Taxation Law Essay Example

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Taxation Law

Taxation Law

In Australia, income tax may result from income that employed individuals are paid, business activities as well as in capital gains. In the case of Allan and Betty, the three types of income tax are evident. First, Allen and Betty are employed, and their employers are expected to deduct tax income and then remit the amounts to the relevant authorities. The two are legally expected to check the tax that is charged on their income so that they can make complains if they believe that they are charged more than is required. They are also expected to ensure that they are not underpaying what is required from them by the authorities (Woellner, 2012).

The cakes and scones that Allen receives from the customers are also taxable. It is a form of payment for his services and should be treated as income hence taxed according to the Australian income tax. The market value of the items has to be estimated and then tax charged on the same.

Allan treated his wine maker’s dog and received some wine as compensation for the same. The treatment was a business activity that was paid for in kind, with an estimated value of $360. This means that the wine is part of his income that should be taxed.

Based on this analysis, the income of Allan and Betty should be added to the value of wine, as well as cakes and scones that Allan receives from the customers. This value should be the gross taxable income that is to be taxed. However, legal deductions should be subtracted before taxation.

In the case of sale of the house, it is expected that the two will pay income tax on the capital gains. If the house was sold at a price that is higher than the cost incurred in its purchase or construction, then the difference between the price and the cost should be taxed at the current rate and paid to the relevant authorities. On the other hand, it is possible that the house was sold at a loss. If this is the case, the tax on the difference between price and the cost of purchase should be carried forward such that in case of any future capital gains income tax, then the amount can be subtracted from the amount carried forward (Helminen, 2011).

b. Differentiating between a hobby and a business is very crucial because it influences the payment of taxes. An individual working from home and making income is not engaging in a hobby. On the other hand, a hobby involves part-time activity that is done after work or during spare time for leisure and happiness of an individual. It should be realized that it is possible that a hobby is converted to a business. All that one is expected to do is to identify early enough whether they are engaging in a hobby or a business or have converted their hobby to become a business. Failure to do this can have legal effects that are associated with taxation (Broe, 2008).

There are several questions that one has to answer to understand whether they are in business or not. If most of the answers to the following questions are yes, then the individual is engaging in a business activity and should seek guidance on how to pay tax;

Is the activity repeatedly done ?

Is the motive of the activity profit generation?

Is the activity done in an organized manner like business organizations do?

Is the activity motivated by any commercial purposes?

After realizing that one has turned a hobby into a business activity, individuals have to register the business and get a business license and Australian business number. From this point, the individuals can engage in the payment of taxes.

Paragraph 2 shows an evidence of a hobby that has been converted into a business venture. The reason is that the activity seems very organized and is now motivated by profits since Allan and Betty have gone to the extent of opening a store and then making arrangements to supply retailers with their farm outputs. The fact that the two sought education about the farming activities also shows that the two invested in their hobby so that they would generate some profits. It is hence evidence that they should pay income tax on the profits that are generated. The expenses should be subtracted from revenues, and other tax claims can be sought, but tax has to be paid to the Australian authorities (Yonah et al., 2011).

In paragraph 3, the issue of barter trade arise, where goods are exchanged for goods and records are kept of the same. This means that the individuals are in business and have to pay tax. Allan and Betty have to use the records that they keep to find out the amount of profits that they generate from the business. Any income from the business has to be taxed because it involves a business activity that generates income. The other traders that generate revenues from the barter trade are also expected to pay taxes since they would have sold their output in the market and would also generate income (Yonah et al., 2011).

Based on the Australian tax law, barter trade involves the exchange of goods for services and other goods. The law states that such trade is not different from trade that involves cash. This means that individuals have to pay income tax from the exchange by cash or by kind. When the tax is to be paid through cash, the items exchanged have to be valued in such a way that the items are valued based on the prevailing market price or the arms-length tax rates. Based on these provisions, Allan and Betty have tax obligations and have to make the necessary arrangements to value the items that they have bartered and ensure that tax is paid (Woellner, 2012).

$650000 is not ordinary income which is to be assessed for tax. This is the revenue that is received from the sale of property. This means that it does not fall under the three categories of income which are mainly salary from employment in form of wages and salaries, capital gains that result from the sale of property or income that is generated from business activities that individuals engage in (Hughes, 2015).

Since the value of sale is not an ordinary income, it is important to calculate the capital base for the purpose of capital gains income tax. The base of the property sold has to be calculated. The following is the calculation for the capital base for the land and building;


stamp duty

legal costs


).Livingston & Gamage, 2010The calculations show that the capital base for the land was $367200. The items included in this case are based on the provisions of the law. They include costs that are directly associated with the acquisition of the property. First, the cost of purchase is which $250,000 was and secured by loan is a major cost that is included in the capital base. Secondly, stamp duty costs are included in the value since it is a mandatory cost that is paid to facilitate transfer of property. The legal costs that were incurred in the process of purchasing the land is also a major cost that is directly associated with the land. Interest paid is related to the loan that was acquired by Alex to buy the land. This means that it is part of the cost incurred in the purchase of the land and has to be included in the capital base. The council rates are associated with the acquisition of the land and are also included. This means that they should be included in evaluating the capital base of the property. Water rates are also related to land use hence its value is also included in the value of the land (


establishment fee

development application fee

legal fees

Architectural fee

Building materials

contractors payments

Water rates

Council rates

It can be seen that the capital base for income tax for the building is $209480. The costs included in the calculation of the capital base include the direct costs associated with the building. A major component is the materials that were used in the construction activities. The materials had a total cost of $120000. The cost incurred in paying the contractors was $60000, which was also a direct cost associated with the building. The legal fees associated with the construction are also directly associated with the property. The legal fees amounted to $4200. Establishment fee was also necessary for the construction to take place, and this means that they are part of the capital base. Development application fees were also part of the costs included, amounting to $4200. Alex also provided labour for the construction process. However, this was not a cost that was paid for hence should not be included in the value of the building (Thompson, 2015).

Based on the calculations, the total capital base is the sum of $367200 and $209480, which is $576680. The costs that were incurred before the sale are also to be added to this value to get the capital base that is to be applied. The valuation costs were $4000. The final capital base value to be used is $580680. The value that is to be subjected to taxation according to the law is the difference between the valuation price which is the market price and the price at which the asset was sold. In this case, the value indicated by the expert is $700,000. This is the value that is to be used as the capital base value. The asset was sold at a cost of $650,000 to a cousin (McCaffery, 2012).

From the analysis, the price at which the asset was sold was below the market value, which was probably because of the fact that it was sold to a relative. However, Alex had incurred less than this cost to buy the land and construct the building. The value that is to be subjected to tax is 650,000-700000=-$50,000. Since the sale resulted to capital loss, the tax loss is to be recovered in the future capital gains tax that is to be paid (Thompson, 2015).

In case the cost base of the property is $600,000 and the property was sold at a price of $650,000, the value that is to be subjected to tax would be the difference in the two values which is $50,000.


The capital gains in this case is $50000


Broe, L. (2008). International tax planning and prevention of abuse : a study under domestic tax law, tax treaties, and EC law in relation to conduit and base companies. Amsterdam: IBFD.

Helminen, M. (2011). EU tax law : direct taxation. Amsterdam: IBFD.

Hughes, J. (2015). The theory, principles and management of taxation an introduction. London New York: Routledge, Taylor & Francis Group.

Livingston, M. & Gamage, D. (2010). Taxation : law, planning, and policy. New Providence, NJ: LexisNexis.

McCaffery, E. (2012). The Oxford introductions to U.S. law. exploring the capital-labor divide. Oxford New York: Oxford University Press.

Thompson, G. (2015). Economic calculation and policy formation. Abingdon, Oxon New York, NY: Routledge, Taylor & Francis Group.

Woellner, R. (2012). Australian taxation law 2012. North Ryde N.S.W: CCH Australia.

Yonah, R., Sartori, N. & Marian, O. (2011). Global perspectives on income taxation law. Oxford New York: Oxford University Press.