MA 613 Taxation Law and Its Implications in Given Questions Assessment Answer
Issues related to CGT assets:
Issue 1: In the current case for Mr. X sold the share for $ 150000 on 15th October 2019 that was acquired on 7 July 2010 against an amount of $ 50000. There is a capital gain because a CGT event of disposal of a CGT asset is occurring according to Sec. 104-10 A1. Wherever gain is occurred because of a CGT event such as a capital gain for the individual and taxed accordingly (Australian taxation compliance and office, 2020).
For the calculation of tax, there are two methods provided by the ITAA, 1997
Tax calculation according to the Discount method
|Sale proceeds||$ 150000|
|Cost base||$ 50000|
|Net gain||$ 100000|
|Discount 50%||$ 50000|
|Capital gain liable for tax||$ 50000|
Tax calculation according to the indexation method
Since the asset is acquired after 21 Sept 1999 than the said assets are not eligible for indexation and this method will not apply (Australian taxation compliance and office, 2020).
Issue 2: X invest cash proceeds from sale transaction to a cash management trust for the interest of 15% per annum, the cash management trust is fraud and they have defrauded many investors including Mr x and the amount of investment is lost. Loss/ stolen of CG asset is also a CGT event according to sec 104-25 thus there is also a calculation of capital gain/capital loss (Australian taxation compliance and office, 2020).
|Cost base||$ 150000|
|Net gain/ (Loss)||($ 150000)|
This loss is adjustable with the capital gain on the sale of shares.
Issue 3: Interest received from the trust is a normal income and it is taxed accordingly. Capital losses are quarantined and cannot be used to adjust with normal income. Capital losses can only be set off with capital gains. Thus, the amount received of % 5500 as interest from the trust is taxed separately (Australian taxation compliance and office, 2020).
Issue 4: Net capital loss of $ 20000 can be quarantined and forwarded it can only be set off with the other capital gains in the current case the current loss is in excess from current capital gain so it should be forwarded and not set off (Australian taxation compliance and office, 2020).
Family discretionary trust:
A discretionary trust is a trust where the trustee can exercise discretion about who, within the nominated beneficiary, will benefit from trust income and capital from year to year. Trust is not a separate entity. Beneficiaries of the trust are liable to pay tax on the trust income but in some cases, trustees are also liable to pay taxes on trust income.
The tax is charged at the ordinary tax rates and profits are calculated following the provision of section 95 of ITAA 1936 (Australian taxation compliance and office, 2020).
According to section 97 of ITAA 1936, a beneficiary is liable to pay taxes on trust income if he fulfills all the conditions I.e. Beneficiary entitled to the income, He is not under a legal disability or he should be a resident. It should also be noted that the beneficiary is taxed on the income part for which they are entitled whether the said income is received or not (Australian taxation compliance and office, 2020).
In the present case of X and Happy Family trust, it is seen that there is an accounting profit of $ 250000, and profit calculated according to section 95 is $ 300000 for the year ended 30 June 2020. So the tax should be charged on the profit calculated following section 95 of ITAA 1936 (Australian taxation compliance and office, 2020).
The next issue that arises for Mr. X about charging of tax on their entitled amount of $ 50000 that in which tax period the tax is charged on the amount of $ 50000. In the current case, the trustees exercise their discretion on 29 June 2020 which is in the financial year 2019-2020 and the amount paid into X's bank account is on 29 August 2020 that is in the financial year 2020-2021. According to section 97 of ITAA 1936 tax is charged in the period in which discretion is used irrespective of the time of payment or receiving of profits (Biddle, Fels, & Sinning, 2018).
Tax consequences on an employee:
The amount received by the employee from its employer against the services provided by him is considered as income of the employee and the employee is required to file return against this income.
The employer is required to withhold tax on the salary provided to employees and submit to the tax department.
The non-cash benefits provided by the employer to employee is considered as fringe benefits such as reimbursement of expenses incurred by the employee. The employer is required to pay fringe benefits tax on such amount.
In case an employee sacrifices its salary due to certain arrangements between employer and employee than the tax is levied on the amount received by the employee after the sacrificed amount. If the employer pay certain fringe benefit against such sacrifice than that amount is liable for FBT and employee is required to show fringe benefit under ITR (Australia, & Au, 2020).
The amount incurred by the employee for the increment of salary and to earn an income is deductible from the income of the employee while calculating the taxable income of the employee.
As per section 102-5(1), the capital loss can be set off against capital gains only, not against other income.
Taxable income of Mr. X as per provision:
The taxable income of Mr. X for the income year ended 30th June 2020:
|Salary Income from 01st July 2019 to 31st January 2020 ($ 200000* 7/12)||$ 116667|
|Salary Income from 01st Feb 2020 to 30th June 2020 ($ 160000 * 5/12)||$ 66667|
|Total Salary income of Mr. X for the year ended 30th June 2020||$ 183334|
|Less: The amount of course fee paid by Mr. X||($ 25000)|
|Net Taxable income of Mr. X for the year ended 30th June 2020||$ 158334|
|Fringe benefit paid by the company to Mr. X during the year|
|Expenses of textbooks reimbursed by the company||$ 1000|
Source:- (Computed as herewith)
Note: The amount of capital loss related to the income year 2018-19 $ 50000 on the sale of shares is not deductible from the income of Mr. X. As per the provision of Section 102-5, the amount of capital loss can be set off against capital gain only (Biddle, Fels, & Sinning, 2017).
As per the division 7A of Income-tax assessment act, 1936 the loan provided by the private company to shareholders or an associate of shareholders is considered as dividend up to the amount of distributable surplus amount for that income year (Merganovski, 2018).
The total amount of dividend is more than the distributable surplus then the amount of dividend as per division 7A is calculated as follows:
Loan amount treated as dividend * Distributable surplus / Total loan provided to shareholders
A written statement is required that must contain the loan provided by the private company is considered as a provisional dividend. The private company must issue this written statement to the shareholders for getting the dividend is reduced. The shareholder has to show this amount as an unfranked dividend.
In case of debt forgiveness by the private company in respect of a debt taken by a shareholder or an associate of a shareholder may be treated as a dividend paid to a shareholder under division 7A up to the limit of distributable surplus (Australian taxation compliance and office, 2020).
Applicability of provision:
In this case, Y is the sole shareholder of ABC Pty Ltd. The company provided an interest-free loan of $ 100000/- to Y. During the income year, the company waived 40% of the loan amount. The amount of distributable surplus is $ 50000 during the income year (Australian taxation compliance and office, 2020).
As in the given case, Y is sole shareholder, therefore the complete amount of loan amount that is waived by the company is considered as provisional dividend up to distributable surplus.
The amount of loan waived is $ 40000 is considered as deemed dividend as the amount of loan waived is less than a distributable surplus. Y have to show the amount of $ 40000 is shown as an unfranked dividend in its ITR (Fringe benefit taxation, 2020).
When ABC Pty Ltd is a wholly-owned subsidiary of another company incorporated in Australia:
In case ABC Pty Ltd is wholly owned subsidiary of another company and ABC Pty Ltd provide loan to Y is not considered as a loan to the shareholder as in this case, Y is not the shareholder of ABC Pty Ltd and this loan amount is not considered as a provisional dividend for the company whether company waived off the loan amount (Capital Taxation and compliance, 2020).
However, if Y is an employee of ABC Pty Ltd than it is considered as a fringe benefit to the employee, and the provision of FBT applies to the company and Y.
Present legal obligations and relevant legislation:
As per subsection 109Y (2) of Division 7A of Part III of ITAA 1936, the present legal obligation of the private company is the payable liability and enforce presently or at the future date as per applicability of certain law. The unpaid amount of present legal obligation is deductible for calculation of the distributable surplus for that particular period. The provision made by the company for a future obligation is not considered under the present legal obligation.
The Commissioner may accept the present legal obligation as on 30 June, notwithstanding the payment date of the tax and legal obligation is after 30 June. The amount is considered as a present legal obligation for calculation of distributable surplus calculation under subsection 109Y (2) of the ITAA 1936 (Australian taxation compliance and office, 2020).
In the ITAA 1936, section 109Y is introducing to bring a statutory concept of distributable surplus that replaces the concept of profit in section 44 of ITAA 1936. The distributable surplus is calculated by considering the net value of assets of the company subtracting by present legal obligation. The present legal obligation is to be found as per paragraph 35 and 36 of the Taxation law Amendment Bill (No. 3), 1998 (Taxation and Capital Taxation and compliance, 2020).
The case related to present legal obligation and the distributable surplus is Commissioner of Taxation v H  FCAFC 128.
In this case, the tax liability that arises due to the non-payment of the loan amount by the shareholder to the private company is considered as income of the company. The fact of the case that the commissioner considers the loan amount involve cash transaction as there is no loan agreement with the shareholders (Australian taxation compliance and office, 2020).
For calculation of Distributable Surplus calculation, this amount is considered as income of the company, and the tax liability arising on such income is considered as the present legal obligation of the private company for calculating the distributable surplus whether the payment is made in future.