Essay: Taxation And Income - Concepts And Computation.

1)Hilary is a well-known mountain climber. The Daily Terror newspaper offers her $10,000 for her life story, if she will write it. Without the assistance of a ghost writer, she writes a story and assigns all her right, title and interest in the copyright for $10,000 to the Daily Terror. The story is published and she is paid. She has never written a story before. She also sells the manuscript to the Mitchell Library for $5,000 and several photographs that she took while mountain climbing for which she receives $2,000.

 Requirement: Discuss whether or not the three payments are income from personal exertion. Would your answer differ if she wrote the story for her own satisfaction and only decided to sell it later? 

2)Eric provides his employee with the use of a car for 183 days during the FBT year. During this period the car travelled 16,000 km. Eric purchased the car last year for $50,000. The employee contributed $1,000 towards the cost of running the car and has provided Eric with relevant documentation.

 Requirement: Calculate the taxable value of the car fringe benefit using the statutory formula.

3)Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.

 Requirement: Discuss the effect on the assessable income of the parent. 

4)Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980. On 1 September 1986, Scott built a house on the land. At the time, the land was valued at $90,000 and the cost of construction was $60,000. The property has been rented out since construction was completed. On 1 March of the current tax year, Scott sold the property at auction for $800,000.

Requirement:

1. a) Based on the information above, determine Scott’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
2. b) How would your answer to (a) differ if Scott sold the property to his daughter for $200,000?
3. c) How would your answer to (a) differ if the owner of the property was a company instead of an individual?
   
   

Taxable Income from Personal Exertion

With the changes in complex business structure, each and every organization needs to use the strategic tax planning process to mitigate the business risks. There are several concepts are discussed such as tax computation, computation of the car fringe benefit, assessment of income and tax computation in different circumstances.

There are several tax concepts which have been analyzed with a view to assess the income tax rules and ordinary concepts of the tax and income. It is analyzed that when a person gets benefits from his or her skills, talents or hobbies and other sources from where he earns money will be taxable as per the rules and regulation of the income tax.  However, there are several exceptions for the same when the tax of the person does not need to be gone for the taxation. It is evaluated that when person receives voluntary consideration for his own skills. In this case, the consideration which he receives does not get taxed. For instance, if the auditors if sell his auditing skills to government with a view to strengthen the government owkr process in the best interest of government and general public then any amount of consideration received by him will be tax free.  However, if he was intended to sell his skills then in this case, any amount of money received by him will be taxed under his hand (Saez, 2017).

Therefore, it could be inferred that the income earned by Hilary by selling the  copyright for $ 1000, pictures for $ 2000 and manuscript for $ 5000 and all the amount which received as income consideration from the personal exertion and comes under the taxable income bifurcation.

However, she wrote the book for her own pleasure and satisfaction. Nonetheless, she later on had the clear intention to make money from her skills and started to sell her books. Therefore, the entire amount received by her will be taxable in the hands of her as per the rules and regulation of Australian tax practice (Saez, 2017).

It could be defied as benefit which is provided by employer to employees. The employees is given car to use for his personal and professional purpose. It is analyzed that in order to make the same arrangement, employer had to buy the car either through the hire purchase or lease. At the same time, employee uses the car for his personal purpose as well apart from using at the employer’s place (Dyreng, Hanlon and Maydew, 2017).

Car Fringe Benefit Value Calculation

It is considered that the car parked in the premises of the employees beyond the fact that whether it is used by him or not will be considered as car used by  him.

In order to compute the taxable value of the fringe benefit give to employees, there are two formulas given as below(Saez, 2017).

Statutory Formula Method

Operating cost method

These both formulas is used to calculate the taxable income of the fringe benefit using the tax amount payable on the fringe benefit.

Computation of taxable income of the fringe benefit using the tax amount payable on the fringe benefit as per the Statutory Formula method

These are the information shown in the question already.

Base value of car : $50,000

The number of days involved in the FBT when the car given to employees is used for the personal purpose : 183

Days in FBT years : 365

Employee contribution for the car : $1000

Car travelled (in kms) : 16,000 km

Formula used in this case does not required travelled kilometres.

 The statutory rate given is 20%.

The formula is as follows:

= {(base value of car x the applicable statutory percentage x the number of days the car was used for personal purpose) / the number of days in FBT year} – employees contribution (Somers, and Eynaud, 2015).

= {(50000 x .20 x 183) / 365} – 1000

= {(1,830,000)/365} – 1000

= 5013.6986 – 1000

= 4013.6986

= $ 4014

There are several rules and regulation of the income tax which need to be complied by the person before determining the income tax payable on the earned income.

It is analyzed in this case that mother lent sum of $ 40000 to his son as loan amount which will be required to be paid after 5 years as whole sum of $ 5000.

They both did not have any formal agreement and there was no requirement to pay interest

Her son repaid the money back with in period of 2 years.

He made the payment of total capital which is accompanied with $44,000 as the capital repayment of $40,000 along with the interest of $4000 for two years.

The rate of interest payment was 5% per annum for the two years.

The total check given for the payment was $44,000, which includes all the capital payment of  $40,000 and rest of the amount given as interest to mother will be taxed as taxable income of $4,000 in mothers hand.

Assessable Income from Lending Money

The payment of $40,000 given to mother as repayment shall not allowed as tax deduction expenses. However, $ 4000 interest payment could be used by son as tax deduction in his taxable income.

The clubbing of income would have been applied to mother and son if the son were to be minor. In that case, all the income earned by the mother and son will be jointly taxed in the hands of the mother and she will be liable to pay tax on the total income of minor.

However, in this case, both person will be individually taxed as per the income tax rules (Richardson, and Lanis,  2007).

After evaluating the case, it could be inferred that the since 20^th September, 1985, ,capital investment in the residence property brought before the time will be taxed as capital gain taxed if there is increment in the property value (Somers, and Eynaud,  2015).

Since 20 September 1985, the Capital Gain Tax (CGT) came into force. After that, any major capital improvement made in a residence property purchased before that shall be taken into account for capital gain tax. The arrangement has been taken place when the residence is not the person’s main residence (Somers, and Eynaud,  2015).

Investment made to improve the property will be considered that major capital improvement and capital investment

(Improvement will be considered or indexed in case of the given contract in which improvement capital investment is made before 21^st September 1999 of the habitancy acquired before 1985.

Improvement cost capital investment

• The amounted of money exceeding the money capital received on the disposal by the 5% at the minimum.  
• The excess of the improvement in the property will be the assets disposal. 

However, lower of the following given will be considered as the capital gain taxable in the hands of owners (Tran-Nam, et al., 2010).

• Indexation method : proceeds on sale of improvement – cost base of improvement (indexed)
• Discount method:{ proceeds of improvement – cost base of improvement ( without indexation) } – 50% discount

The improvement revealed in the year of the income tax payable would be 1986-87 is $53,950 and for income year 2016-17 is $145,401 (Rendall, 2017).

It is required to check the major capital improvement in the net capital gain loss would be dwelling purchased before 20^th September 1985.

• In this case the cost of the improvement would be determined as amount to $60000 which would be more than the amounted determined as 5% of $800,000 i.e. $40000.
• The cost base improvement after implementing the indexation would be $161,706 (60000* 145401/53950) is more than income threshold for 2016-17 being $145,401 (Ryan, 2016).

It would be considered as capital amount of investment (Schenk, 2017).

Computation of the capital gain or loss

• INDEXATION METHOD : proceeds on sale of improvement – cost base of improvement (indexed) = 800,000 - 161,706 = $638,294

• DISCOUNT METHOD: {proceeds of improvement – cost base of improvement (without indexation) } – 50% discount = (800,000-60000)*.50 = $370,000 (Somers, and Eynaud, 2015).

HENCE, THE CAPITAL GAIN IS $370,000

If the property sold to the Scott’s daughter then the following things will be analyzed.

• What was the date of purchase date when the property was purchased before 20 September 1985 (Lim, and Azhar, 2017).
• When it was determined as residence property.
• When the property was purchased out the superannuation funds (SMSF)
• Allowance of partial exemption due to the use of the property as partial and official.

The tax implication on the property would be around $370,000

There are different rule and regulation applicable on the individual and company in order to determine their taxable income. It is analyzed that if the owner of the capital assets is entity rather than the individual then implication of tax will be changed accordingly. Company and individual fall under the different slab rate of the tax payment and tax rate applies on the nature of the tax payer.  If the tax payer is company then it will be completely liable to pay tax at flat 30% on the income without availing any deduction or slab rate discount (Blaylock, Gaertner, and Shevlin, 2017). 

Computation of Capital Gains Tax on the Sale of Property

On the other hand, individual person could enjoy the benefit of tax slab and other deduction in his taxable income which will eventually reduce his taxable income.

The slab rate is computed after allowing the discount method which is no allowed to companies but for the individuals (Balakrishnan, Blouin,  and Guay, 2018). 

The indexation method could be used to compute the long term capital gains i.e. gain or loss from the assets which have been held by company for more than 12 months (Saez, 2017). 

These above calculations applies to company and will also be used to compute the capital gain tax.

However, below given discount method would be followed to compute the tax amount of company (Heathcote, Storesletten, and Violante, 2017).

DISCOUNT METHOD:  {proceeds of improvement – cost base of improvement (without indexation)} – 50% discount = (800,000-60000)*.50 = $370,000

Conclusion 

After analysing all the detail and applicable taxation rules, it could be inferred that individual and company both needs to calculate their taxation liabilities differently. However, government has given certain exemption to individuals on their earning and beyond that they will be liable to pay tax on their earning. In this case, capital gain taxation analysis and individual tax analysis have been done which will assess the taxable income of company. Now in the end, it could be inferred that every single person should pay tax as per the applicable rules otherwise they will have to face high penalties. There are two methods for the calculations of capital gain tax of the company will also be used to compute the capital gain tax which company needs to pay to government.

References

Richardson, G. and Lanis, R., 2007. Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of Accounting and Public Policy, 26(6), pp.689-704.

Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO's proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.

Tran-Nam, B., Evans, C., Walpole, M. and Ritchie, K., 2010. Tax compliance costs: Research methodology and empirical evidence from Australia. National Tax Journal, pp.229-252.

Rendall, M., 2017. Female market work, tax regimes, and the rise of the service sector. Review of Economic Dynamics.

Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

Lim, T.C. and Azhar, Z., 2017. A Review of the Opportunities, Risk and Challenges of E-Commerce Tax Administration in Malaysia and Other Selected Countries.

Blaylock, B., Gaertner, F.B. and Shevlin, T., 2017. Book-tax conformity and capital structure. Review of Accounting Studies, 22(2), pp.903-932.

Balakrishnan, K., Blouin, J. and Guay, W., 2018. Tax Aggressiveness and Corporate Transparency. The Accounting Review.

Saez, E., 2017. Taxing the rich more: Preliminary evidence from the 2013 Tax Increase. Tax Policy and the Economy, 31(1), pp.71-120.

Heathcote, J., Storesletten, K. and Violante, G.L., 2017. Optimal tax progressivity: An analytical framework. The Quarterly Journal of Economics, 132(4), pp.1693-1754.

Dyreng, S., Hanlon, M. and Maydew, E., 2017. When does tax avoidance result in tax uncertainty?.