Taxation Law Assignment Help

Taxation Law Assignment Help

Taxation Law Assignment Help

Task 1- Capital gain

Introduction

According to Fiddes (2012), Income tax in Australia is determined by legislature income tax assessment act 1936. In this case, we will analyse tax implications of selling a farmland in Australia. In this report, we will also discuss the relevant case laws and legislatures related to the given case. There are two methods for calculating capital gain that is indexation method and discounted method for individual taxpayers. Capital gain for the given case is calculated by applying both methods to determine a best suitable method for the assessee.

Taxation Law Assignment Help

Methods for calculation of capital gain

On 20 September 1999, Australian government discontinued the indexation method of calculating capital gain. But still the assets acquired between 20 September 1985 to 20 September 1999, an individual can still use indexation method (Global Watch, 2013). As per income tax assessment act 1936, capital gain on assets can be calculated by an assessee with the help of following two methods-

Discounted method- This method was introduced by the Australian government to replace indexation method of calculating capital gain. In this method, if the asset is held by the assessee for more than a year then the capital gain of the individual will be reduced by 50%. This method of calculating capital gain is only available to an individual.     

Indexation method- This method is used when assets are acquired between 20 September 1985 to 20 September 1999and such assets has been held for more than 12 months. In the given case farm land has been purchased in 1990, hence indexation method will be available to the assessee.

It is at the option of the assessee to choose between two of the above methods if he qualifies the conditions of indexation method. Otherwise, the capital gain will be calculated as per Discount method.

Facts of the case

In the given case one of the clients Eric Macqueen has acquired an asset in 1900 for establishing the business of producing milk. After 26 years, Eric’s business went down due to introduction cheaper products by the competitor. He decided to sell the acquired land. Eric has two options to sell this land which is as follow-

Selling the land in one transaction- First option for Eric is to sell the land to a developer in one transaction which will realise $2500000 for him. There will be no extra cost on such transaction.

Selling the land after sub-division of land- Another option for Eric is to apply to the local authority for subdivision of land into 50 lots and then sell the land. Each of such will realise $60000 which will generate total sale value of $300000. This option will take an extra time of 9 months as compared to other option.

Comprehensive discussion

Name number- CDS10074  

Facts- in this case, assessee purchased a land for the primary purpose of residence but did not take into consideration the local authority. Due to this assessee sold the purchased house and did not pay capital gain on such profit earned by claiming that the land was purchased for investment purpose. The department of income tax said that such profit on the sale of the asset should be taxed.

Held- the court in the above-mentioned case held that the intention of perching the land for residence is not enough to tax such transaction. The assessee did not construct any residential building on such land. Therefore this transaction will be considered as a sale of an investment.      

Application of comprehensive discussion on given case

From the above discussion of the case laws, we can calculate capital gain to be included in the total income of the assessee. Calculation of capital gain under each of the method is as follow-

Sale in one transaction

Discounted Method

Sale value

   25,00,000.00

Cost of Land

     7,50,000.00

Capital Gain

   17,50,000.00

(-) 50% exemption

     8,75,000.00

Total Capital Gain

     8,75,000.00

Indexation method

In this method, the cost of the land will be adjusted according to indexation value to determine the indexed value of the asset. For the assets acquired before 21st September 1999 indexation factor for the quarter ending 30th September 1999 should be taken i.e. 68.7. Indexation factor for quarter ending 30th September 2016 is 109.4 (Australian Government, 2016). Relevant calculations are as follows-

Indexed cost of land= Cost of land* (CPI of Quarter ending 30th September 2016/ CPI of Quarter ending 30th September 1999)

                                  = 750000(109.4/68.7) = $1194323

Calculation of Capital gain

Sale value

2500000

Indexed cost

1194323

Capital gain

1305677

Sale of sub-divided land

Discounted method

In this case each of the subdivision of land, each lot of land will be considered as a separate section for the purpose of capital gain. The total cost of land will be allocated to each unit on a reasonable basis. Here it is assumed that the area of each of such section is equally divided into 50 units. Relevant calculation are shown as follows-

Sale value of all 50 units- $3000000

Sale value after charging commission on sale= (3000000-2.5%) = $ 2925000

Sale value of each unit= 2925000/50= $58500

Cost of total land = $750000

Cost of each unit= 750000/50= $ 15000

Calculation of capital gain-

Sale value

58500.00

Cost of Land

         15,000.00

Capital gain

         43,500.00

(-) 50% exemption

         21,750.00

Total Capital Gain

         21,750.00

Total capital gain = 21750*50= $1087500

Indexation method

In this case, the sale value and the indexed cost of the asset will be divided equally among all the subdivided sections of land-

Indexed cost of single section of land= 1194323/50= $23886

Sale value of a single section of land= $58500

Calculation of capital gain-

Sale value

58500

Indexed cost

23886

Capital gain

34614

Total capital gain = 34614*50= $1730700.

Answers

S.no.

Methods

Sale in sub-divided lots

Sale in one transaction

1.

Discounted method

1087500

875000

2.

Indexation method

1730700

1305677

Conclusion

From the above calculations of capital gains, it could be said that Eric should choose discounted method as compared to the indexation method. This is due to the fact that income under discounted method is lower than the income under indexation method. Therefore assessee has to pay a lower tax on such income. Eric should also consider selling the asset in one transaction because choosing another method can delay the process by more than 9 months.

Task 2- Residential status

Introduction

In this task, we will analyse the residential status of the Australian citizen and treatment of the income earned by him outside Australia. In this task we will analyse various laws regarding the residential status of the company like a place of permanent residence, 183 days rule, determination of the place of residence etc.

Facts of the case

In the given case study, George is an Australian resident with US citizenship living in Sydney with his wife and children. He also has a bank account at Bendigo bank, Coogee branch in which his monthly salary is credited. He has been asked by his employer to live overseas for a period of 3 years but he will be returning to Australia every four months for one month. In the year 2016 also he has on overseas consultation for 150 days. We have to determine his residential status for the year 2016 and during the time period in which he will be consulting overseas. Determination of the residential status will be based on two conditions-

1. If his wife and children reside in Australia in their house in Coogee, Sydney.
2. If he sold his house and the whole family moves overseas.

Comprehensive discussion

Name of case law- FCT v Applegate (1979)

Facts- In this case, a married solicitor was sent by his employer to New Hebrides for the purpose of opening a new branch. The commissioner claimed that he should be considered as a resident of Australia as he does not have a permanent place of residence in New Hebrides.

Held- The full federal court, in this case, held that he will be considered as a resident of Australia and all his income will be taxed as per Australian law. This decision was based on the fact that he had a permanent place of residence in Australia (Fickling, 2015).  

Name of case law- FCT v Jenkins (1982)

Facts- this case is very similar to as the above-mentioned case law. In this case, assessee was working in a bank in Australia. He was transferred to New Hebrides for an indefinite period of time as an accountant. A similar claim was made by the commissioner as assessee does not have a permanent place of a resident in New Hebrides. 

Held- In this case, it was held by the court that time period of residence of the assessee was not defined and hence it is very hard to establish a permanent place of residence for assessee in Australia (Shaw, 2012).                        

Application of comprehensive discussion on given case

Determination of residential status for the year of 2016

According to Australian Government (2016), for being a resident in taxed in Australia a person should fulfil all the following conditions-

1. His domicile should be in Australia unless the commissioner is satisfied that he has a permanent place of residence outside Australia.
2. He should reside in the country for more than 183 days during a particular financial year.
3. He should be

a. Is member of scheme established by superannuation act 1990: or
b. Is an employee under for the purpose of superannuation act 1990: or
c. His spouse or child under the age of 16 is covered under (a) or (b) above.

As per the above provision, we can say that he is a resident for the year 2016 as he has fulfilled all the above conditions. It is given in the case that he has been an Australian resident and also spent around 210 days in Australia in the current year.  It is assumed that he has fulfilled the third condition specified above as no information regarding it is given in the problem.

Residential status in coming three years

Residential status of George will be determined on the basis of two conditions given on the problem that is as follows-

1. If his wife and children reside in Australia in their house in Coogee, Sydney.
2. If he sold his house and the whole family moves overseas.

The main factor in determining whether person leaving Australia is resident or not, is based on permanent place of resident of such assessee. In an important case law of R v Hammond (1852), the court stated that ‘A man’s residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression’ (Australian Government, 2016). In a similar case FCT v Applegate (1979), “Abode is the place in which one lives, one’s home”. From the above two cases, we can say that permanent place of residence is a place where a person resides with his family.  

Condition1- If his wife and children reside in Australia in their house in Coogee, Sydney.

In this case, George will be considered as a resident as he has a permanent place of a resident in Australia. Another fact supporting this conclusion is that the intention of the assessee is not to permanently reside overseas. It is given in the problem that he will be residing overseas for a period of 3 years and he will be visiting Australia every four months for a period of one month. In this case, he will be required to pay tax on salary income and investment income as per the provisions of Income Tax assessment act 1936.       

Condition2- If he sold his house and the whole family moves overseas.

In this case, the assessee is selling off his home in Australia and moving overseas for the period of 3 years. Hence it could be said that after selling the house, assessee under consideration would not have any place of residence in Australia. In such a case he will be considered as non-resident and tax on salary income and investment income will be taxed in the country in which he will reside (O'Sullivan, 2013).                          

Conclusion

From the evaluation of the above-discussed points, we can conclude that George will not be a resident of Australia if he sells off his permanent home in Australia and moves overseas with his family. But he will be resident for the year ending 31st March 2016 in both the cases. George should decide whether to choose the first option or second on the basis of comparison between tax rates prevailing in both the countries. If tax rates in the overseas country are lower than he should go for the second option.  

References

Australian Government, 2016, “Consumer price index (CPI) rates”, Australian Taxation Office. 

Australian Government, 2016, “Work out your residency status for tax purposes”, Australian Taxation Office. 

Clark, J. 2014, “Capital gains tax: historical trends and forecasting frameworks”. Economic Round-up, (2), p.35.  

Fickling, J W., 2015, “Case Law Developments in Residency – Individuals”, Western Australian Bar, 2015.

Fiddes, R. 2012, “Introduction to Capital Gains Tax”, Whitelaw McDonald- solicitors and attorneys.

Global Watch, 2013, “Australia: Legislation to remove 50% capital gains tax discount for foreign and temporary residents is now law”, International Assignment Services.

O'Sullivan, B., 2013, “Taxation of non-resident estates”. Estate &?business succession planning: a practical and strategic guide for the trusted adviser, p.315.

Shaw, A., 2012. 'Tax files: Wherever I lay my hat': That's my place of domicile. Bulletin (Law Society of South Australia), 34(2), p.16