HA3042 Taxation Law Tutorial Questions Assignment 1 Answer

Question 1) 

Alex’s income-

Alex is the resident of UK. He has accessible income of $90,000from Australian sources. He doesn’t have any allowable deductions.

Based on the above information we have to answer two questions-

Taxable income of Alex:

It is clearly stated in the case that is no allowable deductions. Therefore to calculate taxable income of Alex we have to convert Australian dollar into Pounds .The current rate of exchange rate of Australian dollars to pound is -  1 A$ = 0.53 pounds. Therefore, A$90,000* 0.53 = £47700. Hence the taxable income of Alex is £47700

Tax payable:

In UK the amount of tax payable depends on the residing status of an individual of an individual. In UK, if a person holds foreign domicile he/she is not liable to pay any tax but if a person holds UK domicile he is liable to pay taxes as per the current tax rates.  The person can be granted tax reduction if there is tax treaty between two countries (Sovereign, 2020). In this case we have to assume that the person holds a UK domicile and there is no tax treaty between UK and Australia. The income slab and tax rates in UK are as follows (Gov.uk, 2020)-

Alex’s income falls in the second slab. Therefore tax will be calculated at the rate of 20%. Tax payable by Alex in UK- £47,700*20%= £9,540.

Alex is also liable to pay some taxes in Australia. In Australia, he has pay taxes at the rate of 32.5% for each for each 1$. Therefore Alex’s tax in Australia will be A$ 2769.

Question 2) Anna’s gain:

 Anna has two clients Sam and Lily. She provided a fitness course to Sam for which she charged $1,000 and the training materials amounted $100.  She provided video recording materials to Lily for which she charged $1,000 and the materials amounted $200. We are required to calculate Anna’s taxable income. In this given context the proper consideration made that in Australia business operations expenditure is deductible from the income (Ato.gov.au., 2020).

Taxable income from Sam- $1000- $100= $900

Taxable income from Lily- $1000- $200= $800

Total taxable income of Anna - $900 + $800= $1700

Question 3) Capital gain or capital loss for Alex

Alex has a hobby of collecting gramophones. He sold is old gramophone for r $3,000 on 20^th February 2020. He purchased that gramophone for $500 on 1^st June 2020. According to Australian legislation, f items are included in Australian capital gains tax are real estate, lease, licenses, goodwill, shares, investments, crypto currency , collectables (coins, stamps, painting, jewelry and antiques) exceeding a certain amount (Austrade, 2020). There are few exceptions regarding capital gains tax on collectables-if the collectable was purchased for $500 or less, if the collectable was purchased for $500 or less before 16th December 1995.

Gramophone is a collectable which comes under the category of collectables. Although Alex had a gain of $3000- $ 500= $2500 but as per the tax law this will not be counted as capital gain or loss because it was originally purchased at a price of $500. Therefore no tax should be charged on the capital gain of Alex.

Question 4) Deductibility of the management fee to William and the bank interest charges:

Sam is a property dealer. He purchased a building in Sydney at a price of $2,000,000 for commercial purposes. To purchase this property he took a loan from ANZ bank and is liable to pay interest. He hired a real estate agent William for renting out that property. William charged $8,100 as management fees from Sam. According to the Income tax assessment tax act Australia, the interest is deductible if it is purchased for a commercial purpose. The property should be available for rent. No deductions are applied if it is taken for personal use.  According to ITAA Australia, management fess is only deductible if it fulfills the following criteria-

1. The expenses have been repaid for the exhortation regarding the purchasing selling of speculation.
2. The costs spread the expense of overseeing or administrating the speculation which is claimed by financial specialist who makes the case.
3. It should not be in the form of commission.
4. It is comparable to the counsel on interest in the non-enrolled account (McCluskey, 2018).

In the given case it does not qualifies the given criteria because the amount paid to William a management fess is in the form of commission to the broker. Thus, $8100 cannot be deducted.

Question 4) Disposal of the old machinery:

John has a small business. He purchased machinery for $8000 on 1^st June 2018 and sold the same for $4000 on 31^st August 2019. The effective life of machinery was 5 years and e used the same machinery n 90% of the business operations. According to ITAA 1997, the value of asset will be deducted to the extent it is used for personal purposes (ICAA, 2012). Here, 10% value will be deducted from the total amount of machinery. 

• 10% of $8000= $800
• Value of machinery = 9000-800= $7200

Financial area in the Australia is from 1^st July to 30^th June. Depreciation from prime cost method-

Asset cost*(number of days/ 365 days) * (100 percent/ effective life of asset)

Number of days held- 1^st June 2018 to 31^st August 2019 – 457

Depreciation= $7200*(457/365) *(100%/5) =$1803

Value of machinery after charging depreciation= $7200-$1803=$5397

Hence, John had a loss $5397-$4000= $1397.