Case Study Help on Taxation Law

Answer 1

  • The legislative right of the Parliament to make laws with respect to taxation and to bring effect to them is derived by clause (ii) section 51 of the Australian Constitution. It states that the Parliament shall make laws relating to taxation for the good governance of Commonwealth and shall not discriminate between States or parts of States in making such laws.
  • The Commonwealth Constitution provides for the separate of the 3 powers of government namely – legislative, executive and judicial. These are respectively performed as follows:
    1. The Parliament drafts the law relating to matters of taxation and revenue generation for the economy and enacts them after the approval of the Senate;
    2. Once the law has been framed it is put into force and the Australian Taxation Office (ATO) acts as a steward of the tax system and helps the government by effectively administering the tax laws and supports the development of procedural requirements relating to tax legislation;
  • Judiciary including the High Court and the Federal Courts are responsible for interpreting the statute and decide on the cases brought before it for disposal of justice.

 

Answer 2

The opinion is sought on whether the business profits earned by the US-based manufacturer from sales within Australia are taxable in Australia. The answer reside inside the provisions of conventions between the United States of America and Australia for the avoidance of double taxation. In particular Article 7 of the USA-Australia Treaty states that business profits of an enterprise shall be taxable only within the State in which it is incorporated / based. However, such profits could be taxable in the other State if it carries on business in the other State through its permanent establishment (PE) in that other State.

According to Article 5 of the Treaty, PE is any form of fixed place of business through which business of the enterprise is carried on whether wholly or partially. This ‘place of business’ may include an office, branch, place of management, or factory, workshop etc. In the instant case, the US based manufacturer has effectively been operating in Australia through a serviced office through which its sales representative is able to engage with public and obtain new orders from customers. In our view, this would constitute a fixed place of business in Australia as the same has not been expressly excluded from sub-section (3) of Article 5.

In view of above, the profits of US enterprise to the extent of orders procured in Australia (i.e. by the PE in Australia) shall be taxable in Australia, and the US-based entity would be able to claim foreign tax credits on those profits under the US tax laws.

 

Looking for Help on Taxation Law?

Dear Indianna,

You have informed us that the 22 hectares of land that is the subject matter of the CGT event has always been used by yourself for generating taxable income (rather than being your main residence). Hence it’s disposal will result in CGT event and give rise to capital gains tax. CGT introduced on 20 September 1985, therefore gain made on disposal of assets acquired before 1985 are disregarded and treated as exempt for the purpose of CGT computation.

PART 1 – The issues involved in both cases are as follows:

  1. Land acquired on November 1, 1979
    1. Since 20 hectares undeveloped land is sold, no CGT event shall arise. You should continue to record the remaining 2 hectares of land in your books.
    2. Same as above in case (a). Capital proceeds shall be taken as per auction bids.
    3. In this case, you choose to construct residential buildings through a developer on your land. In accordance with the provisions of subsection (2) of section 108.55 of the Income Tax Assessment Act 1997, you shall treat the building as a separate asset as the construction began after 1985, provided the asset’s cost base exceeds both the improvement threshold ($150,386 for 2018-19), and 5% of the capital proceeds received from disposal. Accordingly, capital gain on the building upon its disposal shall be recorded separately. No CGT shall be computed on value of the land.
  2. Land acquired on November 1, 1986
    1. CGT shall be recorded for the 20 hectares of land sold. Cost of the total 22 hectares shall be proportionally divided among the area sold out.
    2. Same as above. Capital proceeds shall be taken as per auction bids.
    3. Capital improvements in the form of development of residential building shall be capitalized as a separate asset only if certain balancing adjustment provisions under subdivision 40-D or sections 355-315 or 355-525 apply. Since buildings are depreciable assets, their disposal will give rise to balancing adjustments as per section 40.285. Hence their CGT shall be computed separately from the CGT computed on land.

PART 2 – Year of booking the assessable income

  1. In scenario (a) the income shall be assessed in the year in which CGT event A1 arises i.e., when the property is disposed of.
  2. In scenario (b) CGT event shall arise when the bid is accepted by the seller i.e. the day of auction.
  3. You have entered into a contractual right for the construction and development of property. However the amount to be realized is contingent on development and sale of residential blocks. The profit on block of shall be recognized and treated as a CGT event when the same is sold to the outside party under the contract. In our view, this is so because the profits would not accrue to yourself until the same is realized by the developer under the terms of the agreement.

Answer 4

The fundamental principle governing the rule for the claim of borrowing costs incurred on loan as an allowable expenditure is given under section 25.25. It states that borrowing costs can be claimed insofar as they are incurred solely on money used for purpose of producing assessable income. Hence, money utilized for purposes other than generating assessable income shall be disregarded / not allowed. The deduction has to be spread over the period of the loan, which means that if the money was partially used for business purpose and partially for some other purpose, the maximum amount allowed under the Act shall be proportionately reduced for the period money is not used for business. This method along with illustration is given in subsection (4).

Under certain circumstances, the interest paid on loan could be disallowed being considered by taxation officer as loss or outgoing of a capital nature. For example, in St George Bank Ltd v FCT (2009) wherein the full bench of the Federal Court held that interest payments by a parent company to its subsidiary pursuant to its obligations under a subordinated debenture is outgoing of a capital nature and interest cannot be allowed as a deduction within the meaning of section 8-1(2)(a) of the ITAA97.

Likewise, in Macquarie Bank Limited v FCT (2004), the Court held that payments of interest on loan secured for passing funds to other companies of the Macquarie group at a higher interest rate would constitute payment of interest on capital account.

In view of the above, Amity would be entitled to claim payments of interest on loan acquired for the purpose of developing her accommodation business. The maximum amount that can be claimed shall be determined keeping in view the ‘remaining expenditure’ and ‘remaining loan period’ as defined in subsection (4) of section 25.25.