Mid Semester Exam Answers for TLAW603 Taxation Law

MID SEMESTER TAKE HOME EXAMINATION Unit TLAW603 Taxation Law Semester 2 2023 Date: 23 September,2023 Name of Student Preeti Karki Student ID 2022031902 PART A Only state the letters 1. b. 11. b. 2. c. 12. b. 3. b. 13. a. 4. e. 14. b. 5. c. 15. b. 6. e. 16. a. 7. a. 17. b. 8. b. 18. b. 9. b. 19. b. 10. a. 20. a.

PART B You may re-format the table to provide yourself with more space to insert your answers. Question 1 Ans: Marianne's capital gains tax (CGT) consequences for the asset damaged by fire are decided under the CGT requirements under Australian tax law. Here's a summary of the key factors: 1. Capital profits : When an asset is destroyed, the amount of insurance or compensation obtained is typically recognised as the asset's capital profits. Marianne's insurance or other form of compensation for the damaged asset would be considered as capital proceeds from the CGT event. 2. Cost Base: The asset's cost base is what Marianne initially paid for it, which in this case is $50,000. Additionally, if certain other expenses linked with the asset (such as upgrades, ownership costs, or legal fees relating to the acquisition or disposal) were incurred, these may be included to the cost base. 3. CGT reduction : Assuming Marianne is an individual taxpayer, she would be entitled for the 50% CGT reduction on any capital gain if she kept the asset for longer than 12 months, as she did in this case (from 1 June 2008 to 29 June 2018). . 4.CGT Discount Application: If Marianne made a capital gain and is entitled for the CGT reduction, she would lower the capital gain by 50% before putting it in her assessable income.

5.Net Capital gains: Marianne would include any nett capital gains in her taxable income for the year, which would be taxed at her marginal tax rate. She cannot deduct a capital loss from her income, but she can use it to offset other capital gains in that year or future years. Question 2 In the given scenario, Jane grants Ashleigh an option to purchase her beach house in Byron Bay for which Ashleigh pays $2,000. The provision of an option and its potential exercise or expiry is a matter that has implications under the Australian capital gains tax (CGT) provisions. Specific CGT event- Granting an Option : CGT event D2 is the precise CGT event that applies to the circumstance in which Jane provides an option to Ashleigh. When a taxpayer provides an option or equivalent right, CGT event D2 occurs. Explanation: 1)Trigger of the CGT event: The CGT event D2 is triggered when Jane gives the option to Ashleigh, rather than when (or if) the option is exercised. 2) Capital Proceeds: In this instance, Jane's capital proceeds from the CGT event are equal to the amount Ashleigh paid for the option, which is $2,000. 3) 3)Cost Base: Jane's cost base for the option includes whatever price she spends to grant the option as well as any incidental charges. This is often small or nothing,

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especially if Jane incurs no costs in providing the option. 4) Capital Gain or Loss Jane has a capital gain or loss if the capital revenues from the event (the $2,000) exceed the cost basis of the option. Jane, on the other hand, suffers a capital loss if the capital revenues are less than the option's lower cost base. Finally, CGT event D2 governs the issuance of an option to acquire a capital asset such as a beach home. Jane's capital profits from this event are the amount she receives for the option, and her capital gain or loss is calculated by comparing this to the option's cost base. Question 3 Ans: Capital gains occur when we transfer or sell a non-inventory or capital asset to another individual. Furthermore, financial gains might be either short- term or long-term in nature. Long-term capital gain happens when we own an asset for more than three years or, in certain cases, longer. The asset will be a short-term capital asset if it is not a long-term capital asset.Now, in this scenario, Paula has agreed to hire the boat to Ethan initially and then enter into an arrangement for Ethan to buy the boat at the end of three years or sooner. Now, the asset, the boat, which is a non-inventory asset or capital asset, will undoubtedly be purchased by Ethan before the conclusion of the three-year agreement. As a result, the transaction attracts capital gain since there is a transfer of capital asset from Paul to Ethan,

and it will be short term capital gain, for which a short term capital gain tax will be computed. Question 4 Ans:The main residence exemption is an important component of the Australian Capital Gains Tax (CGT) system. When a dwelling is treated as a taxpayer's main residence, any capital gains made from its sale are generally exempt from CGT. The situation described with Steven's property in Sydney has implications for this exemption. 1)Establishment as Main Residence: Steven stayed in the home and made it his primary residence from 1 July 2012 to 30 June 2014. As a result, any prospective capital gain from the sale of this property during this time period would be completely free from CGT under the primary home exemption. 2)Absence and Rental Period: Steven relocated to another country and rented out the property from July

1, 2014 to June 30, 2016. The "absence rule" is a provision in Australian tax legislation. Even if you no longer use a home as your primary residence, you can continue to classify it as such for CGT purposes for up to six years if it is rented out (or indefinitely if it is not producing income). As a result, even though Steven was not residing in the house throughout this two-year period, he may still claim the main residence exemption for the time it was rented out, as long as he did not regard another home as his primary residence during that time. 3)Returning to the Property : Upon his return on July 1, 2016, Steven re-established the property as his primary residence. This strengthens its position as his primary residence for CGT purposes. 4)Implications for Sale : If Steven sells the house after relocating, the whole period of ownership from 1 July 2012 to the date of sale may qualify for the primary residence exemption, which means he may not have to pay CGT on any capital gains realised from the sale. This presupposes he hasn't designated another home as his primary residence during his ownership of this Sydney house. Given the conditions outlined above, and assuming Steven did not claim any other property as his primary residence throughout the rental term, the Sydney property might be recognised as his primary residence for the duration of ownership, making it eligible for the full main residence exemption if sold.

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Question 5 Ans: When an asset is transferred as a gift in the purpose of Australian Capital Gains Tax (CGT), the capital proceeds are normally deemed to represent the asset's market value at the time of the transfer. In the presented scenario, if Mary-Anne presents an apartment to Michael and the market value of the unit at the time of transfer is $285,000, the capital profits for CGT purposes are $285,000. This implies that if Mary-Anne wanted to compute any capital gain or loss on the sale of the flat, she would use the $285,000 as the capital proceeds.

Question 6 Ans: When a business owner takes business assets or stock for personal use, the transaction is normally regarded as if it were a sale at market value under the Australian tax system. This is to guarantee that business owners do not avoid paying taxes by personally consuming the company's output rather than selling it. For Jordan's situation: 1. Cost of Goods Taken for Personal Use : The materials Jordan took for his own use were valued at $5,000, but they could have been sold for $6,250. 2. Assessable Income : The market value of the materials, which is $6,250, should be included in Jordan's assessable income for his business. This is because, from a tax perspective, it's as if the business 'sold' the materials to Jordan at their market value. So, $6,250 would be the amount that is assessable in respect of the materials Jordan took for his own yacht. Question 7 Ans: The basic formula for calculating your tax

liability in Australia every income year is: Taxable Income = Assessable Income - Deductions From the taxable income calculated, the tax payable is then determined based on the tax rates applicable for the income year. Let's break down and explain each element of the formula with reference to the Income Tax Assessment Act 1997 (ITAA97): 1)Assessable Income : This is the entire amount of income that is taxable. It covers both ordinary and statutory income. ITAA97 reference: Section 6-5: Describes regular income, which may include service revenue, company income, or property income, such as rent. Sections 6-10 go over statutory income, which includes particular income items outlined in the Act, such as capital gains or certain fringe benefits. 2)Deductions: Deductions lower the amount of income that is taxed. They are usually costs incurred while earning taxable income. ITAA97 reference: 8-1 Section: This is the main part that covers general deductions. Essentially, you can deduct any loss or spending experienced in acquiring or creating your assessable revenue from your assessable income. However, there are some exceptions, such as capital, private, or domestic expenses, as well as some

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additional charges explicitly excluded by the statute. Other specific sections in the ITAA97 enable or reject certain deductions, such as work-related costs, travel expenses, and so on. Finally, after the taxable income has been determined, the amount of tax payable on that income would be computed using the current tax rates for people, corporations, trusts, and other organisations. These tax rates can alter on a yearly basis and may differ depending on criteria such as the taxpayer's resident status or kind of income. Question 8 Ans: Calculating Li's Taxable Income for the year ended 30 June 2019: . Assessable Income : .  Salary: $75,000  Net rental income: $9,000 Total Assessable Income: $75,000 + $9,000 =

$84,000 . Deductions : .  Bank charges on investment account: $150 (Deductible under s8-1 ITAA97 as it's an expense incurred in earning the net rental income)  Tax agent’s fees: $500 (Deductible under s25-5 ITAA97 as it's a cost associated with managing tax affairs)  Purchase of a raffle ticket: $100 (This is typically non-deductible as it is considered a private expense. Even though the raffle supports a good cause, the purchase of raffle or lottery tickets are not deductible under the ITAA97.) Total Deductions: $150 + $500 = $650 . Capital Losses : .  Capital losses on sale of shares: $8,000 (Capital losses cannot be deducted against ordinary income. They are carried forward to offset future capital gains. Thus, this will not be deducted from Li's assessable income in this year.) Taxable Income : = Assessable Income - Deductions = $84,000 - $650 = $83,350 Tax payable : To calculate the exact tax payable, you'll need to

apply the relevant tax rate for the $83,350 income based on the individual tax rates for the 2018-2019 financial year. The tax rates can be found on the Australian Taxation Office (ATO) website. As of my last training data, the tax rates for residents for the 2018-2019 financial year were:  $0 – $18,200: Nil  $18,201 – $37,000: 19c for each $1 over $18,200  $37,001 – $90,000: $3,572 plus 32.5c for each $1 over $37,000  (and there are higher brackets for income beyond $90,000) Using these rates, Li's tax on $83,350 would be: = $3,572 + 0.325 x ($83,350 - $37,000) = $3,572 + $15,088.75 = $18,660.75 Medicare Levy : In addition to the tax, most taxpayers also pay a Medicare Levy. The Medicare Levy is typically 2% of taxable income, though there are some exemptions and reductions available. For Li: Medicare Levy = 0.02 x $83,350 = $1,667 Total tax payable including Medicare Levy : = $18,660.75 + $1,667 = $20,327.75 Assumptions made :  Li is an Australian tax resident for the whole fiscal year.  There are no other eligible deductions, tax offsets, or credits.

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 Li is exempt from the Medicare Levy levy.  There are no other sources of income, deductions, or capital transactions that have not been stated.  Li's total taxable income is less than the Temporary Budget Repair Levy level. 窗体顶端窗体底端 PART C Insert which option you are answering and insert your responses below. [indicate which Option, 1 or 2] Option 2: A) Ans: Legislation : Income Tax Assessment Act 1997 (ITAA 1997) Sections 6-5 and Division 40. Under section 6-5 of the ITAA 1997, the profit from the selling of a business asset such as machinery utilised in the course of carrying on a business is normally deemed assessable income. If the machinery has depreciated, there might be balance adjustment events under Division 40 of the ITAA 1997, where the terminal value of the machinery is compared to its adjustable value at the time of

disposal. The distinction between the two might be an assessable income or a deductible amount. B) Ans:Legislation : ITAA 1997 sections 6-5; Scott v Federal Commissioner of Taxation (1966) 117 CLR 514. Payments or gifts received in conjunction with the execution of services or as a result of employment are normally taxable under ITAA 1997 section 6-5. In the Scott case, it was determined that testimonials (such as presents) made in recognition of the taxpayer's professional distinction constituted taxable revenue. As a result, the car and the money collected may be considered taxable income for the gamer. C) Ans: Legislation : ITAA 1997, Sections 6-5, Division 230 (TOFA - Taxation of Financial Arrangements). Exchange profits (or losses) that constitute ordinary income (or ordinary loss) may be assessable (or deductible) under section 6-5. Division 230 of the ITAA 1997 (TOFA regulations) may apply in the case of more sophisticated financial arrangements. D) Ans: ITAA 1997 s 6-5.

If the boat is supplied as an incentive for the tennis player to become a professional and therefore make money, it may be considered assessable income. The boat's worth would be the amount included in the recipient's taxable income. e) Ans: Legislation: ITAA 1997, Sections 6-5. Employment payments, including incentives, are normally assessable under section 6-5 of the ITAA 1997. As a result, the incentive paid to the cricket captain would constitute taxable income. F) Ans: ITAA 1997 sections 6-5; Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47. While section 6-5 of the ITAA 1997 treats presents received in connection with the performance of services as assessable income, minor gifts or tokens of gratitude, such as flowers, may not necessarily be classified as assessable revenue. In the Hayes case, it was determined that not all gifts received in connection with employment or professional activity are taxable. Given their nature and lack of a direct relationship to particular services done, the flowers are unlikely to be considered assessable revenue in this case. G) Ans: Income Tax Assessment Act 1936, Section 6-5, and Income Tax Assessment Act 1997, Section 6-5.

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Patrick Mills is only taxed on his Australian-sourced income if he is a non-resident for Australian tax reasons. Earnings from basketball and coaching in Australia are considered Australian-sourced income and are taxed. If the duties are done in Australia or the contract is engaged into in Australia, the advertising sportswear profits are likely to be regarded Australian-sourced and liable to tax. H) Ans: ITAA 1997, Divisions 40 and 995. A payment received for the sale of the right to use a trademark is considered capital proceeds and may result in a capital gain. A trademark sale would be considered the disposal of a CGT (Capital Gains Tax) asset, and the capital gains or losses need to be calculated. This is subject to capital gains tax. I) Ans: ITAA 1997, Sections 6-5. Payments made between family members, particularly for domestic or home tasks, are often deemed private or domestic in nature and therefore not assessable. A husband's allowance to his wife for home tasks is unlikely to be regarded assessable income for the wife J) Ans: ITAA 1997 sections 6-5. Rewards won in contests such as a TV quiz show are usually considered assessable income under section 6-5 of the ITAA 1997 if they are obtained in connection with activities undertaken with order to

convert the rewards into revenue.

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TLAW603 Mid Sem Exam Answer Sheet T22023

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