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CLWM4100-Tax On Disposal And Deductions

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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.

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

Australian Tax Office regulations define the terms, conditions, and environment that surrounds tax residency of limited companies in Australia. This terms and condition are primarily based on formation, ownership operations, control and decision-making options.

Australian Tax Office qualifies a company for tax residency purpose if the company is formed and incorporated in Australia Miller and Oats (2016.Pg 31.) Applying this condition, I wish to inform Elwood Blue that this shipping company does not qualify to be a resident company for tax purpose since we are informed it was formed and based in Singapore.

The other options that most likely qualify this shipping company to be part of Australian tax resident is the aspect that a company may not be incorporated in Australia but it does its business operations, central management and whose powerful decision making is made by Australian individuals who reside and work as individual tax resident Maisto (2009.Pg 12.)

Going with the above latter condition, I wish to say that the shipping company owned by Elwood Blue and other three directors qualify to be an Australian Tax resident by the fact that most operations are done in Sydney Australia, and of course, the most crucial part is that of the signing of work contracts. Likewise, the fact the overall control and management is conducted and led by Elwood who is an Australia Individual for tax purpose makes this shipping company to be an Australian one for tax needs. This analysis, therefore, informs Elwood Blue that the shipping company they own indeed is part of the Australian Resident Company for tax purposes. 

 

Part 2

Elwood point of need in this part 2 is application and effect of capital gain or loss in his income Evans, Minas and Lim (2015.Pg .736.)

Scenario 1;

Capital Gain/Loss=25000 – 27500 = (2500), however, it should be noted that Elwood car is used for personal Corias (2012.Pg 10) purpose hence termed as personal asset hence going with ATO regulation any disposal gain or loss of a private asset are deemed exempted from capital gain tax hence Elwood not expected to neither declare any gain if any or claim tax set off for the loss of (2500) he incurred since his car is used for private use hence not qualifying for cgt.

Scenario 2;

Indexation for time value of the purchase cost=113/37.9=2.981, hence cost value=20000*2.981=59630

The =Agreed sales price on disposal=20000*10=200000

=Paid sales residual=20000*8=160000

=Gain on disposal will be =200000 – 59630=140370, this is what Elwood is to declare as CGT income and of course claim bankruptcy loss deduction payment of 40000 since he was not paid. 

 


Scenario 3;

Indexation of shares=110.5/62.8=1.759

=cost of shares=1.759*80000=140764

=sales residual=175000, hence Capital Gain=175000-140764=29236 hence this gain on sale of shares has to declared by Elwood in his income for tax purposes.

Scenario 4;

Indexation=113/55.2=2.05=cost value=5000*2.05=10250

Capital Gain=15000-10250=4750, Elwood should declare this gain on income as a gain resulting from the disposal of his antique. 

 


Scenario 5;

Indexation=110.7/93.8=1.18=20000*1.18=23600

=Capital loss=5000-23600=18600 he has to forward this loss to the next period whereby it will be used to set off any capital gain that will be earned thus reducing the burden.

Scenario 6;

Indexation of shares=111.4/67.5=1.650*41500=68475

=Capital loss=68475-45000=23475 Elwood has to forward this loss to the next period whereby it will be used to set off any capital gain that will be earned thus reducing the burden

Scenario 7;

5years quota renew fee=5*5000=25000

Cost price=25000, therefore the two cost of the quota=25000+25000=50000

Sales proceeds=50000, therefore, capital gain, or loss is nil since the cost price equals the sales proceeds hence no need of Elwood to declare this income. 

 

Part 3

According to the Australian Tax Office on tax deductions, the regulations are very precise on interest on the loan and its application instead of the tax. Elwood took the loan with an insight of investing this money into car importation, which indeed he invested even before the strict limitation indeed affect him. Interest on loans that have been invested on businesses that generate revenue is considered allowable expenses for tax deductions hence the fact that Elwood loan was borrowed for the importation of car even before the imposition of the strictness law the law allows him to claim this interest expense as deductible allowance Blake lock and King (2017.Pg 15.)

Concerning the media campaaign I wish to say that the campaign cost is not recognized as either a mere marketing cost or even litigation and more so it is not related to any income generation instead it is there to curb and picket against the federal government on this law it has introduced this therefore makes this campaign cost un-claimable for tax purpose as allowable deduction. 

 

References

Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.

Connection, P.L.U.M.B.I.N.G., Make the right claim.

Corias, J., 2012. What you should know about personal services income. Electrical Connection, (Autumn 2012), p.110.

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.

Maisto, G. ed., 2009. Residence of companies under tax treaties and EC law (Vol. 5). IBFD.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

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