Problem law question on income tax

Part 1 A

According to the Income Tax Assessment Act (1997), whether the income is assessable income will be affected by the nationality of a person. If the person is an Australian resident, then almost all of his or her ordinary income is assessable income. If not, then only some of his or her ordinary income will constitute assessable income. That is because it should in most cases be derived from Australian sources. In Clara’s case, neither the $25,000 compensation for her job position change nor the $15,000 for her agreeing to cease her business for the next 5 years constitutes ordinary income, let alone assessable income. Here, we do not need to consider Clara’s nationality since Clara’s case is special rather than ordinary.

Both of the two compensations are not formal income. That is to say, if one side in the dealing process is not satisfied with how much the money is, he can choose to break the deal. The two incomes may be changed in a different way. In terms of job salary, it is only a partly reflection of a job. That is to say, if one is not satisfied with a job, there will probably be other aspects that may persuade him or her choosing the job, such as job environment. It is a yes or no question about the job, other than a deal in the salary. That is to say, money is not an influencing factor in one’s choice of their job. However, the two compensations stated here differ. The amount of money is obviously a decisive factor in Clara’s choice whether to stay on her present position and company or not. She can also keep her part time job as she wishes as long as her boss wants to leave her in the right position. The board of directors can also fire Clara if they consider her action to disobey the regulation of the company.

Based on the analysis above, it is uncertain about the two compensations in amount. It is a compromise for both sides to reach the deal that the company promises to pay Clara more money for her to not leave the current position. Compared with ordinary income, they are special and even not possible to be audited. It is almost impossible for tax department to know such incomes. Therefore, both of the two compensations do not constitute the assessable income and ordinary income.

Part 1 B

As is known, the Capital Gains Tax has been separated from tax of other common gains. During the Second World War, “Capital Lock” phenomenon became a serious problem since tax rate was significantly high. Many investors were worried because they were impressed that once they earn from the capital, most of the gains would be taken away by taxes levy. Consequently, the public chose to invest in nothing. The “Capital Lock” Effect obviously caused huge damage to the development of the economy. During the past decades, the government had been making effects to the reformation of Capital Gains Tax, which had been more reasonable for the development of economy, though there is still problem in tax levy.

Generally speaking, Capital Gains Tax has the following main characteristics. Firstly, Capital Gains Tax is optional in some sense. One can choose to make no investment if they want to escape any risk. That is to say, Capital Gains Tax is based on the sale behavior of capital owners. Compared with other common income including interest, bonus and rewards, gain from giving up the ownership of capital is voluntary. This provides convenient methods for the government to control Capital Gains Tax. It is in this sense that Tanya has freedom to make decisions about whether to sell her capital or not. The second one is that Capital Gains Tax is significantly influenced by the inflation rate. Compared with speculation, investment is a long-term behavior. The increment of a certain investment is by many factors, of which the inflation is an important one. There may be false image that one gain from an investment but actually he or she loses money due to inflation. When the inflation rate is significantly high, it will be difficult for one to decide whether to sell his or her capitals or not. Thirdly, the Capital Gains Tax of stocks is double levied. One’s stock purchase behavior is based on stock appreciation rather than its present value. The gain of stock sale is actually included in future earning component of a company. Tax on this is actually already added to future income of the public.

The incomes and payments of Tanya are shown in Tables 1 and 2. From a comprehensive perspective, Tanya need not be worried about the Capital Gains Tax since the total income is much higher than the total payment. Specifically, the total income from the land and Tanya’s retail shop is $21,132,000, while the total payment is $420,000. Though the difference between the total income and payment is significantly large, which suggests a big deal of Capital Gains Tax, the relatively larger income ensures Tanya a good net income. In details, the selling price was approximately 8 times higher than the purchase fee. Tanya earned $2,800,000 to $2,900,000 per year in her retail shop for the successive 7 years from June 2008 to March 2015. The two blocks made Tanya earn money rather than loss money in this investment. So Tanya’s choice to sell the block of land and her retail shop is acceptable for the sake of her rights.

From Table 2, Tanya’s other net asset could be obtained by calculating the difference of total asset and payment. The asset configuration is healthy. Tanya should be careful about her future investment in companies and stocks to avoid risks. There is no need to be worried about the Capital Gains Tax liabilities.

Table 1 Money paid for the land and Tanya’s retail shop (in US Dollars)

Income Payment

Purchase Fee 115,000

Stamp Duty 5,000

Build a Retail Shop 280,000

Leather Sofa 20,000

Annual Turnover

(2008.06-2015.03) 2,800,000- 2,900,000

Rent out the garage

(2008.06-2015.03) /year 15,000

Sale of the land 900,000

Sale of the sofa 15,000

Business of the Retail Shop (next 4 year)/year 150,000

Total 21,132,000 420,000

Table 2 Tanya’s other incomes and payment (in US Dollars)

Asset Payment

Purchase TLC Pty Ltd. 400,000

Australian Government Bonds 100,000

Restaurant 300,000

House 1,400,000 650,000

Rental Property 550,000 350,000(50,000 mortgage)

Shares in Invest Pty Ltd. 975,000

Shares in Commonwealth Bank 600,000 100,000

Motor Car 30,000

Total 3,925,000 1,580,000

From Tables 1 and 2, we find that Tanya’s overall asset is in great condition. She can try to let herself own several small business concessions, which could cut down the Capital Gains Tax payment. It is suitable for Tanya to take the chance of next Small Business Rollover.

 

Part 2 Housing Affordability and Tax Effects

Tax policies and the affordability of housing

The position that taxes have been having on the position of capital gains the ATO policies have been materially influencing the numbers on the ownership of homes within the Australian divide. Looking at the policy recommendations that ATO (2015) tables on the favoring that real estate has been receiving under the effect of taxation, the reality that is asserted is one that can be considered as truth to the recommendations of tax on housing being a hotly debated concern. In particular, the most valid of these concerns is tabled on the influence that the taxes will be having on the affordability of the housing interests. Identifying with Kenny (2012, p. 79) the personal tax system will be one of the major concern that will be affecting the ability of an individual to own a house. This is particularly a notion that is attached to the position that the assessment of income and investment capacity will be having. With this position in mind the first of the effects is based on the investment capacity that tax has in improving the propensities of individual to invest in the economy.

With reference to the current tax policies that are tabled by the ATO, the second of the concern that are tabled with the dimensions of taxation are the property tax on the price of supplying the new property or housing, aside from the council rates and land taxes the income tax will be majorly forming the discussion of this essay.

Thus, to focus on the discussion of Rego, Morgan & Fornell (2013, p. 12) there are four major positions form which the tax policies in the Australian divide will be affecting the position of the housing and ownership of homes. These are the negative gearing of property, the capital gain tax which is of primary interest here, the stamp duties, land taxes and social justice policies (The Conversation 2015). In essence, the reality is that are will be some capital gains taxes that will render the investments in property very non lucrative. This is a position that is shared by the validation of the taxation systems and the tax policies. Looking at the policy on tax as suggested by the ATO on housing the assertion is that housing tax is one of the major sources of revenues for the government (The Conversation 2015). Identifying with the position that the land and stamp duties have, any sale of property within the government territories must be accounted for. The use of policy in reducing of increasing this tax items can be a position from which the states can be influencing the incentives in housing. The other most valid interest that is developing as in influence to the policy of housing and housing ownership is the concerns of negative gearing. Many are the time when the property owners will be in a scenario to exhibit these negative positions in return. According to Taylor & Richardson (2012, p. 478) this means that the property expenses which may be inclusive of the property depreciation costs, the mentioned land taxes, and the maintenance and report costs that the property will be incurring. In fact, these expenses can be very high such that the gearing ratio as compared to that of the revenues that the landlords and the property owners are collecting is negated annually (Milligan 2014, p. 5). According to some recent survey carried out by the Hilda Survey 2006 at least 33% of the landlords were negatively geared at that particular time (The Conversation 2015). Thus, the position of negative gearing will be very encouraging to the tenants who take up property on rent. This will be implicit of the position that the negative gearing will serve to benefit renters by keeping rent down.

Thus it is noted that the current four tax policies that are affecting the demand and the supply for housing can be better channeled with the influence of tax policy. Thus, the Australian position is better defined along the suggestions of how better to changes the number and the motives that the consumers will be having in terms of investments with the housing sector. According to Taylor & Richardson (2012, p. 470) this is position that can be inclined by the convents of changes in policy regulation as handled in the next chapter.

Reforms on housing tax laws

The suggestion of the needs to have a number of reforms in the Australian tax system will be better placed under the needs of changing the perception of the investor and the landlords in this case (The Conversation 2015). With the negative gearing position has been suggestively described as the major and the main interest that the investor will be having. Identifying with some of the channels that are involved in housing and property ownership in Australia, the uncertainty of tax is what comes out in the open. Thus is this gearing ratio was to be taken into consideration and the effect that the land rate and the stamp duties have on the expenses that housing has in Australia (The Conversation 2015).

Thus the efforts of policy changes will be better described with the ATO changing their prerequisite obligatory stamp duties to lesser valuation. This will be a position form which the affordability of housing will be maintained with the stating that the governments still maintain the generation of revenue (Badertscher, Katz & Rego 2013, p. 229). Equally, identifying with the position that is asserted by the interest on the land rates the analysis will be a similar one. This is suggested along the position that the reality of investment and purchasing of property and housing will not lead to future higher payment making the investment not worth the value in good time.

Thus the changes in the policy recommendation will be better positioned along the suggestions of the needs and effects that the relaxation of policy will have on the boosting of investment in the housing sector. According to Rego, Morgan & Fornell (2013, p. 12) the development of lower maintained and lowers repair will be the point form which the interest can be developed from. Nevertheless, repairs and maintenance cannot be fully reflected with the concerns for taxation, thus there will be the needs to have the policy have better interest and better validation of interest to their concerns. Therefore, in suggesting the dropping of land rates to lower valuation will be materials of two things (Rego, Morgan & Fornell 2013, p. 8). These are the position of the government still maintaining their pool of revenues and the number of housing owners equally increasing in this case. Identifying with these two positions it is noted that the valuations that the revenues will only be affected positively if these expenses are to be reduced.

Equally this will thus, assert that there will be two positions from which investor will be standing at the financial ending of investment periods this is the suggestions of whether to receive their investment returns or equally reinvest what they have made in the year of operations back to risk gaining more in the next financial year. Looking at this position, the income tax liability that might be existing with the repayment and the reinvestment of the dividend earned will all be dependent on the management that the investment has been receiving. On a personal level, it is therefore noted the investment, reinvestment and enjoying return is taken based on the rationality that the investor will be having form capital gain tax.

According to Coddington (2013, p. 3) these changes in policy are the only valid direction from which the assessments could be tabled in the deliberations for the managements and the operations of the investment in housing. With this the text was developed based on the review from which the performance of the theoretical analysis was very well represented with the historical performance of taxation in the housing sector, the success and the failure that the housing sector has had in the Australia and equally the documented findings in this second part as the policy changes. Looking at the direction that was presented by the taxation and housing findings, this report was able to have a valid direction with the interest of developing more on the performance of the future. Seeking to demonstrate a much more understandable and less common application, this text opts for the use of the desired changes with housing numbers and still maintains more in the revenues that the government will be getting (Milligan 2014, p. 5).

According to Webb, Watson & Hinks (2003, p. 124) this suggestion is well orchestrated to suggested any possible relationships that might be existing within the management and the operations of the taxing and investment in housing. Based on the fundamentals of business studies, a perfectly competitive market is one under which the buyers are the price setter in the market. Fronting this idea onto the consumption trends in the housing market is identified as one that the consumer control is more dominant compared to the supply based on associated costs. As a result, the marketing strategy to increase housing will need to be very well thought of according to (Rego, Morgan & Fornell 2013, p. 16). This is primarily because a number of the acquisition strategies and the retention position that have been unique to any marketing housing as a very tax friendly venture, if the campaign is to work with the Australian consumers. Thus, what is the difference with the housing consumers, according to the direction that Smith (2015, p. 4) takes, the housing consumers are known to have a very large affinity to their lower tax returns. As a result, using the position that is expected from the ATO model in income and CGT, the interest that is served by the policy management changes is one that is primarily attached to the opportunities part of making more in returns by lowering the incidence of tax for the ATO polices. Thus, this policy management has one primary objective; this is to identify the opportunities that are in a particular markets environment different from those of the commonly attached housing markets. Hence, Looking at the information that has pressed above, the development of a policy plan can therefore be seen as strategizing position from which the state can develop and organize a plan to keep them from being seen as extravagant in taxation and still maintain revenues. Thus, they will be able make more in terms of sales. Using the synchronization that is identified with the historic performance and analysis, presented on the effects of tax on housing this text notes that the development of the market for property can be the best positioned into what this assessment of the policy influence and its adoption (Dawkins & Reichheld 2011, p. 45).  

Reference:

ATO 2015, Iincome tax rates, viewed 25 August 2015, <http://www.ato.gov.au/Rates/Individual-income-tax-rates/>.

Badertscher, BA, Katz, SP & Rego, SO 2013, ‘ The separation of ownership and control and corporate tax avoidance’, Journal of Accounting and Economics, vol 56, no. 2, pp. 228-250.

Kenny, P 2012, ‘Post implementation reviews of recent Australian tax reform’, Journal of the Australasian Tax Teachers Association, vol 7, no. 1, p. 79.

Milligan, B 2014, ‘Tax avoidance: What are the rules?’, Audit and Taxation , vol 2, no. 1, pp. 1-7.

Rego, LL, Morgan, NA & Fornell, C 2013, ‘Reexamining the market share-customer satisfaction relationship’, Journal of Marketing, vol 77, no. 5, pp. 1-20.

Taylor, G & Richardson, G 2012, ‘International corporate tax avoidance practices: evidence from Australian firms’, The International Journal of Accounting, vol 47, no. 4, pp. 469-496.

Thampapillai, DJ 2014, ‘The Income Tax Assessment Act 1936—S23AG and Double Tax Avoidance Agreements’, Public Policy Research, vol 1, no. 1, pp. 14-28.

The Conversation 2015, Four tax policies Australian house prices rest on, viewed 13 September 2015, <http://theconversation.com/four-tax-policies-australian-house-prices-rest-on-44778>.

Income Tax Act 1986

Income Tax Rates Act 1986

Taxation administration 1953

Income Tax (Transitional Provisions) Act 1997

Income Tax Assessment Act 1997

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