains on which CGT would be applicable = (50/100)*95000 which amounts to $ 47,500.
 
4) Antique is a capital asset which has been disposal leading to event A1 as per s. 104-5 (Gilders et. al., 2016).

Capital losses related to antique sale = 15000-5000 = $ 10,000

The above loss can either be used to balance any derived capital gains on antique or would be carried ahead to the subsequent year.
 
 
 
5) Jewellery is a capital asset which is also used for personal purposes and hence would an item of personal use. For such items, ss.108-20(1) ITAA 1997 states that in the event of any capital losses, these ought to be ignored (Barkoczy, 2017). Clearly, the selling price of jewellery is lower than the buying price owing to which a capital loss arises which as per above discussion is ignored. Hence no impact on tax returns.
 
6) The sale of shares amounts to disposal of capital assets in accordance with s, 104-5 ITAA 1997. Hence, capital gain can be computed by subtracting the cost base from the sales proceeds (Gilders et. al., 2016).
Shares have been purchased @ $ 41,500
Shares have been disposed @ $ 45,000

Hence, resultant capital gains = 45000 -41500 = $ 3,500

The above gains are long term using to holding period being in excess of a year and thereby 50% discount is applicable in accordance with ss.115-25(1) ITAA 1997 (Krever, 2016).
Hence capital gains on which CGT would be applicable = (50/100)*3500 which amounts to $ 1,750.

7) Section 110-25 ITAA 1997 highlights the various key elements of the cost base of an asset. One of these is the ownership costs. In case of quota, ownership costs would be in the form of renewal cost (Deutsch et. al., 2016).
Hence, Quota (Cost base) = Purchase Cost + Renewal Cost = 25000 + 5000 = $ 30,000
Quota sale proceeds = $ 50,000

Thus, capital gains on sale of quota would be 50000-30000 which would amount to $ 20,000.

The above gains are long term using to holding period being in excess of a year and thereby 50% discount is applicable in accordance with ss.115-25(1) ITAA 1997 (CCH, 2013).
Hence, capital gains on which CGT is applicable is (50/100) *20,000 which would amount to $ 10,000.

Part 3: General Deduction

General deduction is permissible under s. 8-1 ITAA 1997. A positive limb which ought to be satisfied is that the expense or outgoing has to be directly and sufficiently linked to assessable income obtained. A negative limb which ought to be avoided is that the expenditure must not be capital but revenue (Deutsch et. al., 2016).
Interest –Section 8-1 provides general deduction for interest if the underlying capital is deployed for assessable income production. Elwood has assumed loan only when government has granted permission for import and also has bought the showroom before the arrival of cars from Fiji. Besides, with the change in government policy it may happen that assessable income is reduced but it would be produced and hence the interest on underlying investment would be deductible for tax purposes (Barkoczy, 2017).

Advertisement Campaign – The key factor is to determine if the underlying expenditure on the campaign is revenue or capital in nature. TO ascertain the same, a test has been highlighted in the verdict of the Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 33. Here, it was indicated that the expenditure type would be capital if the underlying benefit arising from the expenditure would be enduring or lasting over multiple tax years (Krever, 2016). In the given case, if the campaign is successful in lifting the ban from Fiji car imports then it would lead to higher assessable income production for Etwood and this is not limited to current year but would be beneficial in an enduring manner. Hence, the expenditure on advertisement campaign is capital which leads to non-availability of general deduction (Sadiq et. al., 2016). 

 

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.

CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer.

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.

Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W and Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters

Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia

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