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INTRODUCTION

Taxation theory is the set of rules, regulations and policies that are formulated by the government for companies, individuals, firms and others. It should be followed by the tax consultant while calculating tax liability and total tax payable by the company or individual. This is decided by the government or the legal authority of the country (Baldwin, Cave and Lodge, 2012). Australian government has also declared different taxations law that are implemented within the country. In this project report two different taxation systems are followed one is capital gain and another is fringe benefit. The main purpose of this project reports is to gather knowledge of Australian taxation law and its regulations.

This report is based on a calculation of tax which is done by a tax consultant in Mayfield, New South Wales Australia. In first case the client is an antique collector and investor, and sold different assets, and in second case advice is provided to the company, tax consultant is required to calculate tax liability for both the cases.

TASK 1

Australian taxation laws are applied in Mayfield, New South Wales which is an Australian Community. It is a liability of a tax consultant to calculate the taxable amount and payable taxes. In this case the clients is an antique collector and an investor too. In year 2017, many assets are bought and sold by the client and the tax consultant is hired to calculate the tax liability. For this purpose all the Australian taxation laws are followed, such as income tax and GST taxation (Boll, 2014). As the amount received or paid while selling or purchasing assets is considered as capital gain or loss. Hence, in this particular case the taxation will be calculated under capital gain head. The client is not running a business hence, the tax liability will be calculated on individual basis. In this particular case, capital gain and insurance claim tax will be followed.

a. Block of vacant land

In this case the client in a contract to sell a vacant land for $320000, which was purchased in January 2001 for $100000 and the additional expenses that are feature by the client are $20000 for water and sewerage. Selling of land is an investment activity which will be taxable under capital gain head.

Related regulations: In this case capital gain taxation laws are going to followed. According to Capital gain taxation law vacant land will be considered as a investment which a immovable asset which is considered as an investment after 20 September 1985 (Capital gain tax, 2018). According to the taxation authority of Australia a vacant land will be taxable under capital gain head, and the rules are same as for other assets. It will be calculated under sections 110-25 (2), 110-25 (4) and  115-25 (1) because the land was purchased after 20 August 1991. The calculation of total taxable amount is as follows:

Cost base Calculation on 3/06

Acquisition Cost of Vacant land

100000

Add Statutory Rates And taxes

20000

UN-indexed Cost Base

120000

Calculation of Sale Proceeds

Particulars

Amount

Sale income from land

320000

Less Index Cost of acquisition

120000

Gain for next year

200000

Interpretation: From the above tables it has been analysed that total taxable amount for year ending 30 June 2018 is $200000 which is calculated according to section 115-25 (1). Capital gain has occurred because the total capital gain was higher than the cost of the land.

b. Antique bed

In this scenarios the client is demanding for insurance claim on his antique bed which was stolen. It was purchased in 1986 for $5000 in this amount all the expenses are included that are spent by the client. It was stolen from the house of client, at that time the value of this bed was $25000. The client has claimed for insurance on 17 November 2017. But the insurance company has refused the request of insurance claim, as such type of assets are not mentioned in insurance claim law. The client has received $11000 by compromising with insurance company.

Related regulation: In this scenario two different laws are implemented by the tax consultant, first is capital gain under income tax act 1997 and another is insurance act 1984. It will be treated under section 104-20 (1), which is for stolen items. The antique items are recorded under section 108-10 (12) (Braithwaite, 2017). As the cost of asset is greater than $500 and used for personal use by the client than section 118-110 (1) is going to be applied here. Capital gain for the client is calculated as follows according to the section 115-25 (1):

Calculation of index cost of bed

Particulars

Amount

Indexation Factor

Net Amount

Cost of acquisition of Antique bed

3500

1.59

5565

Add Index cost of improvement Additions

1500

1.55

2319

Indexed Cost Base

5000

 

7884

Index factor for cost of acquisition and cost of improvement as per Index reference base – 2011–12

 

Index value

Year

Cost of bed

77.6

Quarter ending September  1986

Additional cost

79.8

Quarter ending December 1986

Index when bed was stolen

123.4

On September ending 1999

Computation of taxable insurance claim

Particulars

Amount ($)

Claim from Insurance Company

11000

Less: Indexed Cost bed

-7884

Net Capital Gain/loss

3116

Interpretation: From the above calculation it has been observed that total taxable amount for the client is $6000 ($11000-$5000) under section 115-25 (1) which is received from the insurance department in full settlement by compromising for the same as the asset was stolen from the house. Tax liability for client is $3116. $25000 which was the market value will not be considered as it is irrelevant under this case and the received amount from insurance company which was $11000 will be considered as the capital gain from the bed.

c. Painting

In this scenario the client has sold a painting for $125000 which was purchased on 2 May 1985 for $2000 from a very famous Australian artist (Dowling, 2014). This painting was sold by the client on 3 April 2018 in an auction. This will be taxable under capital gain taxation.

Related regulation: It will be considered as a capital gain under section 104-A as it is a CGT asset.  The painting was purchased before 20 September 1985 and it will be considered as Pre CGT asset, because the asset was purchased on 2 May 1985. The painting will not be considered as the collectable because it was purchased for investment purpose not for personal use. The calculation of tax and taxable amount is as follows:

Calculation of taxable capital gain or loss of painting

Particulars

Amount

Sale proceeds from painting

125000

Less: Cost base

-2000

Net capital gain/loss for next year

123000

Interpretation: Total capital gain for this scenario was $123000 which is calculated by subtracting the amount of purchase from the sales. ($125000 - $2000). The assets was purchased before 20 September 1985 hence it will be treated as Pre capital gain taxation under section 104-10 (5).

d. Shares

In this scenario the client has a portfolio of shares in which the clients owns different types of shares. The shares are sold and purchased by the client in specific time period. It has done to acquire a capital gain. It includes stamp duty and brokerage.

Related regulation: It will be treated under section 104-10 (1). It will be calculated according to the Australian capital gain taxation laws (Gracia and Oats, 2012). The indexation cost will not be applicable on this scenario as the shares are purchased after 21 September 1999. The calculation for taxation amount for shares is as follows:

(i)Trade of Common Bank Ltd Shares

Purchase Cost of shares

Particulars

Amount

Cost of Purchase per shares(a)

15

No. of shares purchased(b)

1000

Add Stamp cost on purchases(c)

750

Net purchase cost d=(a*b)+c

15750

Proceeds from sale of Shares

Particulars

Amount

Sale Price per share (a)

47

No. of shares sold(b)

1000

Less Brokerage Paid(c)

550

Net sales value e=(a*b)-c

46450

Net Capital gain/Loss

Particulars

Amount

Gain/Loss (e-d)

30700

(ii)Trade of PHB Iron Ore Ltd

Purchase Cost of Shares

Particulars

Amount

Cost of Purchase per shares(a)

12

No. of shares purchased(b)

2500

Add Stamp cost on purchases(c)

1500

Net purchase cost d=(a*b)+c

31500

Proceeds from Sale of Shares

Particulars

Amount

Sale Price per share (a)

25

No. of shares sold(b)

2500

Less Brokerage Paid(c)

1000

Net sales value e=(a*b)-c

61500

Net Capital Gain/Loss

Particulars

Amount

Gain/Loss (e-d)

30000

(iii)Trading of Young Kids Learning Ltd

Calculation for net capital gain/loss

Particulars

 

Amount ($)

Sale proceeds as per current tax year

0.5*1200

600

Less: Cost of base

($5*1200)

-6000

Less: Brokerage cost

 

-100

Less: Stamp Duty

 

-500

Net Capital Gain/loss

 

-6000

There is a capital loss occurred of $6000 for the client.

(iv)Trading of Build Ltd.

Calculation for net capital gain/loss

Particulars

 

Amount ($)

Sale proceeds as per current tax year

2.5*10000

25000

Less: Cost of base

($1*10000)

-10000

Less: Brokerage cost

 

-900

Less: Stamp Duty

 

-1100

Net Capital Gain/loss

 

13000

Interpretation: From the above tables the calculation of taxable amount for the clients for shares are calculated. The client has received capital gain of $30700, $30000, -$6000 and $13000. Indexed costs are not considered because the shares are purchased after 21 September 1999.

e. Violin

In this scenario, the client owns a violin, and the has been sold on 1 May 2018 by the client to the neighbour (Maddison and Denniss, 2013). It was sold for $12000 and it was acquired by the client on 1 June 1999 for $5500.

Related regulation: It will be treated as capital gain tax because the violin was purchased for personal use by the client. The client used the violin a lot and than sold it to the neighbour. It will be treated under section 108-20 (2).

Calculation for net capital gain/loss

Particulars

Amount ($)

Sale proceeds form sale of Violin

12000

Less: Cost of base

-5500

Net capital gain/loss

6500

Interpretation: Net capital gain under this scenario is $6500 which is identified from above table. It calculated under two sections one is 108-20 (2) and another is 104-10 (1) as the ownership was transferred by the owner to the neighbour.

Adjustment of capital loss

Section 995-1 will be considered while calculating total taxable income from client. Current year loss which is not eligible for 50% discount under section 115-25 (1). Therefore the capital loss of $6000 will be adjusted with the capital gain earned from share build shares of $13000 used to set off. Net capital gain will be $7000 (McGee, 2014).

Particulars

Amount ($)

Capital gain form shares

13000

Less: Capital loss

-6000

Capital gain for tax

7000

Total taxable liability

Particulars

 

Amount ($)

Capital gain form sale of land

(200000*50%)

100000

Antique bed

(4500*50%)

2250

Capital gain from sale of common bank shares

(30700*50%)

15350

PHB iron shares

(30000*50%)

15000

Net capital gain tax

 

132600

TASK 2

Advise on FBT consequences and calculation of FBT liability on Rapid Heat

Case scenario:

According to the provided case scenario, Rapid Heat Limited is a manufacturing company which operates in electric heaters. Jasmine, an employee of this company has received a car from the company which is used for work and other purposes. Along with car, Jasmine has also received a loan of 500000 at an interest rate of 4.25% which is used for purchase of holiday home and some of that amount is lend to her husband (Mumford, 2017).

Related regulations:

In order to ascertain the tax liability on Rapid Heat Limited, tax which is applied on this company is Fringe benefit tax. This tax regulation is concerned with the benefits which are provided to the employees by their company against which company has to pay some value as tax. FBT is a tax applied within the Australian tax system but the Australian taxation office. This tax is applicable on most non cash benefits which are provided to employees against their contribution fro the company. This tax implies the liability on the employer and not on the employee.

Calculation of taxable amount:

According to fringe benefit tax, motor vehicle that is car in this case has to fulfils various conductions such as car must be any sedan or station wagon. Vehicle must be a four wheel drive vehicle. From the information which is provided in the case scenario, it has been observed that car is received by Jasmine on 1 May 2017 and tax is needed to be calculated for the year of 335 days that is from 1 May 2017 to 31 March 2018. In this period it is analysed that employee has travelled for 10000 km from car and has also incurred few expenses on her own end amounting to 550  dollars for which employee has received reimbursements (Pickhardt and Prinz,  2014).

As an additional information, it has been informed that car was parked at the airport for 10 days which is not counted as days of employee's personal use.

Number of days for which tax liability is ascertained are 335 but 5 days of repairs are deducted which gives 330 days of tax liability to the company. Formula for calculating this tax liability is (0.2 * base value of car * number of days during that year of tax on which the car fringe benefits were provided by the provider / number of days in that year of tax) – Amount if any paid by recipient.

= [(0.2 * 33000 * (330/365)]

Particulars

Amount

Base value

$33,000

Number of days for FBT

330

Number of days in that year

365

FBT liability for the taxable year

6057.53

Along with car, loan was also provided to the same employee named as Jasmine. Loan was valued at 500000 dollars at the rate of 4.5%. The amount of loan was utilised as, 450000 dollars was used to purchase holiday home and 50000 was lend to Jasmine's husband for purchase of shares in Telstra. According to the rule of fringe benefit tax, if the amount of loan is used for purchase of securities than the taxable amount would be nil.

Along with loan, an electric heater of 1300 dollars is purchased of which manufacturing cost was 700 dollars and its selling price in market was 2600 dollars. Calculation of fringe benefit tax along with consideration of car, loan amount and electric heater is as follows:

Particulars

Amount

Purchase price of electric heater for Jasmine

$1300

Manufacturing cost for Rapid-Heat

$700

Actual selling price of electric heater

$2600

Fringe benefit tax rate

47.00%

Amount on which Fringe benefit tax will be levied (2600-1300-700)

$600

Fringe benefit tax liability ($600*47%)

$282

From the above calculation., it can be said that Rapid Heat is liable to pay input tax credit in relation to GST inclusive acquisitions (Rose and Karran, 2018). GST credit is also claimed on the credit on the price of electric heater. Total of 282 dollars is liable to company to pay.

Variation in FBT liability

According to the case, tax liability is ascertained below if amount which is received as loan is 50000 dollars is utilised as investment in shares instead of lend money to her husband. FBT liability to company is ascertained below:

Particulars

Amount

Actual interest rate levied by employer

4.25%

Statutory interest rate as prescribed by Reserve Bank of Australia

5.50%

Amount of which shares are purchased

$50000

Time duration of loan for which interest need to be charged ( 1 September 2017 to 31 March 2018)

212 days

Total FBT liability for loan ($50000 * 5.50%) - ($50000 * 4.25%) * 212/365

$363

CONCLUSIONS

From the above project report it has been analysed that two types of taxation laws are followed by a tax consultant that are capital gain tax and fringe benefit taxes. Capital gain taxes are for the investments and other capital nature assets. Fringe benefit taxes are those taxes that are implemented on the benefits that are provided by the employer to it employees.

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REFERENCES

  • Baldwin, R., Cave, M. and Lodge, M., 2012. Understanding regulation: theory, strategy, and practice. Oxford University Press on Demand.
  • Boll, K., 2014. Mapping tax compliance: Assemblages, distributed action and practices: A new way of doing tax research. Critical Perspectives on Accounting. 25(4-5). pp.293-303.
  • Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
  • Dowling, G. R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics. 124(1). pp.173-184.
  • Gracia, L. and Oats, L., 2012. Boundary work and tax regulation: A Bourdieusian view. Accounting, Organizations and Society. 37(5). pp.304-321.
  • Maddison, S. and Denniss, R., 2013. An introduction to Australian public policy: theory and practice. Cambridge University Press.
  • McGee, R. W., 2014. The Ethics of Tax Evasion: A Case Study of Brazil. In Handbook of Research on Economic Growth and Technological Change in Latin America (pp. 374-393). IGI Global.
  • Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge.
  • Pickhardt, M. and Prinz, A., 2014. Behavioral dynamics of tax evasion–A survey. Journal of Economic Psychology. 40. pp.1-19.
  • Rose, R. and Karran, T., 2018. Taxation by political inertia: Financing the growth of government in Britain. Routledge.
  • Online:
  • Capital gain tax. 2018. [Online]. Available through:
     <https://www.ato.gov.au/General/Capital-gains-tax/>

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