Income Taxation Law In Australia-assignment

Q1 Under the income taxation law in Australia, every individual or company is liable to pay taxation out of their income. Income in this case is defined under section 25 (1) of the income assessment act (1997) as the any monetary gain earned out of business activities or selling of services . This therefore means that in the financial years 2015, Luke and Lucky are not entitled to pay any tax on the $20,000 sale they made that year. This is because the money they earned was from the sale of personal belonging which in fact was sold below their purchase prices and as such there was no gain derived by them from the sale of the products. In other word, since the sale they made in financial year 2015 were from personal belonging and they did it not as a business but as mean of raising money for holiday, they are not liable to pay any tax since the money earned form that sale does not qualifies as taxable income. However, the sale and income they earned in financial year 2016 qualifies to be taxed. This is because this time round, they income was generated from Business activities which is regarded as income by ordinary concept under Australia law. Rather than selling their personal belonging, they bought stock which they either modified or sold them as they were at a price higher than the purchase cost with the aim of making profit. As of June 2016, they had made a total sale of 38.000 in which they incurred a cost of $16,000 in acquiring the stock they sold. This mean they made a profit of $38,000-$16000=$12000. They are liable to pay income tax from their profit of $12,000 at income tax rate as determined by the authority. This fact are well contained in the case V76 88 ATC 538 where it was held that an individual is liable that the defendant income was income from ordinary concepts of selling services and such they were liable to pay taxes. Q2 In addition, Luke and Lucky will be liable to pay an income tax from the $ 200,000 Lump sum; they were paid after they sold their right to design, existing stock and material to a retail company. The reason they will be liable to pay taxation to this amount is because a gain was made. They have build a business which they sold out to another companies after it become successful and such that derived gains from the sale which automatically make them liable to pay tax on the income earned. Furthermore, in their agreement with the retail company that bought their business, they were in agreement that a loyalties of $1.20 for every item sold will be paid to them for the next twelve year. Again in this case, this loyalty is form of gain which is taxable. Therefore, in financial year 2016, Luke and lucky will be liable to pay addition income tax from the $240,000 income earned from royalties ($1.2 by 200,000 item= $240,000). According to Income assessment tax Act 1997, incomes are treated as either ordinary or statutory for the purpose of taxation. Section 6.5 of the Act introduces the concept of ordinary income. According to this section, any income earned by an Australian directly or indirectly is treated as ordinary income. Ordinary income includes those earned from; • Rendering services • Property (investment income) • Carrying on business In the above context, the income derived by Luke and lucky from the sale of right to their design does not fall in any of the above category and such it is not an income by ordinary concept. In fact, Under ITAA97 and ITAA36, the income is capital gain meaning it falls under statutory income. Therefore, Luke and Lucky are liable to pay capital gain tax resulting from the sale of intangible asset i.e. rights to design at the prevailing tax rate. Q3 When accounting for taxation purpose, one of the important factors to consider is when the income is derived. The general rule is that taxation should be paid when the income is derived. There are two tax accounting method that taxpayers can used. This is earning (accrual) method and receipt (cash method). In then accrual method, Income is derived when it is earned . Under the cash method, income is derived when it is received .According to ATO; small business (i.e. those with aggregate annual turnover of below $2 million) can use either any of the two methods. However for larges business with over $ 2million aggregate sale per year should only use the accrual-basis method . Since Luke and Lucky business qualify to be called small business based on it aggregate annual turnover, it can use either the accrual or cash accounting method Conclusion It is evident from the above discussion that under the income assessment tax Act 1936 and 1997, every Australian and foreigner living in Australia are liable to pay two type ordinary income as well as a statutory income. Individual are required to pay ordinary income when they generate some income from sale of personal services, engage in business activities and investment income. Statutory income is paid when individual derives some income from sale of either tangible assets such as land, building, car, house etc and intangible asset such as right to design, patents, copyright etc. Therefore in the above case scenario, Luke and lucky are liable to pay income tax but only those qualifies to be assessable income. Any income they generate from sale of personal belonging is exempted from taxation. Section two; CGT Small Business Concessions Introduction Small businesses have been hailed as the engine for Australia economic growth. According to a recent study conducted by Council of Small Business Organisations of Australia, Small businesses generate approximately 5.1 million jobs which is half of what private sector provide . The Australian government has come to acknowledge the role of Small business in the economy and such it has therefore provided a number of tax concession to even promote small business further. One of such tax concession is the Capital Gain tax (CTG) Small business concession. This paper is going to discuss CTG small business concession in detail. It will then conduct a critical analysis to determine whether the CGT small business concern as it is currently constitutes is of any contribution to the economy. What is CGT for small business concession? Under the income statement assessment ITAA97 and ITAA36, every business in Australia is under obligation to pay various income taxes including both ordinary and statutory incomes. Just like Medium and large Business, small business are also required to adhere to the income assessment tax Act 1936 and 1997. However, in some cases small businesses are exempted from paying some taxes. This is called tax concession . Currently, In Australia, Small Businesses are exempted from paying Capital Gain tax. Capital gain Tax is a form of assessable income tax that business are liable to pay when they derive gain or profits from disposal of any of their property such as land , car, equipment , patents etc .Division 152 of the ITAA 1997 provide four time of CGT concession that are enjoyed by eligible Small business. These include; 15 year asset exemption- In this cases an individual who is 55 year of age or above and have operated and own a small business for the last 15 years but wish to retire or is unable to carry on with the business due to permanently incapacitate, they are exempted from Paying capital gain tax when disposed the assets of the business. If entity is company or trust, n it can only qualify for this concession if it has a controlling stake of ownership of the assets for a period of 15 years . Therefore, if a company or trust is a minor stakeholder in ownership of an asset it cannot qualify for this concession. The retirement exemption-A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once. A taxpayer under 55 years is only exempt if this is rolled over into a complying superannuation fund . 50% active asset Reduction- under this type of concession, Small business that own an active business asset but does not meet the other three eligibility requirement are only required to pay 50 percent of capital gain if they chose to dispose of the asset Rollover exemption - This is a CGT tax concessions that apply when a small business dispose it assets or property with the aims of replacing it or improving existing one. If an active business asset is sold to give room for a new one or improvement of other, Then the business will be exempted from Paying Capital gain tax when disposal such assets . However, it will have to pay Capital gain tax when it disposes the new acquired assets or the improved assets unless such disposal is meant to give room for replacement. For a business to qualify for capital gain tax small business concession, it must meet the criteria used to defined Small business. The criteria used to define small business have never been consistent. According to the Australian Bureau of statistic, small businesses are those that have less than 20 employees . However, For the purpose of taxation, Small business are defined as sole trader, partnership, companies or trust that has an aggregated annual turnover of less than $2 million earned from business activities. Therefore, for a small business to qualify for capital gain exemption for small business, it must have aggregate annual turnovers that are less than $2 million . What are the Policy objectives of CGT small business concession? There is general agreement that small businesses are the foundation for Australian economic Growth . Evans notes that over the recent years, Small business has become very important component of Australia economy as they contribute 50 percent of total employment Created by the private. Small business does also make major contribution to the Tax revenues of the Government. Evans furthers noted that due to the major and imperative contribution they are making to the economy. The government has been keen to help Small business prosper by offering them tax incentives . It is in this spirit that the government introduced the Capital gain concession for Small Business. In other word, Capital gains tax concession for small business was introduced by the government with the objectives creating a favourable environment for small business to prosper. Equally, as mentioned by Costello Capital gains tax and capital gain tax small business concession are also meant to ensure Australian taxation regime is competitive when compared to other in the world including those of UK, USA, Canada, New Zealand etc. This competitive help attract foreign direct investment which are crucial for economic growth . Has CGT Small business concession achieved it objectives? As seen in the context above, the prime objectives of Capital gain Tax small business concession is to strengthen the important sector of our economy i.e. the small business sector. It is with no doubt that those taxpayers that meet criteria for capital gain taxes small business concession enjoy some benefits. They either enjoy reduction of capital gain tax or complete exemption for the tax . As currently constituted, the capital gain tax concession for small business have several eligibility requirement that need to be met for one small business taxpayer to enjoy any of the four CGT small business concession. These requirements are contained in division 152-1 to 152-60 of the Act. These requirements are; Active assets requirement The active test requirement is contained in section 152-35 to 152-45 of the division 152. According to this requirement, a business is eligible for Capital gain concession for small business only if the asset which is subjected to Capital gain tax has been an active asset. An active asset is; • Is one which has been in use by a small business entity or it affiliate in the course of carrying it business • An intangible assets that that is connected to business operation of a small business entity e.g. Goodwill and patents • Share in a Australian registered company or interest in a trust Maximum net asset value requirement This requirement states that for a small business to be eligible for the 50 percent CGT exemption, the CGT assets must have a net value that does not exceed a net value of $ 5 million. Net value of a CGT asset mean the amount by which the sum of the market value exceed the value of liabilities associated with the asset . These requirement seem straight forward, However, these eligibility requirement has led to the criticism of the entire CTG small business concession been criticised by some academician and practitioners for not meet the criteria for good tax regime. Basically, a good tax regime must meet several internationally accepted criteria. These include simplicity, Efficiency and Equity . In this section of the paper, CGT Small concession policy (and it eligibility requirement) will be evaluated with these tradition criteria for good tax regime in mind. A taxation policy can only meet it objectives if the three Criteria i.e. Simplicity, equality and efficiency are met. Simplicity In order for taxation policy to meet it objective it must be simple to understand and administer. This is because simplicity directly affect taxpayer compliances rate with policy requirement. If a taxation policy is simple, taxpayer compliance rate is high. The opposite is true. Capital gain tax concession for small business in Australia is criticism for being too complexity . As mentioned earlier, one of the requirements for good tax regime is simplicity . Taxpayer must be able to pay their taxes and apply for concession where applicable with lot of easier. But if a tax regime is complex it discourages taxpayer form compliance. Madsone and Sadiq claim that the current Capital gain tax small business concession is so complex hindering tax payer compliances . In support of the same argument, in his survey, Evans noted that the current Capital gain tax small business concession regime in Australia was hard to understand making compliance rate to be low . The same sentiment was also expressed by Australia taxation office (ATO). In 2004 , ATO published a compliance report in 2004 in which it acknowledged and stated that there was a compliances problem with the Capital gain tax concession for small business which was mainly contributed by several factor including ; • Low level of awareness, knowledge and understanding in relation to capital gain tax small business concession • Recording keeping in small Business were not properly done, making it difficult to calculate capital gain • Capital gain is wrongly calculated by most small businesses • In some cases, Capital gain was being omitted by small business in their tax return . These points as raised by Australian taxation office (ATO) clearly shows the complexity of the capital gain tax small business concession. As it is for now, Capital gain tax small business concession is so complex for an average small business taxpayer to understand, and comply with. This in itself make the Capital gain Tax small business concession regime a bad tax system as it does not fulfil the requirement of Simplicity as used to define good tax system. As mentioned by Wayne, the lack of simplicity in the Capital gain tax small business concession is mainly caused by the eligibility criteria adopted. In order for a small business owner to enjoy the CGT small business concession, they must meet certain criteria depending with the type of concession applicable to them. They is lack simplicity in this criteria Equity In term of equality, CGT Small business concession has been blamed by commentator as Promoting inequality, according to National federation of farmer (NFF), CGT for small business concession is said to deviate from the Equity criteria for good tax system. National federation of farmer in it submission comment to Board of taxation mentioned that The $ 5 million Capital gain Threshold that small business must meet in order for them to be eligible for 50 percent CGT exemption, Unfairly discriminate Small business in farming whose business despite being meeting criteria for small have high level of capital due to the importance of land in the farming business. To support the same argument, the institute of chartered accountant in Australia (ICAA) assert that, the $ 5 million threshold had eroded over time due to the sharp increase in property prices for the last five years. ICAA argues that, the rise of property prices increases the real value of asset held by small business and such increase may go beyond $ 5 Million threshold locking small business out of the CGT concession One of the requirements for Small business to be eligible for CGT concession is that asset must have been active. There are few concerns that have been expressed with this active asset requirement especially relating to what is included as an active asset. The current CGT concession for Small business excludes some form of active assets which to small business are important. It has also been blamed for not promoting equality . According to ICAA, section 152 of does not treat cash, share and contingency Claim as active assets yet they are asset to Small organization. ICAA further assert that idea to exclude cash as an active asset for the purpose of CGT concession, fairly discriminate those Small businesses that chose to hold large cash reserve rather than invest them in property due to the nature of their business. In addition , taxation institute of Australia TIA) express concern with how the Current Capital gain tax concession for small business treat intangible asset such as intellectual property and software. According to TIA, Intellectual property and software developed in- house by Small business are important assets which should qualify for consideration during for 50 percent CGT exemption during their disposal. Otherwise, the current CGT concession regime as it is discriminate those small business who invest heavily on in-house developed intangible assets Efficiency A good tax system /regime must be efficiency and in order for tax policy to meet it objectives it must be efficiency to taxpayers as well as those administering it . The current Capital gain tax regime seems to have look at the issues of efficiency very well. Applying for the Capital gain concession process is less costly. No literature review seems to dispute. In fact, there are numbers of literature that has indirectly described CGT for small Business as efficient for Small Business. According to assertion made by ICAA, CTG for small concession is pocket-friendly for Small business when applying for them. However, due to the complexity of the eligibility requirement, many small business taxpayers are forces to incur extra cost of hiring taxation adviser to advices on matter taxpayer do themselves if the CGT concession regime was made simpler. However, the cost of hiring and adviser may not be that restrictive since quite good number of small business already maintains advisers in relation to accounting and taxation issues . Conclusion The evaluation conducted in this paper point out that the current CGT small business concession regime meant good for the Small business. However, as currently constitute, the Cap[ital gain tax concession for small Business is not achieving the intended objectives of strengthening and supporting Small business due to a numbers of issues relating to eligibility criteria. The eligibility criteria used to determine whether the business qualifies for the CGT concession for small business is faulty as it led to unfair inequality in some cases, it is too complex for Layman taxpayer to understand and comply with. This therefore calls for policy reform on the CGT concession for small business in order for it to meet criteria for good taxation policy hence meeting it objectives. This paper recommends several policy reforms that should be done on this CGT small business concession. One, the maximum net asset value of $5 million that must be met for a small business to qualify for CGT concession must be revised upward to at least a maximum net value of $ 10 million. As it is currently constituted, the maximum value of $ 5Million requirement unfairly locks out many of small business in the capital extensive segment despite them meeting criteria for Small business. Revising the Maximum net value of asset to $10 Million while a5t the same time retaining the definition of small business as those with aggregate annual revenue of $2 million will promote equity since those small business with small revenue but whose assets are has high market value due to nature of their business will be eligible for the CGT concession. In this way, the CGT small business Concession will promote equity which a good tax system must meet. Two; The active asset requirement need to be redefined. As currently constituted, the eligibility criteria is discriminating Small business with intangible cash reserves and =some intangible assets. This eligibility requirement should be reform to be more inclusive on the various forms of assets held by small business