ACC301 Tax Law

ACC301 Tax Law

 

 

 

 

ACC301 Tax Law

 

Part 1

 The computation of assessable income of Michael for year ended 30 June 2019 is given below:

Michael’s assessable income for the year ended 30 June 2019 is made of up his business income from the business of selling pool equipment and materials and servicing swimming pools, income from rental property and income from capital gains.

Total assessable income of Michael for year ended 30 June 2019 is given below:

Net Assessable Business Income                  = $ 617000 (Note1)

Net Rental income                                         = $ 89337 (Note 2)

Net Capital Gains                                            = $ 306050 (Note 3)

(Capital gain on investment property+

Capital gain on collectible + capital gain on lounge)

Total assessable income                                            = $ 1,012,388

 

The detailed calculation of Net Assessable Business income, Net Rental Income and Net capital gains is given below:

Note 1

Business income of Michael
Sales	$ 9,15,000.00
Less: Expenses related to business
Wages	-$ 2,75,000.00
Bad debt written off on 01.07.2019	-$ 600.00
Legal fees	-$ 4,530.00
Gross Business income	$ 6,34,870.00
Adjustments for arriving at taxable business income
Add: Excess  amount of wages paid to related person (EN-1)	$ 40,000.00
Add: Legal fees related to winding up of business (EN-2)	$ 4,530.00
Add: Bad debt written on 01.07.2019 (EN-3)	$ 600.00
Total additions	$ 45,130.00
Gross Assessable income from business (before c/f losses)	$ 6,80,000.00
Less: Carry forward losses excluding the amount of donation (EN-4)	$ 63,000.00
Net Assessable Business Income	$ 6,17,000.00

 

Explanatory Notes:

1. Excess amount paid to relatives is disallowed.
2. Legal fees of capital nature is not deductible
3. Bad debt will not be deductible in year 2018-2019 as written off on 01.07.2019.
4. As per rules of the ATO for carry forward of business, no deduction is allowed for the amount of tax loss that is attributable to donations, gifts and personal super contributions (ATO, 2019a).

 

Note:2

Rental Income
Rental property - vacant land
Rates and Taxes related to vacant land	-$ 5,270.00
Rental property- Dwelling
Gross Rental Income	$ 95,000.00
Less: Expenses paid in connection with rental property
Loan application fee (EN-1)	-$ 392.50
Net income from rental property	$ 94,607.50
Total income from rental property
Income from rental property	$ 94,607.50
Holding expenses on vacant block	-$ 5,270.00
Net Rental income	$ 89,337.50

 

 

Explanatory Notes:

1. The deduction for borrowing expenses incurred in relation to rental property is spread over 5 years or term of loan whichever is lower. Here, term of loan is 4 years, deduction for year 2018-19 is $393 ($1570/4)

 

Note 3

Capital Gain on Investment property in NSW
Investment property in NSW
Sale proceeds		$986500
Less : Cost Base (EN-1)		$376300
Purchase price	$ 3,45,000.00
Stamp duty	$ 2,750.00
Interest on loan	$ 18,800.00
Commission to real estate agent	$ 9,750.00
Fine of $5,450 (EN-2)	$ 0
Capital gain		$610200
Less: 50% Discount		$305100
Net Capital gain on investment property		$305100

 

Explanatory Notes:

1. Indexation method cannot be used as property was purchased after 21.09.1999

2. No deduction is available for fine charged under an Australian law or foreign law.

 

 

Capital gain on  Collectables
Antique
Sale price	$ 7,500.00
Less: Cost price	-$ 2,000.00
Capital gain	$ 5,500.00
Less: Capital loss b/f	-$ 3,500.00
Capital gain remaining after setting off capital loss
Remaining capital gain	$ 2,000.00
Less: 50% discount	-$ 1,000.00
Net Capital gain	$ 1,000.00

 

Explanatory Notes:

1.  No indexation will apply as it was acquired after 21/09/1999.

2. Capital loss on collectibles brought forward from previous years can be adjusted only against capital gains made on collectibles.

 

Capital gain on Personal asset - Lounge
Sale Price	$ 14,950.00
Less: Cost base	-$ 15,000.00
Capital loss	-$ 50.00

 

Part 2

The value of fringe benefit on interest free loan would be computed by using the benchmark rate of interest of 5.2% (ATO, n.d.c). As the loan was provided on 1 January 2019, interest will be calculated for 3 months only (from January to March). The rate used for arriving at the grossed value of fringe benefits is the lower gross up rate of 1.8868 which is used when benefit provider cannot claim GST Credits.

Calculation of Total Grossed up taxable value of Fringe benefits

Particulars	Working	Taxable value	Grossed up value
Interest computed at benchmark rate	(500000*5.2%*3/12)	6500	$ 12,264
Life insurance premium paid for employee		$ 25,000.00	$ 47,170
Total Grossed up Taxable value of fringe benefits			$ 59,434

 

FBT payable for year ended 31st March 2019= 49623*47% = $ 27934

 

Part 3

Michael has a Net capital gain of $ 306050 for the year ended 30 June 2019. The capital gains made by Michael for the year 2019 are divided into three categories – Capital Gain on Investment property, Capital Gain on sale of collectables, and capital gain on sale of personal asset lounge.

Capital Gain on Investment property in NSW	$ 3,05,100.00
Capital gain on  Collectables- Antique	$ 1,000.00
Capital gain on  Collectables- First day cover	$ 0.00
Capital gain on Personal asset - Lounge	$ -50.00
Net Capital Gain	$ 3,06,050.00

 

(Note- detailed calculations have already been provided in part 1)

As per the CGT rules, collectables that were acquired at a cost equal to $ 500 or lower will be exempt from CGT. Hence, no capital gain shall apply on sale of First day cover as it is an exempt CGT asset.

 

Part 4

The income tax deductions that can be claimed by Michael for the year ended 30 June 2019 are given below:

Michael is entitled to claim the following income tax deductions against his business income

Wages

Out of the total wages of $ 50000 paid by Michael to his brother, only $ 10000 would be deductible for tax purposes because deduction is only available for those amounts paid to relatives that are reasonable. As per the provisions of sections 26-35 of ITAA 1997, excessive payments made to relatives are not allowed as deduction (ATO, n.d.a).

Legal Fees

The legal fees paid in relation to winding of an earlier business are of capital nature (ATO, 2018). Hence, no deduction will be allowed for same.

Bad Debts

A deduction for bad debt is available in the year in which I is actually written off. No deduction shall be allowed for the bad debt written off on 01.07.2019 for the year 2018-2019, however deduction can be claimed in year 2019-20.

Rates and taxes paid for vacant land

Certain expenses such as council rates, interest etc. that are incurred in relation to vacant land which is intended to be converted into a rental property are deductible. Hence, this will be deductible against rental property income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

ATO. (n.d.a). Income Tax Assessment Act 1997. Retrieved from https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/26-35

ATO. (n.d.b).  Expenses deductible over a number of income years. Retrieved from https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Rent/?page=17#Borrowingexpenses

ATO. (n.d.c). Fringe benefits tax – rates and thresholds. Retrieved from https://www.ato.gov.au/Rates/FBT/?page=1#Statutory_or_benchmark_interest_rate

ATO. (2018). Legal Fees. Retrieved from https://www.ato.gov.au/Individuals/myTax/2018/In-detail/rent/?anchor=Legalfees

ATO. (2019a). Business losses. Retrieved from https://www.ato.gov.au/Business/Income-and-deductions-for-business/Losses/