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HI6028 Questions of Taxation Law Assessment Answer

Assessment Details and Submission Guidelines
Trimester
T1 2019
Unit Code
HI6028
Unit Title
Taxation Theory, Practice & Law
Assessment Type
Individual Assignment
Assessment Title
Questions of Taxation Law
Purpose of the assessment (with ULO Mapping)
The individual assignment will assess students on the following learning outcomes:
  1. Demonstrate an understanding of the Australian income tax system, the concepts of income and deductions, CGT, FBT, GST general anti-avoidance provisions and income tax administration. (ULO 1)
  2. Identify and critically analyse taxation issues. (ULO 2)
  3. Interpret the relevant taxation legislations and case law. (ULO 3)
  4. Apply taxation principles to real life problems. (ULO 4)
Weight
20% of the total assessments
Total Marks
20
Word limit
Not more than 2,000 words (acceptable to be 10% above or below this word limit)
Submission Guidelines
  • This assignment along with a completed Assignment Cover Page is to be submitted by the due date in soft-copy only (Safe assign – Blackboard).
  • The assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook.
  • It is the responsibility of the student submitting the work to ensure that the work is in fact his/her own work. Ensure that when incorporating the works of others into your submission that it is appropriately acknowledged.
  • The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers.
  • Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style.
  • It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook.
  • Proper referencing in accordance with school regulations.

Individual Assignment Specifications

Purpose:

This assignment aims at assessing students on the Learning Outcome from 1 to 4 as mentioned above.

Assessment task:

Question 1(10 marks)

Your client Helen wants to fund her business as a fashion designer, therefore she has sold some of the assets as follows:

  1. An antique impressionism painting Helen’s father bought in February 1985 for $4,000. Helen sold the painting on 1 December 2018 for $12,000. (2.5 marks)
  2. Helen sold her historical sculpture on 1 January 2018 for $6,000. She has purchased the piece on December 1993 for $5,500. (2.5 marks)
  3. An antique jewellery piece purchased in October 1987 for $14,000. Helen sold the antique jewellery piece on 20 March 2018 for $13,000. (2.5 marks)
  4. Helen sold a picture for $5,000 on 1 July 2018. Her mother purchased the picture in March 1987 for

$470. (2.5 marks)

Advise the Capital Gain Tax consequences of the above transactions.

Question 2(5 marks)

Barbara is an economist researcher and commentator. The Eco Books Ltd offers her $13,000 for writing a book about economics principles. Barbara has never written a book about economics principles, but accepts the offer and writes the economics book called ‘Principles of Economics’. She assigns the book’s copyright for

$13,400 to The Eco Books Ltd. The book is published and she is paid. She also sells the book’s manuscript to the Eco Books Ltd’s library for $4,350 plus several interview manuscripts she has collected while writing the economics book for which she receives $3,200.

Discuss each of the above payments to Barbara separately and states if these are income from Barbara’s personal exertion. (2.5 marks) Would your answer differ if Barbara wrote the Principles of Economics’ book before signing a contract with The Eco Books Ltd in her spare time and only decided to sell it later? (2.5 marks) Support your answer by referring to relevant statutory and case law.

Question 3(5 marks)

Patrick paid $52,000 to his son David to provide some assistance in his newly started business. They agreed that David repay his father $58,000 at the end of five years. Patrick provided this loan to David without any formal agreement or security deposit for the sum lent. Patrick told his son that he need not pay interest. However, David repaid the full amount after two years through a cheque, which was included an additional amount equal to 5% on the amount borrowed.

By referring to relevant statutory and case law, you need to discuss the effect of these arrangement on the assessable income of Patrick. (5 marks)

Assignment structure should be as the following (students responses involves calculations, and students must refer to the relevant legislation and cases whenever required according to the questions).

Questions 1:
Capital Gain Tax regarding antique impressionism painting
Capital Gain Tax regarding historical sculpture
Capital Gain Tax regarding antique jewellery piece
Capital Gain Tax regarding picture


Questions 2:
Discuss Barbara ‘s income under the case scenario
Discuss Barbara ‘s income under the alternative scenario


Questions 3:
Discuss the effect of these arrangement on the assessable income of Patrick


Answer

Taxation Theory, Practice & Law

Answer to question no- 1

Capital Gain Tax in the context of antique painting 

In the case study, it has seen that there are some issues arise in the context of selling off an antique painting. The centre of the entire incident is Helen, who wants to pursue her career as a fashion designer. In order to fund her career, she has decided to sell some of his assets. In the year 1985, the father of Helen has bought an impressionist painting for $4000. Thus, Helen has sold the painting for $12000 in the year of 2018, on 1 December. As stated by Evans et al. (2015), capital gain tax in the country of Australia has formed some of the rules in the context of purchase as well as selling of an asset. As for example, all the assets that are purchased before or on 20 September in the year of 1985 are exempted from the capital gain tax (Australian Government. 2019). In this case, scenario, the actual market value of the asset is $12000. In addition to that, the actual time of painting inheritance has not included in the case scenario. Hence, capital gain tax is imposed on the selling price of the antique painting as 28%. Helen wants to make a profit by selling her father assets, as she has not used all of these assets in the last few years. The capital gain tax in the context of the painting is as below: 

1) Assets have been purchased before 1999 so the indexation method will be applied for the computation of the capital gain. 

ParticularAmount $
Selling price12000
Purchase price12042
Capital gain /loss(42)


Working Note:

Cost of purchase as per the indexation method = $ (4000/37.9)*114.1=12042

Table 1: Capital gain tax applicable to Helen

(Source: Refer to Excel)

As per the above calculation, it can be clearly seen that the total loss amount of Helen is $ 4120 by selling the antique painting. In addition to that, the total capital gain in the context of her selling was $8000.

ParticularAmount $
Selling price6000
Purchase price10120
Capital gain /loss(4120)


Capital Gain Tax in the context of historical sculpture 

In the case study, it has seen that Helen has bought a historical sculpture in the year of 1993, December for $5500. Apart from this, it has also included that Helen has sold this sculpture in the year of 2018 for $6000 in order to fund her carrier. After analysis of the market, she has understood that the selling price of such sculpture is higher through the online site. However, it can be stated that the Helen has made a profit by selling the asset. As per the Australian tax law, most of the assets that are used in the personal context are exempted from this tax such as furniture, car, home and many others (Australian Government. 2019). Hence, it is clear that Helen has made some of the profit by selling the sculpture. According to McClure et al. (2017), the capital gain tax has played an important role in order to change the financial status of a country. In the year 1999, the government of Australia has introduced an extension of 50% in the context of individual taxpayers based on actual capital gain. However, as per the capital gain tax, it has calculated that the total liability tax of her selling is 28%. The tax liability, as well as capital gain tax, has calculated as below: 


ParticularAmount $
Selling price13000
Purchase price33117
Capital gain /loss(20117)

Table 2: CGT regarding the selling of historical sculpture

(Source: Refer to Excel)

The purchase cost of indexation: 112.6 /47.6*13000=$33117

As per the above calculation, it can be clearly seen that the total liability tax on the asset has estimated at $20117. In addition to that, the total capital gain/loss of the selling is $ (20117)


Capital Gain Tax in the context of antique jewelry 

In the case study, it has seen that Helen has bought a piece of special jewelry that is antique in the month of October in the year 1987 through the amount of $14000. After that in the year of 2018, March she has sold this antique piece in order to make money for her carrier. Since she has an urgent requirement for money, she has sold the asset for $13000. Hence, it is clear that she sold the asset on a loss. The prime reason behind the loss is the low amount of liability tax in respect of capital gain. As opined by Green (2016), CGT of Australia has induced some of the tax exemption regarding personal assets within the country. In addition to that, the price of the jewelry in the year 2018 was low as compared to the previous year. As per CGT, all the assets that are purchased before or on 20 September in the year of 1985 are exempted from the capital gain tax (Australian Government. 2019). At the time of the purchasing, the jewelry the market value was $14000. Hence, in the year 2018, the value gas decreased to $13000. However, Helen has to go with loss, as there is no option to get a higher price.


Capital Gain Tax in the   context of the picture

As per the case study, it has been seen that Helen has also sold a picture that is purchased by her mother in the year of 1987 for $470. Helen has sold this picture for $5000 in the year of 2018. In Australia, there are 10% GST in most of the services and goods (Australian Government. 2019). In addition to that, Helen has made a huge profit, as the market value of the asset was low in 1987. As stated by Yong and Ma (2015), the entire asset that has bought before 1985 is exempted from the CGT. However, in the selling of picture Helen can make a profit of $4530. As per the Section of 104-230, Income Tax Assessment Act, 1997 all of the collectables that are below the evaluation of $500 is exempted from the CGT (Australian Government. 2019). 

Carry forward of capital loss 

TOTAL CGT APPLICABLE FOR HELEN
ParticularsSales pricePurchase priceProfit/lossTax deductionNet profit/loss
Impressionism Painting1200012042-Credit-
Historical sculpture600010120(4120)Credit-
Jewellery1300033117(20117)Credit-
Total CGT to be paid--

Table 3: Total CGT liability for Helen

(Source: Refer to Excel)

In the given table, it can be illustrated that the actual Capital Gain tax compensated by Helen is shown. It can be deduced that Helen has margined the profit of $5400 by selling painting in 2018 because the book sold is excluded by CGT. As mentioned by Sadiq (2019), CGT exemption is applied before the year 1985 in Australia. On the other hand, CGT applied after the 1985, it cost up to the tax of $10000. Thus, Helen makes the loss in selling jeweler. The net loss can be seen was -$720 and Helen has to pay the CGT over selling price. Moreover, with the help of selling historical sculpture, Helen makes profit of $360. Hence, this can help Helen to decrease liability because of Capital gain tax.    

Answer to question no-s 2

Analyze the income of Barbara in the context of case scenario

In the given case study, it can be seen Barbara is known as the economist commentator and researcher who have published books of ‘Principles of Economics’. Further, while Barbara became famous about writing of books, The Eco Books Ltd had offers Barbara amount of $13000 in order to write the new book related to the topic of economics principles. The money received by Barbara is taken as normal income while the publishing house has agreed of paying certain payment for writing the economics book. On contrary, Barbara assign copyright of the economic book minimum amount $13400 to the same publishing house The Eco Books Ltd. Reese (2015) stated that, copyright act is needed for publishing the book under right belongs to the licensee of literary to handle the work.  Moreover, it can be seen that Barbara sold the manuscript of the ‘Principles of Economics’ book at the amount of $4350 in which Barbara has gathered the interview manuscript which shows that the amount Barbara has been paid is not normal income. 

As per the viewpoint of Bhat (2017), intellectual property helps to passes the two types of rights such as copyrights and industrial property rights that show the human intellect. On the other hand, by writing the economics book, Barbara has collected the amount of $3200. In case of Apple and Samsung’s Patently Expensive IP Dispute, it is related to the intellectual property in which Apple claims to Samsung of infringing the design patents of iPhone (findlaw.com.au, 2011). Thus, it revealed about the importance of an infringement of high price tagging and good patent strategy. It can be stated that in terms of getting profit from the publishing house, it can be Barbara normal income rather than gain high profit. However, after selling the intellectual property of the book can subject the Capital Gain tax liability.

Analyze the income of Barbara in the context of alternative scenario

In the given scenario, it has been observed that Barbara has already sold the manuscript of book in order to gain good earning. On the other, though Barbara is not professional writer and does not signed any type contract with any publishing house, so Barbara has to pay the capital gain tax in order to earn the profit for the book. As per the viewpoint of Sims (2016), capital gain needs to be taken into account for the capital assets increasing value. In the context of book, the total capital gain is achieved based on copyright of the book for its manuscripts and distribution. Further, Barbara needs to pay GST for publishing the book into the market of Australia in order to gain profit from the publishing house like The Eco Books Ltd. in terms of writing the famous book “Principles of Economics”, it needs the permission of government to publish with its manuscript and copyright. According to Income Tax Assessment Act 1915, Part 13, it can be stated that the personal exertion gained by Barbra can be exemption of income when Barbara is on active service (legislation.gov.au, 1915). In case of Burge v Swarbrick [2007] HCA 17, absence of copyrights has been seen and the allegation has been put to both men by each other (hcourt.gov.au, 2007). Anti-overlap, provisions have occurred due to interaction among statutory protection of design and copyright.  

Answer to question no- 3  

Analyze the impact of arrangement for assembling the income of Patrick 

In the given case study, Patrick returned David amount of $52000 after two year of lending it. It can be seen that, the amount taken by any organization has to pay the accessible income. Here, Patrick has taken the money personally from his father David and it can be termed as the ordinary income. In the Australian Taxation Law, the accessible income received by the person has to pay interest on the contract to run the business (ato.gov.au, 2019). On the other hand, it can be seen that there is no contract signed between David and Patrick, still, Patrick pays David $52000 in two years along with the 5% interest after five years of the lend amount. 

Further, in terms of the Australian Contract Law, in Part 2.2 of Contractual Aggression and The Law, it has been stated that clients can generate the contracts as aggressive in the basis of the negotiations in the mentioned contract (consultaustralia.com.au, 2012). On the other hand, the law operates free of the contract between the parties while both the parties have to handle their own liabilities and risk in order to gain the money. Thus, in the case it can be seen that Patrick has returned money to David with his own liabilities and risk without any interest for the first two years. In addition, after years, Patrick has paid 5% of the $52000 money to David with its liability.    

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