Taxation law ACC708

Section – A

Baldrick had bought an investment property for $ 20,00,000 on 1^st July 2018 and had rented the property from the same date. To buy the property he had taken term loan from the bank on the same day for an amount of $ 18,00,000 of 8 years (Australian taxation rules and undertaken regulation, (2019).From the rented property he is earning the rental income which is received by him in cash from the tenants. During the period from 1^st July 2018 to 31^st June 2019, he had received a total rent of $ 84,000 and a prepaid rent for July 2019 of $ 9,000 resulting in the total income of $ 93,000 (Australian taxation rules and undertaken regulation, (2019).

The rental income is chargeable to tax on accrual or cash basis whichever is earlier. Thus, the entire balance of $ 93,000 which was received is to be charged for tax subject to certain allowance of deduction of expenses (Australian taxation rules and undertaken regulation, (2019).

Baldrick is having a loss on the rental property income after deducting the incurred allowable expenses from the income earned from the rental income (Braithwaite, 2017).

Notes:

• The rental income is chargeable to tax on the accrual concept or cash basic whichever is earlier (Australian taxation rules and undertaken regulation, (2019).
• Baldrick had taken a loan for the purchase of the investment property for which only the interest component is to be allowed as a deduction from the income of the rental property. There, any amount disbursed for the repayment of the loan is not to be allowed a deduction (Braithwaite, 2017).
• He had paid to a real estate agent to evict a tenant for $ 2,300 for the non-payment of the rent creating a vacancy. It is been assumed that this vacancy was filled by him on the same date. Therefore, the amount spent to evict the tenant is an allowable expense and is to be allowed to claim the deduction (Australian taxation rules and undertaken regulation, (2019).
• He had incurred certain costs under repairs and maintenance at the time of the purchase of the investment property. The front window of the building was damaged and was replaced on 4^th July,2018. Initial repair and maintenance expenditure is allowed as a deduction (Braithwaite, 2017).
• There are certain expenditures which are to be allowed over the period. These expenses relating to the above case are Loan application fees, Legal cost incurred to take the loan to buy the property, Legal Cost incurred for buying the property and the stamp duty paid on the purchase of the investment property. In case the total borrowing expense is less than $ 100 then it is fully allowed in the year in which it was incurred but if the expenses are over and above $ 100 these are to be allowed as deduction over the periods. These expenditures are to be allowed as deduction over 5 years or the loan period whichever is less. In the present case, the loan is for 8 years and therefore the expenses are to be allowed as deduction over 5 years continuously, starting from the year in which it was incurred (Australian taxation rules and undertaken regulation, (2019).
• State taxes and the land taxes are to be allowed as a deduction only on the cash basis. These expenses are to be allowed as an expense as a deduction in which it was expended (Braithwaite, & Reinhart, 2019).

Section – B

Source:- (Australian taxation rules and undertaken regulation, (2019).

Melchett Pty Ltd. should file the franking account return and must lodge the franking account tax return by the last day of the following month from the end of the financial year. A franking account is to be prepared by the companies which are:

• Liable to pay the deficit franking tax
• Liable to pay over franking tax
• Obliged to disclose the variation in its benchmark franking percentages 
• Or given a written notice by the Australian Taxation officer (Australian taxation rules and undertaken regulation, (2019).

As per the Benchmark rule, firstly the entity had to select the franking percentage for the period. The benchmark is to remain uniform for the whole year. Any subsequent distribution in the same period should be at the same franking percentage. The rule is ensuring that the benefit of the franking credit is spread more or less evenly across all the members proportionately to the interest of their ownership (Australian taxation rules and undertaken regulation, (2019). The rule has set integrity to prevent them from disproportionate allocation of the franking credits to certain members (Arnold, et al. 2019).

A breach in the benchmark rule will not invalidate the distribution made to the members but will result in the imposition of over-franking tax or imposition of under-franking tax for the entity. The over-franking tax and under-franking tax is to be calculated by the difference between the franking credits allocated and the benchmark allocation (Australian taxation rules and undertaken regulation, (2019).

• In case the franking distribution exceeds the benchmark franking percentage, the franking entity is required to pay over franking tax which is equivalent to the excess franking credits (Australian taxation rules and undertaken regulation, (2019).
• In case the franking distribution is less than the benchmark franking percentage, the franking entityshould debit in its franking amount equivalent to the unused franking credits. In other words, to say these credits are to be wasted (Sakurai,  & Braithwaite, 2019).

If there is a significant variation between the benchmark franking percentage and if it varied by over 20% in the franking period for which franking distributions are made by the franking entity(Australian taxation rules and undertaken regulation, (2019).

Section – C

Mrs. Betty Blue runs a restaurant operation in Sydney as a sole trader. Her husband is a house husband the family has no other source of income. She is looking for different situations that would result in saving of the taxes of her earnings from the business.

Partnership: A partnership is a form of doing the business where an entity s formed on mutual agreement between the two persons. The process of registration of the partnership business is simple and there are less financial disclosure reporting obligations (Murphy, 2019).

The main advantage of having a partnership business is that the partners are chargeable to income tax on the individual tax rates, thereby reducing the overall net tax expense. Any expenditure spent by the partnership business which may not be allowed to claim as a deduction for the business is to be allowed as a deduction to the partners in the ratio of their partnership profit sharing (Australian taxation rules and undertaken regulation, (2019). There are minimal filing requirements. And the major disadvantage of using this format of business would be the income of the partnership is to be shared among the partners of the business (Australian taxation rules and undertaken regulation, (2019).

Company: This is the most common structure for business which look to achieve the high growth and project their assets and liabilities. These are governed by various regulatory bodies having their rules and regulations over the financial obligations which is to be followed by the companies (Evans, 2019). 

The major advantage of registering with this form of business structure the company members will have a limited liability. Companies are required to file an annual tax returns which is to be lodged to the Australian Tax Office. Also, the corporate tax rate is less than the individual tax rates (Bentley, 2019). There are expenditures which are not allowed as a deduction to the individuals or the partnership business structure are allowed as a deduction to the companies. The companies have also the advantage of giving the members of the company a tax-free income as the taxes on the income are borne by the company which results in the more attraction of the individuals. Also, with the new rules of the personal service compliances, there are various rules applicable to the individuals and trusts which do not apply to the company (Australian taxation rules and undertaken regulation, (2019).The major disadvantage of this form of the structure of the business is that the company shall comply and apply for the tax filing number which is to be used at the time of filing of annual return. The companies will have to get themselves registered for GST if the annual GST turnover is $ 75,000 or more. There is no tax relief for a corporate company which is available to the individuals i.e., the individuals are given an amount which is to be tax-free for them but the companies are not given any of such benefits this is to say that they are charged income from the first dollars they are earning (Australian taxation rules and undertaken regulation, (2019). On the capital gain tax, the company is to pay tax on the entire capital gains they earned but the individuals and earned are allowed a portion of the capital gain tax-free. This portion is to be 50% for individuals (Cooper, & Wenzel, 2019).

Family Trust: This business structure is for the business owners who want to distribute the income to the family ensuring the assets are protected and also reducing the tax liability of the total Income.

The major advantage of setting up the family trust it secures the assets for the family such as an ability to build a house for a child to live in without the right to ownership to be forfeited as it is under the trust. The trust is made to distribute incomes in such a manner that it results in lower incomes for tax purposes. Family trust is having the advantage of the capital gain tax compared to the companies. The trusts are allowed to have a deduction of 50% of the capital gain income which cannot be applied by the companies (Australian taxation rules and undertaken regulation, (2019).The trust is also privileged to have a certain amount of income exempted from the tax which is not available to the companies. The major disadvantage of this form of business structure is that tax avoidance can be risky, and the tax account is to be consulted before opting for this form of business (Chapman, 2011).

Conclusion: All the business structures are having some advantages and disadvantages and to judge them there are no set parameters. The set of requirements for each individual vary from one another (Australian taxation rules and undertaken regulation, (2019).

Recommendation: Mrs. Betty blue shall opt for the family trust as it would result in tax saving, but she should discuss with the tax consultant