ASSESSMENT ITEM HELP

Question 1

Meranti Ltd. Manufactures high-quality furniture at low cost and exports it to Aussie Ltd. The sales volume of Aussies Ltd is high that affects other furniture manufacturers in Australia and threatens the local employment market. In the current income year, the government of Australia imposed high import duty on the annual sales of imported furniture of Aussie Ltd. spent $2 million on an advertising campaign in the Australian media to repeal this duty. The company also wanted a petition from the Australian public in the parliament for this. The advertising amount for this was eight times of normal advertising budget. Aussie Ltd. had to pay a $1 million redundancy payment to their 50 employees.

In Australia, the taxation law of Australia is different for residents and non-residents. Residents need to provide tax for their all sources of income. Income tax regulation 1936 listed some countries that emphasize tax treatment. The tax might be lower if Meranti Ltd is operated in those listed countries. If not, then Aussie Ltd. needs to provide a high amount of tax for it because Aussie Ltd. imports furniture from Meranti Ltd.

However, non-residents need to provide tax only sourced in Australia. For small businesses, the company tax rate is 27.5% from July 2016 for businesses that earn less than $10 million yearly. For the companies, there is no tax-free threshold. However, for a business, the tax rate is lower than the highest tax of an individual (Tran‐Nam & Evans, 2014). Aussie Ltd. generates high income by selling furniture in the Australian market at low prices. For the lower price, Aussie Ltd. needs to provide lower tax for each of their furniture. However, for higher sales, the revenue generation of Aussie Ltd. is high and for this reason, Aussie Ltd. needs to provide high-income tax.

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Australian resident tax rate 2017-18

Income	Tax
$0- $18200	Nil
$18201- $37000	19c for each $1 over $18200
$37001-$87000	$3572+32.5c for each $1 over $37000
$87001-$180000	$19822+37c for each $1 over $87000
$180001 and over	$54232+45c for each $1 over $180000

In 2017-18, Australian residents need to pay taxes according to the above table. However, the business tax is slightly different. The generated income is high for Aussie Ltd. which affects other furniture manufacturers in Australia. The high income generated by Aussie Ltd is the reason to provide high-income tax.

According to Custom Tariff Act 1995, Self-assessment of correct tariff classification is needed for the goods imported by an importer. Incorrect information may lead to penalties. The tariff advice service provides free advice on the goods of importers. The department can help the importers who import goods on a one-off basis.

Australian Customs and Border Service (ACBPS) imposed 10% GST on taxable imports. It is the sum of the customs value of goods, payable customs duty, payable wine tax, payable or paid amount to transport the imported goods to the importer’s place of consignment in Australia, and the insurance cost of the transport (Sadiq et al. 2017). Therefore, Aussie Ltd. imports furniture from overseas which was a taxable import. On this importation, Aussie Ltd. needs to provide GST according to the policies of ACBPS. In Australia, a subsidiary company needs to develop an audited financial report with ASIC according to Corporation Act 2001 section 292. Aussie Ltd. is a subsidiary of Meranti Ltd and for this reason, they need to provide audited financial reports according to the law.

According to Capital gains tax (CGT), if an Australian company sells its share to another active foreign company, needs to provide tax (www.ey.com). By selling their shares to that foreign company. The assessable capital gain of Aussie Ltd. is included in their taxable income and taxed at the same rate as ordinary income. Aussie Ltd. generates high income in Australia by selling high-quality furniture imported from Meranti Ltd. Therefore, Aussie Ltd. needs to provide tax to the Australian government at a high rate according to their income statement. Therefore, as a subsidiary company by selling its shares to Meranti Ltd., Aussie Ltd. needs to provide Capital Gain tax at the same rate as its income to the Australian government.

According to the business structures, Aussie Ltd. can be categorized as Company. A company needs to be registered for GST if its annual turnover is $75000 or over (Tang, 2016). They must lodge an annual company tax return and pays tax according to the company’s tax rate. Aussie Ltd. generates revenue from its expertise and skills. Therefore, Personal Services Income (PSI) rule will be applied to Aussie Ltd. According to PSI, the income generated by Aussie Ltd. can be treated as their income, and that affects their claimed deduction.

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To claim a tax deduction, Aussie Ltd. needs to spend money to generate revenue. Aussie Ltd. needs to show the expanse of their company is used to generate revenue. The expenditure needs cannot be domestic or private and the expenditure must not be outgoing of capital (Braithwaite, 2017). The main expenditure of Aussie Ltd. consists of the salaries of the employees, and import of the furniture from Meranti Ltd. Therefore, to claim a deduction on the imposed tax, Aussie Ltd. needs to maintain all these conditions.

Aussie Ltd. generates its income by selling furniture mainly to the people of Australia. From this income, Aussie Ltd. makes their budget, provides salaries to their employees, and imports furniture from Meranti Ltd. Aussie Ltd. can claim a tax deduction to their income by showing their expenditure according to Australian law.

According to Income Tax Assessment Act 1997, Aussie Ltd. can claim a deduction on their income. Section 8-1(1) includes, People can claim a deduction if they experience a loss in their income generation and that loss needs to be production-related (“Legal Database”, 2017). However, Aussie Ltd. did not experience loss in their business by selling a large number of furniture to the people of Australia at lower prices. There is also no loss in the production system of Aussie Ltd. Therefore, according to section 8-1(1), Aussie Ltd. cannot claim a deduction in their tax.

According to 8-1(2), people cannot deduct a loss or outgoing under this section if it is a loss of capital, loss of domestic or private nature, to gain or produce one’s exempt income or non-assess (“Legal Database”, 2017). Aussie Ltd. did not experience any loss in their capital or domestic or private nature. For this reason, Aussie Ltd. cannot claim any kind off of tax deduction according to Income Tax Assessment Act 1997 (Residency Requirements for Companies, corporate limited Partnerships, and Trusts. 2017). Therefore Aussie Ltd needs to follow various types of policies. Nexus text is one of the best policies for solving this tax implication problem. Aussie Ltd should apply this policy to get relief from this new tax implication.

According to the nexus test, it is referred to a pursuit undertaken by an individual or a private company regarding a governmental entity or State. This test is used for solving any dispute between Government and individual persons. This nexus test is required in tax determination which this test will help to the determination of taxability and deductibility. According to this case, the company needs to appeal against government order and discussion on the legality of governmental restriction (Residency tests. 2017). Aussie Ltd is also incurred many expenses of their advertisement against the Australian government’s policy and now Aussie Ltd wants to avail tax benefits for recovering their business growth. The company also blames the government that Government is trying to interfere in normal business affairs. Therefore, Aussie Ltd wants to get relief from Government’s policy by taking some advantages through taxes by applying this Nexus model.

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Question 2

James decided to buy a block of five flats which he intended to rent to tenants in the future to earn a fixed amount. Before buying the property, he contacted a building inspector and asked for his advice about the expenses that he would incur to upgrade and renovate the properties. He was advised by the inspector that it would cost him around $20,000 for renovating the roof, for plumbing and to paint the rooms.

James bought the property on the 1st of September 2016 and the plumbing, painting, and roofing works were all completed and the first tenant came in on the 1st of October 2016. Within a short period after the tenants moved in, a part of the upstairs collapsed and James was informed that the property was infested with termites and he has to spend around $50,000 to repair and renovate the ceiling and the flooring. For future benefit, James decided to use steel and good quality timber to make sure there are no further complications. The renovation works were completed on the 1st of February 2017 and James further paid $2000 to the pest control company to check the termite-infested areas of the property and take measures against them.

Residential homes are generally exempted from taxes in Australia. But if the house or the flat is used for renovating for profit or running a business, only then will capital gains tax (CGT), income tax, and goods and services tax (GST) be incurred (Sadiq et al. 2017). If the property is used for income only then the owner of the property should include that income in the income statement and has to pay tax as per the taxable income slab set by the government of Australia.

In this project, since the person named James is purchasing a block of five flats for using it for earning money, so in this scenario James has to include his income earned from rent in his income statement as he is taxable according to the government of Australia. In this case, James has to maintain all the records of all expenses made him so that he can claim them as deductions and include all the costs in his income statement to make his financial statement more transparent. In this scenario as well, in case James decides to sell his properties, then the amount of money he will get during the sale of the properties will lead him to pay capital gains tax (CGT). As stated by MacLaran (2014) in some cases if James decides to rent out the home he has been living then in those cases capital gains tax is not applicable.

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But in case James has a property that he does not intend to rent out to people then the property would be subject to capital gains tax same as in the case of renting a property but income tax cannot be claimed for owning the property as it does not generate any rental income. As stated by Jones (2016) the cost of ownership of the property can be included in the base price of the property which would eventually reduce the capital gains tax during the time of sale. As stated by Wood, Ong & Cigdem (2016) the amount of tax levied when the property is owned or when the property is getting sold then the amount of tax depends on whether the property was used for business or commercial purposes or residential purposes (Legal Database. 2017). Vacant land is considered to be a capital asset and it is taxable under the capital gains tax laws. However, in the case of property being sold, the amount is considered to be ordinary income and is considered under goods and services tax (GST) on the amount received from selling the property.

There are various situations regarding the taxation system like if a person is renovating one or more properties, then tax will be levied determining whether the person is a person property investor or renovating a property for business or commercial purposes to earn profit. About this, as opined by Tang (2016) if the person is investing to earn profit then the amount will be considered to be taxable under the government rules. Furthermore, if construction is done for new residential purposes, then the builders are liable to goods and services tax (GST) on the selling price and the builders can claim the credit amount for the construction costs and the price related to purchases during construction. Construction businesses should always report to the ATO every year regarding the total amount of money paid to the contractors and suppliers of the construction materials and goods.

In cases where a property is leased or rented for business purposes whether it is a commercial or a personal home then the amount of money earned should be included in the statement of tax return and the owner of the property can also claim income tax deductions for certain expenses to the property. As stated by Kelly, Hunter, Harrison, and Donegan (2013) the owner of the property will also be liable for capital gains tax on any sale of assets and the owner can have goods and services tax entitlements and obligations when the property is leased or rented for business purpose. Furthermore, if the owner of the property deals with a one-off transaction like leasing or renovating and buying or selling then the owner will be considered to be owning an enterprise and if the profit earned from the transactions exceeds the goods and services tax registration limit then the owner has to register for goods and services tax (Legal Database. 2017).

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In this project, since the main focus is on a single person, so after discussing the scenarios of when and where can a person be charged for tax, now it should be determined whether the amount earned and the amount spent by James on the property to purchase as well as to renovate would be taxable or not. After studying all the cases when a person can be taxed and in what situations, it can be concluded that James would be chargeable for the entire amount spent by him. First, he will be charged for the expenses for developing and renovating the properties that he had bought. Secondly, he is liable to pay tax as the amount of money earned from leasing the property for rent will earn revenues which will be a source of income for him. So, since the building is becoming a commercial one, he will have to pay tax for the amount of money he is earning. Another aspect that James can use to his benefit is that he can claim deductions in tax for the amount of money he spent on purchasing, renovating, and developing the property, and by this, he can reclaim the amount of money he spent on the property before leasing it for rent. Now, considering the amount of money James is earning in a year on that basis he will be charged for tax for the financial years. Depending on the amount of revenue James is earning every year, the income tax inspectors will be checking the tax slabs and charge James accordingly.