Unit Name: Taxation Law
Assignment: Tutorial Questions Assignment (Individual)
Weighting: 50% Purpose:
This assignment is designed to assess your level of knowledge of the key topics covered in this unit
Unit Learning Outcomes Assessed:
Each week students were provided with three tutorial questions of varying degrees of difficulty. The tutorial questions are available in the Tutorial Folder, for each week, on Blackboard. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions from weeks 1 to 12 inclusive and submit these answers in a single document.
The questions to be answered are:
Question 1 – Week 6 – Specific Deductions(7 marks)
In Year 1, Crocodile Pty Ltd has $600,000 of assessable income and $1,000,000 of deductions. In Year 2, Crocodile has $300,000 of exempt income, $200,000 of assessable income and
$500,000 of deductions.
In Year 3, Crocodile has $500,000 of assessable income, $200,000 of exempt income and
$200,000 of deductions.
Advise Crocodile of its taxable income or tax loss in each year.
Question 2 – Week 8 – Fringe Benefits Tax(7 marks)
Samit borrowed money from his employer amounting to $15,000 on the 2nd September, 2019 because of an emergency situation. His mother was unwell and she lives abroad. Samit needs to urgently send the money to his parents. Because Samit is a good employee, his employer lent him the money with no interest. Furthermore, on the 28th February, 2020 due to compassionate reasons shown by the company – his employer - , the company decided that he was only required to repay $5,000. The employer is GST registered.
Please advise Samit and his employer on the tax implications of the above transaction. Please refer to the relevant Tax legislation and other appropriate sources, including cases, if required.
Question 3 – Week 12 - Transfer Pricing(7 marks)
Please refer to the direct quotation below from the Australian Taxation Office (ATO) for this question. Consider the following extract:
“Base erosion and profit shifting (BEPS) refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally. This is done to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.”
Question 3 (Cont’d)(7 marks)
Please discuss whether taxing “Revenue” instead of “Profit” will solve the Transfer Pricing issue. You must elaborate your answer with appropriate analysis and justification
Note – Please use the following four (4) steps to answer this question:
Question 4 – Week 6 – Capital Allowances(7 marks)
Butterfly Pty Ltd is a small business that utilizes the low value pool for its fixed assets for all its eligible assets. All depreciable assets are 100% used for business purpose, and the closing low value as at 30 June 2019 was $6,250. Shown below in the table is the asset register for Butterfly Pty Ltd as at 30 June 2019.
|Asset||Cost||Opening Adjustable Value||Method||Effective Life||Decline in Value for This Period||Closing Adjustable Value|
|MacBook Pro||4,000||2,400||Diminishing Value (assume 40% rate)||5 years||960||1,440|
|MacBook Air||1,300||1,300||Diminishing Value||3 years||450||850|
|Office Equipment||10,000||7,000||Prime Cost||10 years||1,000||6,000|
|Furnitures||1,200||1,080||Prime Cost||10 years||120||960|
Note - Butterfly purchased a printer on 8 May 2020 for $750 and Butterfly also purchased a TV for the meeting room on 2 June 2020 for $900
Calculate the “decline in value” of the depreciable assets that Butterfly can use as deductions for the
2019-2020 income year.
Question 5 – Week 9 – Partnerships(11 marks)
Alastair is a retired programmer. His wife Fransiska is a retired accountant. Both wish to remain active in their old age and they invest in a Doll shop that is to be managed by their daughter Sophie, who is aged 35. The three of them form a partnership of three called “Wishful’s Doll Shop”.
Alastair and Fransiska contributed $90,000 each to fund the purchase of the shop. The partnership agreement provides:
The accounts for this income year show the following:
|Sales (excluding GST)||590,000|
|Cost of goods sold||290,000|
|Interest on capital paid to Alasdair and Tracy||27,000|
|Salary to Carol||45,000|
|Superannuation to Carol||9,000|
|Lease payments on car (excluding GST)||8,500|
|Other deductible operating expenses (excluding GST)||34,000|
Additional Information during the tax year:
With reference to the facts above:
Question 6 - Week 11 - GST(11 marks)
Joshua Pty Ltd runs a furniture retailing business. During the tax year 19-20, Joshua provided customers with various loan arrangements to finance the purchase of furniture.
Total expenses relating to the loan arrangements (specific loan calculation software and computers) totaled $33,000 (inc. GST)
Joshua’s total expenses during the year (All expenses to run the business included the $33,000) were $2.2 million (inc. GST). Joshua Pty Ltd is registered for GST purposes.
Discuss Joshua’s Ability to claim the $3,000 Input Tax Credit?
Question 1: Calculation of taxable income and tax losses:
|Assessable income||$ 600000|
|Total income||$ 600000|
|Less: Deductions||($ 1000000)|
|Tax losses||($ 400000)|
|Exempted income||$ 300000|
|Less: Tax-loss up to exempted income if tax loss is more than income||($ 300000)|
|Net exempted income||0|
|Assessable income||$ 200000|
|Less: Remaining tax loss of the previous year||($ 100000)|
|Net assessable income||$ 100000|
|Total income||$ 100000|
|Less: Deductions||($ 500000)|
|Tax losses||($ 400000)|
|Exempted income||$ 200000|
|Less: Tax-loss up to exempted income if tax loss is more than income||($ 200000)|
|Net exempted income||0|
|Assessable income||$ 500000|
|Less: Remaining tax loss of the previous year||($ 200000)|
|Net assessable income||$ 300000|
|Total income||$ 300000|
|Less: Deductions||($ 200000)|
|Taxable income||$ 100000|
As per the provisions of ITAA, 1997, the fringe benefits are liable for FBT for the employer in case of benefits provided to the employee other than the salary and employment benefits. The waiver of a loan is liable for FBT in case the waiver is arisen due to employment-related reasons. The interest benefits are also liable for FBT if the interest charged from the employee on the loan amount is less than the standard rate of interest.
The waiver of a loan is not considered as fringe benefits for the employer if there is a financial implication for recovery of debts. The employer has made all efforts to recover the amount. The reason for the waiver of the loan is not related to the employment relationship. The employee has no assets for recovery of loan amount and there is a waiver after the negotiation and discussion of management. However, there is no impact on the interest benefits provided to an employee on the loan amount (Grudnoff, & Richardson, 2018).
Application of taxation law on the case:
In this case, the loan is waived and the employee is required to pay only 5000 under the compassionate reasons which are related to the employment relationship. Therefore the waived loan amount of $ 10000 is considered fringe benefits and liable for the FBT for the employer. The employer is liable to pay FBT at the rate of 47% on the loan amount waived i.e. $ 10000 and FBT liability is $ 470. The employer also cannot claim the deduction of the loan waived to the employee.
The employer is also liable to pay FBT on the interest amount i.e. calculated at the standard rate of 5.37%. The interest amount in this case is:
$ 15000 * 5.37% * 180/365=$ 397
$ 5000 * 5.37% * 185 / 365 =$ 136
Total amount of interest benefits = $ 533
FBT on the interest benefits=$ 533 * 47%=$ 251
The employee is not liable to pay tax on the fringe benefits received from the employee however the employee is required to report the number of fringe benefits received in the tax returns submitted to the tax authorities.
Question 3: Transfer pricing issue:
Facts of the case:
The issue is related to the organization which is operating a business in different countries. The BEPS is the tax planning strategy in which the location of profit shifts for disappearing the tax to the locations where it is little or no real activity and the taxes are low that results in little or no overall corporate tax. The strategies in BEPS take advantage of a combination of features of home and host countries' tax system. The corporate tax is applicable on the income earned at the domestic level and the income which is taxed in more than one tax jurisdiction results in double taxation. The process is illegal as the tax authorities are not able to tax the income of taxpayers effectively (Oguttu, 2016).
Relevant tax laws and cases:
As per Division 13 and current transfer pricing rules in sub-division 815-B, the taxation issues of BEPS in which profits are shifted to the countries in which there is low tax implication to avoid tax. The amount on which tax is applicable is revenue in place of profits. There is the involvement of withholding tax on the amount paid by the party to the taxpayer which imposes the tax on the revenue part and reduces the tax of profit shifting. The OECD has worked for reducing the causes of BEPS and tax the profits of organizations in the tax jurisdiction in which it is earned. The actions taken are prevention of abuse of double taxation treaty, prevent the artificial avoidance of permanent establishment, and assurance that the transfer pricing outcomes are for the value creation (González-Barreda, 2018).
Application of tax laws:
Based on the above rules, and the objective of preventing tax avoidance, there is taxation rules applicable to the revenue instead of the profits of the taxpayer. The payer is liable to deduct the tax before making payment to the recipient which increases the recording of revenue income in particular tax jurisdiction. For the avoidance of cases of BEPS, the tax implication of revenue instead of profit is the effective measure taken by the tax authorities.
The case concludes that the taxing of revenue income is the best solution for avoiding the transfer pricing issues that arise in BEPS. The OECD and new rules of transfer pricing increase the application of this law system. The payer of revenue income is liable to withhold the tax on the amount paid to the recipient and required to report to the tax authorities which help in identifying the revenue income generated in a particular tax jurisdiction.
Question 4: Decline in value of the depreciable assets:
Calculation of depreciation and decline in value:
|Assets||Opening Adjustable value||New Asset purchased||Method||Calculation||Decline in value||Closing Adjustable value|
|MacBook Pro|| $ 1,440.00 || $ - || Diminishing || 1440 * (365/365) * (200% / 5) || $ 576.00 || $ 864.00 |
|MacBook Air|| $ 850.00 || $ - || Diminishing || 850 * (365/365) * (200% / 3) || $ 566.67 || $ 283.33 |
|Office Equipment|| $ 6,000.00 || $ - || Prime Cost || 10000 / 10 || $ 1,000.00 || $ 5,000.00 |
|Furniture|| $ 960.00 || $ - || Prime Cost || 1200 / 10 || $ 120.00 || $ 840.00 |
|Low-value pull asset|| $ 6,250.00 || $ 1,650.00 || Diminishing || 6250 * 37.5% + 1650 * 18.75% || $ 2,653.13 || $ 3,596.88 |
Base value * (no. of days assets held / 365) * (200% / assets effective life)
Question 5: Partnership income and income of partner:
a) Calculation of net income of the partnership firm:
|Sales income||$590,000 |
|Less: Salary to Carol||($45,000)|
|Less: Superannuation contribution of Carol||($9,000)|
|Less: Lease payment on a car||($8,500)|
|Less: Other deduction operating expenses||($34,000)|
|Less: Interest on a loan provided by Alastair (40000*0.05)||($2,000)|
|Net income of partnership firm||$201,500 |
b) Calculation of assessable income for Alastair:
|Interest income on capital (90000 * 0.10)||$9,000 |
|Share in profit of partnership firm (201500 - 9000 - 9000 - 45000 - 9000)/3||$43,167 |
|Interest income on loan||$2,000 |
|Income earned from tutoring of programming language||$15,000 |
|Total assessable income of Alastair||$69,167 |
Question 6: Claim of the input tax credit in GST:
The fact of the case:
Application of taxation law:
The GST input credit is available for the expenses that are incurred to earn the income from the business and run the business effectively. The GST input credit is related to expenses incurred for run the business and the expenses on which credit is booked are incurred for effective processing of business and earn income from business such as benefits to employees, advertisement, loan facility to customers, etc. which has relation with the business and helps in increase the business income.
In this case, the loan arrangement is done so that it is easy for the customers to purchase the furniture and the loan arrangement is for the benefits of the business of furniture. The loan arrangement increases the sales of furniture and helps in business. Therefore the company can claim the input tax credit on the GST paid on the expenses incurred related to loan arrangement.