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Taxation Law Assignment Case Study

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Part A

On 1 July 2013 Lee commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but Lee quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2013/14 he had a small client base of local builders and private referrals and billings (fees) of $75,000.

During the year 30 June 2015 Lee submitted a design as part of a national competition for the Citadel, the centrepiece of an urban redevelopment. His visionary design and revolutionary use of local materials greatly impressed the judging panel and, to national acclaim, Lee was awarded the prize early in the year and commissioned to build the structure. Immediately he borrowed $1 million, rented premises in Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2014/15 his billings were $1.5 million.

Required

Discuss whether Lee should return on a cash or accrual basis in 2013/14 and in 2014/15

  • What factors affect the choice of a cash or accrual basis?
  • Does Lee have a choice of the basis he adopts?
  • Does the Commissioner of Taxation have a right to insist on a particular basis?
  • Should Lee’s basis be the same in both years?

Part B

Beta Smash Repairs is a panel beating/smash repair business conducted as a sole proprietorship by Bert. The business commenced on 1 July 2013. In addition to the repair service, Bert obtains or purchases wrecked vehicles or vehicles in poor condition, rebuilds and plans to sell them. At the end of the first year of operations (2013/14) none of these vehicles had been sold.

At 30 June 2015 there were six rebuild vehicles on Bert’s premises. Two of these were obtained for nothing; three cost $500 each. The sixth vehicle was brought in by a customer. She and Bert agreed as follows: Bert would work on repairing the car as time permitted, look for a buyer and, if possible, sell the car. Ownership was not transferred to Bert and if he sold the car, one third of the proceeds would go to the customer and Bert would retain two thirds.

During the year Bert purchased $50,000 of vehicle parts of which $5,000 remained on hand at 30 June. Other repair costs and overheads amounted to $80,000. Bert estimates that 70% of total costs relate to the smash repair side of the business and the balance relates to rebuilding the six vehicles referred to above. Costs are spread evenly over the six vehicles and Bert estimates that each car would sell for $12,000 when complete.

Required:

Advise Bert of the income tax implications of the above, including all possible closing stock figures. You must cite all relevant sections of the Acts and case law. [Disregard GST]

Part C

  • Identify the types of taxes that apply to digital currencies (such as Bitcoin) in Australia at the present time.
    In your answer you should list relevant ATO Rulings/Determinations.
  • Assume that all states and territories agreed to expand the definition of ‘money’ in A New Tax System (Goods and Services Tax) Act 1999 to include digital currency; and to expand the definition of ‘financial supply’ in A New Tax System (Goods and Services Tax) Regulations 1999 to include digital currency. Would your answer in (a) be the same? Why, or why not?

Assignment Solution

Part A

During the year 2013-14, Lee as an architect commenced his business. He was engaged in the work of preparing building designs and specifications for local council building permits. Lee quickly through his good work gained a reputation within tight timeframes. He had a small client base of local builders and private referrals and billings (fees) of $75,000.

As per the provision of Australian tax laws and tax ruling 98/1, business houses having a turnover of less than $2 million can choose among any method for accounting i.e. either cash or accrual system.

As per the provision of tax laws, a business house can opt on cash basis n the following circumstances:

  • In case the business house is a small business entity.
  • In case, when the cash accounting turnover does not exceed $2 million
  • If the income has been correctly accounted for using the receipt method.
  • If in the opinion of the income tax commissioner the cash system of accounting will give a better picture. (Source_ GSTR 2000/13)

Thus in light to the above provision being the turnover of services so provided by Lee is less than the required turnover of $2million, Lee has an option to choose among any accounting method among the available two.

Further in the year 2014-15, Lee submitted a design as part of a national competition for the Citadel, the centrepiece of an urban redevelopment. His design impressed the judging panel and Lee was awarded the prize early in the year and commissioned to build the structure. He took rented premises in Main Terrace and employed staff. During 2014/15 his billings were $1.5 million.

As per the provision of Australian tax laws and tax ruling 98/1, business houses having a turnover of less than $2 million can choose among any method for accounting i.e. either cash or accrual system.

In light to the above provision, if the commissioner of tax based on the nature of business, in writing can specify a particular method of accounting is better for the enterprise. (Source_ GSTR 2000/13)

As per the provision of tax laws, an assessee can change the method of accounting from cash system to non system. However, the change should take place on the first day of the tax period. Thus, in the given case, Lee can change the method of accounting from one period to another. Nowhere in the law it is specified that the assessee should use the same basis of accounting in subsequent years.

Part B

Beta Smash Repairs is a sole proprietorship by Bert. In addition to the repair service, Bert obtains or purchases wrecked vehicles or vehicles in poor condition, rebuilds and plans to sell them. However, at the end of the first year of operations i.e. 2013/14 none of these vehicles had been sold.

In the given case, being Bert does not carried out any operation, thus was not eligible for any king of tax in year 2013-14.

Further in the year 2014-15 Bert rebuild 6 vehicles. He obtained the two of these for free and three at a cost of $500 each. In case of the sixth vehicle he entered into an agreement with the customer that in case of sale, one third of the proceeds would go to the customer and Bert would retain two thirds and thus the customer does not transferred the ownership of the vehicle in favour of Bert.

In the given case, none of the vehicles that have been built in by Bert has been sold. He has incurred all the necessary cost on building the same and the vehicles are expected to be sold at the rate of $12,000 per vehicle. Bert in this case hasn’t provided any service to the customers nor is the customers committed to purchase the rebuilt vehicle. Thus in this case, Bert will not recognise any accrued income fro the difference between the cost incurred any the expected selling price for the vehicles.

Further Bert was engaged in carrying out its regular business of repairing vehicle. Under the roof of this business, he purchased parts amounting to $50,000 out of which $5,000 was at the end of the year was in his hands. He further incurred $80,000 cost on overheads and estimated that 70% of the total cost was incurred in carrying on its repair business and the balance for rebuilding the vehicles.

 

Amount

Spares parts purchased

$50,000

Closing stock

$5,000

Spare parts consumed during the year

$45,000

Other repair costs and overheads incurred

$80,000

Total cost incurred during the year

$1,25,000

70% allocated to repair business

$87,500

30% allocated to rebuilting business

$37,500

 

Thus in this case, Bert is carrying out two separate businesses, in repairing business, the expenditure for the years reaches to around $87,500. Bert at times of calculating the taxable income for the year 2014-15 for the smash repair business should deducted the above expense form the revenue received on providing the smash services.

The vehicle that has been built in by Bert will be treated as inventory other than the one that is not owned by Bert. All the vehicles except one have been purchased by him either for cost or for free. He has incurred necessary amount in bring the asset i.e. the vehicles in saleable condition. Thus the cost incurred will form part of the vehicles vale and be treated as finished goods inventory for Bert.

Particular

Cost incurred in acquiring the asset

Additional cost incurred

Cost of inventory

Vehicle 1

$ –

$6,250

$6,250

Vehicle 2

$ –

$6,250

$6,250

Vehicle 3

$500

$6,250

$6,750

Vehicle 4

$500

$6,250

$6,750

Vehicle 5

$500

$6,250

$6,750

 

On the other hand, being vehicle 6 s not owned by Bert and as per agreement the vehicle still remains under the ownership of its original buyer, thus, the same will not form part of the inventory for Bert.

Further in case of smash repair business, as provided in the case, $5,000 will be the closing stock the repair spare parts and thus this will be for part of the inventory for the smash repair business.

Part C

Digital currency means digital money. It is modern medium of exchange that is being used all over the world. This modern exchange source is different form bank notes and coins. This source of exchange has similar properties but has borderless reach and transfer of ownership. This modern digitalised currency is used to buy physical goods and services, just like traditional currency. Bit coin is one type of digital currency also known as “decentralized digital currencies,”. However, it is known by this name being there is no central point of control over the supply of money.

There is difference between Virtual currency and Digital currency.  Virtual currency cannot be used in the real life. It cannot be used to purchase real assets. These are controlled by centralised authorities and mostly found in online gaming. Amazon coins are the most recent example of virtual currency.

On the other hand, the Digital currency is used for purchase of physical goods and services Thus it can be used in real life and for purchasing real assets.

The Australian tax authorities provide specific guidelines from taxation of digital currencies mainly Bit coin. As per the Australian tax authorities, the Bit coin is neither foreign currency nor it can be regarded as money. The Bit coin because of its features is not eligible to be taxed as goods and service tax. Thus considering all these points, Bit coin is regarded as capital asset and is eligible for capital gain taxes.

In relation to the transactions that have been place with Bit coin, following records are required to be maintained:

  • The date on which the Bit coin transaction has taken place.
  • The amount of Australian dollar involved in the transaction
  • What was the purpose behind the transaction?
  • Whom was the other party with which the transaction took place?

As per the provision of tax authorities, if a person is not carrying any business or an enterprise and normally through Bit coins pays for goods or services, then in that case these transactions will not be eligible for any income tax or GST implications. On the other hand, any capital gain or loss arising on disposal of the bit coin will not be taxed provided that the cost of the bit coin is less than or equal to $10,000.

In case of business transaction, if the business house receives bit coin in exchange of goods and serves then in that case the transaction will be eligible for Goods and service tax. In the same way, if the supply of goods and services are treated as taxable supply in that case, the s house can claim input tax credit on the Goods and service tax that has been paid for the Bit coin transaction at times of purchase.

At times of making payment of salaries to the staff, if the company instead of making payment through Australian dollars makes the payment in bit coin, then in that case, the transaction will be treated as fringe benefit and the employer in that case will be eligible to the provisions of the Fringe Benefits Tax Assessment Act.

At the same time when the bit coin so earned is disposed off the same will be eligible for capital gin tax. However, at this time any capital gain so calculated above is reduced by the amount that is ought to be included in the assessable income as ordinary income. (Source TR 2001/10)

On the other hand, if the person carries on a business of selling and buying of bit coin, then in that case the proceeds so derived from the sale of bit coin are included in the assessable income. On the other hand, any expense in relation to the above business for carrying out the activities will be regarded as expenses and thus allowed as deduction. Goods and service tax is applicable on the supply of bit coin.

If in case all states and territories agreed to expand the definition of ‘money’ in A New Tax System (Goods and Services Tax) Act 1999 to include digital currency; and to expand the definition of ‘financial supply’ in A New Tax System (Goods and Services Tax) Regulations 1999 to include digital currency. Then in that case, the digital currency will be treated as normal currency and in that all the provision that are applicable in case of goods and service tax of normal money will be applicable on digital currency. The Australian tax authorities provide specific guidelines from taxation of digital currencies mainly Bit coin. As per the Australian tax authorities, the Bit coin is neither foreign currency nor it can be regarded as money. The Bit coin because of its features is not eligible to be taxed as goods and service tax. Thus considering all these points, Bit coin is regarded as capital asset and is eligible for capital gain taxes. But being once the digital currency is covered under the definition of “money” under the New Tax System (Goods and Services Tax) Act 1999 same will be eligible for GST taxation.

References

Tax Ruling 98/1_Cash and accrual system _ http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR981/NAT/ATO/00001

GSTR 2000/13, Goods and Services Tax Ruling _ http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR200013/NAT/ATO/00001

Tax Ruling 2001/10 _ http://law.ato.gov.au/atolaw/view.htm?locid=%27TXR/TR200110/NAT/ATO%27&PiT=99991231235958

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