The Common and Statutory Rules Applicable in Business - Report Example

Customer’s Name Customer’s Course Tutor’s Name 30th April, 2013. Under the Australian Tax Authority, it becomes a matter of fact in determining whether an enterprise is a business or a hobby. The report begins by giving an introduction of what a business entails, give some of the common and statutory rules applicable in business, any drawbacks or benefits of being taxed as a business, how to determine if an Enterprise is a business and lastly whether there are any negative gearing in Division 35 provisions. For tax purposes, a business venture can be defined to be any enterprise, trade, calling or vocation where an individual earns income that is translated to bring profits excluding the expenses incurred. It is to be noted that a business does not include an employee in their occupation as they are not entitled to accessing the profit. Business is taxed under business income as a result of the transactions carried out. Section 5-6 of the Income Tax Act 1997 1further explains what may constitute income. It is therefore advisable to separate between what can be regarded as a hobby and what is to be defined as a business and it all depends on the activity one is involved in assessing the income. If one is to be engaged in business activities, the Australian Tax Authority requires one to have a number called an Australian Business number which is registered to show the legality of a business. The IRS defines the rules that Common Law 2stipulates and these rules are used to determine whether an enterprise is a business venture. The rules consider the level of control that the owner has and the relationship that exists between the venture and the owner. The rules are divided into three one being behavioral control, the second being the relationship with the venture and the owner and lastly being the financial control that the owner has( Daily. pp. 24)3. Under financial control, for an enterprise to be termed as a business, the owner should be responsible for all activities that involve using and accessing finance. The owner therefore has to have investments that are of significance to the business venture meaning that the business has the ability to purchase its own equipment. All business expenses should be under the owner and they should be paid by the business and not the employees. The business should either benefit from a profit generated or a loss suffered as a result of the activities being engaged in and this should not be attributed to a specified individual. A business has to make its services available to other people hence should be an open venture. In a business, a specified payment method should be chosen that is to be used to pay all its employees. Under the type of relationship, a business must be engaged in writing contracts as this shows the legality of a business. A business should have employee benefits such as paid vacation and different types of insurance. A business has the legality of hiring employees on a permanent or temporary basis as it prefers. Lastly, a specified activity should define a business as through the activity a business is defined (1992 Australian Income Tax Legislation, pp. 55)4 Under behavioural rules, this defines ways in which a business owner should behave towards his employees. The first category is the instructions given as they determine how a business is to be approached and the procedures to be used to conduct the business. A business has to have a degree of instruction where employees have to instil rules and regulations that are meant to control business activities (Tax Agent and Business Portals, pp.35)5. A business should be evaluated oftenly and this becomes the work of an employer to conduct such an activity to access the level of profit or loss being generated. Lastly a business has to have continuous training and through this, skills are attained. In the determination of the rules to be applied in the determination of cases, the following rulings have to be taken into account. The amount of income earned should be in accordance with the Income Tax Assessment Act 1977 6and must be earned in an ordinary way of business. Any loss that might be incurred should be under section 8-1 of the (ITAA 1997). The assets being used in the business should be accounted in the capital expenditure as a depreciating asset. Common law has a role in determining what is characterized in a business activity and all this is according to the degree of impression as noted in the case of Ferguson ATR 884; ATC 42717. It can also be noted in the case of Evans v. FC of T 89 ATC 4540; (1989)8 in a federal ruling that there is no indicator that is evident enough to determine if a business is being carried on. It can thus be concluded that an enterprise will only be claimed to be a business if it is based on overall impressions after assessing the activities being carried out as whole and the intention of the owner (Barkoczy, pp.56)9. A recent case law that involved a determination of whether an enterprise was a business or a hobby saw a man being charged guilty and a fine of $10,000 after he had refused to declare his enterprise as a business. This is after he decided to rare turtles which earned him an excess of $100,000 after selling 1200 of them and claimed that this was out of enjoying the enterprise. The facts of the case were that the man purchased the turtles from the internet and he too did his advertisement through the internet. The ruling was determined according to the Australian tax Authority where each case is determined differently and in ruling any case, one would be considered to be carrying out a business and would be entitled to being taxed if the its main intention is to make a profit and if the venture is meant for commercial purposes. These rulings are important as having any money from a business is viable to income hence entitles to an Australian Business Number. In the case, it can be argued out that the enterprise was a business as it earned more than $75,000 in terms of profit and the activity being carried out was with the intention of making a profit as it was a repetitive activity. The ATO states that an enterprise which earns $75000 as annual profit is entitled to being a business venture and has to be registered. A business is also entitled to tax deductions in case the venture has any allowable expenses in the duty of earning income. It can therefore be ruled out that an enterprise is normally a business if it qualifies for the following details. If the venture is meant for commercial purposes. If an individual has an added intention of being in business If there is a probability of generating profits Is there is a regular activity being carried on If the activity is planned in a businesslike manner If the size and scale of the enterprise can be attributed to a business venture. Businesses have tax advantages where they can be exempted from criminal tax that can be gotten out of skimming activities which are associated with small business ventures (Mancuso, pp.43)10. Another advantage is that the businesses have administrative concessions while tax is being administered to them. When it comes to substantive tax concessions, businesses are allowed in accordance with the substantive interpretation of the law. A business is also entitled to general and specific tax concessions in situations such as income splitting. Among the disadvantages of being taxed may involve: Not all the profits gotten are as a benefit towards the owner where in the profit earned, some of it has to be remitted to the tax authority. Also there is difference in taxation where those businesses that generate less profits are taxed lowly while those that earn high profits are taxed higher. It is also a disadvantage to a business where it has to be taxed on the kind of venture being undertaken. In a situation where a business Is a monopoly. It is believed that it fetches a lot of profit thus taxing contributes towards a business being motivated. Negative gearing refers to a kind of financial leverage where an investor is given an opportunity to borrow money that is meant to be invested but the income generated is less that the amount incurred in managing and investing. This includes the interest charged on what was borrowed. In negative gearing, the investment bought generates less than what was borrowed until there comes a situation where the asset is sold and that is the only way profit is realised. In an investment making losses, they still have to be taxed. Negatively geared property that is incurring losses is tax deductable against other personal income. According to income tax treatment interest on investment is deductible even in a situation where the income generated is less than the interest earned. It is in such a situation that any shortfall is offset from other income sources, meaning that the business does not entirely suffer. Negative gearing is allowed to individuals under Division 35 and this is based on the amount of capital gains that one makes against the losses made during commercial activities11.Taking the example of a business, Division 35 must be taken into consideration when a business is experiencing losses meaning that they are not to be distributed. Division 35 is part of ITAA through the New Business Tax System Act 2000 and it is based on any business activity. Division 35 does not apply in all areas and is not eligible to excess deductions in a business activity. Works Cited 1992 Australian income tax legislation: incorporating all amendments to 6 January 1992.. North Ryde, N.S.W.: CCH Australia, 1992. Print. Australian master tax guide 2013. 52nd ed. Sydney, N.S.W.: CCH Australia, 2013. Print. Australian tax legislation. Sydney: Australian Tax Practice, 1997. Print. Barkoczy, Stephen, and John Baring. Australian tax casebook. 7th ed. North Ryde, N.S.W.: CCH Australia, 2004. Print. Common Law Daily, Frederick W.. Tax savvy for small business year-round tax strategies to save you money. 6th ed. Berkeley, CA: Nolo, 2002. Print. Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 Ferguson ATR 884; ATC 4271 Income Tax Act 1997 Income Tax Assessment Act 1977 Mancuso, Anthony. Incorporate your business. 2nd ed. Berkeley, CA: Nolo, 2004. Print. Tax agent and business portals: Australian Taxation Office.. Canberra: Australian National Audit Office, 2006. Print. Read More