BULAW5916 Taxation Law and Practice Assignment Sample
Assignment Details
The purpose of the assignment is to enable you to explore and communicate your understanding of relevant aspects of taxation law.
There are two questions: Question 1 (worth 20 marks) and Question 2 (worth 10 marks). You must answer both questions in a single word document. Note that Question 1 has two parts and that you should answer both parts.
The assignment requires you to do independent research. In this regard, you may find the library’s databases useful. You should appropriately reference your assignment and provide a reference list at the end of your assignment. This is not a group assessment task. Your assignment must be your own work.
Word Limit
The length of the assignment is to be approximately 1,600 words. Given the differing weighting of marks between questions, you should use your discretion in allocating the number of words when answering each question.
Referencing
The referencing method used in your assignment must be in accordance with the APA referencing system. Details for this style can be found via the Federation University Library weblink: https://federation.edu.au/library/study/fedcite
Presentation
All written answers should be presented as complete sentences as opposed to bullet point answers. Where relevant, support your answers with reference to appropriate case law and the Income Tax Assessment Act 1997. Please do not refer to legislation other than the Income Tax Assessment Act 1997. Also, please do not consider residency and source issues. State any assumptions you make, and if your answer requires further information from the hypothetical clients, please state precisely what information this is and why it is required. Providing irrelevant detail and lengthy references to facts without attempting to analyse the scenario from a tax law perspective will not be looked at favourably.
The Scenario
In 2020 Creamy Acres Pty. Ltd. (“Creamy Acres”) purchased 100 acres of land. Creamy Acres was formed to purchase the land and use it as a dairy farm. However, since the land was purchased, it has not been used as a dairy farm or for any other purpose. Ava and Adam own 50% each of the shares in Creamy Acres and they are its sole directors. They have no experience in primary production activities such as dairy farming, but they have previously bought and sold properties.
Required:
1. Imagine you are a registered tax agent and that Ava and Adam come to you for advice:
(a) First, advise Ava and Adam as to the Australian income tax consequences of Creamy Acres selling the land; and
(b) Second, advise Ava and Adam as to the Australian income tax consequences if they were to sell their shares in Creamy Acres. 6 marks
Your answers to (a) and (b) should focus on whether these possible transactions would be likely to lead to “assessable income” and whether there would be capital gains tax consequences.
2. If instead of selling the land, Creamy Acres develops it and builds residential properties on it, and then rents the residential properties out, what would be the income tax and accounting consequences? Please consider whether this situation would give rise to assessable receipts and deductible expenses, and the relevance of any applicable Australian accounting standards. You should mention any relevant Australian accounting standards to support your answer. You may find this website helpful to refer to: https://aasb.gov.au/pronouncements/accounting-standards/
Solution
Question 1
Part A
Income tax consequences of Creamy Acres selling the land
Issue
The issue to be assessed is to evaluate Income tax consequence on sale of land by Creamy Acres Pty. Ltd.
Regulations
Income tax provision relating to ordinary income (Sec 6.5 of ITAA 1997)
The above specified section asserts that assessable income includes income as per ordinary concepts i.e. commonly referred as ordinary income. In case of Australian resident assessable income includes ordinary income from all sources worldwide. In other words, income derived directly or indirectly from all the sources whether in or outside Australia during the income year is considered ordinary income and is part of assessable income (Sadiq et al, 2023).
Case study Westfield Ltd. v FCT (1991)
The issue discussed in the case study is Westfield Ltd. v FCT (1991) is relating to whether the sale of land, originally purchased with intention of development should be considered as ordinary income or capital gain. The specified company was involved in business of designing, construction and operating shopping centres. It was concluded that transaction which are not within normal course of business are considered as ‘extraordinary transactions’ (Westfield Ltd. v FCT (1991). The distinction between ordinary income and capital gain is done on the basis of nature of transaction. Even some transactions are recognized as isolated transaction in case transactions are one-off in nature and not undertaken by business operations. It was assessed in case of FCT v Whitfords Beach Pty Ltd (1982) that profits relating to extensive land development project managed by company which had no other business activities were considered as ordinary income. The judgement provided by court for FCT v Whitfords Beach Pty Ltd (1982) asserts that main focus would be made on intentions ; thus as intentions aligns with profit making it would be considered as ordinary income.
Analysis
The decision provide in Westfield case highlights that transactions which could not be in ordinary course of business would be considered as capital asset transaction and taxed as per provisions of capital gain. Further, Whitfords Beach Pty Ltd (1982) emphasis on the intention of assesse involved in the transaction for ascertaining whether it is part of ordinary income or an isolated transaction. In present case of Ava and Adam as even though the land was purchased to be used as dairy farm but not such operations have been conducted. Further, they are not having any experience in primary production activities but were involved in business of buying and selling properties (FCT v Whitfords Beach Pty Ltd (1982). The facts of the present study specify that the company had intention to land development rather than continuing business of dairy farm. Thus, considering the facts of present case it can be said that it is land development as assessed in case of Whitfords Beach Pty Ltd (1982).
Conclusion
It can be concluded that selling of land by Creamy Acres would considered as ordinary income and taxed under assessable income of Creamy Acres Pty. Ltd. It would be appropriate to state that the differentiation between capital receipt and ordinary business income is done on the basis of intention and action made in specific scenario. The decision has been provided considering the judgement provided in above discussed case laws and facts provided in present study. The profit attained from selling land would be taxed as ordinary income under section 6.5 of ITAA 1997. Thus, no capital gain taxation consequences would occur for university assignment help.
Part B
Tax consequences in case of sale of shares of Creamy Acres
Issue
The issue to be assessed is to evaluate tax consequences of sell of shares by Ava and Adam
Regulation
Income tax provision relating to capital gain (Section 102-20 of ITAA 1997)
The provisions provided in section 102-20 of ITAA 1997 specify that capital gain or capital loss is made in case capital gain taxation occurs to a CGT (capital gain tax) asset. CGT refers to tax paid on profits relating to sale of asset. It includes property, land, crypto assets etc. (Capital Gain and Losses: ITAA 1997, 2024)
Calculation of capital gain (Section 102.5 of ITAA 1997).
A capital gain occurs when ‘cost base’ of capital asset is less than ‘capital proceeds.’ Initially capital proceeds relating to CGT event are calculated and cost base of asset is reduced from same. In case proceed exceeds the cost base; the difference is considered as capital gain. Net capital gain is ascertained by reducing capital gains made during year by capital losses made during income year (Todtenhaupt et al, 2020). Further, unapplied net capital losses from previous year would be reduced after deducting capital loss of current year. The asset which has been entitled for more than 12 months is entitled to 50% discount on their capital gain.
Analysis
Capital gain tax is levied on profit acquired by disposing of asset such as shares. The capital gain would be calculated on the cost base, which will be the initial price of share; however cost relating to purchase of asset i.e. brokerage, legal fees would also be considered while calculating total cost of asset. Ava and Adam would be subject to capital gain if the shares are sold for higher value in comparison to cost base. In case the shares have been owned for more than 12 months then they would be entitled for 50% on capital gains.
Conclusion
It can be concluded that capital gain tax provisions specified in section 102-20 of ITAA 1997 would be applied in present case. Further, Ava and Adam would be responsible for capital gain in case receipts received on sale of shares are higher in comparison to its cost. Further, advantage of 50% discount on capital gain would be available in case shares were held for more than twelve months.
Question 2
When Creamy Acres rent out residential property after developing land it would be taxed under assessable income for taxation purpose. The company is required to consider GST provisions relating to rental income. It would be required to pay 18% tax on rent to government for renting residential properties. The income would be recognized on the basis of AASB 15 Revenue from contract with customers which specifies principles to be complied by entity about the nature, amount, timing and uncertainty of revenue from the contract. The contract made between the parties would specify the performance obligations as well as services to be provided to another party (AASB 15: Revenue from contracts with customer, 2024).
AASB 116 (Property, Plant and Equipment) would be considered to evaluate the cost of building and ascertaining deduction relating to same. The specified standard asserts that an entity cannot incorporate expenditures relating to day to day servicing of property, plant and equipment to its carrying cost. The expenditure made for development of residential property i.e. cost which is directly attributable to bring the asset to the location; dismantling and removing of items etc. would be considered as part of cost and capitalized as asset (AASB 116: Property, Plant and Equipment, 2024). The cost of the building would include cost of site preparation, initial delivery and handling cost, professional fees or any other cost relating to the development of residential building. Even deduction relating to depreciation would be allowed on residential building. Depreciation refers to systematic allocation of depreciable amount of asset over its useful life. The depreciation relating to an asset is calculated after reducing residual value and it begins when asset is available for use. The provisions specified in AASB 5 states that depreciation of an asset ceases at the earlier date which is classified as held for sale.
AASB 136 (Impairment of Asset) would be considered to evaluate the appropriate cost of asset so that it is not carried at more than their recoverable value. An entity is required to assess whether the asset is impaired or not at the end of year irrespective of the fact that whether there is indication of impairment or not (AASB 136: Impairment of Asset, 2024). Thus, Creamy Acres would require complying with provisions of specified standard to claim deduction relating to impairment if any in context with residential building.
Other deductions which can be claimed by Creamy Acres as business expense includes day to day operating expenses, purchase of products or services for the business and depreciation expenses relating to asset (Australian Taxation Office: Business Tax Deductions, 2024). The principals to be considered to evaluate whether an expense can be claimed as business expense or not includes analysing that expense should be made for business purpose only as no deduction is allowed for expense made for personal purpose. In case any expense is made for both personal and business use than proportionate made for business use can only be claimed as deduction (Arnold, Ault, & Cooper, 2019). Further, it is necessary to keep records to prove that expenses are made for business purpose only.
Thus, the rental income of Creamy Acres would be taxed as ordinary income (assessable income) under section 6.5 of ITAA 1997. It would require complying with provisions of AASB 116 (Property, Plant and Equipment) and AASB 136 (Impairment of Asset) to ascertain the value of residential property and assess deductions available on same. Further, other deductions would also be available as general deduction if they are made for business purpose. Lastly, the deductions relating to depreciation would be also available on residential property according to the useful life and cost of asset.
References
Books and Journal
AASB 136: Impairment of Asset. (2024). Retrieved through < https://www.aasb.gov.au/admin/file/content105/c9/AASB136_08-15_COMPdec16_01-19.pdf>
AASB 15: Revenue from contracts with customer. (2024). Retrieved through < https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14_COMPdec22_01-23.pdf>
AASb 16: Property, Plant and Equipment. (2024). Retrieved through < https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPdec22_01-23.pdf>
Arnold, B. J., Ault, H. J., & Cooper, G. (Eds.). (2019). Comparative income taxation: a structural analysis. Kluwer Law International BV.
Australian Taxation Office: Business Tax Deductions. (2024). Retrieved through < https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions>
Capital Gain and Losses: ITAA 1997. (2024) Retrieved through < http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/>
Sadiq, K., Black, C., Clements, J., Hanegbi, R., Jogarajan, S., Krever, R. E., ... & Walpola, S. (2023). Principles of Taxation Law 2023 (No. 16th). Thomson Reuters (Professional) Australia.
Sainsbury, T., & Breunig, R. (2020). Tax planning in Australia's income tax system. Agenda: A Journal of Policy Analysis and Reform, 27(1), 59-83.
Todtenhaupt, M., Voget, J., Feld, L. P., Ruf, M., & Schreiber, U. (2020). Taxing away M&A: Capital gains taxation and acquisition activity. European Economic Review, 128, 103505.
Case Laws
Westfield Ltd. v FCT (1991)
Whitfords Beach Pty Ltd (1982).
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