Aspects of Taxation Law

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Thomas is not a resident of Australia however he temporarily visits the country to teach for a semester which lasts for five months, from July to November, but the lecturer lived in the country for another five months until April 2011 with his family members. Cumulatively the lecturer has been in Australia for nine months which is more than six months continuously. For the purposes of taxation it is in order that the lecturer’s residency is proved in accordance to the tax laws of the land. There are various aspects which are monitored before the conclusion of the residency of Thomas and whether he is subject to the taxation as a resident or non-resident. Thomas is not a resident of Australia neither does he intend to migrate and live in Australia fully; however he has intentions of staying in Australia for more than six months continuously. Thomas does not have an intention of becoming a resident of Australia. He resides in overseas as far as Australia is concerned and thus his place of abode cannot be Australia. While in Australia Thomas, the term of his employment is on contract basis and the accommodation is on a twelve month lease. These are also some of the factors considered for residency. Further information critical for his residency determination, is the fact that Thomas is a married man with children however he does not live with whole his family in Australia at the course of his stay.

Thomas has most of his investments in United States of America (USA) which is treated as overseas in Australia. The case of Thomas does not mention his involvement in any clubs, community organizations, or churches which is also an important factor to be considered when ascertaining residency to Australia. Basing on the above measures, Thomas is a non resident of Australia. The law states clearly that even if one has lived in Australia for more than one and half year but does not have any intentions of taking up residents in Australia since his usual place of residence is in USA which is outside Australia. Therefore the non residency of Thomas is justifiable under the given grounds.

As a non-resident of Australia, Thomas is obliged to lodge his annual income from Australia where the annual income year in Australia starts on 1^st July and ends on 30^th June the following year. Thomas will be expected to pay tax at a non-resident rate and does not enjoy any tax-free threshold. Thomas therefore should inform his employers, La Trobe University’s Bundoora campus and the bank, so that the right amount of tax is deducted from his salary.

Assessable income is the amount of income that the taxation Authority of Australia considers during taxation. Thomas has only his salary from La Trobe University’s Bundoora campus as the only money that emanate from his activities in Australia. Thomas being a non resident of Australia is only obligated to lodge a tax return only on those incomes which are earned from his activities in Australia. The treatment given to foreign citizens of Australia during taxation who qualify to be taxed include the fact that they are only taxed on the amount of money that the y have earned in Australia and have special rates of taxation. The amount of interest that one earns from an Australian bank is also taxed though at a lower rate of 10% which far much lower than that of the residents. They are also exempted from Medicare levy though this means that they will be denied benefits ensuing from the same. Foreigners will also not be in a position to be freed from tax on threshold. Unfranked dividends are not taxable for foreign citizens but in situations where the individual qualify to earn franked dividends, they are not included in the assessable income of the individual. The foreigners are mandated to give their rental income information to the taxation authorities.

In the international acts agreement act of 1953, article 13 has been amended to excuse double taxation between United States of America and Australia citizens. This mainly touches on property and other gains emanating from capital investments.

In the case of Thomas’ investment in United States of America for instance the remuneration which comes from the rent of his houses is not part of his assessable income. The basis of this is that he is not subject to double taxation and he does not need to lodge this possession to the tax authority as part of his income owing to his non residency status. The facts about Thomas which supports this solution is that he is a foreign citizen, he is not subject to the double tax agreements, he has worked and resided in Australia for more than six months continuously and he received income during the tax year from Australia. Therefore basing on the income tax assessment act of 1997 the assessable income of a non resident is statutory and ordinary earnings from specifically Australia. This qualifies the fact that the rent received by Thomas from his investment in New York is not part of his assessable income.

Income tax assessment act of 1936 famously abbreviated as (ITAA1936) clearly outlined that the Australian citizens working and earning from foreign countries are not subject to taxation by the taxation Authority of Australia. However section 23AG of the act was amended so that those Australian citizens who were on employment in the overseas were subjected to taxation taking effect at the beginning of the taxation year 2009/2010.

The foreign incomes which are taxable by Australia on its residents who work overseas include; wages, commissions, bonuses, salary and allowances. Therefore if we assume that Thomas is a resident of Australia then his salary from University of Chicago in the United States of America is taxable by the Australian taxation authority. This is because it is treated as foreign income which should be lodged for taxation as stipulated in the IAAT 1936 section 23AG.

Car and travel expenses information is important in considering the total tax of the residents of Australia. The claims are facilitated through the use of forms D1 and D2. The expenses which are related to the employment include public transport, parking fees, road and bridge toll, petrol, oil and repair expenses. However the individual forfeits the deduction if the vehicle given is not used for the purposes related to the employment. Any slight private use of the vehicle nullifies the entire claim even if the citizen sticks to the regulation but violates only ones.

The parking fee of $200 which Thomas was given for free by the institution where he was working will be considered during taxation. This is because during the time when Thomas was working, there was no alternative use of the vehicle apart from going from work place to his house (Coleman et al., 2010).

The dividends from BHP are fully franked meaning that they include franking credits. Such dividends on shares warrant franking tax offsets. The franking credit therefore must be included among the assessable income alongside the franked dividends. There are deductions however which are made on franked credits which include management fees; this are the expenses incurred on investment advisers at the course of investment period. Interest on the initial amount if it was borrowed in order to buy the shares is also deductible from the assessable amount. Debit tax was initially deducted before the amendments in 1^st July 2005. Travel expenses are also deducted where an individual travels to service the investment portfolio or to seek the consult of the broker. The cost of publications and journals, internet and computer charges, at the course of investment period is also deducted. Moreover borrowing expenses and shares involving listed investment company is subject to tax deduction. The information which should be given to taxation authorities includes reinvestment plan, bonus and the dividends on the behalf of the shareholder.

Rosa therefore is obliged to tax deductions on computer and internet charges as well as the stationery. Since her shares are franked her assessable income will have to include the franking credit which for this case is 50%. This means that the assessable amount of dividends basing on the franking is half the total amount. She is also entitled to tax deduction owing to the fact that BHP is a listed investment company which is a consideration done when calculating the taxable dividends from such companies where some amount is waivered. She is not entitled to other deductions mentioned above because she does not incur those cost considering the fact that she does not have an officer who helps her manage her shares.

The definition of business for taxation purposes in Australia include trade, any profession, vocation or employment however this does not encompass an employee’s occupation. Share trading business is inclusive of this definition. There are a number of factors used to determine whether an individual is indulging in a business of share trading or is simply a share holder. First is the main intention of the individual for investing in buying and selling shares whether it is for profit purposes or not. Secondly is the rate of business, the voluminous nature, the frequency of the business as well as the resemblance in the market. Lastly is the record keeping, licenses, business number from Australia and a business name which is registered. It is true therefore that the profit making intentions on its own is not enough to tell whether an individual is involved in share trading business or not. A share trader is therefore defined as an individual who is involved in the buying and selling of shares for the sole purpose of earning income from the shares o full time basis subject to the above conditions. This differs from a share holder who is person buying and selling shares with the sole purpose of getting income proceeds from the transactions.

Basing on these facts, Rosa qualifies to be a share holder because she is not a registered business person in the field of buying and selling shares. Moreover, the business of buying and selling shares is not her main activity since she does it during her part time. Therefore Rosa does not indulge in a share trading business since she does not meet the requirements of share trade business which include licensing, registered name of the business. The frequency of her business transaction on shares and the amount of shares that she trades in are low and therefore does not qualify to be a share trader.

The determination of capital loss or gain is governed by some systematic steps which include;

Step one: Determination of capital gain tax (CGT) events.
The events which are related to capital Gains tax (CGT) are those events which lead to loss in the capital investment. These events occur upon a successful transaction where shares are sold or disposed. Some of the events considered here include when payment is done to an individual which is not part of the dividends or when a non assessable payment is made by a trust or fund as a single holder.
Step two: Determination of Duration of the CGT event.
This is significant in determination of the duration of the transaction in relation to the annual taxation year. The event starts upon ownership of the capital and the event ends when the individual stops the ownership of the shares.
Step three: calculation of capital loss or gain.
The third and final step involves the actual calculation of the actual gain or loss. The methods used for calculation include discount and indexation methods
The calculation of capital gain or loss is done in considering a number of factors. The following steps are followed during the calculation
1. Calculate the amount that ensued from the selling of the shares which in other words is known as the total proceeds from the capital
2. Determine the cost of every CGT to the individual which is also known as the cost base
3. Calculate the proceeds from the capital by getting the difference between the capital proceeds and the cost base. All the individual gains and losses are the summed up to determine the amount of total taxable capital

The above procedures will therefore be used to determine the amount of capital gain or loss to be lodged to the tax authority for the purpose of taxation (Deutsch, 2010).

Rosa’s case therefore can be done as follows;

Step one: Calculation of proceeds
Proceeds from the capital;
Franked shares of $700- this was not disposed or sold so there is no CGT event which took place
Rosa Sold 5,000 shares in TLS for $3 per share on 1 June 2011. The shares were bought at $2.50 per share on 7 December 2010
Proceeds= (5000*$3) =$ 15,000
Rosa Sold 1,000 shares in WBC for $30 per share on 18 June 2011. The shares were bought at $5 per share on 20 May 1989.
Proceeds = (1000*$30) =$30,000
Rosa Sold 2,000 shares in NAB for $35 per share on 25 March 2011. These shares had been acquired for $40 per share on 11 October 2005.
Proceeds = ($35*2000) = $70,000
Total proceeds =$15000+$30,000+$70,000 =$115,000
Step two: Calculation of cost base.
TLS share:
Cost base = ($2.50*5000) = $12,500
WBC shares:
Cost base= ($5*1000) =$5,000
NAB shares:
Cost base = (2,000*$40) = $80,000
Step three: calculating capital gain or loss
TLS shares:
$15,000-$12,500 =$2500(Capital gain)
WBC Shares:
$30,000-$5,000= $25,000(Capital gain)
NAB shares:
$80,000-$70,000=-$10,000(Capital losss)

The capital gain or loss of Rosa’s shares can be calculated by summing up the individual gains and losses.

$2500+$25000-$10000 = $17,500

Therefore the total capital gain from the shares is $17500. This amount should be lodged for tax purposes as much as Rosa’s shares are concerned.

When Rosa sells her shares through her company
When the shares are sold through her company then the conditions for determination of the capital gain will change in that the conditions prevailing in the company will apply. First the company qualifies the conditions to be called a small business according to the CGT concession. The losses incurred during the investment time are deducted from the capital gain. The total capital gain will be less depending on;
- The company’s qualification of the 15- year exemption or not.
- The eligibility of CGT capital gains
- The presence of depreciating assets in the company
  Rollover of the business is exempted due to retirement reasons. Therefore the taxation of the capital gain is different when it comes to selling shares through a company and selling them as an individual.

Tax treatment of the expenditure relating to the investment property ownership of a property which earns income to an individual has special tax exemptions. The capital gain to be given to the tax authority will be less the expenses involved in the property throughout the year. The factors which affect taxation of property investment include;
- The rented percentage of the investment; whether it is part of the investment or all the investment.
- The costs involved to repair or improve the property
- The sale of a portion or all the investment
- The presence of an operational office within the investment

The annual tax return should include all the income which comes from the rent of the property, however the following information is important to consider during deductions from that taxable income; the changes in the renting rates, the interest ensuing from the property, the insurance costs incurred, the management agent of the real estate and the cost of capital works involved

Basing on the above provisions, Rosa’s expenditure on the investment will be treated as follows;

$20,000 used in the installation of new outdoor decking area will be part of the cost base of the investment.
$1,500 being payment for the investment management is deducted from the capital gain of that tax year
$1,000 being payment of the insurance will be deducted from the capital gain.
$2,000 legal costs is part of the costs incurred as management cost and therefore is deductible from the capital gain

Introduction of capital gains in September 1985 means that the proceeds which came from invested capital formed part of the assessable income of an individual. Before then the capital itself and other sources of income such salary were considered for taxation. Capital revenue distinction is used to determine the amount of capital invested and appropriately specify which of the income is taxable with the respective deductions. During this time the losses incurred on the capital investment were not significant similar to the gains because they were not included in the assessable income of an individual.

Capital distinction therefore has become irrelevant in the current structure since the assessable income is considered using capital gains and losses. The calculation of capital gain and losses is done using capital proceeds and the cost base values. The current system takes into account the initial capital which was the amount determined using capital distinction as the cost base depending on its nature. This saw separation of capitals in 1985 where capital gain tax assets were clearly outlined. An example of this separating a building and a parcel of land containing the building since building is a CGT while the land is not.

Basing on these developments, the statement above is true because the capital distinction before 1985 was basically used to determine the nature of the capital investment. The capital gains were tax free and therefore they were not significant similar to the capital losses. However with the introduction of capital gain in 1985, the capital losses were included because the cumulative sum of gains and losses is now used to determine the total amount of taxable income from a capital investment (Kendall, 2008).

References

Coleman C, et al. (2010). Principles of Taxation Law. Sydney, N.S.W.: Thomson Reuters.

Deutsch, R. (2010). Fundamental Taxation Legislation. Sydney: Thomson Reuters.

Kendall, K. (2008). Taxation and Revenue Law. Chatswood, N.S.W.: LexisNexis Butterworths.

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Aspects of Taxation Law

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