MLC 703- PRINCIPLES OF INCOME TAX LAW
Mar 13,23Question:
Background:
MLC 703- PRINCIPLES OF INCOME TAX LAW
Please note that the following will not form part of the word count:
- References, including statute and cases;
- Diagrams;
- Tables;
You must complete both parts of the assignment. Please complete both parts of the assignment separately. You should allocate approximately 1500 words on both Part A and approximately 1500 words on the policy-based essay question in Part B. There is a strict word limit of 3000 words for this assignment.
For both parts of the assignment you will be required to go beyond the study materials for this unit and you will be expected to conduct your own research of cases and other academic material upon which you should base your answer.
You are encouraged to use headings for purposes of clarity and presentation of your assignment. It is however essential that your assignment is written in full sentences and not dot point form. If you use any equations in solving the problem question please make sure that you cite the correct sections of the relevant legislation and that you outline your entire working.
You must begin each question separately. It is however essential that you place your name and student number and the question number on each question which you complete.
Regarding referencing, you will find the Australian Guide to Legal Citation (AGLC) style of referencing in the following web site: https://drive.google.com/file/d/14fRQZ-U68Zwe6UQEBXykR5o8Xbo1jTTI/
Please note that this AGLC style is intended for Law students and although it would be great if you followed it, marks will not be deducted for not citing cases etc exactly as described. In other words, whilst you must reference, you can choose to use other referencing styles (ie not necessarily the AGLC style) if you wish.
The assignments must be completed individually.
DUE DATE: 8:00pm Monday 14 September 2020.
PART 1- PROBLEM QUESTIONS
PROBLEM QUESTION A- WORTH 5% OF YOUR OVERALL MARK FOR THIS UNIT SO YOU SHOULD ALLOCATE APPROXIMATELY 400 WORDS ON DISCUSSING THIS.
PROBLEM QUESTION B- WORTH 15% OF YOUR OVERALL MARK FOR THIS UNIT SO YOU SHOULD ALLOCATE APPROXIMATELY 1100 WORDS ON DISCUSSING THIS.
Nikki owns and carries on a chain of clothing stores. So far she has 7 of such stores. When she chooses a premises to open a new store on, the most important criterion is where she can maximise the sales of clothes. However, she is also influenced by the potential for the land on which each of the shop premises is located on to grow in capital value.
In late 2019, Nikki decides to develop one of the shop premises, because real estate in the area which it is located on had appreciated markedly in recent years. This involved Nikki obtaining a building approval from the local council, demolishing the shop, and building a 6 storey apartment building on the land. As Nikki did not know much about building, this consisted of contracting a major builder to be in charge of the process of building the apartment. These apartments are sold individually to the public through a leading real estate agent.
Ignoring Capital Gains Tax, discuss whether the sales proceeds from the apartments generate ordinary income.
Ken entered into a contract to purchase two retail store premises in June 2003. The cost of each was $300,000, with stamp duty of $20,000 each. Settlement was during August 2003. He used these retail premises (which had been previously unoccupied) to commence a business that sold furniture to the public.
During the time that Ken owned the store, they each had an annual aggregated turnover of approximately $3 million.
During November 2019, Ken, who was 53 at the time, wanted to have more spare time and not carry on a business anymore. He had found that although his turnover was high, after costs his profits were very modest. As a result, he entered into the following contract with Jane:
- The first of the two furniture premises was to be sold to Jane for $1,200,000, and the goodwill attached to it sold to Jane for $400,000.
- The second store was to be rented to Jane for a two year lease (with an option to renew for another two year period). Rent was set at $2,000 a month, with an upfront lease premium of $25,000
- Jane was to pay Ken $200,000 to not compete with her for the following 3
At the time of the November 2019 contract, Ken owned the following assets:
- Full ownership of a main residence in Hawthorn, worth $3
- 42% ownership of a company called PI Pty Ltd, which invests in rural properties. The total market value of PI Pty Ltd was $300,000.
- 80% share on an investment property (Ken’s cousin owns the other 20%). The total
value of the property was $500,000. It had a $300,000 mortgage over it.
- Superannuation worth $1.5
- Shares in BHP worth $200,000.
- An apartment in Kew (see below)
On 1 December 2015 Ken had bought an apartment in Kew to live in. This cost him $400,000. After living in it for 2 years, on 1 December 2017, Ken bought and moved into his Hawthorn house (mentioned above), which he from that point on claimed as his main residence. At the time, his apartment in Kew was worth
$500,000, which he immediately rented out. The Kew apartment was sold for
$510,000 in December 2019.
Advise Ken as to the CGT consequences regarding the 2019-20 tax year. In doing so please discuss Ken’s ability to utilise the CGT Small Business Concessions.
Please also include a discussion of the Net Capital Gain made by Ken for the 2019-20 tax year.
PART 2- POLICY BASED ESSAY QUESTION
Should the Australian Capital Gains Tax system have a 50% discount available to taxpayers?
Discuss this with reference to the criteria for evaluating tax policy:
- Economic efficiency
- Simplicity
- Equity/fairness
You should feel free to discuss any other relevant matters.
Answer:
Introduction
Advise to Ken as to the CGT Consequences Regarding the 2019-20 Tax Year
Author
Institutional Affiliation
Course
Instructor
Due Date
Advise to Ken as to the CGT Consequences Regarding the 2019-20 Tax Year
A capital gain occurs when the value of capital asset increases. El-Maude, et al. (2018) posits that people realize capital gains after selling their assets. On the other hand, a capital gains tax is the amount that the government levies on profits when entities vend their assets, which have value increment. Governments tax the gain that people make and not the money they receive.
The Capital Gain of the First of the Two Furniture Premises
The capital proceeds of the first of the two furniture premises = $1,600,000, which includes the selling price to Jane for $1,200,000 and the goodwill attached to it and sold to Jane for $400,000.
The First of the Two Furniture Premises’ Base Cost
The following is the first of the two furniture premises’ base cost.
The purchase price $300,000
Add: Stamp duty $20,000
The first of the two furniture premises’ base cost $320,000
Capital gain = Capital proceeds – base cost
The Capital Gain of the First of the Two Furniture Premises
The following is the first of the two furniture premises’ capital gain.
The capital proceeds $1,600,000
Less: the base cost $320,000
The capital gain $1,280,000
The capital gain of the first of the two furniture premises = $1,280,000
The Capital Gain of the Kew Apartment
The capital proceeds of the Kew apartment = $510,000
The purchase price of the Kew apartment = $400,000
Capital Gain = Capital proceeds – the acquisition price
Therefore, the capital gain of the Kew apartment = $510,000- $400,000 = $110,000
The following is Ken’s Net Capital Gain for the Year Ended 30 December, 2019
Capital gain of the first of the two furniture premises $1,280,000
Add: Capital gain of the Kew apartment $110,000
Net capital gain liable to capital gains tax $1,390,000
Advise to Ken as to the CGT Consequences Regarding the 2019-20 Tax Years
Ken sold the first of the two furniture premises for $1,200,000 and also the goodwill attached to it for $400,000 to Jane. My advice to Ken is that because he sold one of his two furniture premises together with the goodwill attached to it, the law assumes that he is ready to pay capital gains tax on both the premises and the goodwill. Hence, Ken ought to pay a capital gains tax on both the premises and the goodwill to the government. According to Dealtry (2017), when an individual sells his or her property, the authorities treat its goodwill as part of the assets, which qualify as capital gains to tax it. Thus, it is vital to ascertain the capital proceeds of the property and its goodwill’s base cost. Dealtry (2017) asserts that goodwill arises when a property’s buying price surpasses its net value. When a firm sells its capital asset, it should be aware of the likely CGT consequences. Capital gains or losses are the assets’ capital proceeds of sales minus their base costs. Chaney, Gunn, and Coleman (2020) state that ascertaining the goodwill’s base cost is controversial. Governments have no unique provisions about goodwill; hence, entities apply the ordinary capital gains tax’s rules. Therefore, firms should include the assets’ base cost all the expenses, which they incur as costs with a direct relationship to those assets’ creation.
Ken’s Ability to Utilize the CGT Small Business Concessions
Entities can get the CGT exemptions, rollovers, and other concessions. Smulders, et al. (2016) posit that authorities permit individuals to use concessions to suspend the capital gains that they get from active assets, which they use in small businesses. Such concessions include the 15-year exemption, rollovers, retirement exemption, and 50% active asset decrease. Ken can have the assessable capital gain on the Kew apartment, since; he bought it on 1 December 2015 and sold it in December 2019 (4 years later). However, Ken cannot have the assessable capital gain on the first of the two furniture premises as he purchased it in June 2003and sold it in November 2019 (16 years later). According to Trad and Freudenberg (2018), an individual cannot have the 15-year exemption when his or her business has constantly possessed active assets for 15 years. Furthermore, if the individual is 55 years old and above, and retires or is eternally disabled, he or she will not have the assessable capital gain if they vend their property. Therefore, because Ken wanted to have more time and not carry on business anymore, he cannot have the assessable capital gain on the Kew apartment, although, he sold it after having it for 4 years. The tax authorities would assume that Ken is retiring even if he is 53 years.
Trad and Freudenberg (2018) assert that governments allow the above concession if an individual sells active properties and they are small entities whose aggregated yearly revenue is not more than $2 million. But, during the time that Ken owned the stores; they each had an annual aggregated turnover of approximately $3 million. Therefore, Ken cannot have the assessable capital gain on the first of the two furniture premises. Again an individual must possess net assets, which do not exceed $6 million. These assets do not include individual use property such as a residential house, especially if the individual does not use it to generate earnings.
For this purpose, Ken’s business net assets are as follows.
42% ownership of PI Pty Ltd $300,000.
80% share on an investment property (80% X $500,000) = $400,000
Shares in BHP $200,000
Total $900,000
Therefore, if Ken’s aggregated yearly revenue was not more than $2 million, he could utilize the CGT small business concessions based on his business’s net assets that did not exceed $6 million. This could become possible because he used these assets in the business.
The Net Capital Gain Made by Ken for the 2019-20 Tax Year
Ken is below 55 years but because he chooses to retire, he will not have the assessable capital gain after vending his property. The net capital gain made by Ken for the 2019-20 tax years was $1,390,000. If Ken wanted a retirement exemption as a CGT small business concession, he would get the exemption from a portion of the net capital gain. According to Krever and Sadiq (2019), authorities exempt capital gains that entities get after selling an active property to a maximum of a lifetime’s limit of $0.5 Million. Therefore, the government would exempt Ken on the $110,000 capital gain only on the Kew apartment that ken sold. When an individual is below 55 years, the government recommends payment of the exempt money into a superannuation fund that complies (Bentley, 2019). Furthermore, people can pay the exempt money into retirement savings accounts. Consequently, the amount of the capital gains that the government would not exempt Ken is for the first of the two furniture premises, which is $1,280,000. The 15-year exemption concession is making Ken not to have the assessable capital gain on the first of the two furniture premises, since, he purchased it in June 2003and sold it in November 2019 (16 years later). This one is also barring Ken from getting the 50% active asset reduction. Cima and Cotler (2019) state that, businesses can decrease their capital gains on an active property by 50%. Moreover, people can have a 50% capital gain tax discount if they have possessed the items for more than a year. Thus, Ken can have the 50% active asset deduction on the Kew apartment because he has possessed it for 4 years.
Conclusion
Business people might be capable of claiming the small business capital gain tax concessions’ benefit to decrease the capital gain that governments tax. Furthermore, the individuals can claim the 50% general capital gain tax discount if they meet the applicable conditions.
References
Bentley, D. (2019). Does a Capital Gains Tax Work? The Australian Experience Eleven Years on. Journal of Malaysian and Comparative Law, 23.
Chaney, P. K., Gunn, R. N., & Coleman Jeter, D. (2020). Implications of Changes in GAAP for Business Combinations (and Goodwill) on Accounting and Finance Research. The International Journal of Accounting, 55(02).
Cima, R. P., & Cotler, B. R. (2019). Recent Developments Relating to Investments in Qualified Opportunity Zone Funds. Journal of Taxation of Investments, 36(2).
Dealtry, R. (2017). Hunting Goodwill along the Intellectual Equity Trail. Emerald Publishing Limited.
El-Maude, J. G., Bawa, A. B., Mohammed, J., & Pate, H. (2018). Impact of Capital Gains Tax Awareness on Revenue Generation in North-Eastern Nigeria. International Journal of Financial Management, 7 (3).
Krever, R., & Sadiq, K. (2019). Non-residents and Capital Gains Tax in Australia. Canadian Tax Journal, 67(1).
Smulders, S., Stiglingh, M., Franzsen, R., & Fletcher, L. (2016). Determinants of Internal Tax Compliance Costs: Evidence from South Africa. Journal of Economic and Financial Sciences, 9(3).
Trad, B., & Freudenberg, B. (2018). A Dual Income Tax System for Australian Small Business: The Experts’ Verdict. Australian Tax Review, 47(1).
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