The report is being prepared in order to analyze the different aspects of tax associated with the starting of the new business plan and the tax obligations that may arise in regard to different operations during the business and also the tax liabilities that may arise after the sale of subsidiary and the refinancing plan of the business. Different operations of the business leads to different kinds of tax obligations which are to be discharged accordingly.
As per the provision of subsection 6(1) of the income tax assessment act 1936, the permanent establishment is the place from where a person is carrying on activity that is related to the business or is engaged in business activities. As per taxation ruling 2002/5 of Australian taxation office, the permanent establishment will also include place in which business is carried by way of agent, a place where equipments are being installed and engaging in construction business etc. As per the ruling, there should be both geographical permanence and temporal permanence. Thus a business is said to have temporal permanence if it is continued for 6 months or more. (ATO, 2002)
Hence Taite and Aramis are planning to carry on business for more than 6 months thus it will be considered that they are operating through permanent establishment.
The income generated from the permanent establishment will be liable to Australian taxation and accordingly all the liabilities of Australian income tax will be paid. The assets that are the part of the permanent establishment will also be liable for the capital gain tax in Australia at the time of sale of asset. (ATO, 1987)
Case law: Applegate v. FCT 78 ATC 4054 at 4060; (1978) 8 ATR 372
Deductibility of interest expenses
As per the provisions of section 8(1) of the income tax assessment act 1997, interest is deductible if the interest is paid on funds which are used for the purpose of business. As per the taxation ruling, TR 95/25, the refinancing principle says that the interest paid on the amount that is borrowed for the repayment of money which is used for the purpose of business or profession will be eligible for deduction as business expense. But the interest expense will be deductible only if it is used for the purpose of the business or profession. Thus the taxable entities which are the resident of Australia will be eligible to deduct the interest incurred prior to business expense and interest incurred during the business operations also the interest expense incurred after sale of business will also be deductible as it will lead to assessable income in the future period. Thus the interest after planned repurchase will also be deductible as it is being done as a part of the business. (ATO, 1995)
Case law: 12/95 95 ATC 175; AAT Case 10,079 (1995) 30 ATR 1169.
Deductibility of expected losses after repurchase
As per the provision of Australian taxation office, the expected losses that will be incurred after the repurchase will be eligible to be set off against the income that will be received in the future period when the subsidiary is repurchased and income will be derived by way of business operations of the subsidiary. As per taxation ruling 2014/15, the expected losses will be carried forward for the years till the subsidiary are repurchased and hence the business income which will be received by way of subdivision will be eligible for set off against the income. (ATS, 2017)
CGT on sale of subsidiary
As per the provisions of section 104.1 of the income tax assessment act 1997, capital gain tax is liable to be paid on sale of capital gain tax assets. The capital gain tax needs to be paid on the excess of sale proceeds over the cost of acquisition of the asset. As per the provision of section 118.25 of the income tax assessment act 1997, the capital gain tax made on sale of the trading stock is not taken into consideration. As the trading stock does not constitute the part of capital gain tax asset. The capital gain will also be disregarded if the capital gain tax asset is now being hold as the trading stock as the trading stock does not tend to be a part of the capital gain tax asset. (AustLII, 2017)
Thus in the above case assesses will not be exempted from the capital gain tax obligations in regard to the land which is being considered as the trading stock in the event of sale of subsidiary. The sale of subsidiary catches various types of capital gain tax event. But in the event of sale of business, there is non-existence of business hence there is no trading stock in the business. Thus in this case land will be considered as the capital gain tax asset and it will not be considered as the trading stock and hence capital gain tax will be liable to be paid on sale of land after sale of subsidiary.
Business risk and risk management strategies
The different types of risk that are being associated with the plan are as follows:
- There is the strategic risk that there may be inflation or deflation which may lead to decrease in the land thereby leading to losses.
- The new legislative rules may come in regard to the land development business which may lead to complications in the future period.
- The financial risk may arise as the consumers may be less interested in investing in land and buildings.
- The company may lose its market position by not supplying the services and products.
- The company may suffer from the operational risk due to failure of the internal operations and the lack of proper working of the person working inside the organization. (Andrew Blackman, 2014)
The different types of risk management strategies are as follows:
- The market situation needs to be analyzed continuously in order to understand the market risk.
- The company management needs to keep close eye on the regular operations of the business in order to ensure that adequate quality of services is being maintained in the business.
- A well planned internal control system should be introduced in the organization in order to increase the effectiveness of the working of the organization.
- The management of the company needs to take regular check on the interest rates in order to reduce the financial risk. (Dana Driffin, 20xx)
The business plan needs to be executed with proper care so that the tax obligations can be discharged. Taite and Aramis would be operating through the permanent establishment and thus the permanent establishment will be liable to Australian taxation and hence income will be chargeable to Australian taxation. The permanent establishment will thus become a taxable entity thus they will be eligible for the deduction of the interest that is being paid on the amount of funds that are to be borrowed for the business. The sale of subsidiary will also attract various types of capital gain tax obligations and hence they will be liable to pay off the capital gain tax accordingly. The sale of land after sale of subsidiary will also attract the capital gain tax obligations. The new business plan may also suffer from various business risk and they need to be evaluated accordingly in order to take the steps accordingly in order to reduce the different type of business risk.
- Australian Taxation Office, 2002, “TR 2002/5 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?”; Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR20025/NAT/ATO/00001
- Australian Taxation Office, 1987, “Taxation Ruling IT 2423 Withholding Tax: Whether rental income constitutes proceeds of business- permanent estalishment- deduction of interest”; Available at: https://www.ato.gov.au/law/view/document?DocID=ITR/IT2423/NAT/ATO/00001
- Joe Harpaz, 2016, “Permanent Establishment becomes tax authorities’ weapon of choice in attack on corporates”; Available at: https://blogs.thomsonreuters.com/answerson/permanent-establishment-becomes-tax-authorities-weapon-choice-attack-corporates/
- ATS, 2017, “Tax Considerations For Australian Expatriates”; Available at: https://www.smats.net/Tax/Expats.aspx
- Oliver Jankowsky, Anthony Bradica, Frank Hinoporos, 2016, “A Guide to Taxation in Australia”; Available at: https://hallandwilcox.com.au/a-guide-to-taxation-in-australia/
- Australian Taxation Office, 2016, “Tax on Income and capital gains”; Available at: https://www.ato.gov.au/Business/International-tax-for-business/Foreign-residents-doing-business-in-Australia/Tax-on-income-and-capital-gains/
- Australian Taxation Office, 1995, “Deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9525/nat/ato/00001
- Australian Taxation Office, 2016, “Interest, Dividend and other investment income deductions”; Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Interest,-dividend-and-other-investment-income-deductions/
- Australian Taxation Office, 2015, “CR 2015/14 Off Market share buy-back: Thinksmart Limited”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=CLR/CR201514/NAT/ATO/00001
- Australian Taxation Office, 2016, “CR 2016/72 Telstra Corporation Limited: Off-market share buy-back”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=%22CLR%2FCR201672%2FNAT%2FATO%2F00001%22
- AustLII, 2017, “ITAA 1997- Section 118.25 Trading Stock”; Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.25.html
- ITAA 1936, 2017, Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/
- Australian Taxation Office, 2015, “18 Capital Gains 2015”; Available at: https://www.ato.gov.au/Individuals/Tax-return/2015/Supplementary-tax-return/Income-questions-13-24/18-Capital-gains/
- Australian Taxation Office, 2017, “CGT Assets and Exemptions”; Available at: https://www.ato.gov.au/General/Capital-gains-tax/CGT-assets-and-exemptions/
- Andrew Blackman, 2014, “The main types of Business Risk”; Available at: https://business.tutsplus.com/tutorials/the-main-types-of-business-risk--cms-22693
Dana Griffin, 20xx, “Types of Business Risk”; Available at: https://smallbusiness.chron.com/types-business-risk-99.html