Global Perspectives On E-Commerce Taxation Essay.

Residency Rules in Australia

Discuss about the Global Perspectives on E-Commerce Taxation Law.

Section two subsections 6(1) of the Income Tax Assessment Act 1936 defines a resident of Australia as a person, other than an organization whose domicile is in Australia, or who has been in Australia, continuously during more than one-half of the year of income (Picciotto, 2007). The section further defines a resident of Australia as a person who is an eligible employee under the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person. Ideally, a resident of Australia is an individual who has a permanent home in Australia and was present in Australia for a day in the year of income (Basu, 2007). The person is also a resident of Australia he or she has no permanent home in Australia but was present in Australia for a total of 183 days or more in the year of income or an average of 122 days or more in the year of revenue plus two preceding years.

In Henderson vs. Henderson’s case of domicile, the Supreme Court considered what was required to establish a residence at law to rule this case. Here, the court set that clear evidence was necessary to establish a change of domicile (Nielson, and Harris, 2010). This appeal of Henderson vs. Henderson arises where the Madison County Chancery Court orders the equitable distribution of Henderson's property after Mary and Howard chose to divorce.   In first ruling was held in 1994 where Mary was granted a divorce from Howard on the ground of adultery.  During this decision, she was given custody of their minor child, a variety of assets that was valued more than $ 350,000, and alimony of $ 683 per month. Howard, on the other hand, was awarded assets lower than $ 20,000. This Court, however, granted Howard's petition for writ of certiorari, citing that the chancery court failed to classify assets as marital or non-marital. The chancery also neglected to determine marital domicile. On this appeal, the chancery divided the marital estate equally between Mary and Howard and held that they were not eligible for periodic alimony.

According to this case of Julie, she did not have a permanent home in Australia. Her year of income was 2016, and she lived temporarily in Australia (Lang, 2014). However, since she was present in Australia for 365 days, she would be considered a resident of Australia in the year of income. This is because she has surpassed the principle of 183 days or more to be considered a resident of Australia. This question, however, tells us that we do not need to find the temporary residency rules. This leaves us with the permanent state of residency that says that one would be considered a resident of Australia if he had an ongoing home in Australia and was present for at least a day in the year of income. With this rule in mind, Julie would not be considered a resident of Australia, as she has no permanent home in Australia.

Assessable Income of Julie

In this case study, only the amounts that were received by Julie in the year of income would be assessed. During the year ended 30 June 2016 Julie, Julie made six transactions. First, she received a salary from employment in Canada before 31 August 2015, which was equivalent to AUD$5,500. Since this amount was earned before 31 August 2015, it would not be included in her assessable income (Picciotto, 2007). Second, she received a salary paid by a fruit grower in Bundaberg of AUD$6,000. Since this amount was received in the year of income in Bundaberg, it would be included in her assessable income. Third, Julie won a $250 prize for winning the annual watermelon-eating contest in Bundaberg. Since this award was earned in the year of revenue, it would be included in her assessable income but taxed on a withholding tax rate of 20%, which is final. Fourth, she received interest on her Australian bank account of $180, which should be included in her assessable income as it was received in the year of revenue. Julie is required to pay a withholding tax on this interest (Basu, 2007). Fifth, she received interest on her Canadian bank account equivalent to AUD$200. This amount should be included in her assessable income. However, since $20 withholding tax had been deducted by the Canadian bank before crediting her account on 1 March 2016, it should not be included in her assessable income. Lastly, Julie received $220 from the sale of excess clothing, sleeping bag and other personal items on eBay before Julie leaving Australia. This amount is taxed at source, and therefore it should not be included in her assessable income.

In conclusion, Julie would be assessed on the salary she received from the fruit grower in Bundaberg of AUD$6,000, the $250 prize that she won in the annual watermelon eating contest in Bundaberg, and the interest she received on her Australian bank account of $180. This is because these amounts were realized and received in the year of income and no withholding tax had been charged on the interest she received on her Australian bank account (Lang, 2014).

According to the income tax act, if compensation were paid for the loss of business, the compensation would be for the loss of capital asset (Reinhardt, and Steel, 2006, p.1). The income tax assessment act s8-1 states that any losses that are of capital nature are not deductible. However, the receipts for compensation would be deductible under s8-1, as they would be considered as ordinary income. In this case, Ted received $45,000 in compensation for the permanent loss of access to the street at the rear of his business premises. Since this receipt was because of permanent loss, it would be deductible for tax purposes. In this same scenario, Ted was also compensated $15,000 for the loss of profits caused by the temporary disruption to his business. This amount would be assessed for tax purposes as seen in Carpark v FCT (1966).

Assessable Income and Deductible Expenses of Ted

Second, Ted received $50,000 for signing a contract with a clothing company to only stock their brand of protective work clothing (Zelinsky, 2010, p.1289). He was also not to stock any other brand apart from the one stated in the contract. According to re Seagate Technology, LLC, 497 F case, the owner of the patent was required to prove the defendant acted without taking into consideration his actual state of mind and that he knew of the high likelihood of the infringement of the patent. In this case, the court ruled that the Seagate test was unduly rigid and that payment of damages was necessary. Section 284 of the income tax assessment act was also used to award damages based on infringement of the patent (Reinhardt, and Steel, 2006, p.1). The amount of $50,000 received by Ted should, therefore, be included in the assessable income for tax purposes. 

Third, Ted received a large order from a mining company to supply the company’s employees with uniforms where he issued an invoice for $15,000 for the order on 25 June 2016. Since the amount was received on 15 July 2016, it should not be included in the assessable income of the year of revenue ends 30 June 2016 as seen in subsection 25(1) of the income tax assessment act 1936 (Kirchler, Niemirowski, and Wearing, 2006, pp.502-517).

Finally, on 28 May 2016 Ted placed an order for $45,000. The goods were, however, shipped on 10 June 2016 and arrived at Ted’s shop on 5 July 2016. Since the shipping terms were FOB, Ted took ownership, control, and risk of the clothes once they were loaded onto the ship. The goods were loaded on 10 June 2016 while the year of income ended as at 30 June 2016. This implies that the cost of the stock of $45,000 should be included in the assessable income as payment for taxation purposes (Handley, and Maheswaran, 2008, pp.82-94).

In conclusion, Ted's allowable deductions would include the compensation of $45,000 for the permanent loss of access to the street at the rear of his business premises, and the compensation of $15,000 for the loss of profits. They would also include an amount of $50,000 for signing a contract with a clothing company, and the cost of stock of $45,000. This is because these costs were incurred by Ted in the year of income and they were suffered to realize the taxable income (Handley, and Maheswaran, 2008, pp.82-94).

Allowable Deductions - John and Denise

According to SSAct section 1075 of the income tax assessment act 1997; only expenses directly related to the ordinary business operations would be deductible (Dai, Maydew, Shackelford, and Zhang, 2008, pp.709-742). These deductible expenses would include those incurred while earning the taxable income for the year of revenue or such expenditures necessary for conducting the business with the purpose of earning the taxable income. SSAct section 7(2) states that capital expenditures, investments, superannuation contributions for the partner of the partnership, obsolescence and any donations to charitable institutions are not unacceptable business deductions (Dai, Maydew, Shackelford, and Zhang, 2008, pp.709-742).

In this case study, John and Denise incurred business deductions such as a fee to establish the company structure of $1,200, a feasibility study of $660, loan establishment fee of $1,500, and construction cost of the building of $98,000, which was incurred in 2005 by the company that owned that building before DDC (King, and Fullerton, 2010). The firm also other business deduction such as small commercial premises of $450,000, a hydro bath of $900, fencing of $10,000, legal fees of $6,000 to defend itself against the closure notice, veterinary fees of $800, and a donation of $5,000 to the RSPCA. The income tax assessment act 1997 states that allowable deductions are those deductions that are incurred on normal business operations that are they are earned as a result of the taxable income or for conducting business operations for the purpose of earning the taxable income. John and Denise are partners in the DDC business (King, and Fullerton, 2010). This means that they would be taxed on any remuneration paid to them by the partnership. They would also be taxed on any interest on capital less interest on drawings and the share of adjusted taxable income after allowing or deducting salaries, bonuses, commissions, and interest on capital. In this case, John and Denise contributed $100,000 each to the partnership. Interest on this amount would not be taxable in the business, but rather it would be taxed on John and Denise, which means that it is not an allowable deduction for the firm. 

John and Denise incurred a fee of $1,200 to establish the company structure. Since this amount was incurred to conduct the business to earn the taxable income, it would be an allowable deduction for tax purposes (Spisto, 2008). Second, they conducted a feasibility study at the cost of $660. This feasibility study was used to determine the viability of the project. This means that it is an expense incurred to conduct the business to earn the taxable income. It should, therefore, be included as an allowable deduction for taxation purposes. Third, John and Denise a loan establishment fee of $1,500. This amount was used to acquire a loan of $300,000 to be used to finance the Doggy Day Care Pty Ltd business operations. This amount should, therefore, be included as an allowable deduction as it was incurred to conduct the business to earn the taxable income (Prentice-Hall, Inc, 2008). Fourth, a construction cost of the building of $98,000 was incurred in 2005 by the previous owners of the building. Since this amount was not born by the Doggy Day Care Pty Ltd and in the year of income, it should not be accepted as an allowable deduction. Fifth, John, and Denise incurred $450,000 to purchase small commercial premises. These small industrial facilities were used to conduct the doggy day care. This implies that since they were used to earn the taxable income, they would be included as allowable deductions for income tax purposes (Gurney, 2006, p.259).

Conclusion

Sixth, John, and Denise bought a hydrobath for $900. This would be included as an allowable deduction since it was used to conduct the business operations that is bathing the dogs for the purpose of attaining the business objectives. Seventh, the Doggy Day Care Pty Ltd incurred a cost of $10,000 to fence the premises. Ideally, renovation is a disallowable expense as it is not an ordinary business operation. This means that it should not be deducted for taxation purposes (Freudenberg, Tran-Nam, Karlinsky, and Gupta, 2012, p.677). Eighth, John, and Denise incurred legal fees of $6,000 to prevent the closure of company out of the lawsuit presented by the neighbors. This amount is not an ordinary business operation, and it should therefore not be allowed for tax purposes. Ninth, John, and Denise incurred veterinary fees of $800 to prevent a lawsuit by one of the neighbors whose dog got ill. Since this fee is not a normal business operation, it should not be allowed for income tax purposes (Elliffe, and Yin, 2011). Lastly, John and Denise donated $5,000 to the RSPCA. Since this is a donation to a charitable animal organization, it should not be taxed which means that it is not an allowable deduction.

In conclusion, the amounts that should be included in the taxable income are the fee of $1,200 to establish the company structure, the feasibility study of $660, and the loan establishment fee of $1,500. The cost of $450,000 incurred while purchasing the small commercial premises and the cost of the hydrobath of $900 should also be assessed. All the other expenses incurred by John and Denise should not be included in the assessable income as they are not conducted for the normal or ordinary business operations (Hoffman, Raabe, Smith, and Maloney, 2013).

According to S 48 of the income tax assessment act 1997, capital gains, the cost of the improvement, PMS fee are held to be deductible expenditure (Desai, and Dharmapala, 2008, pp. 13-30). This is evident in the case of 52 SOT 327 (Mum.) (Trib.). In this case, the assessee earned capital gain from the sale of his ancestral land. He claimed exemption from taxes in according to u/s 54F towards the four flats he had purchased that were to be converted into one residential building. The court allowed the exemption on the basis that the flats were separate and independent residential buildings. The tribunal held that if the requirement of the family of the assessee were met by merging the four apartments into one residential unit, the assessee would be allowed to claim exemption as it would be deemed as a capital gain (Devereux, 2008, pp.698-719).

Roy had previous capital losses. In 2010, Roy had a capital loss of $5,000 while in 2014; he had a capital loss of $15,000. These losses are to be carried forward and offset against the capital gains of 2016 (Di John, 2006). Roy has two assets that is a holiday home and a diamond ring, which he inherited from his mother. On 20 April 2016, Roy sold his luxury penthouse apartment for $250,000 in cash, and he also received win a luxury boat that had a market value of $630,000. Roy had initially purchased the house in 2005 for $750,000. During this purchase, he incurred stamp duty and legal fees on the purchase of $10,000 and the sale of $1,000. He also committed council rates insurance of $15,000 during the period of ownership. One way of calculating the capital gains is by taking the selling price of the asset minus the original price of the property (Tanzi, 2014). The price of sale and the buying price must include all fees and expenses relating to the purchase and selling of the holiday home as shown below.

The capital gain on the sale of the holiday home would, therefore, be as shown in the equations below.

Roy also had a diamond ring, which his mother had purchased in 1997 for $2,500. At the time his mother passed away that is in 2014, the diamond ring had a market value of $5,000 (Burman, 2010). Roy sold the ring for $5,800 on 28 February 2016 at an auction fee of $580. Here, a different technique would be used to calculate the capital gain of Roy. This technique is known as the indexation method of calculation of capital gains. This method is used if the asset was acquired before 21 September 1999 and the asset was owned for twelve months or more. Ideally, inflation is bound to affect the cost base (Jin, 2006, pp.1399-1431). It is therefore recommended that the cost base should be indexed to determine its current value as at the year of income. The indexation factor will be as shown below.

The indexed purchase price would, therefore, be calculated by taking the total purchase price multiplied by the indexation factor as shown below.

The capital gain or loss would be the selling price of the diamond ring plus the auction fee less the indexed purchase price as shown below.

To get the capital gain or loss that would be included in Roy's assessable income, we will sum up all the previous capital loss with the recent capital loss and gain as shown in the equation below.

Roy would, therefore, have a capital gain of $105,380, which would be included in his assessable income for the income year ended 30 June 2016 for capital gains tax purposes. This capital gain was realized after deducting the capital losses from the prior periods (Jin, 2006, pp.1399-1431).

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