Essay: Accounting And Taxation - Conjoined Twins Or Separate Siblings?

Accounting And Taxation Conjoined Twins Or Separate Siblings?

Permanent Establishment in Australia

The taxation ruling of TR 2002/5 is associated with the permanent establishment. The definition of permanent establishment has been defined in the “subsection 6 (1) of the ITAA 1936” and also applicable for the taxation purpose of both the ITAA 1997 and “schedule 1 of the Tax Administration Act 1953” (Kiprotich 2016). The “subsection 6 (1) of the ITAA 1997” provides the definition of permanent establishment as the concept that is used in Australian tax treaties. As stated under “subsection 6 (1)” permanent establishment refers to the place through which an individual carry on any form of business’ constitutes a reference to the place that is used for performing the person business activities. The place should have the essentials of both the geographic and temporary nature.

A business that is incorporated in UK and doing business in Australia, the obligation to tax will be determined by the tax treaties among Australia and UK along with the scale and nature of the business (Jones and Rhoades-Catanach 2015). The profits of a business of a contracting state will be considered taxable only in that state except when the company carries on the business in the contracting state through the permanent establishment located in the other state. If an enterprise performs the business in that way, the profits of the company may be taxed in the other state but only to the amount that is attributable to the permanent establishment.    

Treaty that is formed between Australia and United Kingdom adheres with the concept stated under “subsection 6 (1) of the ITAA 1997” for the permanent establishment in respect of the OECD model of tax convention of income and capital (Miller and Oats 2016). The ITAA 1997 lay down the enforcement of law relating to double taxation agreement with the United Kingdom. The profits that a company incorporated in UK doing business in Australia will be considered for taxation at a company tax rate of 30% for the profits made by the firm in that branch.

According to article 5 (5) the independent agent has the habitually exercises that a contracting state of an authority to conclude the contracts in the enterprise name the company would be deemed to have the permanent establishment in that state (Fleurbaey and Maniquet 2017). A company of one contracting nations will not be considered to be having the permanent establishment in the other business nation. An organization might be carrying the business through the broker or with the help of agent of general commission or with any independent agent where an individual is carrying the functions of broker or agent. On finding that the activities of the broker and agent are such that they are largely performing the functions of business alone then the person would not be held as an independent agent.

Tax Treaties with the United Kingdom

According to the opinion defined under article 5 (6) of the OECD model, it acts as the exception to the object. The article excludes the theory of permanent establishment if the source is enclosed by the agreement which made them the agent and acting in the ordinary business course (Christie 2015). If the agent has settled down the agreement from the ordinary business course the agent is not considered as permanent establishment of the enterprise unless it is certain that the contracting person closes the contracts. On noting that the activities of agent comprise of the auxiliary character then it may not constitute an enterprise as the permanent establishment.

As defined under the “subsection 6-5 (1) of the ITAA 1997” any income generated from the personal exertion is considered as assessable in the ordinary concept. A large part of the income holding the element of private earnings will be considered as the ordinary income (Rees-Mogg 2017). The commissioner held its verdict in “Commissioner of Taxation v Scott (1935)” that there are noteworthy elements of payments derived by a person from the employment or business will be held liable for assessment. Section 6-5 of the ITAA 1936 defines that income from personal exertion includes wages, salaries, allowances or employment bonus or fees received for signing contract related to termination payments or business. These receipts would be held assessable under the ordinary concepts.

As understood from the scenario of Andrew McSwington he was considered as the prospect of MLB and engaged in an agreement for a payment of $45,000 to play for Adelaide Chomps. As per “section 6-5 of the ITAA 1997” an item having the nature of income is considered to be come home for the taxpayer (Sikka 2017).

The receipt of $45000 by McSwington is considered to be assessable income irrespective of the fact that the sum paid by the employer to the sportsmen for providing service of athlete in the capacity of employee. The commissioner in the event of “Commissioner of State Revenue v. Fitzroy Football Club Ltd (2016)” an individual engaged in sports can generated their earnings and non-cash benefits for their involvement in sports (Kabinga 2015). Activities leading to business income comprises of commercial use of skills used in sporting excellence as the armature prior to be a professional player.

The situation of Andrew McSwington states that he use of his skills for prospect of MLB is regarded as the public fame that is linked with the activities comprising of utilization of professional skills of an individual. According to the “subsection 84-5 (1) of the ITAA 1997” the derivation of earnings from the sporting results in income from personal exertion since the income is regarded as the reward for Andrew private skill (Woellner et al. 2014). The receipt of payment by Andrew from sporting activities forms the part of the assessable income and the same shall be held for assessment.

Income Taxation Laws

In the later instances evidences gained from the case study puts forward that Andrew purchase house so that he can use it as place for residence and renting the house in the later part of year when he is away from home. The judgement in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” rental income is regarded as the periodic receipts that is generated by the person when the person rents the property (Barkoczy 2016). As per the Australian taxation office a person that derives the rental income shall be considered liable for taxation and should declare in their tax return such rental receipts. Andrew intention of renting the property for the later part of the year to generated rental income constitutes periodic receipts. Therefore, Andrew will be held liable for taxation purpose for the rental income generated by renting out the property.

The definition of income that is obtained from the one-off point of sale has been defined in the event of “Myer v Federal Commissioner of Taxation”. The figure of $45.37 million was held by the commissioner as the income in respect of ordinary concept under “Section 25 (1) of the ITAA 1936”. Even though it is apparent that the figure was not obtained during the ordinary course of business but had the feature of profit making scheme (Tan, Braithwaite and Reinhart 2016). The motive of the taxpayer for entering into the transaction was regarded as the profit making intention. The commissioner of federal court stated its judgement by demonstrating that the figure obtained by the taxpayer was the ordinary income under the second limb of “paragraph 26 (a)” and under “section 25 (1)” for executing the business of profit making.

According to the commissioner argument the receipt derived by the taxpayer was gain originating from profit making transaction and the eventual intention was to make profit (Cao et al. 2015). The federal commissioner of taxation in Myer case provide an explanation regarding the profit or gains arising out of the ordinary business course is held as income. In an extended elaboration the business activities performed the taxpayer was in the direction of deriving profit and the gains was held in the nature of income.

Preceding from the above defined clarification there two forms of gains and profits that falls within the jurisdiction of “Section 25 (1) of the ITAA 1936”. As held by the commissioner in the “Commercial and General Acceptance Ltd v FCT (1997)” profits from the transaction forming the part of the ordinary business course is held assessable (Braithwaite 2017). The court further mentioned the case of “Chamber of Manufacturer Insurance Ltd v FCT (1984)” where the profit and gains derived from the ordinary business course despite the taxpayer did not entered into the ordinary business course will be held assessable as ordinary business income.

Tax Implications of Rental Income

According to the judgement in the case of “Federal Commissioner of Taxation v Whitfords Beach (1982)” profits and gains from business is held liable for assessment for income under ordinary concept (Davis et al. 2015). The definition of income has expanded to take account of the assured net profits derived from the business altogether with the flow of income. The commissioner in “Federal Commissioner of Taxation v Cooling (1990)” implemented the principles of Myer to determine the outcome of case (Saad 2014). The commissioner held that taxpayer entered into the business transaction. The transaction was regarded as the noteworthy part of business activities of an organization with no fitting usage of irrelevant intent of producing the business profits through imbursement of incentives.

Similarly in the case of “Rotherwood v Federal commissioner of taxation (1994)” the verdict of the commissioner included that the imbursement of incentive in cash to sign a long lease was regarded as ordinary income (Robin and Barkoczy 2014). Nevertheless the commissioner of taxation implemented the reference of Myer to demonstrate the single business transaction and cited the reference of “FCT v Cooling (1990)” to correctly adjudge that the receipts is viewed as ordinary income from the business activities of taxpayers.

As explained by the Australian Taxation Office expenditure that a business incurs during the pre-commencement stage is allowed for deductions. The commissioner of taxation in “Softwood Pulp and Paper Ltd (1976) v FCT (1976)” stated that expenses for interest payment by an establishing paper producing industry is not allowed for deduction (Robin 2017). The primary reason for not allowing the expenditure allowable for deduction is because the expenditure was occurred in preliminary business stage.

The commissioner further clarified in “FCT (1990) v Osborne (1990)” that expenditure occurred during the preliminary business stage is held capital expense (Blakelock and King 2017). The judgement of the commissioner clarified that the company commenced its business operations when it began fertilizing the land and cost was barred from being considered as allowable capital expenditure. A business progresses form the commencement stage where an active business operations are performed. Any form of loss or outgoings sustained during the generation of assessable income shall be considered as the allowable business expenditure.

As defined under the “section 8-1 of the ITAA 1997” expenditure incurred under the positive limbs will be considered as the allowable business expenditure (Kennedy et al. 2017). There must be nexus between the business expenses and taxable income. This section does not takes account of expenditure that are capital in nature. The federal commissioner in the case of “Federal Commissioner of Taxation v Ronpibon Tin NL (1949)” stated that there should be nexus between the expenditure and income to determine that the expenditure are incidental and relevant in generating taxable income (Ismer and Jescheck 2017). Therefore, the interest paid on loans is an expenditure that is occurred in deriving the taxable income and these expenditure are regarded as allowable expenditure for deductions.

Tax Implications of One-off Point of Sale Gains and Profits

Under positive limbs of “Section 8-1 of the ITAA 1997” a person is allowed to claim permissible deductions for expenditure incurred in generating taxable income (Blakelock and King 2017). As held in “Brown v FCT (1999)” interest is allowed for deductions if the income source is not any more existent and such expenditure is related in generating assessable income.

Preceding from the above stated explanation the expenditure or losses that are in business directions are allowed as deductions under “section 51 or section 8-1”. Interest is held deductible where an appropriate connection among the business activities (Robin and Barkoczy 2014). Therefore, interest on loan is held as the allowable deductions if the interest expenses is directly related to producing taxable income.

The discount rule of 50% on CGT is applicable for the capital gains that are made upon the disposal of the asset. The rules states that to gain a CGT discount it is necessary for an asset to be held for a minimum of 12 months prior to its disposal (Braithwaite 2017). The 50% CGT discount is regarded as the good system of taxation. This is because it enables the taxpayer to lower down their burden of tax. Under this rule an individual deriving the capital gain can apply the 50% CGT discount to reduce their burden of taxation and then include those amount into their taxable income.

An individual deriving CGT gains from the assets that are mutually owned should allocate those gains based on the ownership of shares. For instance, a partner of the partnership company derives gains from the disposal of assets that are held jointly and one half of the portion of gain is provided to the partner. A person shall only be held for taxation up to the extent of gains generated. This give rise to one-half of the amount of capital gains that is added into the pool of an individual’s income enabling that person to pay lower amount of taxation.

An extended support has been offered to the present role of capital gains tax discount since facilitates individual taxpayer with the help of escaping the instances of higher taxes on capital gains that originates from the rising prices opposite to the value of property. According to argument of Cao et al. (2015) 50% CGT discount is not regarded as the bad taxation rule however there are some of the discounts that it liberal and it is exposed to the hazards of misapplication.

Tax Implications of Business Transactions

According to the statement made by the Davis et al. (2015) it is understandable that changes in one form of tax might create an intrusion within the economy particularly if it is directed towards one form of assets. In an alternative argument put forward by Saad (2014) where suggestions have been made in the adoption of all inclusive tax since this would assist in removing the disorder with equivalent handling of taxation among all types of venture and investments.

The 50% rule of CGT discount is viewed as the good system of taxation since it sincerely provides assistance in lowering the burden of taxation on individual taxpayer relating to the capital gains made. Additionally, the system is helpful in escaping the burden unjust or higher taxation that is largely because of inflation (Braithwaite 2017). Conclusively, an assertion can be stated that the rule of 50% CGT discount is viewed as the good system of taxation. The reason for considering the policy is good because it offers taxpayers to lower their tax burden.

Reference List:

Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.

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

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Christie, M., 2015. Principles of Taxation Law 2015.

Davis, A.K., Guenther, D.A., Krull, L.K. and Williams, B.M., 2015. Do socially responsible firms pay more taxes?. The accounting review, 91(1), pp.47-68.

Fleurbaey, M. and Maniquet, F., 2017. Optimal income taxation theory and principles of fairness. Journal of Economic Literature.

Ismer, R. and Jescheck, C., 2017. The Substantive Scope of Tax Treaties in a Post-BEPS World: Article 2 OECD MC (Taxes Covered) and the Rise of New Taxes. Intertax, 45(5), pp.382-390.

Jones, S. and Rhoades-Catanach, S., 2015. Principles of Taxation for Business and Investment Planning. McGraw-Hill Higher Education.

Kabinga, M., 2015. Principles of Taxation. Jesuit Centre for Theological Reflection.

Kennedy, T., Smyth, R., Valadkhani, A. and Chen, G., 2017. Does income inequality hinder economic growth? New evidence using Australian taxation statistics. Economic Modelling, 65, pp.119-128.

Kiprotich, B.A., 2016. Principles of Taxation. governance.

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

Rees-Mogg, W., 2017. David Ricardo, from Principles of Political Economy and Taxation (1817): Extract from Principles of Political Economy and Taxation (1817). In The Case for Gold Vol 2 (pp. 93-94). Routledge.

Robin and Barkoczy woellner (stephen & murphy, shirley et al.), 2018. Australian taxation law 2018. OXFORD University Press.

Robin, h., 2017. Australian taxation law 2017. OXFORD University Press.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier.

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.