Capital gains Tax Historical Trends and Forecasting

Question: Discuss about the Capital gains Tax for Historical Trends and Forecasting. Answer: Introduction: Permanent establishment as defined under Subsection 6 (1) of the Income Tax Assessment Act 1936 states that a person, state of an authority, commonwealth or through which an individual carries on any business without limiting the generality of the foregoing. This includes a place where the person is carrying on a business through an agent or a place where the person is using or installing substantial equipment or substantial machinery. From the current study, it is evident that Alex Ran and Ryan Tan a resident of Singapore having its business in the same country looking forward to expand their business operations in Australia (Woellner et al., 2016). The study highlights that the brothers have also held a shares in ASX listed companies is Australia and intends to use the service of stockbroker, which they found online to sell the shares in order to raise capital for their enterprise. The ruling of the Permanent Establishment provides that it does not takes into the consideration a place where the person is involved in the business dealings through using the service of a bonfire commission agent or broker. The rulings provides that brokers who in relation to those dealings acts in the ordinary course of his or her business who does not receive any remuneration or otherwise than at the customary rate in relation to those dealings of that kind, not being a place where an individual otherwise carries on a business. It is noteworthy to denote that the rulings provided under Subsection 6 (1) of the Income Tax Assessment Act 1936 states that Alan Tan and Ryan Tan is looking to raise the capital through using a broker who will be negotiating and concluding the terms of contracts on behalf of the brothers (Snape De Souza, 2016). Hence, the use of various brokers by Alan Tan and Ryan Tan will not result in Permanent Establishment in Australia. Determination of tax implications for Melbourne and Cambrai operations: According to the concept of Australian Taxation Laws if an individual acquires a vacant land either for private use or for business purpose it is normally considered as capital assets and are subjected to capital gains tax. In the current study, Alan Tan and Ryan Tan bought the properties with the intention to subdivide the land into ten blocks. The abandoned land was subdivided further into two small blocks in order to raise money by selling the blocks and the remaining eight blocks for constructing townhouse. Hence, the income raised from the selling of the subdivided land should be considered as capital gains and any profit is generally treated as capital gains, which is subjected to capital gains. As stated under the ITAA 1936 subdivision of land does not necessary result in the CGT event unless an individual retains the ownership of the subdivided block of land. This in turn represents that an individual does not make capital gains or a capital loss during the time of subdivision. However, under the current case study of Alan and Ryan the initial intention was to make a capital gain from the sale of two subdivided block of land and this would constitute Permanent Establishment. On the other hand, the remaining eight blocks were used for townhouse which implies that the constructed properties were used for residential purpose and were also engaged in the profit-making activity of property renovation and is liable for CGT tax (Kania, 2013). Considering the tax implications regarding the context of the definition of Permanent Establishment it is evident that Subsection 6 (1) definition implied on acquisition and subdivision of land in context with the ITAA 1936. Determining the residency of brothers and tax implications: Australian resident are usually taxed on their income from all sources whereas a temporary resident of Australia along with the overseas resident they are usually taxed on their income sourced in Australia. In the current case study, it is evident that the anticipated time of stay for the brothers was eight months. According to the 183 days Statutory test an individual would be considered as an Australian resident if an individual has originally been in Australia continuously or intermittently for more than one half of the income year (David, 2013). The commissioner of tax is satisfied that that the individuals original place of dwelling was outside Australia and the individual does not intend to take up the permanent resident in Australia. As stated in the given case of FC of T v Jenkins 82 ATC 4068, where an office of bank was transferred from Australia to work in bank of New Hebrides office for a three-year term. However, depending upon the Applegate the time that he spent working in New Hebrides was the tax payers permanent place of abode rather than Australia. Hence, under the current study both the brothers spend more than one half of the Australian income year living in Australia which would be substantially regarded as more than the statutory period of 183 days (Zelinsky, 2016). Hence, they would be considered as a resident of Australia since the duration and continuity of their presence was greater than the one-half of the income year. Application of CGT rules with necessary calculations: Application of CGT rules on Sale of Shares: Shares in a company or units are treated in the same way compare to any other CGT assets. It is assumed that the shares are acquired by the brothers after 20 September 1985 and Capital Gains Tax is applicable on gains derived from the sale of shares or units on the occurrence of CGT event (Clark, 2014). Thus, under the current study it is observed that the brothers were engaged in the sale of shares with the help of broker and gains derived from such sale of shares or units are liable to be taxed under the CGT event. The shares were redeemed by switching them from one fund to another and received assessable payments as it involved involuntary change in ownership. Demolitions and construction of town houses and planned disposal of townhouse and beef business: As stated under the income tax assessment act 1936 if an individual is demolishing a house the cost base does not gets reduced because any losses suffered and can be increased by the cost of demolition. In the current study, it is observed that the vacant land was demolished to build up townhouse which was later sold off to raise money and the remaining blocks of townhouse was used for residential purpose (Althaus et al., 2012). Thus, when a property changes its form to being a business into a trading stocks would lead to the application of CGT and any profit made from such sale of such block of land would constitute Capital gains tax. On the other hand, improvement made on Cambrai property with the intention to re-establish in the form of commercial herd would represent a business venture and any profits derived from the business would be taxed as normal income. Cost Calculation of Fitzroy Project:- Particulars Amount Cost of Fitzroy Block $12,50,000 Brokerage Fees $16,000 Demolition Cost $37,000 Interest Cost per year $35,000 Cost of 10 Blocks $13,38,000 Cost of 2 Undeveloped Blocks $2,67,600 Cost of 6 Blocks $8,02,800 Add: Construction Cost $24,00,000 Total Cost of 6 Town Houses $32,02,800 Cost of Each Townhouse $5,33,800 Income tax implications on the disposal of townhouse: A house is usually exempted from tax unless an individual has an investment property which is build or renovated for disposal. Ryan and Alex bought the abandoned land with the intention to renovate for profit and using it as running a business, this attracts income tax implications with capital gains tax and goods and service tax (De Goede et al., 2016). Special CGT rules are applicable since both Ryan and Alex are foreign residential who ceases to be an Australian resident for taxation purpose. Analysis of Cambrai Operations: The Cambrai operations will be considered as business since the property was originally acquired with the intention of re-establishing it for commercial herd. This ultimately signifies that any profits derived from the business would be considered for income tax (Hegemann et al., 2015). However, on the event of suffering loss from carrying on the business of commercial herd such losses are subjected to be offset on gains made from commercial herd only. Non-resident Company Company Company Company Company Company Particulars 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Assessable Ordinary Income 0 0 $15,000 $2,50,000 $12,50,000 2000000 2150000 Less: Deductible Expenses Repairs 850000 850000 850000 850000 Depreciation on Capital Improvements 125000 250000 375000 500000 500000 500000 Interest Expenses 60000 60000 60000 60000 60000 60000 Net Ordinary Assessable Income 0 -1035000 -1145000 -1035000 -160000 1440000 1590000 Assessable Statutory Income: Sale Proceeding of Shares 1750000 Less: Cost of Shares -625000 Less: Brokerage -17500 Capital Gain Tax on Shares 1107500 Less: 50% Exemption 553750 Net Capital Gain Tax on Shares 553750 Sale Proceeding of Undeveloped Blocks 650000 Less: Cost of Undeveloped Blocks 267600 Net Capital Gain Tax on Undeveloped Blocks 382400 Sale Proceeding of 2 Townhouses 1600000 1600000 1600000 Less: Cost of 3 Townhouses 1067600 1067600 1067600 Capital Gain on 3 Townhouses 532400 532400 532400 Less: 50% Exemption 0 266200 266200 Net Capital Gain Tax on Townhouses 532400 266200 266200 TOTAL TAXABLE INCOME 553750 -1035000 -762600 -502600 106200 1706200 1590000 Tax on Taxable Income 230872.5 0 0 0 31860 511860 477000 Deductibility of interest incurred on contingency funding options: As stated under section 8-1of the income tax assessment act 1997 interest incurred on the contingency funding are the monies which is raised by Ryan and Alex through are deductible. The rulings specifically state that the payments are deductible under the positive limbs of section 8-1 of the Income Tax Assessment Act 1997 as an expense of generating income as opposed to the application of income generated (Mehrotra et al., 2013). Analysis of structure: From the study it is evident that the two brothers are not planning to consolidate both the units however it is better advised that a partnership form of control would add significant advantage with complete control over one property. It is further recommended that the interest of the property should be vested equally in each others control and trusteeship form of property management would constitute as an advantageous step forward in managing the ownership of land. To further justify the interest of beneficiaries an equal distribution of ownership would form an appropriate mode of holding equal rights on each property. Reference List: Althaus, C., Bridgman, P., Davis, G. (2012).The Australian policy handbook. 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