HI6028 Taxation Theory, Practice & Law Sample

Posted on December 29, 2021 by Cheapest Assignment

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1. Eric’s net capital gain or loss for the year 


Eric has acquired various assets in the last 12 months which include an antique vase, an antique chair, a painting, a home sound system, as well as shares in a listed company. Last week he has sold the same for different values. This shows that the assets were in his possession for less than a year. Thus his net capital gain or loss this year would be short-term in nature. A significant observation is that Eric would not be able to take advantage of the indexation model since the assets were held by him for less than 12 months


When an individual buys assets in order to meet his personal needs or recreation purposes, the same can be termed as “assets for personal use”. Collectables are assets that are of lower quantity but of higher value. Eric’s assets like the home sound system and the shares of the listed firm belong to the “assets for personal use” category whereas the antique vase, antique chair, and painting can be categorized under collectables.  

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When assets with a procurement cost of less than USD 10,000 are sold, the capital profits from such sales are not subject to taxation. In the given situation, assets for Eric’s personal are the home sound system worth USD 12,000 and the shares in a listed organization worth USD 5,000.


The other assets that were sold by Eric were collectables. The taxation rule says that if a person acquires capital from such type of sales, the procurement price of which is at par with or lower than $500, it cannot be taxable. The collectables that Eric had were an antique vase costing $2,000, an antique chair costing $3,000, and a painting costing $9,000. This information is used to determine the total capital performance of Eric:

Assets Cost base of Assets Capital Proceeds of Assets Difference value Net Capital Gain/ (Net Capital Loss)
Antique Vase 2,000 3,000 1,000 Capital Gain
Antique Chair 3,000 1,000 -2,000 Capital Loss
Painting 9,000 1,000 -8,000 Capital Loss
Home Sound System 12,000 11,000 -1,000 Capital Loss
Shares in a listed firm 5,000 20,000 15,000 Capital Gain
Total 31,000 36,000  
Net Capital Gain / Loss     5,000 Total Net Capital Gain 



Eric’s total cost base of personal assets exceeds USD 10,000 which indicates that his capital gains from the sale are taxable in nature. Similarly, the procurement value of his collectable assets is greater than USD 500, thus they are also subject to tax

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2. The taxable value of Brian’s fringe benefit for the 2016/17 FBT year.


The scenario presented features the loan of USD 1 million taken by Brian from his employer for a time period of 3 years at a special interest rate of 1% per annum that is payable in monthly instalments.


The margin between the current rate of interest in the market and the special rate of interest charged by the employer can be termed as fringe benefits of Brian. In order to accurately compute Brian’s taxable value of the fringe benefit, the prevailing statutory rate of interest must be taken into account. As per the details, the loan was offered to Brian on 2016, April 1st, so the applicable rate of statutory interest is 5.65%


A series of steps have to be followed to arrive at the taxable value of his fringe benefits for the 2016/17 FBT year. Firstly, the loan fringe benefit would be computed based on the precedent of eliminating the deductible rule. The deductible rule states that interest on the loan as per the actual interest rate must be subtracted from the interest on the loan based on the statutory interest rate.

(1)Thus Interest value based on the statutory interest rate of 5.65% = USD 10,00,000 * 5.65% = USD 56,500 and interest value based on the actual interest rate of 1.00%) = USD 10,00,000 * 1.00% = USD 10,000. So derived loan fringe benefits = USD 56,500- USD 10,000 = USD 46,500

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(2)The interest value based on the statutory interest rate is USD 56,500 (USD 10,00,000 * 5.65%). The particular assumption made at this stage is that this value is the real amount payable.

(3)As per provided details, Brian has used 40% of the financial loan for income-producing purposes and other financial obligations. So his tax-deductible interest expense is USD 56,500 * 40% = USD 22,600. This is a hypothetical figure. 

(4)His real tax-deductible interest expense must be calculated, which is USD 10,000 * 40% = USD 4,000. expense 

(5)The real tax-deductible interest has to be deducted from the hypothetical value: USD 22,600 – USD 4,000 = USD 18,600

(6)Brian’s ultimate taxable amount that he has to pay can be arrived at by deducting the 5th step value from the 1st step i.e. USD 46,500 – USD 18,600 = USD 27,900


In case the interest is paid at the end of the loan period, the deemed time is estimated from the time when the interest becomes payable. But if Brian’s loan interest is paid in monthly instalments, the particular period is assumed from the time when the interest payment starts. Another consideration that needs to be made if Brian does not have to repay the loan interest is that the same steps would be followed but the rate of interest would be taken at 0 per cent. 

3. Accounting of capital gain or capital loss 


The presented scenario involves a couple, Jack, and Jill, who are tied up in a written agreement relating to the renting of property. 


According to the agreement, Jack is eligible to get only 10% of earned profits from the property while Jill is supposed to receive 90% of its earned profits. In case of loss, Jack has to suffer the total loss. 


Last year Jack and Jill incurred a loss of USD 10,000. As per the agreement, dealing with the loss from the property is the sole responsibility of Jack and Kill has no role to play in this situation. As per set rules, Jack must bear the entire loss that has been incurred o the property. 

Jack basically has two choices with him at the moment to deal with the loss that has arisen. The first option is that he can offset this particular loss with his other source of income earned during the financial year. The second option is that he could carry forward the loss to the subsequent year until the sale of the property. When profits are generated from the property, the same must be distributed between Jack and Jill on the basis of the agreed proportion i.e. 1:9. The interesting observation from the presented scenario is that Jack has the right to offset the loss against the gains that could arise after the sale of the particular property.


Thus in the presented plot, it can be stated that Jill will not be having any responsibility with respect to the taxation implications relating to the rental property. Jack will have the financial responsibility for the losses relating to the property and he will have to record it in his books of accounts.

4. Principle established in IRC v Duke of Westminster [1936] AC 1


The case IRC v Duke of Westminster [1936] is a popular legal scenario that has gained significant attention due to its relation to taxation rule. It basically highlights the fact that an individual is righteously entitled to use legal measures and methods to reduce his tax figure by depreciating his net income. The key principles from the case have been highlighted. 


Every individual has the fundamental right to apply a strategic change model to accounting management in order to reduce the total income that he has earned during a period. The crucial necessity is that ethical methods must have been used by him to exempt himself from making the payment of the excess tax amount. The ethical and fair application of legal tools and strategies for the purpose of minimizing the total earnings on which tax is applicable puts the individual in a safe position. Authoritative figures like the Commissioner of Inland Revenue cannot compel him to pay additional tax if he is backed by law. https://cheapestassignment.com/nursing-reflective-essay 

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In the current times, the application of this rule might be questioned based on the inferences from the latest case laws. As per the new case laws, a firm that incurs a loss could alter the financial details in its financial statements like its balance sheet and income statement and it could also write off its fixed assets at any value as per its desire.

But at the same time, it allows individuals to adopt fair means to reduce the tax amount that has to be paid by them. Individuals and concerns need to adopt ethical practices and use the tax law to minimize the payable tax value. Due to the increase in the use of unethical methods by organizations and individuals, this rule is being questioned. But the fair implementation of the rule is necessary so that the tax burden can be fairly reduced.


It is necessary for an organization to adopt fair and ethical means while performing its financial transactions so that in the future it will not have to face any kind of penalty. This case that has been presented empowers individuals to reduce their tax burden by applying fair and legal means. Thus individuals and firms must use ethical practices and not try to betray the law.

5. Logging firm case


Bill owns a large parcel of land with many tall pine trees. He wishes to use it for grazing sheep and thus wants to clear the trees. A logging firm seems interested to pay him USD 1,000 for every 100 meters of timber that they take from the land. The presented case needs to be reviewed to understand the taxation aspects.  


The receipt of Bill from the logging concern reveals two different scenarios. The first scenario states that Bill would be receiving a lump sum amount of USD 50,000 from the company for clearing the trees from his yard. The other scenario states that Bill would be receiving recurring amounts from the concern of USD 1,000 for every 100 meters of timber that they would clear from his land. Both scenarios are different in nature since the first one is a one-time transaction while the latter one is a repeated transaction. 


If Bill would be receiving USD 50,000 from the logging company for granting them the right to remove as much timber as required from the land, it would be assumed to be his capital receipt. It would also imply that the firm would have the entire right to cut off the trees in the vineyard. A vital aspect that needs to be taken into consideration in this scenario relates to the tax relating to such capital gains. Taxes would be charged to Billy for the bulk receipt for the simple reason that the receipt is of a large value and it is not recurring in nature. 


The nature of the financial transaction between the two parties i.e. Bill and the logging company is crucial since it has a vital impact on the applicability of the taxation rules. As per the prevailing tax laws, the receipt of a bulk value is considered to be a capital receipt and relevant tax rates are applicable in the situation. 


If Bill would be receiving recurring amounts of small amounts, the rules relating to capital gains would not apply in the situation. The income earned by him would be recurring in nature and thus the tax that would be charged on such income would be as per the standard interest rates. So the nature of receipts has a strong correlation with the tax rule that is applied in any given circumstance.

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