Australian Taxation Law Essay Example

Australian Taxation Law 7

Australian Taxation Law

4. From James’s acquisitions, the total GST he paid is given below,

Purchases

Biscuits

Notebook

Entry fee

Prescription

Bathroom

Therefore, total GST paid is $15.20

Income tax is a broad term referring to income as an ordinary concept, income from personal exertion, income from property and income from compensation payments. First, the “ordinary income” definition as recorded in section 6-5 is represented by various common law principles such as formally, s25(1) ITAA361. According to the Income Assessment Act 1936 – Section 25A, the income excludes profits from sale of property acquired after 20 September 1985, 1997-98 year of income, or undertaking prior to these periods. Assessable income will include profit arising from the sale of property that had been acquired for profit-making purposes, after 23 August 1983, including company shares, partnership and trust interest2.

$1,000,000 invested in Cayman Islands

Pertaining to the $1,000,000 Australian dollars invested in a Cayman Islands bank, the $130,000 interest earned in the 2010/2011 financial year will be exempt from tax assessment; though it would be considered taxable as a return on investment under the third definition of ordinary income; receipt from property. Fundamentally though, the interest being received as “flowing” from the invested amount is qualified as income from property, and thus assessable3.

The exemption is the case due to “transfer pricing” laws recently passed by developed countries, Australia included. According to the legislation, a number of the countries do not impose income tax or impose negligible income tax or exempt non-residents from income tax. Because Cayman Islands, among other countries are considered for this exemption, the host country ought to derive all the profits if an individual sets up a company in one of the countries. Furthermore, no tax payments would have to be paid on all other world-wide operations4.

$30,000 won from Poker tournaments

Concerning Nathan’s $30,000 won from his Poker tournaments at Crown Casino, poker players often fall in a gray area when it comes to taxes. Individuals do not have to pay taxes on their winnings on their online poker tournaments especially if they do not constitute the majority of their income. Primarily, the Australian government considers poker as a game of luck – gambling – and to tax winnings is likely to open up a can of worms that would cross over into other gambling winnings.

However, if the Australian Tax Office (ATO) can prove that the poker is played professionally, and not just as a hobby, the winnings will be taxable income. More often than not, the individual ought to be keeping detailed records of his wins and losses from the Poker playing. In a case involving Joe Hachen and his 2005 WSOP win, Hachem managed to convince the courts that his win was from a “hobby” and therefore should be exempt from taxation. Having been employed as a mortgage broker, Hachen did not have a “professional” attachment to his poker playing, despite having earned the title of a poker pro.

In 2009, Tony, Hachem’s brother had his house raided by tax authorities because of issues he had with the ATO. Poker players should therefore keep meticulous records of their winnings with the advice of an accountant, to avoid getting in trouble with the tax authorities. Considering Nathan’s case, his detailed records of his wins and losses would ease the tax authorities’ job of taxing his income (McKenzie & CCH editors, 2008)5.

Business receipts, opening and closing debtors

Nathan’s 2010/11 credit sales are given by:

Closing debtors + Cash – Opening debtors = Credit sales, translating to, (105,000 + 1,058,500) – 90,000 = $1,073,500. The resulting credit sales amount will be subject to income tax. In additional to other items in the Schedule C (that shows the income of the business for tax year and deductible), the credit sales figure will be considered in the computation of gross profit or loss, and thus taxable income for the business.

A $20,000 prize award to Procom to New York

According to section 15-2 ITAA97 certain incomes or gains from personal exertion are considered statutory income. However, s15-2(3)(d) prevents section 15-12 from applying in cases where the amount has already been considered as ordinary income. Thus because the $20,000 prize award to Procom was as a bonus, granted to the taxpayer, and was in respect of distribution services of IMB computers, it meets the conditions of being considered assessable income. Similarly, to be considered as ordinary income, the prize should be in cash or convertible to money6. In this case, the introduction of s21A into ITAA36 in 1988 allowed for the inclusion of a non-convertible business benefit as convertible to cash7.

Business benefits would normally be exempt from tax, especially by employers to employees, and are considered benefits in kind. Additionally, certain benefits that become taxable depend on the type of employee; with lower-paid employee exempt from tax and tax imposed on employees who are not lower-paid. Thus the paid holiday for Procom will be considered assessable income as it’s a performance-based benefit.

On the other hand, the ‘fringe benefits taxable amount’ is ‘in the ordinary case refers to the sum of all allocated by the Fringe Benefits Tax Assessment (FBTA) Act to the various “fringe benefits” provided by the employer in the current tax year8.

Sale of Procom business to Ashley

The sale of Procom business (though partly) is considered a capital receipt and is one of the most important omissions from an individual’s “ordinary income.” The profit made after the sale of the capital asset is termed as a “capital gain.” The proceeds of sale are either capital or income depending on what part the asset plays in the taxpayer’s activities. In Nathan’s case, the computer business was the major activity, although a larger portion of land and warehouse remained in his possession. Therefore, the $4 million is considered a capital receipt and will be exempt from taxation. According to the Income Tax Assessment Act 1997 subsection 116-20(1) deals with the general rules about capital proceeds. The act clearly states that the market value of the property other than shares received, or entitled to be received, is worked out as the time of the event. No further explanation is required as stipulated by the law9.

However, in the ordinary income idea, certain gaps exist, and necessitate the adoption of Tax Law (especially on the rules about assets depreciation and capital gains tax) which has rules that will at times add the items as statutory income.

The legislation as to what happens to a subdivided pre-CGT land after 19 September 1985, the land will maintain its pre-CGT acquisition date because no CGT event has happened; considering that the subdivision of the land is not a CGT event itself. Profits from the sub-division may be taxed as ordinary or statutory income under sections 6-5 or 6-10.

References

Hill, J. (1993). Tubemakers of Australia Ltd v. FC of T 93 ATC 4207 at 4210.

McKenzie, A. & CCH, editors. (2008). GST: A Practical Guide. CCH New Zealand Limited: Australia.

Sherman, D. M. (2009). Policy Forum: Tax-Included Pricing for HST—Are We There Yet? Canadian Tax Journal. 57 (4): 846–848.

1
FC of T v. Cooke and Sherden 80 ATC 4140; (1980) 10 ATR 696 was initially limited to business benefits, but has been amended to include non-cash benefits.

2 Spiro, P. S. (1993). Evidence of a postGST increase in the underground economy. Canadian Tax Journal. 41, 247-58.

3
Federal Wharf Co. Ltd v. DFCT (1930) 44 CLR 24 at 28 defines interest as flowing from principal sum, and is earned by the investor for being kept out of the use and enjoyment of that principal sum.

4 Sherman, D. M. (2009). Policy Forum: Tax-Included Pricing for HST—Are We There Yet? Canadian Tax Journal. 57 (4): 846–848.

5 McKenzie, A. & CCH, editors. (2008). GST: A Practical Guide. CCH New Zealand Limited: Australia.

6
FC of T v. Cooke and Sherden 80 ATC 4140; (1980) 10 ATR 696 having exposed gaps in the tax law coverage of business benefits, called for the introduction of s21A which allowed f or a non-cash business benefit inconvertible to cash to be treated as if it was convertible to cash

7
FCT v Whitaker (1996) 96 ATC 4823; (1998) 98 ATC 4285

8 Hill J in Tubemakers of Australia Ltd v. FC of T 93 ATC 4207 at 4210; (1993)

9 Spiro, P. S. (1993). Evidence of a postGST increase in the underground economy. Canadian Tax Journal. 41, 247-58.