About Taxation

Most civilizations have placed taxation at the forefront for a very long time. People continued to contribute to the ad hoc systems of governance that existed back then even before the emergence of organized systems of government as we know them today. As such, taxation is a significant source of funding for the federal government, allowing it to carry out the objectives it has set. It enables effective resource allocation by the government, allowing citizens to gain from government initiatives (Smith, 2006). Taxation also can be used to close the ever increasing gap between the rich and the poor by imposing hefty taxes on the rich and using the proceeds to initiate programs which will benefit the impoverished in the society. Different governments have different rules and regulations governing taxes in their various domiciles. Governments have also combined forces to come up with policies to ensure there is minimal tax evasion in international trade which is caused by such loopholes like transfer pricing amongst others. In this paper we delve into the case study given by tackling the questions given. Frequently, previous relevant case laws will be cited.

In the first paragraph of our case study we closely examine two couples; Mr. and Mrs. Allan who are residents of Australia. The first situation of a tax possibility is when they decided to sell their home in order to acquire a larger home. Such an incidence would either lead to a gain or a loss. Our case study is very silent on whether the couple made a profit. In case they made a loss, there are no taxes that would apply on the monies received. However, if they made a gain, for the gain to be exempted from taxation, it would depend on whether they meet the conditions set by the revenue authority. The conditions require that; the family must have lived in the residence in the entire period they have owned it, the house must have not been applied for any commercial purposes whatsoever and it should be on land which is 2 hectares or less (Mahoney, 2004). The house will also qualify for partial exemption from taxation if the following conditions are met: the residence was the Allans’ main dwelling place for only part of the time they owned it, either of the family members has another different home, the land in which the home is attached has been used two generate income in one way or another and the land is more than two hectares (Mahoney, 2004). Therefore the question whether the proceeds from the house are subject to taxation or not will depend on whether the above conditions have been met. Since our case study is very silent on whether the aforementioned conditions, it is probable that Mr.Mrs.Allan will not be subject to any tax liability from any potential gains arising from the transaction.

Mrs. Allan’s wife part time job is taxable since the benefits she receives from the employment can be directly traced to the job she does. The tax legislation in Australia does not exempt any employment income from being subjected to taxation. Whether it is a full-time job, part time job or even a casual job (Campbell, 2010). Under the tax laws, Mrs. Allan’s employment income tax would have been combined with that of her husband if it is proven beyond reasonable doubt that the institution in which she works is directly associated with the husband (Mahoney, 2004). However, the case study is very silent on that and therefore we presume that the Organization was not in one way or another related to Mr. Allan. The fees which Mr. Allan receives from offering services are fully taxable as well as the gifts he receives from the elderly. The gifts are taxable because they are in relation to his profession. The rationale behind this is that he would not be given the cakes and scones if he were not offering the services. Under the tax laws in Australia, a gift such as wine which Mr. Allan received that is consumed at home and not at the work place or a social gathering will be exempted from taxation if it is $300 or less. In this case where the retail value of the wine was $360, the amount will not be exempted from fringe benefit tax.

Given the dynamic nature of businesses in the recent times and taxation alike, it is imperative that a clear distinction between an hobby and a business be made in order for the tax payer to do tax planning so as to understand any potential tax liability that may arise in the future. For an activity to be classified as a business it has to meet among other conditions, the activity must have been registered as a business with the relevant statutory body, the intent of the individual must be profit generation, the activity should be repeated severally, the activity must be large enough to be a likened to other activities in the same industry, the activity must be carried out in a planned manner in such a way that business records are kept among others. On the other hand a hobby is an activity which is carried out for leisure or to pass time. The major distinguishing factor between a hobby and a business is that the former is not carried out with the motive of making profits whereas the latter is carried out with the passion of making an extra dollar in mind (Mahoney, 2004).

An example of case law regarding a hobby and a business is that one between commissioner of taxation and Stone. The respondent served in the police force and in addition participated in javelin as a hobby. In the year of income under review she received some benefits in kind for her participation in various events, grants by the Australian Olympic committee and queens land academy of sport, as fees for appearances she made and prize money. The appellant commissioner adjudged that all her receipts to be consisting of her taxable income in the respective year of income under review. The respondent however did not agree with this position and thus she decided to appeal. After many series of court appeals it was finally held that the appearance fees she received constituted part of her taxable income for that year (Smith, 2006).

In the second paragraph we have several situations which give rise to tax obligation.Firstly, according to tax legislations the expenses spent by Betty and Allan in order to gain knowledge on organic farming is an allowable expense against incomes generated. This is because it is directly traceable to the economic activity they are undertaking. The marmalade and relish incomes received by the couple will be subjected to a tax. Although their initial motivation was not to make profits, they ended up making excess money and thus the profits will be subjected to taxation. Since they do not keep business records for their transactions, they will not be in a position to deduct allowable expenses from the expenses incurred in generating these incomes (Smith, 2006).

In our third paragraph we are faced with a barter trade situation which simply is carrying out trade transactions without using money. According to Australian tax laws, barter trade incomes and expenses incurred in the process should be treated just like the normal monetary expenses and incomes are treated. Thus there is no special concessions is to be extended in barter transactions. The participants’ incomes from the barter will be subject to taxation. The expenses they incur will also be deductible for tax purposes (Mahoney, 2004).

The $650,000 receipt from the transfer of property transaction will be treated as income received ordinarily in the process of carrying out a business activity. This is because Mr. Allan had already put the house for business use by renting the house to a third party. As such it is an income which will be subject to taxation. It will be assessable under s 5-6.If the transfer of the property did not qualify as income received in the ordinary course of doing business that is in both section 5-6 and section 15-15 then the proceeds received will not be subject to any taxation (https://www.ato.gov.au/law/view/).

If the proceeds are not income by ordinary concepts, then the way the cost of the land is valued will slightly change as compared to if the transaction generated receipts in the ordinary way. The cost of land will include the upfront money paid to the initial owner and also the necessary expenses incurred during the transfer process. This will include costs like stamp duty, legal costs paid for conveyance to be effected to the third party, the water rates and the council rates. A quick addition of these figures as provided brings the total cost to $260,580.The cost of the house will be calculated by adding the cost of the land in which it is attached and the expenses which were used during acquiring of the land. Addition of these figures gives us a cost of $498,250.This implies that when calculating the capital gain which was realized under the transaction, the total cost will have to be subtracted from the gross proceeds. The court case of Hope v Bathurst City Council (1980) is the most suitable in our scenario here. The respondent in the case had included his personal expenses while calculating the cost of house he was selling. These expenses could not in one way or another be traced to the house. It was held that such behavior was repugnant and retrogressive. The respondent thus ought not to have included such expenses in determination of the cost of the residence (Auerbach, 2009).

To calculate the capital gain we subtract the total costs involved from the incomes received. Subtracting $600,000 from $650,000 we get a capital gain of $151,750.This amount will be subjected to a tax. If the transaction in an unlikely event yielded a capital loss, the amount would not be taxable but rather the tax payer would recover the losses from future transactions if his/her business activity involves buying and selling of property. Capital losses are very rare due to the appreciating nature of property and land. The relevant case law can be drawn from the court case of F.C. of T. v McDonald (1987).In the court case, the respondent had been sued by the commissioner of taxes for failing to declare the capital gain he had made from the sale of his rental property. He had included expenses of capital nature in determining his capital gain/loss. In so doing he found that he had a capital loss and thus to him no tax liability was going to arise. However, it was held that items of capital nature should not in any way whatsoever be subtracted from the gross proceeds of a capital transaction. Instead, capital allowances should be claimed (Poterba).

The importance of taxation in any economy cannot be over-emphasized. The effectiveness of tax collection of a Country’s revenue authority will determine the economic path of the nation (Devos, 1999). Recently there have been cases of tax evasion through illegal transfer pricing. This was exposed in the leaked panama papers. Such behaviors should not be condoned. Economic agents need to have a thorough understanding of tax provisions in order to ensure they are not at logger heads with the respective tax authorities. Failure to which they will find themselves spending exorbitant sums of money in court cases and penalties imposed on them. Tax professionals should also constantly undertake tax courses in order to update themselves of the ever changing tax laws. A holistic approach towards tax planning will ensure organizations and individuals reap big time from their business activities while at the same time giving to Caesar what belongs to Caesar.

Bibliography

Auerbach, A. (2009). Retrospective capital gains taxation. New York.

Brown, P. K. (2010). Stock return seasonalities and the tax-loss selling hypothesis: Analysis of the arguments and Australian evidence. Melbourne: Journal of financial economics.

Campbell, I. W. (2010). Casual employment, part-time employment and the resilience of the male-breadwinner model. Gender and the contours of precarious employment.

Devos, K. 2. Tax evasion behaviour and demographic factors: An exploratory study in Australia.

https://www.ato.gov.au/law/view/. Taxation.

Mahoney, D. D. (2004). Taxation in Australia. MELBOURNE.

Poterba, J. 1. Venture capital and capital gains taxation. Tax policy and the economy.

Smith, J. 2. Taxing popularity in Australia.