Taxing Personal Capital Gains In Australia: Evaluating Provisions Of Income Tax Assessment Act 1997

Discuss about the Taxing Personal Capital Gains in Australia.

Computation of Tax Liability

This part of study evaluates the provisions of the Income Tax Assessment Act, 1997. The assessable income and the tax liability are computed as per the rules described under the Act. In the given study Bruce Lee is the resident of the Australia. Bruce is the lawyer and his own legal practice in Australia. But apart from this Bruce is also the lecturer in the university, and receives the salary from that university. Moreover Bruce also has investment properties, through the income is generated. For computing the assessable income of the Bruce the following provisions of the income tax act will be apply, which are described as below-

1. There are various sources from which the income can be generated by the individual, which are classified under the business income, investment income, employment income and the other source income.
2. Assessable income includes the income derived from the ordinary activities of the business and the income which is specified under the Act. Normally the income derived from the business activity of the assessee is referred as a business income generated from the ordinary activities of the assets and will form part of the assessable income of the person. Further, some business expenses are essential for running the business. Therefore the expenses which have been incurred wholly and exclusively for the business purpose are allowable for the tax computation. The allowable expenses reduce the business income and lead to a reduction in a tax liability of the person.
3. As per the provisions of the act investment income is included in the assessable income of the assessee, generally rent received, bank interest, dividend makes part of the investment income. Further expenses incurred for earning the investment income is allowable expenses.  However, the expenditure which is in capital nature is not allowed for deduction from the income, this type of expenses added to the cost of the asset and changeable to the depreciation.
4. As per the provisions of the income tax assessment Act, ‘gross-up and credit’ mechanism is applicable to the franked dividend. A resident shareholder of the company when receiving the dividend from the resident Australian company, then individual gross up the amount of the dividend received from the company and then entitled to a tax offset equal to the gross-up amount at the time of calculation of the assessable income.
5. Exempt income is not subject to any tax. Moreover, this type of income is not included in the assessable income.
6. Employment income is the money earned by the working, whether it is part time or full time. This income must be included in the assessable income of the assessee.
7. Tax loss incurred when the total deduction claimed by assessee for an income year is more than the assessable income and the exempt income of the assessee. Income Tax Assessment Act, 1997 allowed for the carry forward of the tax loss subject to some conditions. An individual can carry forward tax loss in the next year and must set off first against the exempt income, and the remaining tax loss can be set off from the assessable income. Moreover set off of the carry forward tax loss in the sequence of the year in which the loss occurs.

Table 1 computation of the assessable income for the FY 2017-18

Further, in the question, it is given that carry forward tax loss of the past year for the Bruce of $ 12,000, the carry forward loss first set off against the military income that is $ 8000 and remaining carry forward tax loss $ 4000 will be set off from the assessable income that is $ 301110.

Thus, the net taxable income after setting off prior period tax loss is $ 297110

Tax liability for Bruce for the financial year 2017-2018

Table 2 computation of the tax liability for FY 2017-18

1. An individual can carry forward a tax loss liability indefinitely but must claim a loss in next year when the income arises. As per the provisions of the income tax assessment Act, carry forward tax loss must be first set off against the exempt income of the individual if any, and the remaining tax loss set off against the assessable income of the individual. In the present study, Bruce has carried forward tax loss of $ 12000,  and the exempt military income of $ 8000, Therefore by applying the provisions of the act tax loss set off against the exempt income and then against the assessable income of the individual.
2. In the given study, Bruce received $7000 from an Australian resident company fully franked, therefore at the time of calculation of the assessable income the dividend amount gross-up and the take the credit equal to the gross-up amount.
3. Cost of replacing the roof tiles on the investment property after the roof was damaged in a severe storm, is assumed as the capital expenditure by the company.  It is the cost which enhances the economic life of the investment property and assists in generating the future economic benefit. Along with this, it is money spends by the individual for maintaining the property. Thus all the conditions related to the capital expenditure get satisfied, and therefore it is a nondeductible expense.
4. The payment towards the rates on the family home $ 2200 and electricity for family home $ 900 are not related to the profession of the Bruce. These expenses are incurred for the house. Therefore they are not deductible from the business income of the Bruce.

The income tax Assessment Act 1997, prescribe the all the rules, regulations with respect to the taxation system of Australia. The present study is about the determination of the assessable income for the individual. In the given study, it is stated that the H Pty Ltd is engaged in the business of buying and selling the property. The company purchased the land with the intention to earn the profit by selling the property, but due to some reason the company did not sell the property and make the apartment on it, and then sold the apartment.

According to the section VI of the Income Tax Assessment Act 1997, assessable income refers to the income generated from the ordinary activities of the business and the income which is specifically defined as income under the income tax law. The ordinary activity of the business includes the income from rendering personal services, income earned by the trading activities and so on. Assessable income is impacted by the source of the income, resident status of the individual and manner of deriving the income; therefore it is necessary to determine the source of income so that assessable income can be computed accurately.

Notes

Income from the ordinary activities is generally regarded as the revenue receipt of the business. Moreover, if the person entered into a transaction with the intention to earn the profit, then also it is included in the assessable income of the individual, even though the transaction was not the ordinary activities of the business. Therefore the intention of the parties makes the great impact on the assessable income.

In the present study, the ordinary activity of the H Pty Ltd is to sell and purchase of the land, and the receipt of the sale of land is regarded as the revenue receipt and should be included in the assessable income. However, H Pty Ltd on the one land, instead of the sale of the land, constructed the apartment and then sold the apartment. Since H Pty Ltd, purchased that land with the intention to sell the land in the future and earn the profit. As  already described above that of the person entered into a transaction with the intention to earn the profit, then also it is included in the assessable income, even it does not constitute the ordinary activity of the. Therefore by considering the rules given in the Income Tax Assessment Act, 1997, it is the obligation of the H Pty Ltd to include the profit from the sale of the apartment in its assessable income for the current financial year.

By analyzing the above study it has been concluded that generally, the assessable income includes the consistent and the regular income of the person, but the intention of the parties for any transaction also make the great impact on the inclusion of the assessable income.

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