BULAW5916 Taxation Law & Practice Assignment
Question 1_950
In order to advise Jo regarding tax implications, IRAC method would be the suitable one, for instance whether Jo should be carrying on a business:_300
Issue: In this case, Jo faces a significant loss of around $4300 in the field of photography, which was Jos passion since her childhood. Now, Jo is deciding to start painting based business by selling her photography equipment worth of $55000, thus, the issue here reflects that whether taking-up this business by Jo would run profitably, if so, tax implications wether restrict or foster Jos business.
Rule: Considering the indicators of Jos business activity would help to identify that whether Jo should be carrying the respective business. Hence, these indicators include businesss economic growth, wage growth, cash rate target, and average weekly earnings (1). For instance, current economic growth of Jos last business directs Jo not to go with the Painting business. However, under the Principles of Taxation law, the basic principles of efficiency, simplicity, neutrality, and equity are considered for providing basic and reliable signposts towards improving tax administration. Taxes across Australia are administered and further collected by the ATO (Australian Taxation Office) (2).
Application: Applying the principles of Australian business taxes, Jo can save money through paying the accurate amount on time and taking the advantage of any tax concessions, which Jo is entitled to. The major taxes influencing Jos painting business include income or company Tax, GST (Goods and Services Tax), and CGT (Capital Gains Tax). All of these taxes are set by the Australian government. However, Jo gets an option for making tax payments either on a month basis, quarter basis or year basis. For instance, Jos business is required for registering for GST with the ATO under GST. The amount of income tax, Jos business needs to pay depends on Jos taxable income. It is calculated from Jos assessable income less any deductions. Assessable income refers to income, a business earns including all gross income (before tax) from their everyday business activities such as sales, along with income, which is not the part of their everyday business activities (3). Tax concession can also be applicable to the Jos case, as painting business at the initial stage might seek for this businesss tax rate would be 30% or 27.5%.
Conclusion: After going through the above findings, it can be concluded that Jo should be carrying out a painting business, as it would not seek a high income tax return from Jos business. However, tax-paying amount by Jo would completely depend on the assessable income. Furthermore, since it is a small business with annual turnover of around 10million dollar, then Jo would be able to get a small business tax concession from the ATO.
In terms of advising Jo regarding whether the receipts would be assessable, IRAC needs to be performed:_250
Issue: Here, the issue is whether the small business of Jo involving receipts would undertake these receipts under Australian business tax law. Furthermore, whether those receipts would be assessable or non-assessable, this seeks Jos business classifying their revenues as assessable, apportionable, or non-assessable.
Rule: For the year ended on 30th June 2020, Jo had sold 12K dollar worth of professionally finished photographs, thus as per the rules of income, Jo is an Australian resident for the tax purposes, the first 18,200 dollar of Jos early income is not taxed. However, two requisites regarding income include there needs to be profit and the profit need not to be excluded by law from taxation. However, two characteristics include taxable income consist of both unearned and earned income and it is less than the adjusted gross income. Jo can easily claim the tax-free threshold for reducing the amount of tax, which is withheld from Jos pay during the year, 2020. Jo is advised to carry out a business regarding painting services, thus this seems to be a trade or commerce from a businesss perspective. Thus, Jos small business is subject to a reduced tax rate of 26% for the current income year 2020-21 as per the rule of income in business. Therefore, some services are expected to be sold to the non-members visiting this business, hence the receipts would be assessable. Business tax receipts also called gross receipts are the sales of a business, which form the basis for taxation in some states and particular local tax authorities. Many amounts that a business receives are assessable income, which includes receipts from trading with its non-members along with income from the sources being outside of the organization (4). Thus, in Jos case, assessable income would include receipts when Jo would sell Jos Paintings to the customers and generate income even from the sources that are out of Jos business.
Application: The tax-free threshold makes reductions in the amount of tax being withheld from a payer during a year (8). Receipts or proof of purchases refer to a document that a business provides to its customers as a record of their purchase (5). Thus, selling the paintings of Jos business seems to be a transaction between this business and its customers, thus a proof of purchase would be sought by the customers end. Furthermore, assessable points the profits, which are capable of being assessed for the taxation purpose, thus the receipt could indicate the profits, Jos business could gain. Taxable income is the amount that is received by deducting gross income from allowable deductions (6). Hence, it is the income, Jos business needs to pay tax on, which includes income from this business and wage and salary to be given to that hired employee.
Conclusion: Thus, all findings reflect that yes the receipts of Jos business would be assessable, which showcases the profits gained for being assessed to pay taxes.
When it comes to advise Jo related to whether the expenses would be deductible, IRAC needs to be performed in the following manner_250
Issue: Issue is whether the expenses, which Jos business would gain after trading or selling its services to its customers, are deductible. It means that whether Jos business would be able to gain some expense ever before paying the taxes.
Rule: Under the Section 8-1 of the Income Tax Assessment Act 1997, an individual can reduce their taxable income through claiming deductions that are generally provided under the act mentioned earlier (7). Jos advertised services in the local newspaper and hiring of an assistant is one the expenses, which could be deductible. The provision (Tax Assessment Act 1997) could allow Jo availing deductions for the expenses, which Jo incurs while gaining their personal non-business income, for instance, office rent, net capital gains or interest from investments, salary to a hired employee.
Application: Applying the Section 8-1 associated with the Income Tax Assessment Act 1997 reflects that work-related expenses from the Jos business end would be deductible, however if the expense is for both private and business purposes, then Jo can only claim a deduction for the portion related to work. Jo can easily able to claim a deduction for the expenses, which are directly related to Jos work as home office expenses. While completing Jos tax return, Jo is entitled to claim deductions for a few expenses; most of those are directed associated with the earning of Jos income.
Conclusion: After analysing the overall scenario, it can be concluded that the expenses of Jos business would be deductible, however only work-related expenses rather personal-related expenses.
Question 2
Advise XYZ Company as to whether the amount it has received as compensation constitutes assessable income
In order to assess the above case from the taxation law perspective, IRAC would be the suitable method done below:
Issue: The compensation sought by XYZ gets received by this company itself; however it is yet unclear that whether the compensated amount consists of any assessable income. Thus, this issue is to be assessed by reviewing the general rule of income with two prerequisites and two characteristics, along with the principle of compensation in specific.
Rule: The general Rule of Income reflects that an individual, who is found to be a resident of Australia, is assessable on worldwide income; however there is exception based on the extent, which it is exempt income. Thus, XYZ as an individual company of Australia is assessable on the income, which this company gains from the compensated amount. Income data seems to be much easier for gathering along with a policy analyst is interested in distributing both threshold expenditure and income (9). However, as per general rule, net payable income has been taxed at the graduated rates that range from 19% to 45%, however, various rates get applied to non-residents. However, two requisite of income reflect that it needs to be gain and that gain needs to be realized or received. Thus, as per these requisites, there has been seen some gain received by XYZ Company and this gain is not excluded by treaty of taxation. On the other side, two characteristics of income, income needs to be in the form of moneys worth and the source of income needs to be definite. In relation to the compensated amount of XYZ, it is identified that the income is in the form of money and the source of income is always definite that is ABC Company. The suitable case to this scenario is Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd. In order to come to the most appropriate judgement, the Supreme Court of NSW has been involved, where the major issues were based on intention of creating legal relations (10). As per the principles of compensation under the Australian Taxation law, there is one principle based on economic efficiency that reflects that the business tax system needs to raise revenues in a manner, which minimizes the effects of the tax-system on the decisions except, where there seems to be a need for correcting for a market failure (11). The Taxation Administration Act 1953 is the rule under which a ruling is applicable to that individual, who receives an amount as compensation (12). However, another suitable case to this scenario is Heavy Minerals Pty Ltd v FCT.
Application: Applying the above-case reveals that the amount or sums received by the XYZ Company in consideration of the cancellation of a contract by ABC for the supply of computer technology and software of their assessable income in the year in which they were received. There could be a scene that the XYZ Company might need to pay the costs of the Commissioner; there could be re-assessment of tax as per the decision. However, application of Taxation Administration Act 1953 to the XYZ Company as it receives compensation; hence it would consider the CGT consequences for XYZ, the recipient of the amount, along with whatever the amount needs to be included in their assessable income of XYZ Company under Part IIIA of the Act, known as Income Tax Assessment 1936. Furthermore, interest getting awarded as a part of the compensation amount seems to be assessable income of the recipient company under the provisions of general income. For instance, if XYZ Company receives undissected lump-sum amount of compensation and their interest could not separately be identified and even segregated out of the receipt, then no part of the same receipt could be said for representing interest. In addition, if the XYZ Company receives the amount upon the termination of its contract with ABC, seems to be a compensation for loss of their future earning, then it is assessable income. As per viewpoint of 12, Australian business has a progressive marginal tax rate, having the maximum rate for each individual at 47% for the taxable income over 180K Dollar for the income year 2016-17. The ruling under Income Tax Assessment reflects that the total amount received by XYZ Company as compensation for repudiating the agreement with ABC, and is paid for avoiding paying damages arise as an outcome of terminating the respective contract. It is identified that any amount that can be identified as interests or is in the interests nature, and whether being paid as part of a compensation or even separately, always constitutes of assessable income of a taxpayer under the provisions related to general income (13). Thus, in this case, that amount also seems to be in the nature of interests and paid as compensations part, thus the amount constitutes of assessable income.
Conclusion
After analysing the case and its different aspects, it can be stated now that the amount, the XYZ Company has received as compensation consists of assessable income. It is due to that that amount can easily be determined as interest as per the general income provisions. Under the Income Tax Assessment Act 1963, it is also sayable that the compensated amount constitutes of assessable income. Furthermore, there seems to be a loss of future earning reflecting that the same amount constitutes of only assessable income.
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