Australian Taxation Law Issues - Assignment Example

Australian Taxation Law Name University Course Tutor Date Australian Taxation Law Problem Question 1A According to the taxation law of Australia, assessable income refers to income that is subjected to taxation on grounds that one earns more than his/her tax-free threshold. A number of examples of assessable income have been available to the public in Australia, as per the Income Tax Assessment Act of 1997. Interest from banks accounts, pensions, rent, and bonuses and overtime received by an employee have all be listed as assessable income in Australia (Burman & Randolph, 1994). In addition, dividends alongside other investments’ income have also been listed as assessable income in Australia. In the case of involving Clara, the amount of $25, 0000 is not subject to taxation. Ideally, this amount is not in the provisions of the Australian Taxation Law for assessable income. It is rather compensation and not one of the forms of income categorized as assessable income. It is, therefore, legally right that the $25,000 awarded to Clara by her employer ought not to be subjected to taxation, as per the country’s laws. In Australia, ordinary income calls for a benefit in money or its worth. Ideally, this could be inclusive for instance an existing liability’s reduction (Burman & Randolph, 1986). For income to be termed as ordinary income there is a requirement for an activity of income earning; this activity ought to be the likes of a profit generating activity, personal exertion, property, or investment. In the case involving Clara, she would simply receive $15,000 to give up on the business she had been running. This is because her employer felt that, while completing tax returns for public members, Clara would be mentally exhausted thus inability to deliver with full potential (Auerbach, Burman & Siegel, 2000). According to the 1997 Income Tax Assessment Act, the amount of $15,000 cannot fall under any of the following categories: a profit generating activity, personal exertion, property, or investment. This has the implication that it would not be within the legal framework for any agency to refer to the amount of $15,000 as ordinary income. Problem Question 1B In the Australian taxation context, Capital gains tax (CGT) is normally applied on the gains on capital upon an item’s disposal; there are, however, a number of exemptions. It is worth noting that the family home is the most notable exemption in this regard. There is application of rollover provisions on a number of disposals with transfers to beneficiaries on death being the most significant. According to the Australian Taxation Law, CGT has an operation which treats net gains as taxable income-this applies for the tax year which saw the sale of the disposal of the asset (Auerbach, L Burman and J Siegel, 2006). In cases where assets are held at least for a year, individual taxpayers get a 50% discount on gains or 33% discount for superannuation funds. There is a possibility of offsetting capital losses against capital gains, alongside carrying forward, indefinitely, a tax year’s net capital losses. Generally, a capital gain refers to the value hike of a capital asset; it could be brokerage or other costs of transactions. There are also cases when assets have capital loss implying that their values have declined. Australia follows the international norms implying that the realization of capital gains and losses for the purpose of taxation is only done upon the sale of the asset (Diamond & Mirrlees, 1971). The Australian Taxation Law has provisions for exemptions from tax on capital gains. For example, there are exemptions on principle residence alongside assets whose acquisition was before 20th September 1985; ideally, the introduction of the capital gains in Australia came on this date. There are also provisions for rollovers for a number of gains; these are inclusive of gains on items transferred at death, upon a court decree ordering divorce, and in the event of company acquisition in exchange for shares. In the course of taxing capital gains, the first consideration ought to be the appropriate taxation baseline-consumption tax versus income. The taxation of capital gains under ideal income tax happens as accrued while there is no taxation of gains under a consumption tax. There are some arguments that there ought to be concessional status approach of capital gains under an income tax; in the section based on a consumption tax base desirability. Tanya has a number of capital gains tax liabilities for her actions. Tanya has decided to sell her land (including the shop and the garage) at a price of $900,000. It is worth noticing that the block was purchased back in the year 2007 at a price of $115,000. There are, however, additional costs; a stamp duty of $5000 and the construction fee (of the retail shop) of $280,000. According to the Australian Taxation Law, Tanya would pay capital gains tax for the sale of her land, retail shop, and garage (Burman & White, 2003). However, Tanya does not have capital gains tax liabilities for the following items: the house that plays the role of her primary residence now valued at $1,400,000, her rental property now valued at $550,000, the shares in Invist Pty Ltd., her shares in Commonwealth bank now valued at $600,000, and her motor vehicle now valued at $30,000. This is because, as stated by the Australian Taxation Law, one pays for capital gains tax only after the sale of the property. In this case, Tanya has only shown the intention of selling that land that has a retail shop and a garage (Ernst & Young, 2008). Tanya ought to take advantage of CGT small business concessions provided for by the Australian Taxation Law in order to have amount of payable Tax reduced. Tanya is an individual Tax payer implying that she ought to get a 50% discount on the tax to be paid for the sale of her land. She has held the land since the year 2007 implying that it represents long-term gains. Notably, the Australian actual tax regime for capital gains does not follow either the consumption tax model of the pure income model (Ernst & Young, 2008). This has the implication that the taxation of capital gains takes place upon realization and not as accrued. The legislation states calls for half-rate taxation thus this would apply for the land, the retail shop, and the garage. Tanya also ought to take advantage of the loss at which she would sell the sofa in her retail shop. The sofa was bought at $20,000 but its current value is $15,000. There is a provision by the Australian taxation Law that losses ought to be deducted against capital gains, where else, net capital losses ought not to be deducted against other income v. Indeed, there is a provision that losses could indefinitely be carried over thus deducting them against future capital gains. It is thus advisable for Tanya to make use of the rollover and the long-term gains advantage to minimize the amount of tax she would have to pay upon the sale of her property. PART II i) Recently, Australia has been characteristic of discussions regarding the lack of housing affordability as a result of tax policies. There have been indeed a number of taxes that have effect on the housing market. Ideally, the personal tax system has been influencing the rental housing affordability via income assessment from rental properties investment, capital gains, and offsetting expenses (Auerbach, 1991). There is also effect on the housing market as a result of owner-occupied housing exemption from capital gains and personal income tax systems, council rates, housing transactions stamp duties, land taxes, and stamp duties on housing transactions. Notably, prices are capable of sending a signal to an economy’s direct resources. It has also revealed that there is a tendency of directing resources where they are most valuable in the vent of reflection resource constraints and real preferences by price signals, rather settings of tax policy (Wulff, 1997). The housing market operation efficiency is significantly reduced by the event of adding taxes to demand volatility or limiting the supply of housing. Tax policy general efficiency principle entails the minimization of its impact on economic activity. In the same way, there is effect of tax system on both housing prices and fairness. This has the implication that at times the disadvantaged groups cannot afford houses as a result of the tax system. There are, however, other public policy objectives that are relevant to the taxation of housing. The purpose of housing (as a savings vehicle providing retirement security) has the implication that there ought to be no taxation of income from owner-occupied housing. The four most significant tax policies affecting real estate investment in Australia are the capital gains concessional treatment, negative gearing, land taxes, and stamp duties (Wulff, 1998). Capital gains tax Levying of capital gains tax is done on the owner’s marginal tax rate, however, the maximum tax on capital gains is 22.5% as a result of concession. Therefore, real estate has become an attractive investment class as a result of concessional treatment of capital and negative gearing. This could have the implication of lack of affordability of housing for the disadvantaged groups (Yates and Reynolds, 2003). Negative Gearing There is an immense deal of money loss by a negatively geared property regarding cash flow. This leads to a situation in which the costs are more than the income. The provisions of negative gearing have the implication that there is a possibility of offsetting these losses against other income. At times there is operation of investment properties at a loss assuming that there will be real returns from capital gains upon the sale of the property (Yates and Reynolds, 2005). This has the implication that negative gearing completely depends on investors who make unearned income. There is categorization on capital gains under unearned income considering that the property owner does nothing in the creation of extra value of the property. It is worth noting that, over time, buildings undergo value depreciation while land undergoes value appreciation. Ideally, the increase of the value of land is as a result of government and community action; this is inclusive of population growth and provision of infrastructure ((Yates and Reynolds, 2000). Land Taxes Australian jurisdictions provide for two types of land taxes: state government and local government land taxes. There is levying of both taxes on investment properties, although there is exemption of owner-occupied housing. Notably, land taxes stand out to be some of the most economically efficient taxes. In the recent past, the Commonwealth Treasury released a report indicating that land taxes have the capability of creating a net economic advantage, where else, the other examined taxes have the implication of additional costs; the stamp duty was the worst (Bridge, Phibbs, Kendig, Mathew and Cooper, 2007). Stamp Duties In Australia, stamp duties are enacted by the state and a levied during purchase of the property, on basis of the property’s sale price. It is worth noting that these duties have been termed as undesirable and inefficient by economists (Burke, 2005). The principal reason for this view of economists is the barrier created by stamp duties to the effective allocation of housing stock. Ideally, the cost of stamp duties forces individuals to shift to properties that suit their needs in a better way (Gans and King, 2003). An outstanding example is the case which sees parents remain in a big family home, after their children leave, since shifting to smaller homes would erode their financial benefit. ii) A change of some of the tax laws that make housing less affordable is of much need in Australia, in the sense of economic efficiency, fairness, and government revenue protection. According to a Grattan Institute report, there are suggestions that an extra A$7 billion could be generated annually by territory governments and cash strapped state via a shift from stamp duties to land tax. In doing so, the governments could make up for their financial inadequacies alongside creating more efficiency in the economy (Burke, Zakharov & Neske, 2005). To this effect, the ACT leads the way with the transition being made in small increments for the next two decades. In addition, there ought to be the abolishment of the negative gearing and the removal of the concession on capital gains for real estate. Ideally, an immense deal of inefficient state and territory taxes ought to be replaced by land taxes in order to enhance efficiency in the economy. It has often been stated that real estate concessional taxation has the objective of encouraging the supply of housing. It is, however, worth noting that most of these concessions have been going to the investors who buy existing housing stock (Dieleman, Clark and Duerloo, 1995). Notably, there are significant barriers to real estate reforms. For instance, approximately 2 million taxpayers in Australia own investment properties meaning that they are much likely to oppose the reform. It is also worth noting that significant land tax imposition would have the implication of a one-off fall in land prices, thus a number of recent buyers would have higher mortgages than the property value. This has the implication the reform can only be either slow or grandfathered to ensure that the existing investments are still operating within the provisions of the old tax policies (Ford and Wilcox, 1998). It is politically difficult for serious reforms in Australia; however, this could have enormous benefits, including an efficient economy and an efficient tax system. References A Auerbach 1991, “Retrospective Capital Gains Taxation” American Economic Review 81, 167. A Auerbach, L Burman and J Siegel 2000, “Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data”, in J Slemrod (ed), Does Atlas Shrug? The Economic Consequences of Taxing the Rich , 355. Bridge, C., Flatau, P., Whelan, S., Wood, G. and Yates, J. (2003) Housing Assistance and Non Shelter Outcomes, AHURI Final Report, June 2003, http://www.ahuri.edu.au Bridge, C., Phibbs, P., Kendig, H., Mathews, M. and Cooper, B. (2007) The costs and benefits of using private housing as the 'home base' for care for older people: secondary data analysis, AHURI Final Report, forthcoming, http://www.ahuri.edu.au Burke, T. (2005) "Foresight: Housing over the Horizon", paper presented to the National Housing Conference, Building for Diversity, Perth, 26–28 October. Burke, T. and Zakharov, R. & Neske,C. (2005) Long-Term Housing Futures for Australia: Using ‘Foresight’ to Explore Alternative Visions and Choices, Final Report, AHURI, http://www.ahuri.edu.au Burman, L & W Randolph 1994, “Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data” American Economic Review, 84, p794. Dieleman, F., Clark, W. and Duerloo, M. (1995) "Falling out of the home owner market", Housing Studies 10(1):3–15. Ernst & Young 2008, “U.S. Individual Capital Gains Tax Rates High”, American Council for Capital Formation ACCF Special Report , available at http://www.accf.org/media/dynamic/2/media_275.pdf. Ford, J. and Wilcox, S. (1998) “Owner Occupation, Employment and Welfare: The Impact of Changing Relationships on Sustainable Home Ownership” Housing Studies, 13(5):623–638. Gans, J. and King, S. (2003) Policy Options for Housing for Low Income Households, A report for the Prime Minister's Home Ownership Taskforce, http://www.mrcltd.org.au/ L Burman and D White 2003, “Taxing Capital Gains in New Zealand” New Zealand Journal of Taxation Law and Policy, 355, 2 L Burman, K Clausing & J O’Hare 1986. “Tax Reform and Realizations of Capital Gains in 1986” National Tax Journal, 47, 1. Organisation for Economic Co-operation and Development 2006, Taxation of Capital Gains of Individuals: Policy Considerations and Approaches. P Diamond and J Mirrlees 1971, “Optimal Taxation and Public Production I: Production Efficiency” and “II: Tax Rules. American Economic Review 8 and 261. Wulff, M. (1993) "An Overview of Australian Housing and Locational Preference Studies: Choice and Constraints on the Housing Market" Urban Policy and Research, 11(4):230–237. Wulff, M. (1997) “Private Renter Households: Who are long-term renters?”, Urban Policy and Research, (15)3:203–210. Wulff, M. and Maher, C. (1998) "Long-term Renters in the Australian Housing Market", Housing Studies, 13(1):83–98. Yates, J. and Reynolds, M. (2003) Low Cost Rental Study, A report prepared for the NSW Department of Housing. Yates, J. and Wulff, M. (2000) "W(h)ither Low Cost Private Rental Housing?", Urban Policy and Research, 18(1):45–64. Yates, J. and Wulff, M. (2005) "Market Provision of Affordable Rental Housing: Lessons from Recent Trends in Australia", Urban Policy and Research, 23(1):5–19. Read More