HI6028 Assignment Sample
It is required to arrange the money for conducting the business efficiently. The some concerns were for Helen as she wanted to make fund arrangement through selling of her some assets. But at the same time, it was also a concern for her to decide whether she will have to pay capital gain tax on the selling these assets.
Helen sold antique painting to arrange the money that raised the concern related to capital gain tax for her. In this transaction, she purchased this painting on February 1985 at price of $4,000 and sold it $12,000 on 1 December 2018. Concerning to this transaction, it is required to decide whether Capital Gains Tax (CGT) is applicable or not.
The CGT rule was brought in practice on 20 September 1985 in Australia. So, this rule can be applied on the assets which are bought or acquired on or after 20 September 1985 (Auerbach and Hassett, 2015).
According to this rule, the assets which are purchased before this are known as the pre-CGT assets and are exempted from the CGT.
The acquisition cost = $4000
Sales price: $12000
Profit will be as follows:
Sales price- acquisition cost
Profit = $8000
This profit will not be considered under CGT because the antique painting was bought before 20 September 1985 that makes it exempted from any capital gains tax. So, Helen will not have to pay any CGT on selling of this asset.
Helen sold a historical sculpture on 1 January 2018 at the price of $6000 to arrange the fund for the business. She purchased it in December 1993 at the price of $5500. It was also a concern for Helen to decide whether this transaction will be considered under CGT. Before 20th September, 1985, some assets like painting, art, drawings, archaeological collections, sculpture, etc.
were not part of the capital assets. It means the CGT was not applicable on these assets. But after 20th September, 1985, all these assets are categorized under capital assets and CGT was applied on these asserts if the seller gets the capital gains on selling these assets (Alpanda and Zubairy, 2016).
But at the same time, there is an amendment with selling of these assets as capital gains tax is applicable on these assets if they are worth of more than $500 on purchasing. The gains on these assets with worth of more than $500 will be taxable.
From the case, it is identified that the historical sculpture was purchased after 20th September, 1985, so the CGT is applicable in point of time. At the same time, the value of the purchased item i.e. sculpture is $5500 that is quite more than the set limit of $500 for being taxable under CGT rule.
So the capital gains will be calculated as follows:
Acquisition price= $5500
Sales price= $6000
Capital gains= sales price-acquisition price
So, capital gains tax will be 20% on the capital gains obtained from the selling of sculpture that will be counted as follows:
Net capital gain will be as below:
Net capital gain= capital gains – tax on capital gains
So, Helen will have to pay CGT of $100 on its capital gains from the sculpture that will reduce the capital gains from $500 to $400.
Helen sold antique jewellery as it is also crucial for her to know whether this transaction can be considered under CGT. For this, the CGT rule states that the assets which are purchased before 20th September, 1985, those will be CGT free. Apart from this, the assets like antique jewellery, sculpture, art, etc.
having value less than $500 will be CGT free. From the case it can be identified that Helen bought antique jewellery piece in October 1987 at the value of $14,000.
She sold it at $13000 on 20 March 2018. As the jewellery was purchased on October 1987 after the set date so, the capital gains tax rule is applicable on this transaction (Faccio and Xu, 2015). Apart from this, the purchase value s also greater than $500, so CGT will be applicable for this transaction.
Acquisition cost= $14,000
Sales price= $13,000
Capital gains = Sales price- Acquisition cost
= -$1,000 (capital loss)
In this situation, Helen will face a capital loss of $1000 as there will be not capital tax on this but she can show it in total capital tax gains to reduce the capital tax.
Helen’s mother bought the picture in March 1987 at the price of $470. Now, Helen sold this picture at price of $5000 on 1 July 2018. This transaction was held after 20th September, 1985, but it has the value below $500. Based on this CGT rule, it can be stated that the CGT will not be applicable on this transaction.
Acquisition cost: $470
Sales price: $5,000
Capital gains= $5,000-$470
CGT will not be applied on this transaction as $4530 will be net capital gain.
Personal service income (PSI) is associated to the revenue generated by using personal competencies and efforts made at individual level. This can be obtained through an industry, profession or trade. Concerning to this rule, the case questions of Barbara will be solved.
As per the case, the amount of $13400 was paid to Barbara in form of copyright by Eco books. The issue is whether this income will be categorized under Personal service income. If the income can be categorized under PSI then it will cause a special tax that will be paid by Barbara. The following conditions should be fulfilled to categorize the income under PSI:
- An income is categorized under PSI if a contract based on expertise or labour of the individual causes more than half amount of income.
- Individual is not a sole trader.
- Individual generates income through partnership, trust or a company.
- 80% rule: if 80% or more portion of income is generated from the same client then it follows the PSI rules (Lawrence and Bennett, 2017).
If an income fulfills these conditions, then it will be categorized under personal income and will create the PSI tax for the earner.
As per the case, Barbara is not a sole trader and generated the income through a publishing house. 80% rule also considers that Barbara earned 80% or more part of her salary through the same client i.e. Eco books. Then it can be stated that the income generated by Barbara will be considered under the PSI rules.
Total income from the Eco Books= $13400+$4350 = $17750
But total income = $13400+$4350+$3200
Portion of the income from the same client= $17750/$20950 = 84.72%
So, it can be depicted that
Here, 80% rule is applicable in this case scenario means Barbara‘s income under the case scenario will be tax deductable. It is because she generated 80% of her total income from the same client. At the same time, she earned this income from her efforts and skills. In addition, she sold the manuscript to eco books for $4350 with the actual payment $13400 made to her.
These two incomes will be considered under PSI but the income from selling interview manuscripts at $3200 will not be part of PSI. It is because this is required for the individual to earn from two or more clients who are not connected to each other (Aldridge et al., 2015).
But in this case, selling of interview manuscripts along with writing the economics book was for the public. So total PSI will include income generated for copyright of the book and manuscript to eco books.
From the case, it can be determined that alternative scenario is related to the writing of the book before signing the contract in spare time and selling it later. In such situation, income generated from this will not be for the business as well as will not take more than 50% of time due to being written in the spare time.
This income is not generated from the business (Lawrence and Bennett, 2017). Therefore, this income generated in alternative scenario will not be considered under PSI.
Impact of the arrangements on the assessable income of Patrick
While analyzing the case study, it is examined that there is the case of income aspects related to the leading money to a person as an individual. In this manner, if the money is borrowed by any person or an individual, then it is important for the lender to disclose about any kind of interest as well as gains (Dixon and Nassios, 2016).
Under this case, according to the tax law, it is also important for the person who is going to give money as a loan and earn any type of benefit such as interest on the loan amount gave to other person, to pay some amount as the tax to the government because there is the tax liability for him to pay tax on his earning.
In addition to above, under the case, Patrick gave $ 52,000 to his son David as the loan along with the promise of paying back of $ 58,000 after completing the five years.
At this time, Patrick and the David both did not create any formal agreement or any kind of security deposit in concern of the sum lent without taking any interest payment on the borrowed money (Burkhauser et al., 2015).
At this time, it is also examined that if any person give loan to his family member, then there is complicated and unfavorable situation that takes place. In addition, there is no clearance about the interest amount in this case but David paid additional amount to his farther other than the principle amount.
In this manner, it is considered interest free agreement but at the end, Patrick earned money from its lent money that means, there is a tax liability for Patrick and he has to pay tax on its earned income.
In the similar manner, it is reflected on the basis of income tax rules, the interest free loans are not considered as the tax liability for both the lender and the borrower.
On the basis of this term, if Patrick takes back principle amount only then its loan is considered as the interest free loans which is not considered under the taxable amount after five years (Alghamdi and Rahim, 2016.).
AT the same time, it is also displayed that Patrick did not demand any interest on its loan amount but it asked to his son for the extra amount that means this extra amount is not defined under the income because this loan was given as the interest free rate loan to his son. That is why, it is determined as the gift which will not be taxable.
Although, David refunded its complete loan within two years by a cheque with 5 % additional amount of its total borrowed money (Chardon et al., 2016). In this manner, this additional amount is chargeable by 5% because it will be considered under the taxable income. In this manner, Patrick’s taxable income will be:
|= ($ 52,000 * 5 %)|
= ( $ 52,000 * 5 / 100)
= $ 2,600
On the basis of above mentioned calculation, it can be mentioned that Patrick will be liable to pay tax of amount $2,600 which had been generated on the additional amount of 5% paid by his son.
Aldridge, R., Callahan, R.A., Chen, Y. and Wade, S.R., 2015. Income tax preparation assistance service learning program: A multidimensional assessment. Journal of Education for Business, 90(6), pp.287-295.
Alghamdi, A. and Rahim, M., 2016. Development of a Measurement Scale for User Satisfaction with E-tax Systems in Australia. In Transactions on Large-Scale Data-and Knowledge-Centered Systems XXVII (pp. 64-83). Springer, Berlin, Heidelberg.
Alpanda, S. and Zubairy, S., 2016. Housing and tax policy. Journal of Money, Credit and Banking, 48(2-3), pp.485-512.
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.
Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.
Lawrence, S. and Bennett, M., 2017. Image rights in Australia: Fair game or foul ball?. Taxation in Australia, 51(9), p.487.