Taxation

Posted on May 31, 2023 by Cheapest Assignment

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Capital Market Assumptions given in Appendix

The term taxation means the compulsory money that is collected by the levying authorities, mainly by the government.  The term applies to involuntary levies, from income to other gains in capital to estate taxes. Taxation is quite different from other forms of payment such as market exchange and other services. The government collects the taxation through explicit and implicit manner or threat of force. The taxation is different from the protection racket and extortion because the institute on which is imposed is a government, not private (Auerbach & Hassett, 2015). The tax system varies from place to place, country to country. In recent situations, taxation occurs in physical assets like property, events, and sale transactions. The formulation of the tax is one the vital thing and issues in political circles.

Taxation is the principle where the government is raising revenue. Without taxation, the government wasn’t able to circulate the laws properly and face problems in the export and import of the products. So taxation is important to deliver the products or the public goods and services to the various communities (Basu, et al., 2014). There are various ways government can raise revenue; they can charge fees for rendering services and also for granting the license impose fines amount for breaches of laws and generate new laws and rules for various assets and investments (Besley & Persson, 2013).

Taxes are the special systems that are imposed on the communities. Taxation laws are described as the body of laws that helps to govern the liabilities of a person and the organization to pay the tax. It covers the entire rule and establishes the tax base and incidence of the tax.  Australia has a vast body of taxation law (Bick & Fuchs-Schündeln, 2017). The primary source of the country is to find the thousands of pages of tax legislation that are enacted by the commonwealth, the territory parliaments, and the state.

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1. Overall calculation of the net capital loss or gain for this year

Australia’s taxation laws are operated by the commonwealth constitution and the international treaties that include the Double tax agreements (DTAs) entered into foreign countries.  Taxation is extremely important and useful for various studies and challenges of society because of its voluminous nature as well as due to the technical complexities.  In the last few years, it was observed that Eric has taken several attempts to solicit some asserts (Chen, Wang & Yang, 2014).  According to the question, it was assumed that he had those assets for a year. The taxability of the capital increases when the selling price of the assets increased from the base cost, according to Dowell, 2013 (Dowell, 2013). The indexation cost will not be valid to Eric as he had not reserved assets for more than a year.

Assets:

  1. Asserts are brought by the customers for their fun and use that don’t include the collectibles. These assets are again sold to some other person; the taxability doesn’t arouse when the acquisition costs of assets are less than $10000. According to the question, Eric has acquired personal asserts (Farhi & Gabaix, 2015). The first item that he has acquired is the sound system for the home which has an acquisition cost of $12000. The second assertion that was with Eric is the share of the company which has the acquisition less than the previous one which is $5000.
  2. Asserts that are brought by Eric for his enjoyment and fun don’t include the taxability of gain capital as the procurement cost of assert is less than or may be equal to the $500. Depending on this information, the collectibles are captured by Eric. The very first assertion that was captured by Eric is the painting which has an acquisition cost of $9000. The second assertion is the antique chair that has an acquisition cost of $3000. The final assertion is the antique vase having an acquisition of $2000 respectively (Farhi & Werning, 2013).

Based on the entire discussion, the following has been formulated that are used to compute the gain or capital of the respective assets.

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Estimation of Capital

Particulars Cost Base of Assets Capital Proceeds of Assets Net Capital Gain/ (Net Capital Loss)
Antique Vases  2,000 3000 1000 Gain
Antique Chairs  3,000 1000 (2000) Loss
Painting of the assert  9,000 1000 (8000) Loss
Shares that are listed in the company  5,000 20000 15000 Gain
Sound system for home 12,000 11000 (1000) Loss
Net Capital Gain/Loss     5000 Gain

 

Some important notes:

  1. Asserts that are acquired for more than a year for any personal use, the taxation of the capital is applicable in such cases.
  2. The taxability is applicable for the collectibles that are acquired and costs more than $500.
  • The capital losses for the whole year have been set with the necessary net value of gain or loss.

2. Loan to Brain

Brian has suggested a new system to the employees where he was offering loans for three years with one percent of interest every month. Due to this idea of $1 million, many came to open their account and to get the benefits of the loans that were offered by Brian to his employees. He was offering an interest rate less than the market rate of interest. Apart from this, to compute the taxability of these types of benefits, the rate of the statutory interest should be taken into consideration (Guner, Kaygusuz & Ventura, 2014).

In Step 1, In this case, the loan benefits will be calculated after removing the rule. The interest on the loan is based on the actual rate of the interest which should be subtracted from the loan that is based on eth statutory rate of the interest. The interest that is based on the statutory interest= is $1000000*5.65%= $56,500.Interest that is based on the actual interest= $1000000 * 1% = $10000. The taxation is different in both the case, that is $56,500 – $10,000 = $46,500. In step 2, Brian should follow the next step carefully. He needs to calculate the statutory interest rate after accepting the amount to be real and payable. The rate of interest is $1000000 * 5.65% = $56,500 (Kleven, Landais & Saez, 2013). Coming to the 3rd Step, from the entire percent, forty percent was used in the utilization of the meeting for the future, where Brian has computed the tax-deductible cost (manually) which is $56,500 * 40% = $22,600. As per step 4, out of the entire loan amount, forty percent was used in the meeting for the future by Brian (real amount) which is $10000 * 40% = $4,000. In step 4, apart from the above steps, the real amount is now calculated in this step from the manual figure to conclude. Therefore, $22,600 – $4,000 = $18,600. In the Final step, the final amount should be calculated by deducting the amount from step 1 after determining the amount till step 5. Therefore, $46,500 – $18,600 = $27,900 (McDaniel, Repetti & Ring, 2014).

However, if there is any system of repayment of these loans before the termination period, then instead of the usual repayment system, the deemed period of the loan will be assumed from where the interest has been started or become payable, respectively (Mellon, 2016). Apart from all these, the obligation is on the part of the repayment mode of the interests, then in such cases, the computation should be done similarly to the actual interest rate which is considered zero (Miller & Oats, 2016).

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3. About Jack and Jill Loan

Jack and Jill both agreed to borrow the money for their rented house where Jack was capable of receiving the 10% of the profit, whereas Jill was supposed to get 90% of the profit from their entire property. As per the written agreement between Jack and Jill, in case of any loss in the property, Jack has to bear the full loss which is 100%. In the last year, they have sustained a loss of $1000 which was completely paid by the jack without any obligation of the loss on the Jill (Piketty & Saez, 2013). The loss created a set off on the other forms of income of Jack which will determine the net profit or loss for the entire year. Apart from this option, he has one more option which is to carry forward the entire loss for the following year.

Whenever Jack is facing any type of loss, and then he has the right to bear the total amount and can carry forward the same amount in the upcoming years to maintain the net income or loss of amount (Tanzi, 2014). In the second case, if there is any gain then the amount will be divided between Jack and Jill in the ratio of 10:90. In these cases, Jack has the full right to set off the entire loss of $1000 which has come after selling the property. Therefore, from the entire discussion, it was clear that Jack was able to bear the losses that have occurred in the previous year and he is gaining the amount in the present year after selling the property (Rothschild & Scheuer, 2016). It was concluded that, if Jack didn’t have any gain in the recent year then he has to carry the entire loss without any involvement of Jill. So, this process has helped Jill to stay away from the taxation effects where the jack was only supposed to bear the loss of the books (Tanzi, 2014).

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4. Legal Plan

According to the law, every individual has the power to the legal plans and strategies that help them to decrease the total income at the last of every year, according to the case study of the IRC v Duke of Westminster [1936] AC 1 (Miller & Oats, 2016). After going through the case, it was clear that every individual has the right to utilize the right and benefits that are attached to the total income. In familiar terms, the rights are only valid when they are used fairly and correct methods are applied to it which is supposed to reduce the cost of the income and the tax values at the end of the year.

The following principles are classified from the above case study:

Principles 1:

The complete authority has been given to the individual to use the strategic methods and plans to reduce the total income by managing their accounts (Chen, Wang & Yang, 2014).

Principles 2:

No extra taxes will be implemented if the process will be followed in a relevant manner without any illegal means or methods.

Principles 3:

When the individual follows the fairway to reduce their amount and tax rate, then they will not be forced to pay the extra tax rate shortly.

The point number is valid until any new law is implemented in the country. The ideology is different from each other and varies from the previous one. The main aim of these rules has huge significance in the current situation in various manners (Kleven, Landais & Saez, 2013).

The rules are quite true and relevant for the surrounding as they are capable of preventing the organization from extra accounts an advantage. Apart from this, the rule also offers legal power to the business authorities in a simple manner. For example, when a business is facing huge losses in a particular year that address its obligations, then in such cases, they have the chance to change the balance sheets and the amount and can prepare the new one with the fixed assets and their values (Bick & Fuchs-Schündeln, 2017). In some cases, the business didn’t provide the relevant documents but still, they can proceed further. But certain restrictions apply to them. They should not follow any illegal path to achieve so. Combining the entire discussion, it is clear that the organization has to operate fairly to achieve the target and should follow the laws and procedures.

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5. Land Problem of Bill

In this scenario, Bill has a piece of land that he has thought of using for the grazing purpose of the sheep. To fulfill his desire, the entire land needs to be cleared as trees were present over there. Therefore, he has hired a logging company to clear the land. The company has charged him $1000 for every 100 meters of timber. But here the main question arises, is whether the tax applies to the logging company for the entire amount (Farhi & Gabaix, 2015).  According to the given situation, there are no facts on the receipts that are received from the firm which is considered as the revenue object or may not be considered as an object. The highest degree of uncertainty proves that the rules which are related to capital gains do not apply to Bill’s recent situation (Farhi & Gabaix, 2015).

When Bill is investing a total amount of $50000 in the logging company for the removal of the trees to get the timbers, then the same amount completely comes to Bill’s hand as a capital receipt. This happens due to reason where the total amount is considered as the lump sum and there is no other recurring receipt for it. Again, the transaction that has occurred provides the right to the particular authority to remove the trees from the respective lands. So, after the entire scenario, the case was considered as the lump sum receipt as well as the total capital receipt. Hence, the taxation of the capital is in the hands of the Bill (Bick & Fuchs-Schündeln, 2017).

So in the above two scenarios, the value of the invested money has a huge significance on the laws of taxation. The two cases are completely different. In the very first case, the receipt is in the hands of the Bill and is recurring whereas in the second case, the receipt is in the hands of the bill but that is not recurring that provides the right to receive the payments from the logging of the trees in the further situations. He will get the same receipt in a bigger one and that will be considered as a one-time receipt (Besley & Persson, 2013). So, in the next situation, Bill is getting enough amount of money from the opposite side. This act is considered a lump sum by selling assets. When one party sells the product to the other party, then the same receipt is considered as well as the taxation. When it was observed that the first case didn’t attract any tax gain, then it should treat as a normal tax and no capital gain.

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References

Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. The American Economic Review105(5), pp.38-42.

Basu, S., Vellakkal, S., Agrawal, S., Stuckler, D., Popkin, B. and Ebrahim, S., 2014. Averting obesity and type 2 diabetes in India through sugar-sweetened beverage taxation: an economic-epidemiologic modeling study. PLoS medicine, 11(1), p.e1001582.

Besley, T.J. and Persson, T., 2013. Taxation and development.

Bick, A. and Fuchs-Schündeln, N., 2017. Quantifying the Disincentive Effects of Joint Taxation on Married Women’s Labor Supply. American Economic Review, 107(5), pp.100-104.

Chen, Q., Wang, Y. and Yang, C.L., 2014. Taxation under Autocracy: Theory and Evidence from Late Imperial China (No. 2014-03). School of Economics, Shandong University.

Dowell, S., 2013. History of Taxation and Taxes in England (Vol. 1). Routledge.

Farhi, E. and Gabaix, X., 2015. Optimal taxation with behavioral agents (No. w21524). National Bureau of Economic Research.

Farhi, E. and Werning, I., 2013. Insurance and taxation over the life cycle. Review of Economic Studies80(2), pp.596-635.

Guner, N., Kaygusuz, R. and Ventura, G., 2014. Income taxation of US households: Facts and parametric estimates. Review of Economic Dynamics, 17(4), pp.559-581.

Kleven, H.J., Landais, C. and Saez, E., 2013. Taxation and international migration of superstars: Evidence from the European football market. The American Economic Review, 103(5), pp.1892-1924.

McDaniel, P.R., Repetti, J.R. and Ring, D.M., 2014. Introduction to United States international taxation. Wolters Kluwer Law & Business.

Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Piketty, T. and Saez, E., 2013. A theory of optimal inheritance taxation. Econometrica, 81(5), pp.1851-1886.

Rothschild, C. and Scheuer, F., 2016. Optimal taxation with rent-seeking. The Review of Economic Studies83(3), pp.1225-1262.

Tanzi, V., 2014. Inflation, indexation, and interest income taxation. PSL Quarterly Review, 29(116).

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