LAW3130 Revenue Law And Practice

Question:

Marzena is an estate developer. She operates her business solely.

Marzena owned seven blocks of land valued at $72,000 each, as of July 2016.

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These blocks were bought by Marzena on 1 July 2012 for $53,000 each.

Marzena bought 10 more blocks of Brisbane land during Marzena’s income year, which ended on 30 June 2017. She intended to prepare these blocks for sale at profit.

The 10 blocks cost $81,000 each.

Marzena also spent $3,700 on each new block to cover land clearing costs and preparation.

Marzena also sold 11 blocks for $100,000 each.

Marzena also sold one block of land to her brother, who bought it for $60,000.

This block was very similar to another that she sold during the year.

Marzena also signed a contract to purchase a separate piece of land, which was valued at $79,000, on the 1st September 2016.

This smaller block was originally bought in Springfield in March 2015 by Marzena for $81,000.

She intended to build an office block on the property in order to have a shop front for her business, where she could meet potential clients as well as conduct her daily activities.

Marzena submitted plans for approval to the council, at a cost cost of $1800. However, Marzena learned that underground parking was required because of restrictions on planning in the area.

Marzena made the decision to sell her land and find another block in a more desirable area.

Marzena was asked to advise her whether she would have an ‘assessable revenue’ for the financial year ending June 30, 2017.

Toowoomba Drilling Pty Ltd is a medium-sized business that specializes in large-scale surface and underground drilling.

Toowoomba Drilling Pty Ltd. is the company’s private subsidiary.

The company is worth approximately $1.5million and has around 12 tradespersons as well as 5 administrative staff.

The large machinery used for drilling has a value of around $20 million.

The company has contracts with private land owners, property developers, and the QLD State Government.

It is a specialist in large infrastructure projects, where pipework drilling is necessary.

QLD State Government granted large grants to local businesses as part of its major new rail infrastructure project. These grants could have been used to buy new machinery for the construction of the new railway.

Toowoomba Drilling Pty Ltd agreed to pay $550,000 for funding the purchase of new machinery.

Toowoomba Drilling received the full amount in a lump-sum payment in June 2017.

Toowoomba Drilling received a lump sum of the full amount in June 2017.

With reference to applicable legislation, caselaw and/or rulings let us briefly discuss the question of whether Toowoomba Drilling Pty Ltd should keep track of income on a cash- or accruals basis.

With reference to applicable legislation, case laws and/or rulings, discuss whether State Government funding would constitute statutory income or ordinary income. It could also be discussed whether it would be derived from the 2017 income tax year.

The topic below will be addressed by your written research assignment.

You will need to show high levels of critical thinking and analytical reasoning in relation to the application of Australian taxation laws and tax policy.

Academic research that demonstrates the following is required.

You will gain a deep understanding of the particular tax laws.

The policy context of law, and if applicable how other jurisdictions deal similar issues.

Critical reflection about whether the law meets its stated purpose, is consistent with good tax policy principles or could be changed/improved.

These critical reflections must be supported by the research you have conducted as well as your independent thinking.

Deductions: Discuss and critically assess the extent to that Australia’s deduction system meets the principles of a good tax program (specifically simplicity, fairness).

It may be interesting to compare this with New Zealand’s deductibility system.

CGT Small Business Concessions. Discuss and evaluate the Small Business CGT Concessions system in Australia.

Your evaluation of whether the current regime meets these objectives or not is a part of your overall policy discussion.

Division 7A (treatment for private company loans). – Discuss and critically evaluate Section 7A as an anti-avoidance provision.

Your discussion should include an overview of the overall policy objectives as well as your assessment of whether or not the Division currently meets those objectives.

Part IVA Amendments–The general anti-avoidance provision was recently modified. Discuss and critically analyze the policy motives for these amendments, and whether or not they will achieve these objectives.

Negative Gearing – Discuss and critically examine the tax-deductible impact that negative gearing has on investment and savings decisions.

Your paper should define what negative gearing is from a tax perspective. It should also explain how the Australian tax system treats negatively geared investment.

Your paper should also include a discussion on whether negative gearing should not be allowed from a tax perspective.

Other tax topic, either tax policy related or tax technical.

Approved by the course examiner

Answer:

Issue

Marzena, a property developer, purchased a piece of land to be developed into a building and sold it for profit.

Due to cost increases, Marzena had to cancel the project.

The land plot was later sold.

It is important to establish whether the company has received any assessable income.

This is in addition to determining if the income is an ordinary one.

Laws

These laws have been used to resolve the issues outlined above.

The section 4-1 in the Income Tax Assessment Act of 1997

The section 6-5, Income tax Assessment Act 1997

Section 6-10, Income Tax Assessment Act 197.

Section 100-20, Income Tax Assessment Act 1997

The Income tax Assessment Act 1997, section 100-25

Application

In section 4-1 of The Income Tax Assessment Act of 1977, it states that any individual, company or entity must pay tax on the taxable earnings.

The allowable deductions allowed under section 8-1 are subtracted from the assessable income according to section 4-15 of Income Tax Assessment Act. This calculates the taxable income.

The tax law stipulates that assessable Income can be either ordinary income or statutory income. (Vann 2016).

Income according to the ordinary concept means ordinary income, as per section 6-5 Income Tax Assessment Act 1977.

Income that is not ordinarily income is considered statutory income according to section 6-10.

Section 6-5 and section 6-10 both provide that all income received by a resident taxpayer is taxable.

It can therefore be stated that income derived from selling lands should also be included in assessment income according to the sections above (Smith et. al.

The income from the sale or transfer of capital asset is a statutory source of income.

To properly classify the income, it is necessary to determine the nature and type of the asset.

It is essential to determine whether the block that was sold of land is a capital asset.

If it is determined that the land block sold qualifies as a capital asset, then the income derived therefrom will be treated as statutory income in accordance with section 6-10 of Income Tax Assessment Act 1977 (King 2016).

Capital gain or loss can be attributed to a capital tax event, as per section 100-20 in the Income Tax Assessment Act 1997.

Capital gain tax events are caused by the disposal of capital gains tax assets.

Some capital gain tax assets can be described under section 100-25 (Income Tax Assessment Act 1997)

This is an example of capital gains tax assets. It includes shares, land, and buildings.

CGT events can include selling land if the land isn’t used for business purposes.

It is important to know the intent behind the purchase of land in order determine if the income from sale of that land is capital income or statutory.

In this instance, the land was acquired for the purpose of developing buildings and then selling it for profit.

In this case, the land was considered inventory. Therefore, income derived by the sale of land should not be treated as ordinary income. (Russell 2016).

Conclusion

Based on the discussion above, it is clear that the company engages in land development. The land owned by the company should be treated as an inventory and not a capital asset.

Income from the sale of land should not be taxed as it is income that can be assessed.

This is because land is not considered a capital asset. Therefore, income derived by the sale of land must be treated as ordinary income.

Issue

The company, which is involved in underground drilling, has signed a contract with Queensland.

This project involves the construction of major infrastructure that is related to Railways.

The government provided equipment financing for the construction project, but the contractor was required to work exclusively on the project for a period of 3 years.

If the contractor breaks the terms of the agreement, the government will require the contractor to repay the money.

There are two things that must be considered in such a case.

The first issue is to determine whether cash accounting or accrual account is right for the business.

The second is to decide whether the funding received by the government should include ordinary income or statutary income.

Law

These rules and regulations were applied to address the issues mentioned above.

The taxation ruling 98/1

The Taxation Ruling 2006/3

Application

The TaxationRuling 98/1 outlines the accounting style that an entity should use to tax.

Para 16 of Taxation Ruling 98/1 explains that there are primarily only two methods of accounting in order to comply with section 6-5(2), and (3) of 1997 Income Tax Assessment Act.

This ruling (Mahar, et al.) outlines the two types of accounting.

Para 18 of the taxation rule 98/1 says that cash or receipt method accounting is appropriate for income earned from employment, non business income, and personal skill and knowledge.

Para 20 of this taxation ruling provides that income earned from business should be recorded on an accrual basis in order to pay tax.

According to the taxation ruling, the business should choose between accrual and running accounting in order to pay tax. Amendment 2016.

The Taxation Ruling (2006)/3 contains all the regulations and rules governing the payment of the government to a business.

Para 10 of that ruling stipulates that any payments made by government to the business in order to continue the operation must be included in assessable income in each year of receipt. (Peiros and Smyth 2017).

In the event that the business has to sacrifice profit or part of sales in order to receive funds from the government, then the amount should be excluded from the assessable income.

This business received funding from the government, but it has not sold shares or lost profits.

This case should therefore include the funding received for equipment from the government as a statutory source of income.

Conclusion

According to the Taxation Ruling 98/1, the business must use either accrual or earning accounting.

However, the Taxation Ruling 2006/3 stipulates that the assessable income should include any funding received from the government.

Evaluation of the CGT Small Business Concession

This report examines the concessions that are available to small businesses for capital gains.

The report describes the types of capital gains that small businesses are permitted to make.

It also addresses the conditions that must be met.

The Australian economy has been impacted by small businesses, which have contributed significantly to employment and economic growth (Geljic and al.

The small business sector accounts for 49%.

It can be estimated that 97% of all private sector businesses are owned by small businesses.

Small business is an important component of Australia’s economy.

The report’s main purpose is to assess the impact of small business concessions.

Capital Gain Tax Introduction and Implementation

Australia is a significant member of the Organisation for Economic Development and Cooperation.

Australia was the first member to adopt the capital gains with the introduction Income Tax Assessment Act 1936 Part IIIA.

The capital gain tax was implemented on 20 September 1985. Section 160A to 160 ZZU were used.

Capital gains realized on the disposition or transfer of assets weren’t subject to capital gain tax before the introduction (Tucker 2016).

However, income from normal activity was subject to the normal tax.

To eliminate the disparity in taxation, the capital gain tax has been introduced.

Capital gain tax applies to assets that are being sold or disposed of that were acquired on or after September 20, 1985.

Assets purchased before September 1985 are exempt from tax. They are also known as pre capital gains tax assets (Holland, 2016).

Capital gain does not have a separate rate of tax.

According to section 6-5 of the 1997 Income tax Assessment, 6-10, an individual, trust, or other entity must pay tax on all ordinary and statutory income.

The marginal rate of tax is applied to income from capital gains and is considered to be the statutory source (Tran?Nam, et al.

Under section 100-20, the Income Tax assessment Act 1997, the disposal of shares or real estate is considered a capital gain event.

It can therefore be said that the capital gain tax is the tax rate that is applied to the profit from disposal of capital asset.

The law on capital gains tax in the Organization for Economic Cooperation is already being applied by all member countries.

The law can be compared to show that there are mainly two approaches for taxing capital gain. These are the ones that the OECD member countries follow.

The capital gain tax is treated as ordinary income.

For the purpose of calculating the tax payable, the capital gain is treated as ordinary income.

The capital gain does not count in ordinary income under the second method.

For the calculation of the tax payable, the capital gain is subject to a different rate of tax (Woellner, et al. 2016).

The tax rates for countries that are members of international organizations for economic cooperation and other developing countries can be compared to see that Australian has the highest.

This means that Australia has a higher capital gain tax rate than most other countries.

The Purpose of Capital Gain Tax Legislation

The 21 September 1999 announcement was made that the amended capital gain tax had been approved.

Here are the reasons that CGT legislation was approved:

There is a need to improve asset management in order to properly allocate natural resources.

It was observed that the existing capital gains tax structure had a negative impact on the economic efficiency and productivity of the resources.

It was necessary to modify the capital gains tax structure due to the reasons mentioned above.

The system of indexation was repealed and averaging was instituted in Australia to bring the capital gain structure in line.

This has resulted in a reduction of complexity and helped the taxpayer.

As can be seen, small businesses have a higher tax burden (Somers and Martins 2016,).

The small business has had to reduce their savings because of Australia’s high tax rate.

The small business has a lower investment capacity due to a reduction in its savings.

This has adversely affected Australia’s economy.

The law was amended to protect the small business interests.

The legislation expanded and rationalized the capital gains tax concession for small business.

The provisions were combined and compliance costs were reduced in the new legislation.

The treasury stated that the capital gain tax small-business concession was intended to allow small businesses to keep more money for investment (James, Maples 2016).

This will increase the Australian economy’s growth as more people will invest in small businesses.

This legislation encourages individuals to invest. It provides small business concessions for the owner when the business is sold or acquired, or terminated.

The capital gain tax concession will help promote a culture of savings and investment.

This legislation is intended to decrease the tax burden as it was discovered that individuals and small businesses bear the most of the tax burden (Russell, 2016).

Legislation on CGT Small Businesses Concession

Capital gain tax concessions are dealt with in section 152 of the Income Tax Assessment Act 1997.

The law stipulates that the capital gains tax can be reduced or eliminated if the small company meets the conditions.

The following are the capital gain tax concessions available to small businesses:

The rollover relief for capital gain tax

Retirement exempts you from paying capital gains tax

If the active acid test is satisfied, the capital gain tax can be reduced by fifty percent

If the business has been in existence for over 15 years, full capital gains tax exemption is possible.

For small business to qualify for concessional treatment on capital gains, they must meet the following conditions (Damaso 2016 and Martins 2016).

CGT Tax Rollover

A small business taxpayer can defer the payment of capital gain taxes arising from the sale or transfer of active assets.

This relief can only be granted if the asset is not replaced within a certain time.

The replacement of assets must be used for the same purpose. There is no obligation to do so.

Assets can be replaced for another purpose (Long, et al.

You can also use the assets that were replaced in another business.

If there is a sale of shares or transfer of interest in trusts, the small company should be the controlling entity of either the trust or the company just before the CGT event.

If the taxpayer selects to rollover concession, then the cost base of replace assets can be used. Capital gain rollover may also be available.

The rollover should not be considered if the capital gains exceed the cost base to replace the assets (Barross et al. 2016, 2016).

Exemptions for small businesses in retirement

The capital gain arising out of a small business can be ignored by the taxpayer if it is used for retirement.

A maximum of $500000 can be claimed as a retirement exemption during a taxpayer’s lifetime.

To the extent that exemption is available, capital gains from small businesses can be considered exempt.

The taxpayer must be at least 55 years of age to be eligible for this concession.

The amount from capital gains should not be used by a young taxpayer if they are under 55 years of age. Instead, it should be used to fund superannuation or retirement saving accounts.

The 50% deduction is available for small businesses. A taxpayer can also apply to receive additional retirement exemption (Bloch, Bhattacharya 2016,).

This means that taxpayers can apply the general 50% discount, and then the retirement exclusion to calculate the capital gains tax due.

Only 25% of capital gains are adjusted for the $500000 threshold.

This exemption is available to an individual who owns the business either as a sole proprietor, partner or partnership.

Trusts can have one or more controlling interests.

Crawford and Botchwey (2016) state that the exemption does not apply to trusts or companies without a controlling individual.

A person can make an eligible termination payment without having to be retired in order to benefit from the small-business construction.

Eligible termination payments are the amount that can be used to qualify for the retirement exemption. The amount is not considered as perquisites by Bird et al.

For a company to be eligible for a termination payment, the employee must receive termination from the office per ATO ID 02493

A Small Business Receives 50% Off

Small business entities that are unable to qualify under the 15 year exemption but have met the basic requirements can be eligible for 50% off the capital gain.

This concession is in conjunction with the general discount.

A small business can reduce total capital gains by 75%. Capital gain tax will be payable only on the 25% original capital gains (Robson & Laurin 2017).

In this instance, the taxpayer can first apply the 50% general discounts and then further reductions of 50% can be applied to the small business concession.

Additionally, the taxpayer can apply the current loss as well as the unapplied capital gains against the current-year capital gain.

You can further reduce your capital gain by applying the small-business rollover or retirement exemption.

The taxpayer can choose the method in which the exemption will apply.

Concession for small businesses 15 years

If an asset is being sold and has been held continuously for at least 15 years, the small business will not be required to pay capital loss tax.

The entity must be an individual to qualify for the concession.

This concession is only available to entities that are incapacitated, disabled, or retired.

If the entity is a trust or company, there should be a controlling individual during control or ownership (Abor 2017,).

The entity may apply for the capital gain tax concession if this condition is met.

For the purpose of this concession, the assets that are sold must be considered active.

Active assets are those that have been used at least for half of their ownership period.

This rule has been modified slightly to allow for a 15 year exemption.

Capital gain tax should not be activated more than 15 years prior the capital gain tax event.

For capital gain tax exemption, assets must be maintained continuously for 15 years prior the capital gain taxes event.

If all of the above requirements are met, the entity may apply for 15 year small business concession.

The rollover relief and subdivision 126A special treatment are available for assets acquired under subdivision124B in case of divorce. Yanotti (2016)

It is possible to continue the ownership period in the event of an involuntary sale of assets.

For the purposes of this exemption, assets that have been replaced will be considered as if they were purchased at the same time as their original assets.

The capital gain tax on small businesses that qualify for the 15-year exemption is exempted completely and should not be considered under section 102-5(1).

The capital gain tax is not payable if the trust or company passes the 15-year exam.

The trust or company must make sure that the concessions received from capital gains tax exemption are distributed among beneficiaries or shareholders within the 2 year period from the capital loss tax event (Chung 2016).

The Good Tax System and the Evaluation of the CGT Concession

The effective tax system is used to evaluate the capital gain tax concession for small businesses.

(Mahar, et al.) The evaluation is based on efficiency, equity and simplicity in the taxation system.

Equity

The concept of equity refers to justice, fairness, and fairness.

There are two types equity: horizontal equity and vertical.

The concept of horizontal equity requires equal treatment for everyone in the same economic environment.

This means that no matter what the organizational structure of a business is, all business should be treated equally by the legal system.

Vertical equity is a situation in which there must be some justice and fairness between two income groups. (Smulders, et al.

This means that those with higher income should pay more tax.

It can therefore be said that to make the system equitable, people from the same income level should pay the same tax rate and individuals with higher incomes should pay higher taxes.

This will ensure that both horizontal and vertical equity are maintained.

The capital gain tax was introduced in order to promote equity within the tax system.

The capital gain tax system’s primary goal is to strengthen the integrity and not raise revenue (Carpentier, Suret 2016).

The system’s efficiency means that it uses as little resources as possible to achieve maximum output.

While the inefficiency that comes with tax collection cannot completely be removed, it can be reduced.

A tax system that is efficient minimizes revenue collection distortions.

This allows for equitable tax burdens for all taxpayers.

Complex rules surrounding the capital gains tax small business concession increase compliance costs as efficiency is improved (Burchardt, et al.

If the rules and regulations of taxation are simple, it is easier for people to understand them.

Simpler rules and regulations reduce compliance costs as well as administrative burdens.

ATO did research to determine the compliance cost for capital gains tax (Davis, 2016).

According to the research, there are several factors that can increase compliance costs.

The complexity of rules for small businesses concessions and frequent changes are the major causes of increased compliance costs.

It was discovered that not enough steps were taken in order to simplify the taxation system.

Accordingly, compliance with the capital gains tax small business construction process is complex (Stewart und Thomas 2016).

Conclusion

This discussion shows that capital gain tax has greatly improved the simplicity, equity, and efficiency of Australia’s taxation system.

Capital gain tax small-business concession was created to increase equity in Australia’s taxation system.

There is still complexity in the tax system. It is imperative that proper steps are taken to reduce the complexity and simplify the taxation system.

All the data have indicated that capital gain tax concessions have greatly contributed to Australia’s economic growth by encouraging people to invest in small businesses.

Although the capital gain tax promoted equity within the system, further reform is needed.

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