Law Assignment Income and commercial
PART A
- Advise how Mr Sharma’s income will be assessed, and outgoings be allowed in his individual income tax return for the year ending 30 June 2019; and
Arun Sharma is earning from different streams that can be taxable or not. It is the issue to decide these earnings can be considered under income tax returns or not. His gross salary is $85,000 [PAYG withheld $30,000]. This amount will be taxable by considering under the range of $37000 and $90000 in which $3572 is fixed amount and above it, 32.5 cents is paid for each $1 over $37000.
At the same time, he is also getting $2,910 for using his car for work- related mileage 4 850 KM during the year. For this, Arun may claim as the car expenses deduction.
In addition, he also got the gift from the employer in form of a Sony TV valued at $6,000. Apart from this, he also got the gift of $2,000 cash in the marriage anniversary. These both gifts are not taxable because a person can give up to the annual exclusion amount of $15000 from many people every year without facing any gift taxes. Recipients do not need to pay any tax on the gifts. People can a total of up to $11.180 million in lifetime before start owing the gift tax.
He also got the accommodation expenses of $12,750 from different meetings held in different cities of Australia. Additionally, he also obtained $880 as a token honourarium for the year from the Executive Committee of Indian Business Council. All these earnings will be taxable.
Along with this, he also bought a property in Sydney at the cost of $850000 with stamp duty of $33740, loan application fees $2500 and solicitor’s cost $3000 at the time of purchasing this property. He is also getting income from leasing the property at $750per week from 1 January 2019. The earnings will be included in the income generated by Arun with the costs related to property.
Apart from this, he also purchased a property with council rates $450, property agent’s fees $975, interest on borrowings $12 000, interest earned on offset account $12 000, and travel expenses incurred $200 and other outgoings incurred $1750. All these expenses will be deducted from the income generated during this period.
A business of book keeping services is also started by Arun on 1 January 2019 and also paid the accountant with $2500 and also earned $12000 from ABC Petrol Station Pty Ltd and $12 000 earned from Sweet Indian Restaurant transferred to Mr Sharma’s mother in law and $15000 received on 10 July 2019. Outgoings were advertising $450, entertainment $250, and stationery, telephone and postages $1240. He also made donation of $500 and fees to accountant in total $2500 for year ending 30 June 2018. Bright & Young has also given a fee estimate for the year ending 30 June 2019 – $ 1 250 for taxation work and $1 450 financial reporting and related work. It was refunded by Bright & Young to Mr Sharma on 31 December 2018 $350 due to billing by mistake on the invoice of taxation service for the year ending 30 June 2017. All the earnings will be considered under the income generated and costs will be deducted in the same period of the time.
(2) Compute his income tax liability for the year ending 30 June 2019 from the facts and information listed above.
Earnings
85000 + $2,910 +$12,750+880 + (750*4*6 months) + 12000+12000+350
= 85000 + $2,910 +$12,750+880+18000+ 12000+12000+350
= $143,890
Costs:
$33740+ $2500 + $3000 + $450 + $975 + $12 000+$12 000+ $200 + $1750 +2500+ $450+ $250+ $1240+ $500 + $ 1250 + $1450
=$74255
Car expenses deduction:
850 km per week X 48 weeks = 40800 km
40800km X $0.66 = $26928
Total taxable income= $143,890–$74255-$26928
= $42707
PART B
(i) Briefly state the facts, judgment and reasons employed in Sun Newspapers Ltd v FC of T (1938) 61 CLR
In Sun Newspapers Ltd v FC of T (1938) 61 CLR 337, the company was operated by a tax payer who was its director and shareholder. In 1932, Sun Newspapers intended to stop a competitor, which was going to introduce the new and competitive newspaper into Sydney market. For this, it also purchased this firm by paying it £86,500 in instalments not to launch the new newspaper. It was given as the lease of the printing tools of the competitors by making a promise not to print the paper near the area of Sydney for the 3 years duration of the lease (Flynn, 1999). Overall, Sun was successful to prevent the publication from the competitor. In this an agreement was framed that plant con trolled by the other parties to the agreement can be used by Associated Newspapers Ltd and certain employees.
From the case, it was identified that the expense was a non-deductible capital expense it helped Sun to improve its business through purchasing of the competitor in exchange of the big amount. Both appealed to the court for the decision in relation to income tax on the basis of the income derived from the year ended 30th June 1933.
Both appellants claimed for deducting the expenses or money paid to the competitors from their assessable income due to making an agreement. But at the same time, the payment was made by Sun Newspapers Limited. So the question was that the deduction is allowed to Sun Newspapers Limited rather than associated Newspapers limited. However, the agreement under which the payment was made binds only Associated Newspapers limited not Sun Newspapers Limited (Burrell, 1996). But Sun Newspapers Limited made payment which was realized for the business purposes. In this, fact was that it was made voluntarily and includes the possibility of the allowable deduction. It can be seen in the cases Usher’s Wiltshire Brewery Ltd. v. Bruce [1915] A.C. 453, and British Insulated and Helsby Cables v. Atherton [1926] A.C. 205 at p. 212. So, the court declared that the deduction should not be allowed because this transaction was a payment of capital nature.
(ii) Explain how the principles of this case has repeatedly been applied in cases involving outgoings for legal expenses
The income tax assessment act (Commonwealth) 1922–1934 also held that the deduction can be claimed under section 23 (1) (a). Taxable income can be determined based on the following expenses including all losses, outgoings like discount, travel expenses, interest, expenses and discounts. If the outgoings are not in nature of loses and outgoing of capital, then they are incurred in profits or assessable income. It means the issue is that whether the payments are made in the nature of the outgoings of capital. It was evident that the prevention of the competition was beneficial for the appellant companies. It is because it helped them to being forced to reduce their price of the newspaper. This agreement proved beneficial for the companies (Richardson, 1997). It was also clear from the case that the money due under the agreement was paid by Sun, but Associated Newspapers Limited also claimed the deduction. The evidence obtained from the account was also considered in which it was proved the instalments of the £86,500 were paid in perspective of revenue nature as they need to be charged against the revenue in instalment over the agreement terms. In the case of Morley v. Lawford and Co. 140 L.T. 125, it was found weather a payment is made of a capital nature. The expenditure is a non-recurrent unusual expenditure that is incurred to get the benefits of the appellants’ trade through value increase of the newspaper (Higgins, 1966). At the same time, the letter of the managing director also showed that the agreement was written on behalf of the chairman and board of directors of Associated Newspapers Ltd. the purpose of the agreement was clear to stop the competitor for the publication and for three years as the plant will not be used for the publishing purpose to compete with the Sun. So, it can be concluded that Associated Newspapers Ltd. made contract but Sun Newspapers Ltd. made the payments. They both showed the payment in their profit and loss account and claimed for the income tax returns (Flynn, 1999). In relation to this, it was also claimed that the expenditure should be allocated to three years mentioned in the agreement. It means the deduction was in the nature of the loss or outgoing of the capital that was not acceptable.
PART C
Mr. John Smith
Date: 22 May 2019
Subject: key issues for a small business
As I am happy to know that you are starting a new business in the fashion industry mainly men’s clothing. I pray you will do well in this field and achieve success in your business. But at the same time, it will be crucial for you to consider the key issues related to new business structure when you start this business. It is because several legal matters are considerable while deciding the legal structure of the business. The consideration of particular legal structure of the business has an impact on how much tax you will pay; degree of personal liability and ability to raise the finance. Generally, a business can be started by considering different legal structures including sole proprietorship, partnership, limited liability company (LLC) and the limited liability partnership (LLP). All these business structures have different tax consequences as it is required to develop understanding of these businesses to select appropriate one to match your business needs (Aguilera and Crespi-Cladera, 2016).
Sole proprietorship has the simplest structure in the business that is owned and operated by an individual. If you want to work along then this structure is the most appropriate. In concern of this business structure, the tax aspects are appealing because the income and expenses generated from this business will be considered under your personal income and the profits and losses will be recorded on the schedule C form. The “bottom-line amount” from Schedule C can be transferred to the personal tax return. This business structure provides advantages in terms of offsetting the losses with the income that is earned from other sources (Calabrò et al., 2013). This business also makes it mandatory for the owner to fill schedule SE form to pay the self employment tax.
In this business structure, the government allows the owner to make payment of estimated taxes in 4 equal instalments throughout the year. At the same time, the business income is taxed only once. This structure also provides the complete control to the owner over the business to make decisions. However, the owner of the sole proprietorship will e personally accountable for the firm’s liabilities means there is a risk to your assets to be seized if you are not capable of paying debt and face a legal claim filed against you. In addition, it will be difficult for you to raise money under sole proprietorship. It is because banks and financial institutions are not ready to make a loan to this business easily as you will have to be dependent on the financing sources like own equity, savings and family loans (David et al., 2010).
In partnership business, the several individuals will own and operate the business. It may be of two types namely general partnership and limited partnership. In general partnership, the partners have the management of the firm and consider the accountability for the debts and obligations of the partnership. In limited partnership, the partners work as the investors but they do not have any control over the firm. However, the limited partnership is not considered good idea for the new business due to complexity related to needed filings and administrative formalities. If you have two or more partners, then the general partnership will be the most suitable to operate the business. This partnership provides the advantage of tax treatment because there is no need for the partnership to pay on income but “passes through” any profits or losses to the individual partners. In this, each partner files the tax return and indicates his share of income, profit, deduction and tax credits (Blair and Marcum, 2015). There is also personal liability for the obligations and debt for the general partners. However, this business structure is more expensive than the sole proprietorship due to possible legal and accounting services. Without a proper written partnership agreement, it may be difficult for the partners to develop good relationship and accountability for the business.
In the concern of the corporation structure, there is more complexity and high cost involved in the business as compared to other business structures. A corporation is an inpendent legal entity that is separated from the owners and complies with regulations and tax needs. It is beneficial for the small business owner to protect from the liability. It is because the debt is not considered for the owners as the owners do not put their assets at risk. In terms of risk, this business structure is more effective as compared to partnership and sole proprietorship (Calabrò et al., 2013). In addition, some profits can be retained by the corporation without paying tax on them. It is also easy for the corporation to raise money from the banks and financial institutions trough loans and shareholders through equity. But at the same time, it will be costly for you to start business through this business structure. In addition, the legal concern also matters in this business structure because it is required for the corporations to consider the laws of each state with their own set of regulations. It causes difficulty for the corporation business structure to comply with the legal aspects of the each state where it operates. The legal complexity matters for the business owner before starting the business. It is because a corporation needs to comply with more complex rules and regulations as compared to partnership and sole proprietorship raising the need of more services related to accounting and tax preparation. In addition, it is also a big issue with the corporation business structure that the owner has to pay the double tax on the earnings in the business (Oesterle et al., 2013). It is because the corporation is liable to pay taxes at the both federal and state levels and the earnings distributed to the shareholders in form of the dividends are also taxed at individual tax rates on returns. However, there is no need for the corporation to pay tax on earnings paid as a reasonable compensation because it can be deducted as expenses. But IRS has the limitations regarding the reasonable compensation. There will be need to contact the secretary of state or the state office to start the incorporation process for registering the business as incorporation that will be costly process. In addition, it may take time to incorporate the business that can be limiting factor for the new business. Apart from this, there will a need for the corporation business to be abided with the laws and regulations like ways to operate the business, accountabilities of the shareholders, employees, managers and directors, timing of stakeholder meetings, and other related aspects. All these matters may create issue for the business if they are not fully understood and adopted by the owner as per the laws and regulations (Calabrò et al., 2013).
On the other hand, limited liability companies (LLCs) are also popular among the small business owners. It is because this legal structure includes the features of both partnership and corporation. It is effective in terms of tax purposes than any other structures due to providing liability protection without double taxation. At the same time, the profits and losses are passed through to the owners and are considered as the personal tax returns. This structure is more beneficial for the small business owners as there is no limitation on the number of shareholders. The each member can play a full participatory role in the business. But at the same time, there are issues in the LLC also for the business owner. It is because there is need to file articles of organization with the secretary of the state to do the business through this structure. At the same time, there is also need to make an operating agreement that is quite same as the partnership agreement (Blair and Marcum, 2015). LLC also has different tax treatments by the state. It means the firm needs to consider the tax treatments differently as per the state. A LLC operating one state will be treated differently in tax implications in another state. So it is challenging for the owner to consider different tax treatments in the different states. There will be a need for you to ensure the use of services of the experienced accountants of you do business through LLC because he/she will be familiar to the rules and regulations of LLCs. In addition, the rules and regulations related to particular type of the business structure regularly change as it is necessary for the owner to reassess the form of the business timely to use the one which provides the more advantages (Bajagai et al., 2019). There may be risk related to capital paid into the business because the dents and liabilities can be compensated by the personal assets of the owner. The individual returns are taxed as there is no separate business tax return.
References
Aguilera, R.V. and Crespi-Cladera, R., 2016. Global corporate governance: On the relevance of firms’ ownership structure. Journal of World Business, 51(1), pp.50-57.
Bajagai, R.K., Keshari, R.K., Bhetwal, P., Sah, R.S. and Jha, R.N., 2019. Impact of Ownership Structure and Corporate Governance on Capital Structure of Nepalese Listed Companies. In Business Governance and Society (pp. 399-419). Palgrave Macmillan, Cham.
Blair, E.S. and Marcum, T.M., 2015. Heed our advice: Exploring how professionals guide small business owners in start‐up entity choice. Journal of Small Business Management, 53(1), pp.249-265.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
Burrell, C.T., 1996. Taxation treatment of rehabilitation and environmental expenditure. The APPEA Journal, 36(1), pp.615-621.
Calabrò, A., Torchia, M., Pukall, T. and Mussolino, D., 2013. The influence of ownership structure and board strategic involvement on international sales: The moderating effect of family involvement. International Business Review, 22(3), pp.509-523.
David, P., O’Brien, J.P., Yoshikawa, T. and Delios, A., 2010. Do shareholders or stakeholders appropriate the rents from corporate diversification? The influence of ownership structure. Academy of Management Journal, 53(3), pp.636-654.
Flynn, M., 1999. Distinguishing between Income and Capital Receipts-A Search for Principle. J. Austl. Tax’n, 2, p.155.
Higgins, T.J., 1966. BP Australia Ltd. v. Commissioner of Taxation of the Commonwealth. Federal Law Review, 2(1), pp.115-122.
Oesterle, M.J., Richta, H.N. and Fisch, J.H., 2013. The influence of ownership structure on internationalization. International Business Review, 22(1), pp.187-201.
Richardson, J., 1997. Is interest ever an outgoing of a capital nature?. Australian Company Secretary, 49(5), p.204.
