Tax Laws
Please note that the following will not form part of the word count:
� References, including statute and cases;
� Diagrams;
� Tables;
� Calculations.
You must complete all parts of the assignment – three (3) questions. Please complete the various parts of
the assignment separately ie start each new question a new page. You should allocate the appropriate
amount of words to the various questions in accordance with the recommendations in the box provided at
the commencement of each new question. There is a strict word limit of 3,000 words for this assignment.
For the three (3) questions in the assignment you will be required to go beyond the study materials for
this unit and you will be expected to conduct your own research of cases and other academic material
upon which you should base your answer.
You are encouraged to use headings for purposes of clarity and presentation of your assignment. It is
however, essential that your assignment is written in full sentences and not �dot/bullet point� format. If
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you use any equations in solving the problem question please make sure that you cite the correct
sections of the relevant legislation and that you outline your entire working.
You must begin each question separately. It is however essential that you place your name and student
number and the question number on each question which you complete.
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Question One: Suzette’s Income Tax Implications
Suzette should not pay taxes on the gains she made from selling her farm. This is because
Australian laws allow individuals not to include proceeds from selling a home in his/her taxable
income. Australian Taxation Office (2014) cites that when a person sells his/main residence any
profit gained is exempt from taxations. This is referred to as ‘main residence exemption. The
relief applies if Suzette used the farm as his main home and nothing else. However, he must pay
for taxes on rental income he has been receiving since he built the eight town houses. Suzette
should also claim incidental costs he spends in improving or constructing the rental units. Such
expenses include advertisement to tenants, bank charges, insurance, cleaning, gardening and
lawn mowing, property agent fees and commissions among others (Australian Taxation Office,
2014).
Nevertheless, this only applies to part of property used for rental purposes and from the
time the units were rented or available for renting. Therefore, Suzette should apportion the claim
based on floor-area basis. That is, she should not include expenditure on the unit she lives in.
According to Australian Taxation Office (2014) if the unit represents 10% of the property’s total
floor area then she would qualify for the 90% of the total deductions. In addition, she should
claim for the costs incurred from May 2013 up to October 2013 when he converted the houses to
strata tittles. This is because under strata title she does not own the whole property but only the
four units that she did not sell. Barnett and Harder (2014) cite that that according to the new
strata title laws each proprietor pays taxes on his/her gains from the property owned. This means
that Suzette would pay taxes on the four units that she still owns. In other words, she must pay
taxes on all the income she received since she sold the units. The new buyers would pay for their
proportions.
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In addition, Suzette should also use the strata agreement to claim for incidental costs such
as lease costs, licenses fees, and agents’ commissions she incurred while converting the property
to strata title. Barnett and Harder (2014) advices that she should deduct other expenses she
incurred in deriving the taxable income such as maintenance costs. Moreover, since Suzette used
the sales proceeds to purchase an adjoining block of land, she could defer the taxes on gains from
the sales up to December 2014. This is because the capital gain tax event exemption laws allow
property owners to post pone taxes on capital gains derived from disposing off a property by one
year, if the proceeds are either used to acquire a new asset or improve an existing one (Australian
Taxation Office, 2014).
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Question Two:Capital Gains Tax Implications for Thang
Investment Property
Australian tax laws require property owners to work out their capital gain or loss from
every capital gain tax event (CGT) related to the asset in particular year. The capital gain refers
to the difference between the capital proceeds and the CGT asset’s cost base (Hulse et al., 2011).
Therefore, Thang made capital gain because his capital proceeds exceeded its cost base. The cost
base includes purchase costs and other costs associated with acquiring, holding and disposing the
asset such as legal fees, stamp duty, and real estate agent commission among other related
expenses. In this case, Thang incurred $ 200, 000 purchase costs, and $ 10,000 stamp duty.
Therefore, total purchase cost was $210,000. While gains was $ 700,000 sales proceeds, $ 2,000
lump sum and annual rental income. This means that Thang’s capital gain would be $ 490,000
(sales proceeds $ 700,000 – property costs $ 210,000).
The capital gain tax depends on Thang’s income and the duration over which he owned
the asset. Since Thang owned the property for more than a year it would be subject to long term
gain laws. Hulse et al., (2011) cite that individuals whose income fall in the lowest tax bracket
would not pay any taxes, those paying taxes in the next 20% bracket would pay 18% taxes, while
people who fall in higher tax bracket pay 28% taxes. For example, if Thang falls within 20%
bracket his capital gain taxes would be $ 88,200 (18% x $ 487,000). However, he qualifies for
tax deductions such as, legal costs; tenancy cost such as lease agreement and advertisements
expenses; depreciation costs; structural improvements such as amount he might have spent to
repair and maintain the property; and interests on loans he might have borrowed to renovate the
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property (Australian Taxation Office, 2014. Therefore, Thang should deduct the $ 3,000 he paid
back to the client for the lease termination.
Shares in Hong Pty Ltd and Julian Pty Ltd
Like in the investment property case, Thang’s capital gains from his shares in Hong Pty
Ltd Company would be the difference from sales proceeds and the purchase cost. Prince (2013)
argues that Australian laws treat profits on share disposal as ordinary income and not as capital
gains. This implies that gain on share sales are subject to personal income tax laws. However, the
Australian CGT laws exempt business people from paying taxes on personal assets such as main
residence car and home. However, the laws awards exemptions when the taxpayer uses it solely
for enjoyment and cost less than $ 10,000. While his residence in Melbourne would not impact
on his capital gain tax because it does not relate to any recent CGT event. This means that Thang
should include his personal car and residential home in Melbourne in taxable income.
Similarly, since the goodwill cannot be separated from the business, it would be
calculated together with other Thangs’ asset or interests in Hong Pty Ltd. Wallace, Hart and
Evans (2013) cite that in 1998 FCT v Murry case Australian High court held that although
goodwill comprise many elements that might differ from other business assets, it remains one
whole item. This means that goodwill constitute a capital CGT event therefore Thang taxable
income would be $ 2 million. As such, Thang tax liability = sales proceeds $ 4 million (pillow
manufacturing plant factory $ 2.5 million + $1.5 million) – $ 2 million.
However, Thang qualifies for several CGT exemptions. For example, despite Thang
annual turnover exceeds $ 2.5 million he qualifies for CGT concession. This is a preferential
exemption provided to small business owners such as Thang. Australian Taxation Office (2014)
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explains that individuals who qualify for CGT concessions pay tax on 50% of the total capital
gains. In addition, the laws allow Thang to pay a maximum of $ 500,000 from the sales into a
superannuation fund or retirement savings account. Sinclair and Lipkin (2012) cite that this is a
capital gain tax retirement exemption provided to all Australians aged 55 and below. Moreover,
Thang is eligible for CGT rollover exemption. That is, the exemption allows a business owner
who disposes an asset and uses the proceeds to purchase a new property or improve an existing
one to defer his capital gain for one year. This means that because Thang used proceeds from
Hong Pty Ltd to acquire Julian Pty Ltd he might defer part of 2014 capital gain tax to 2015.
However, he should only include the $ 350, 000 shares he spent on Julian Pty Ltd deal. As such,
Thang’s CGT event transactions = sales proceed – tax deductions (rollover benefits + sales
disposal benefits)
= $ 2 million – $ 500,000 – $ 350,000 = $ 1,150,000
As a result, his superannuation would increase by $500,000 to $ 1,950,000; while his
CGT concession relief allows him to pay taxes on 50% of the total capital gain = $ 1,000,000.
.
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Question 3
Australian Recent Family Payment System and Education Entry Payment Law
Reforms
Australian government enacted new laws to encourage families and young people to
participate more actively in the workforce, pursue education and training opportunities. Most of
the new laws were passed on July 1 2014 while some would come into effect from 1 January
- However, the new reforms regarding family payment system and education entry payment
would impact differently on Australians and students especially separated families and
international students.
Families Tax Benefits Part A and B
Under the proposed 2014 budget the government would freeze family tax benefits
targeting separated families. Ducket (2014) cites that family tax benefits rates would remain
constant over the next two years. This would protect the families from inflationary changes such
as rise in the cost of basic commodities. Such tax benefits refer to government supplied payments
to help separated parents meet their children up keep costs. Warren (2014) also cites that the
laws are subdivided into part A and part B. Part A applies to middle and low families with
children aged below 19 years while Part B targets single parents and families with one main
source of income. Both families who qualify for the payment receives benefits after two weeks
and end year additional allowances also known as supplement. According to Commonwealth of
Australia (2014) the laws specify that the government must only award the tax benefits if the
applicants meet certain residence requirement; comes from a low or middle income family; are
fully immunized and the parent care for the child at least 35% of the time. For example, only
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families that earn below $ 150, 000 per year are eligible for tax benefit part B. The government
might award the tax benefit to a parent, foster parent or grandparent.
According to the previous tax systems successful applicants aged between 0 and 12 years
received $ 172.20 while those aged between 13 and 19 years received $224 per fortnight for part
A; while those who qualify for part B earned a maximum payment of $ 146.44 per fortnight
when the youngest child was aged below 5 years and $ 102.20 where the last born was between 5
and 18 (Commonwealth of Australia, 2014). In addition, a family that satisfies the criteria earned
additional $ 3796 annually for the second and every subsequent child. The old system referred to
the additional allowance as maximum rate of Family Tax Benefit Part A or Part B. In contrast,
the 2014 budget reforms removed this benefit instead it introduced new allowances. That is, each
child who qualifies for the maximum rate and is aged between 6 and 12 years would receive $
- Nevertheless, parents receiving over $ 1478.25 annually for child support or spousal
maintenance would no longer qualify for the new payment.
Moreover, under the previous system, the Australian government provided additional
$12.04 for the third and every subsequent child to low or middle income families with more than
four children. On the other hand, the new laws state that the government would award the
payment not only to the fourth but also to every subsequent child. Burkhauser (2014) cites that
the new laws lowered the supplements to be awarded $ 600 per annum for every child who
qualifies for family tax benefit part A and $ 300 per annum to every individual eligible for part
B. This law would be effective from 1 July 2015 and would remain eligible up to 1 July 2017.
The budgetary committee are confident that the new family payment systems are more cost
effective therefore more sustainable than the previous system. That is, the 2014 laws identified
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loopholes in the previous systems, eliminated the unnecessary spending and provided more
rewarding solutions to the affected individuals (Commonwealth of Australia, 2014).
The Students Payments
The recent laws states that education entry payment would not be available for income
support recipients from 1 January 2015. According to the reforms students studying in major
cities would no longer qualify for the relocation scholarship unless they transfer to specific
regional learning institutions. Allan (2014) cites that the government would offer relocation
scholarships specifically from or to new regions to pursue higher education. Unlike the old
system, the reform requires regional education authorities to offer financial assistance to students
who move to or from the major cities only if there is no institution from their previous region
that provides relevant course. For example, a student from Melbourne would not qualify for
relocation scholarship if he/she moves to Ottawa to pursue medicine because there are many
institutions that offer medical related courses in Melbourne.
The new laws further provide that only overseas students studying through formal
international exchange programs would be eligible for scholarships from 1 October 2014
(Commonwealth of Australia, 2014). This means that international Australian students
holidaying overseas would no longer qualify for scholarship. On the other hand, under the
previous system, international students received regular income support while travelling overseas
for a maximum period of six weeks. Therefore, the new laws would allow the education
authorities to utilize financial resources saved in offering more important learning facilities or
activities.
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Impacts of the New Laws on Australian Residents
The new laws are fair, and more efficient. This is particularly because the government
would use savings to target the most vulnerable populations. However, this might negatively
affect families who heavily relied on the benefits consumption behaviors. For example, since the
laws reduce benefits to some families, the members would have to adjust their budget. Therefore,
despite the fluctuations in the market and economic conditions, the families would receive the
same tax benefits for a period of two years. This means that a family that receives $ 300 now
should expect increase or decrease in the tax allowances after 1 July 2017. In addition, the past
economic trends show that inflation is ever rising therefore the family would require more
income next year to afford the same basic commodities they consume now.
Nevertheless, the income department allocated more resources towards providing social
services. For example, it awarded $26.8 million to social services department to enable it provide
key social services to the vulnerable families such as the aged, the poor and single parent
families. Duckett (2014) cites that the government offered $ 1.5 million to the community
development financial institutions to extend their services especially to the low and middle
income families. The new budget specified that the institutions should provide small loans and
financial literacy education services to Australian residents who might not be able to access
affordable financial products. Therefore, such services would compensate the families for the
reduction in the tax benefits.
The budget committee estimated that the government would save more than $ 4 billion
within the next four years from the family payment reforms (Commonwealth of Australia, 2014).
The Australian income department (2014) cites that by reducing family tax benefit part B
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payments the government would save 1.9 billion. At the same time, the government would
record more than $ 377.7 million through lowering large family supplement to families with four
or more children. This is because the large families would receive tax benefits for only the fourth
and/or subsequent child. Moreover, the government would save $ 2.6 billion over the next four
years from maintaining the current family tax benefit. The savings would then be spent on other
key public services. In addition, the reforms would encourage the families to participate more
actively on income generating activities thereby contributing to the growth in Australian gross
domestic product.
Similarly, Education Entry Payment reforms would allow the education department to
offer better quality services. Commonwealth of Australia (2014) argues that the new student
payment laws would allow the country to achieve $ 153.1 million savings. As a result, the
amount saved would be invested in developing local institutions. Therefore, the country would
establish more performing learning institutions. Given that most international students either
belong to high income families or have other scholarships, the laws would ensure that local
institutions only send their students to overseas trip when it is necessary and not just for pleasure.
Consequently, the government would not only eliminate unnecessary expenditure but also
provide scholarship to the needy students. For example, it would use the resources that were
previously allocated to student start up scholarship to provide contingent loans to full time higher
education students.
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Bibliography
Allan, J 2014, Why Australian universities are just not good enough, Quadrant, vol. 58 no.3 pp.
44.
Australian Taxation Office 2014, Personal investors guide to capital gains tax, Australian
Taxation Office, Canberra.
Barnett, K & Harder, S 2014, Remedies in Australian private law, Cambridge University Press,
Cambridge.
Burkhauser, R V 2014, Another look at the economics of minimum wage legislation, Australian
Economic Review, vol. 47 no.3 pp. 409-415.
Common Wealth of Australia 2014, Budget 2014-15 overview, CanPrint Communications Pty
Ltd, Fyshwick.
Duckett, S 2014, Priorities for a new government: keeping the Medicare promise, thinking
beyond services and getting governance right, Medical Journal of Australia, vol. 200 no.
3 pp. 138-139.
Hicks, A, & Tran, A 2014, Small business concessions, Taxation in Australia, vol. 48 no. 7 pp.
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Australia Pty Ltd, Milton, Qld
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Basingstoke.
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