Taxation for Demolition with Lawyers

Question:

Answer:

1. A

In the given case study, Karl is an investment banker and has enough money. Petra his friend ran a DVD store and her store was located on a land property. Petra was struggling financially and needed financial help. Karl lent an amount of $100,000 to Petra at an annual interest of 8%. However, the business was unable to generate income and could not pay the interest amount. Therefore, Karl takes one quarter interest on the Petra’s land for not repaying the loan amount to Karl. An agreement was done that the land property would be sold in near future[1].  The store on the land was demolished and the council plan was obtained to build five storey apartments in its place. Karl worked closely and organized the demolition with lawyers and architects to get the approval from council. The arrangement involved fees of about $20,000 for lawyers and architects. However, the land with council plans and approval was sold for $800,000 through a real estate agent. According to Australian Taxation Law, Ordinary Income refers to gross income of an individual without any reduction other than the deduction from the business income under division 1A SSAct. The sale of land would be considered as income for Karl[2]. The income tax assessment act 1997 section 6-5 (1) provide that assessable income includes all the incomes as per the ordinary concepts that is ordinary income. Therefore, in the given case study, the sale of land generates income for Karl which would be considered as ordinary income and included in assessable income. According to the Australian Taxation Law, assessable income of an Australian resident includes ordinary income derived indirectly or directly from all sources. Therefore, ordinary income refers to income derived from indirectly or directly from all the sources during an income year[3]. The income tax assessment act 1997 explains the concept of ordinary income. Therefore, the sale of land would be considered as ordinary income for Karl as per the Australian Taxation Law. The profits generated from a transaction is consider as income as per the ordinary concept.  The Australian taxation office explains the taxation rule for income earned from the sale of land. According to the income tax assessment act 1997 section 6.5 states that the sale of land would be considered as ordinary income of Karl[4].

1B. Capital Gain Tax Liabilities

Capital loss or capital gain on the assets is the difference between the cost of the asset and selling price of the asset.  The taxpayer has to pay tax on the capital gain made on the assets. Capital gain forms part of the income tax and it is not considered as separate tax. If an individual make a capital loss then he or she cannot claim it against the income and would carry the losses forward and deducting it against the capital gains in coming years[5]. Capital gain tax is calculated on the gains earned from the sale of the assets. In the given case study, Cindy purchased two separate shop premises in the year 1 June 1999 and paid $200,000 for each of the shop premises. Stamp duty was also paid for the shops. Cindy sold the first shop in the year 10^th August 2016. The selling price of the first shop is $810,000. The cost price of the shop was $200,000 plus stamp duty. Therefore, the capital gain from the sale of the shop is $600,000. However, Cindy has not to pay capital gain tax on the capital gain amount as per the Australian Taxation Law[6]. Most of the personal assets are exempted from capital gain tax which includes car, home, apartment and personal use assets such as furniture. Capital gain tax is also not applied to depreciating assets that are used for the taxable purposes such as fittings in the rental property or business equipment.   Cindy had also purchased CBD apartment in Melbourne in the year 1 July 2011 for an amount of $200,000 and also paid stamp duty of amount $10,000. In the year 20 August 2016, Cindy sold the apartment for an amount of $500,000. Capital gain earned by Cindy on the sale of the apartment was 290,000. Therefore, Cindy has to pay tax on the capital gain earned from the sale of the apartment[7].  Australian Taxation Office explains the capital gain tax on the sale of the assets. All the assets acquired after 20 September 1985 are subjected to capital gain tax. In the given case study, Cindy has to pay capital gain tax on the sale of the first sports shoe shop. A company or an individual has to show both capital losses and capital gains in their accounting year. The net capital income of an individual is included in the assessable income of the taxpayer and taxed along with other assessable income at the marginal tax rate[8]. The base cost of the property is the sum of acquisition cost of properly, incidental expenses selling and purchasing the property and non capital ownership cost of the acquired asset. However, Cindy has to pay tax on the capital gain earned from the sale of first sports show shop as per Australian Taxation Law.     

Advice to Cindy to take an advantage of CGT small business concessions

There are significant provisions of tax concessions for the small business entities for their capital tax gain in the Australian Taxation Act. The Income Tax Assessment Act 1997 (ITAA 1997) provide the guidelines that explain the provision of tax concessions for the small business on their capital tax gain[9]. As per the guidelines the concession for the capital gain tax is available for the small business entities, which are included in Division 152 of the (ITAA 1997) Income Tax Assessment Act 1997. After 11:45 A. M. on 21^st Sep. 1999 by the lawful time in the territory of Australian Capital, the concessions for the CGT events can be applied [10].There is not any explanation on the process of the concession applied to a consolidated group of companies. As per the Australian Taxation Act 1997, the definitions of small business are as follows;   

• An individual business entity for an example the sole trader.
• A partner from a partnership firm.
• A small firm or a trust.

The capital gain tax is not a distinct tax but a part of income tax and it computes by the income obtain from capital gain. The tax payer must add the net capital gain that the tax payer makes in an income year in his/her assessable income for that specific year. The tax applied for the capital gain tax at a general marginal tax rate, which applies to the taxable income of the tax payers[11]. Net capital gain is the differences between the total capital gain and total capital loses of the tax payers. The CGT events are associated with events, when any transaction happened such as disposal of any CGT asset is called CGT events. The CGT asset are mainly land and building, company share, units of a unit trust etc. besides this, the contractual right, good will are also CGT asset  [12].

In case of the tax payer obtained a capital gain from a CGT event and that occurred after 11:45 A.M. on 21^st Sep. 1999 ( for example the selling of a CGT asset) the tax payer may reduce the capital gain by utilizing either of this or both of the following;

• Discount of the CGT
• For the small business entity there are four CGT concessions available.

An individual can apply for the CGT discount, besides this, a foreigner or an Australian citizen who does not reside in Australia can apply for CGT discount[13].   

Net capital Gain

Net capital gain on the assets is the difference between the cost of the asset and selling price of the asset. An individual has to pay tax on the capital gain. Capital gain is considered as the part of the income tax and tax is applied on the capital gains[14].  In the given case study, Cindy purchased two separate sports shoe shop. The first sports shoe shop was sold and earned capital gain. The capital gain from the sale of the first sports shop will be included in the current financial year.  The capital gain from the sale of the CBD apartment will not be included in the capital gain tax as because it was the personal asset of Cindy and most of the personal assets are exempted from CGT which includes home, car and furniture etc[15]. The cost price of first sports shoe shop was $210, 000 in the year 1 June 1999 and the selling price of the shop is $810,000. Therefore, the capital gain from the shop is $600,000. Therefore, Cindy has to pay tax on the capital gain.

	Selling ($)	Cost	Capital Gain
First Shop	600,000
Shoes in the store	60,000
Goodwill	150,000
	810,000	210000	600,000

Part 2

Introduction

The Australian government raised the amount of taxes in an appropriate and efficient manner with implementing the necessary revenue system for the collection of taxes. The consideration of the taxation system in the case of capital gain discount under the division 115 of ITAA 97 help in providing views for the context of fairness, economic efficiency, protection of government revenue and the other relevant considerations [16]. The capital gain taxes helps in representing the net income made in the financial year. The assessment of income tax is found to be necessary for the generation of revenue system and thereby the system of discount capital gain tax is created for the enhancement of the capital losses in reference to the working capital. Special rules are applied to the income of trusts with net capital gains and this ensures the discount process of capital gain taxes with the implementation of capital gain taxes[17].   

Main body

In the context of capital gain taxes, a discount gain capital tax is seem to be remaining same with being applied for any capital losses and the net capital losses. The division 115.1 of ITAA 97 describes that a capital gain tax from a CGT asset is a discount capital gain tax only if the entities are making gain from the acquired taxes[18]. With the consideration of the special rules, the implementation regarding the capital gain taxes are taking place with the application of beneficiaries and thereby the inclusion of the cost base index is made on the assets. The special rules are also seemed to be applied on the listed investment companies in order to enable receiving dividends of the shareholders[19].  The divisions 115-10, 115-15, 115-25 and the 115-25 represents the implementation of the capital gain taxes with the variations created in the reforms of the discount capital gain taxes. With the implementation made on the context that represents” capital gains are subject to a 50% discount”, is seemed on the various fields that represents the economic efficiency, fairness, protection of government revenue and the other relevant considerations[20]. Under the above mentioned divisions, the categorization of the treating of the entity is represented with acquiring the CGT assets and the implementation is seemed to be taking place on the basis of the circumstances created.

Evaluation on the basis of fairness

On the basis of evaluation of fairness judgment in the case of” capital gains are subject to a 50% discount” represents the fact that the taxpaying entity seems to be directly dependent on the partner. With the implementation of the direct access to revenue and capital losses, the act mentions that the partnership and the business activities are considered within the non-commercial activities[21]. Henceforth the fairness in the case of “capital gains are subject to a 50% discount” is provided in form of the benefits regarding the expenditures and the losses created. The system of direct access with the creation of variation of the differentiation is made in order to prohibit the activities that are seemed to be crucial with the consideration of disposal of the partnership criteria. With the formation of the partnership activities, each partner will not be prevented from qualifying the 50% discount in the case and thereby the indexations are made on the basis of the disposal of the partnership related assets[22].  As per the considerations of the business for CGT concession, according to the Division 152 of ITAA1997 provides a range of CGT which helps in the consideration of the interest in the partnership and thereby the partner bias is seemed to be creating conflict in considering the significant individual. In this way, the evaluation of the fairness is judged in the context of capital gains which helps in individual consideration of taxation in the capital gains and thereby the “capital gains are subject to a 50% discount” is seemed to be proved in form of partnership activities[23].        

Evaluation on the basis of economic efficiency

The separation of the taxation perspective helps in creating enmity in between the separation of entity. It thereby helps in the creation of the trust in the form of the tax trust return with the respective marginal rates.  The contrast seems to be created with the creation of trust in the form of the CGT concessions[24]. The potential access of the CGT partnership is provided in the small business with thereby accessing the general trust of the partners in the business of the partnership. As per the Division 115 of ITAA 1997, it helps in the creation of the extremely attractive business structures with the disposing of the taxpayer’s assets. It henceforth inhibits access for the provision of the partnership in the form of the non-tax paying entity[25]. Partners are thereby creates the CGT event which in relation helps in the formation of the assets on the basis of the partners. Therefore the trust or the superannuation funds helps in the creation of the rare circumstances that depicts the increment of the conduct of made by the partners. Henceforth the rare circumstances are associated with qualifying the discounts issues with the creation of assets of the partnership[26]. This henceforth creates the economic efficiency in the form of assets increments and the discounts made. It thereby also helps in gathering the information in the context of the circumstances created. Henceforth the rare circumstances are presented in the case of the formation of the economic efficiency which henceforth creates barriers in the case of” capital gains are subject to a 50% discount”.   

Evaluation on the basis of protection of government revenue

On the basis of the evaluation for the protection of government with the implementation of the special rule created with the acquisition of the certain replacement of the assets. At the time of happening of the CGT event and henceforth the membership interest is seemed to be owned with following the CGT event fixed interests. It thereby also helps in the considering the values that are related to it and henceforth the membership interest seem to be laying under the sections 115-30 (1) [27]. The subsection 115-45(4) applies that the trust and henceforth the enhancement is seen in the case of the understanding the enhancement and thereby the assets are seemed to be created in the form of the trusts. The protection of the government revenue helps in the creation of the assets test with acquiring the condition of the original assets with the consideration of the subsections. These subsections helps in the consideration of the CGT event that helps in the creation of application for the event and henceforth the enhancements are applied on the original CGT event[28]. The application of the subsections helps in the construction of the new rules that seems to be implemented by the government and henceforth the original CGT event is considered.      

Evaluation on the basis of other relevant considerations

The evaluation on the basis of the other relevant considerations that are included in the case of the membership assets with the creation of subdivision in the era of the reforms. The acquirer involves in the subdivision of 115-25 that helps in appropriate rolling of the time which provides the enhancement of the process. It thereby also helps in indicating the roll-over assets in regarding the case provided” capital gains are subject to a 50% discount”. It also depicts the unbroken series in the context of the corresponding subdivisions and also the creation of the interests helps in transferring the trust and thereby the involvement of the series take place in the case with providing the subdivisions created with the interest of the Acquirer[29]. The sections 83 A-33 depicts the reduction of the amount included with accessing the challenge of the subdivision 310-D. Therefore the enhancements are made accordingly with providing the roll-overs of the first roll-over in the series with the creation of corresponding original assets for the roll-over. 

Conclusion

The essay depicts the fruitful considerations of the case study with depicting the original assets of the case. It thereby also helps in the creation of the section 115-25 for the provision of appropriate justification for the case” capital gains are subject to a 50% discount”. It also helps in including the interest of the joint tenants and also it helps in including the equal sharing of the replacements. The rollover also depicts the replacements of the assets with creating the roll over in the series acquired. 

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