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Taxation Law : Broad Based Consumption Tax

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Question:

Describe about the Taxation Law for Broad Based Consumption Tax .

 

Answer:

Introduction

The Government of Australia itself directly controls the taxation system in Australia. The provincial governments and local governmental bodies make chief contributions in implementing the legislations related to the taxation of Australia. Goods and service taxes are levied on the products and services, which are subject to taxation. Employees of the organizations are entitled to pay this tax to the Government of Australia. For illustrating this matter, two case studies have been provided here (Alley et al. 2014, p.52). The assignment aims to show the structure of the Australian taxation system with special reference to the case study pertaining to the capital gains tax and-and fringe benefits tax. In the attempt of achieving this aim, two case studies have been provided so that detailed analysis can be done on the basis of these two case studies and detailed picture of Australian taxation system and legislations related to taxation can be got.

Case Study 1

It is evident from this case study, that Fred being intended to sell his holiday home, signed a legal contract with the purchaser on the basis of which the sale of the asset was confirmed and he gained $800,000 after making the sale of his asset. Additionally, he had to pay fees for settling the legal matters and some of the amounts was also paid to the real estate agent, who made the contribution in facilitating the sales process of the tangible asset  for Fred (Apps and Rees. 2013, p.67). It was the same home, which was bought by Fred in the ‘80s at the cost of $100,000 including the cost of stamp duty and legal fees (Baral et al. 2013, p.33). Now the issue is to find out the net capital gain for the year in which he sold his assets on the basis of the comparison between the selling cost and purchasing cost of the tangible asset in the light of mathematical calculation and analysis. For making in-depth analysis of the whole scenario, the table mentioned below can be referred: (Refer to Excel sheet 1)

Amount Fred received

Amount

Received from purchaser

$800,000

Amount Fred incur when he sell

Amount

incurred for legal fees

$1,100

real estate agent' commission

$9,900

Amount Fred incur when he purchase

Amount

price of holiday home in actual

$100,000

stump duty when he purchased

$2,000

legal fees

$1,000

incurred to build a garage

$20,000

After incur legal fees and agent's commission the amount Fred have

$789,000

Total amount that Fred incur when he purchased the holiday home

$123,000

Total net capital gain of Fred in recent year

$666,000

Assuming Fred's net capital loss

$10,000

Total net capital gain

$656,000

Table 1: calculation for Net capital gain

(Source: self developed)

Analysis: In this analysis, it is obvious that Fred has earned $656,000 in the form of total net capital gain in the current year after the deduction of minimal in the form of the net capital loss from the total amount, which was $666,000 only (Besley and persson, 2014, p.99). It has been assumed that the amount of net capital loss was $10,000. From the above-mentioned table, it is evident that the current valuation of the asset is $789,000 excluding legal fees and real estate agent’s commission. On the other hand, the total value of the asset was $123,000 when Fred made the purchase for buying the holiday home. The previous value of the asset at the time of purchasing was deducted from the current value of the asset at the time of selling and the net capital gain of Fred was $656,000 excluding net capital loss (Braverman et al. 2015, p.52).

If the loss arises from the sale of an antique vase, then it will not be calculated as capital loss because it is not considered as capital for Fred. So the loss from the sale of antique vase may be considered as a mere loss for him (Brody et al. 2014, p.65)

Legal Framework related to Goods and Services Tax:

There are some legislations related to the Goods and Services Tax such as A New Tax System (Goods and Services Tax Act) which came into effect in the year 1999 (Cortis and Eastman. 2015, p.181). The act was divided into different parts. From this legislation, an overview of the Goods and Services Tax can be got and a relation between Goods and Services Tax and basic idea regarding central provisions related to Goods and Services Tax and input tax credits can be got (Eccleston, 2013, p.103). Moreover, Moreover, some of the special rules relating to Goods and Services Tax returns and Goods and Services Tax payments are also mentioned in this act. In addition to that, more information can be received regarding the Goods, Services Tax groups, and its membership requirements. Australian Taxation Office plays main role in handling matters related to Goods and Services Tax and in an effective implementation of A New Tax System (Goods and Services Tax Act) of 1999 (Faccio and Xu, 2015, p.277).

 

Case Study 2

In this case study, three scenarios are given on the basis of which issues related to three scenarios are to be found out (Krever and Mellor, 2014, p.37). It is evident from first scenario that  Emma being entitled to receive fringe benefits from her employer Periwinkle, has received a car which later on, was purchased by her at the cost of $33,000 including Goods and Services Tax. The employer itself also reimbursed the expenditure related to the car repair. Now the issue is to find out the extent of loss, which was incurred to due, the minor repairs of the car and from what aspect, it affects the financial performance of the Perrywinkle (Liu and Freudenberg, 2014, p.37).

In the second scenario, it can be seen that Emma spent 90% of the loan amount for purchasing holiday home and remaining 10% was spent on purchasing the share. Now the problem is to find out what are the issues the company had faced in providing the fringe benefits to its employee and what return the company can expect to get from her (Pearce and Pintu, 2015, p.46).

In the third scenario,it is evident that the manufacturing cost of a bathtub is $700 and selling cost of the same is $2,600. Hence, a company has gained $1,900. This bathtub was sold to her at the cost of $1,300. Hence, the amount of loss incurred was $600. The issue is to make a detection of how the employer can find out the way of recovering this and how this loss affects the financial performance of the company (Woellner et al. 2016, p. 34). The entire matter will be analysed in the light of mathematical calculation

Advice to Periwinkle regarding FBT consequences and calculation for FBT liability (Refer to Excel sheet 3)

Things that has to be consider

Amount

 

purchase of car by Periwinkle

$330,00

 

car expense by Emma for company

$550

 

Loan of Emma given by Periwinkle

$500,000

 

used loan by Emma

$450,000

 

purchased share by Emma

$50,000

 

purchase of bathtub by Emma

$1,300

 

cost of bathtub to periwinkle

$700

 

sale of bath tub by periwinkle

$2,600

 

Portion of loan given to husband

 

 

Amount

 

Car facilities given company

7877

 

Loan Facilities given to Emma

337500

 

bath tub

2600

 

Less of Price of bath tub

1300

1300

Total

346677

 

Fringe benefit tax liability

364595

 

If the Portion of loan not given to husband by Emma

 

 

Amount

 

Fringe benefit tax liability

347466

{346677+ 50000*(5.95-4.45)% } *2.1463 *49%

 

Statutory factor

26%

 

Number of days car was used

336

 

Total number of days

366

 

Fringe benefit value of car given to Emma

7877

 

Fringe benefit value of loan for real estate purchase by Emma

337500

 

Table 2: Calculation of FBT

(Source: Self developed)

Analysis:  Here in case of calculation of fringe benefit purchase of car by the company, car expenses by Emma, the loan amount paid to Emma, the loan amount used by Emma, share amount that purchased by Emma, purchased bathtub by emma, cost of bathtub and sale of bathtub will be add first and by giving  proper analytical thoughts, it will be evident that Emma has gained $3,46,677 in the form of fringe benefits which includes loan facilities given by the company,  purchase of bathtub, car facilities and purchase of share . Plus she has received $500,000 as a loan with 4.45% rate of interest. Had she or her husband invested all the amount on share market, the interest rates could have increased up to 5.95% as per the assumption (Burkhauser et al. 2015, p.181). In this case actually Emma gain from The company which help her to increase the income and it make her more interested in work. Fringe benefit are given by many of the company to the employee to make them productive.

Legal Framework: The most important legislation related to the Fringe Benefits Taxation is Fringe Benefits Tax Assessment Act, which came into effect in the year 1986. In this act, the detailed idea can be got regarding the rules and regulations related to the fringe benefits taxation (Williams and Martinez-Perez, 2014, p.802). These taxations are supposed to be collected from the employers. In addition to that, information can be received regarding the value of the car fringe benefits, debt waiver fringe benefits, loan fringe benefits, expense payment fringe benefits, housing fringe benefits, car parking fringe benefits, residual fringe benefits etc, Moreover, there are another fringe benefits and that is living-away-from-home-allowance fringe benefits. Recommendations and regulations have also been mentioned for keeping away from fringe benefits taxation. The property also comes in the ambit of the rules and regulations of Fringe Benefits Tax Assessment Act of 1986. The implementation of this act is taken care by Australian Taxation Office.

b) (Refer to Excel sheet 2)

 

Amount($)

Periwinkle provided loan to Emma at an interest rate 4.45%

500,000

Emma used the loan to purchase car

450000

The part of loan given to husband

50000

If Emma purchase a share with amount

50000

Here assuming the interest rate she can earn from share

5.95%

Then she can earn an amount from share for herself

5297500

Table 3: Calculation of earning from share

(Source: Self-developed)

Analysis: In this case, Emma can buy a share with the amount of $50000 instead of giving that amount to her husband as the loan without interest. If she buy share and the interest rate of share assumed 5.95% then she can earn the amount of $5297500.  This can be added to her income it also help to increase her income, in the contrary if she gives loan to her husband with interest rate then also she can earn from that particular part which, also help her to increase income (Burman, 2010, p.34). As Emma can buy share with the loan amount then she can earn more amount of money not only that she also earn interest from that and if the company gain from the business then also she will be able to earn more.

Conclusion

It has been evident that how capital gains tax is necessary to calculate the value of the tangible asset and how fringe benefits of a company affect the financial performance. The concluding part of this essay can be enriched with some of the valuable recommendations based on which some improvements can be made for making the tax structure of Australia efficient and productive. More taxes should be introduced for ensuring revenue generation. It will help in making Australia prosperous in terms of economic development. Some of the legal frameworks are also given for making the in-depth analysis of the subject content meaningful and contextual and name of the two legislations have been mentioned in this regards such as Fringe Benefits Tax Assessment Act of 1986 and A New Tax System (Goods and Services Tax Act) of 1999. From these two legislations, it has been cleared that the Government of Australia has tried their level best in ensuring revenue generation by imposing tax on almost everything. Consequently, the country has witnessed economic growth and development, which have been accelerated with efficient utilisation of Australian taxation system.

 

Reference List

Alley, C., Bentley, D. and James, S., (2014). Politics and tax reform: A comparative analysis of the implementation of a broad-based consumption tax in New Zealand, Australia and the United Kingdom. Revenue Law Journal, 24(1), p.52.

Apps, P. and Rees, R., (2013). Raise top tax rates, not the GST. Austl. Tax F., 28, p.679.

Baral, H., Keenan, R.J., Fox, J.C., Stork, N.E. and Kasel, S., (2013). Spatial assessment of ecosystem goods and services in complex production landscapes: a case study from south-eastern Australia. Ecological Complexity, 13, pp.35-45.

Besley, T. and Persson, T., (2014). Why do developing countries tax so little?. The Journal of Economic Perspectives, 28(4), pp.99-120.

Braverman, D., Marsden, S.J. and Sadiq, K., (2015). Assessing taxpayer response to legislative changes: A case study of ‘in-house’fringe benefits rules. Journal of Australian Taxation, 17(1), pp.1-52.

Brody, E., Breen, O.B., McGregor-Lowndes, M. and Turnour, M., (2014). 5 An Unrelated Income Tax for Australia?. Performance Management in Nonprofit Organizations: Global Perspectives, 17, p.87.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., (2015). Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Burman, L.E., (2010). The labyrinth of capital gains tax policy: A guide for the perplexed. Washington D.C.: Brookings Institution Press.

Cortis, N. and Eastman, C., (2015). Salary sacrificing in Australia: are patterns of uptake and benefit different in the not‐for‐profit sector?. Asia Pacific Journal of Human Resources, 53(3), pp.311-330.

Eccleston, R., (2013). The Tax Reform Agenda in Australia. Australian Journal of Public Administration, 72(2), pp.103-113.

Faccio, M. and Xu, J., (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.

Krever, R. and Mellor, P., (2014). Legal Interpretation of Tax Law: Australia.Legal Interpretation of Tax Law (Amsterdam: Kluwer, 2014), pp.15-45.

Liu, B., Huang, A. and Freudenberg, B., (2014). The impact of the GST on mortgage pricing of Australian credit unions: An empirical analysis.Accounting Research Journal, 27(1), pp.37-51.

Pearce, P. and Pinto, D., (2015). An evaluation of the case for a congestion tax in Australia. Tax Specialist, 18(4), p.146.

Williams, C.C. and Martinez-Perez, A., (2014). Why do consumers purchase goods and services in the informal economy?. Journal of Business Research, 67(5), pp.802-806.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D.,(2016).Australian Taxation Law 2016. Oxford: Oxford University Press.

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