AUSTRALIAN TAX

QUESTION

1. In the present scenario Bob an Australian resident operated a goat farm property in South Australia, primarily we need to understand what particular amounts are included and excluded in calculation of the assessable income as per the Australian Tax Office rulings (ATO). Under the ATO ruling assessable income is divided into ordinary income and as well as statutory income[1], below is the detailed description of incomes that can be included or excluded with reasoning:

SOLUTION

b)     Compensation of permanent damage to farm because of mining – $100,000: As stated in the above point we understand that Bob had lent his land for business of gold mines to Big Ltd after discovering gold. As his primary business is livestock has to take precautionary measures to safeguard them and in gold mining there is damage to the land as it is dug for mining purpose and thus he can claim compensation of the same and thus this amount is also included for assessment of income.

c)     Sale proceeds received on sale of gold to English Company from a ship wreck near Tahiti – $2,000,000: This income cannot be considered under the assessment income because things found in a ship wreck are considered as the property of the government and the person who found it should sell it to the government, but here Tahiti did not sell to the government he sold it to an English company because of which he cannot include this income as his assessment income and also these sale proceeds are not legal[2] and as per Sec 13 of the Historic Shipwreck Act 1976[3], he is liable to punishment as removal of historic shipwreck and selling to a company is crime.

d)     Sale of goat and sheep – $156,000: From the facts of the case we understand that the primary business of Bob is a goat farm and as per the IT act this income is included in the assessment income. There are many income tax provisions which explain that this particular income is to be included in the assessment of the taxable income because here Bob has organized his activity of selling of goat and sheep in an organized business like way (Newton v. Pyke, Freguson)[4].

1. After understanding the incomes to be excluded and included it is essential that we understand the expenses that are to be included and excluded in the deductions.

a)     Interest expenses paid on a loan for the gold coins hunt: This expense can be included as it is done with the motive of personal gain and also in a business like way. The interest expense on a loan is the interest to be paid on a secured borrowing for gold coin hunt. This expense can be included because it is defined under sec 25-25[5] of the IT Act, 1997 and also Section 26.25[6] of the IT act 1997 explains that we can include only those interests for deduction if they are bought for a cash benefit, non-cash benefit interest is never to be deducted. Thus this interest can be included as a deduction under the expenses.

b)     Hay feed for goats sheep and cattle $ 15,000: This expense is included in the deduction as it is the expenditure on the primary business of Bob and under the provisions and tax rulings stated relating to the primary business and the expenses are incurred in the course of business (Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439, 1976)[7].

c)     Wages, farm and ship’s crew $99,765: Wages and farm related expenses are included in the deduction whereas ship crew expenses are not included because under the Shipwreck act stated above, Bob could not include the income of sale proceeds thus he cannot even include the expenses he had incurred on the same.

d)     Ship 11 metre shipping boat to explore for gold acquired on 1 July of the current tax year $213,000: This cannot be included as per the explanation given above and as per the Shipwreck act because Bob had sold the gold to English Company for his personal benefit and did not sell it to the Government as he had to.

e)     Closing stock of animals had a cost value of$29,000 and opening stock was $26,000: This expense should be included because it is related to primary activity of Bob business and he can include the profit or loss incurred on stock as this is happening in the course of business (TR 97/11, para 48-58) and there is continuity and regularity in the stock.

f)      Sid incurred legal expenses of $10,000 to negotiate compensation for damage to his land: This expense cannot be added in the deduction because it is not related to Bob and it is legal expenses incurred by Sid, if it were the legal expenses of Bob may be then they could be incurred as per the IT act 1997.

g)     Monthly leasing costs of farm trucks and motor vehicles totalled$29,085: These expenses can be included in the deduction because they are the expenses incurred on the primary business of Bob under the tax ruling 97/11. Under the ITAA 1936 these expenses can be shown as special deductions under s 51AD[8].

h)     Repairs and maintenance of vehicles, plant and equipment $12,781: This income is included under deduction as it is incurred from the premises which have been solely used for the purpose of producing assessable income[9].

1. As per the given facts of the case we are required to calculate the depreciation schedule for the year ended June 30, 2012: Barbed Wire fences $12,608.00 and Cattle yard permanent $23,890.00 under the diminishing balance method. These assets have been attained after May 2006, the diminishing value method calculation would be based on the following formulae:

Base Value     X     days held/365    X    200%/ assets effective life[10]

      Depreciation for Barbed Wire Fences:

Base Value = 12,608; assets effective life = 10 years

May 2006: 12608*61/365*200%/10 [1^st Year]

• 12608*0.17*200%/10
• 428.672

July 2006-June 2007: Diminishing Value of Asset = 12608-428.672 => 12179.328 [2^nd Year]

• 12179.328*20%
• 2435.86
• July 2007 – June 2008: (12608-428.672-2435.86)*20% = 1948.69 [3^rd year]
• July 2008 – June 2009: (12608-428.67-2435.86-1948.69)*20% = 1558.96 [4^th year]
• July 2009 – July 2010: (12608-428.67-2435.86-1948.69-1558.96)*20% = 1247.164 [5^th Year]
• July 2010 – June 2011: (12608-428.67-2435.86-1948.69-1558.96-1247.164)*20% = 997.73 [6^th Year]
• July 2011 – June 2012: (12608-428.67-2435.86-1948.69-1558.96-1247.164-997.73)*20% = 798.1852 [Current Year]

In the current year the old fence was scrapped and a new fence of $55,000 was added. The scrap value is to be deducted but as we do not know the scrap sale we would not be showing the value. But the value of scrap should be deducted with the net value of asset (Diminishing value of asset for current year less depreciation of current year). The additional asset has to be depreciated as below:

Base value 55000; estimated life 20 years

• 55000*366/366*200%/20 = 5500

Cattle yard permanent $23,890.00

Base Value     X     days held/365    X    200%/ assets effective life

Base Value 23890; Assets life 20 years

May 2006: 23890*61/365*200%/20[1^st Year]

• 399.25

July 2006-June 2007: Diminishing value of Asset= 23890-399.25 => 23490.75 [2^nd Year]

• 23490.75*200%/20
• 2349.075

July 2007 – June 2008: (23890-399.25-2349.075)*40% = 2114.17 [3^rd year]

July 2008 – June 2009: (21141.68-2114.17)* 200%/20 = 1902.751 [4^th year]

July 2009 – July 2010: (19027.51-1902.75)* 200%/20 = 1712.48 [5^th Year]

July 2010 – June 2011: (17124.76-1712.48)* 200%/20 = 1541.23[6^th Year]

July 2011 – June 2012: (15412.28-1541.23)* 200%/20 = 1387.10 [Current Year]

Thus, as per the depreciation calculation the diminishing depreciation value is $1,387.10; the diminishing value of asset is $12,483.95.

As Bob had opted for the diminishing balance method we need to include the diminishing value of asset that is the value of asset of previous year less depreciation value of the previous year on this the depreciation of the current year is calculated. Calculation of depreciation thorough the diminishing balance method is more advantageous than the straight line method. Under the diminishing balance method the asset value is depreciated to 100%. Most investors choose the diminishing balance method as returns the greater value of deductions in the earlier years. As already stated it helps the investors in claiming 100% from the assets. In given scenario we have assumed the life of asset as per our convenience because the table stating the estimated life of assets does not show any specific life value for the assets in discussion so for that reason we had to assume the life of asset based on our utilization requirement. The reason we are doing own estimation for the estimated life of asset is because there was no Commissioner’s determination in effect.

1. Calculation of Capital Gain or Loss under the ITAA 1997 under the six steps of CGT with legal analysis. Before calculation of the six step analysis for CGT it is essential to note as toe the occurrence of the CGT event.

i.     He sold shares for $100,000 on 30 June of the current tax year. The shares cost $50,000 on 23 July 1989: There is a CGT event because as per the ATO guide to CGT (Capital Gain Tax) any shares or units purchased after 20 September, 1985 are subject to CGT. This event usually occurs when you sell or dispose the shares or units[11].

ii.     On 1 July a piece of artwork worth $10,000 was stolen from his house. The painting was a gift from a friend and it was worth $7000 when it was gifted on 1 September 1998. It was not insured: There is a CGT event as the artwork was stolen, in the current situation we have to calculate CGT event based on the time of its occurrence, as the art work is not insured CGT is calculated on time of the loss.

iii.     He sold a laptop computer for $1000 on 30 June of the current tax year. This was used 90 per cent for work use in his home office. The computer cost $2000 and the opening adjustable value at 1 July was $1500 and the adjustable value on the 30 June of the current tax year was $500.

iv.     He acquired a holiday house for $400,000. Other costs were stamp duty of $23,000 and the legal costs to purchase of $2000. The contract was dated 1 March 1992 and all costs were paid on 31 March 1992. His costs of holding the house included: interest $70,000, repairs $63,000. The house was not eligible for capital allowance deductions.

REFERENCE: Income Tax Assessment Act, 1936

1. Income Tax Assessment Act, 1997
2. Taxation Ruling No. TR 92/3, Income Tax: whether profits on isolated transactions are income; http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001
3. Taxation Ruling No. IT 2186; http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2186/NAT/ATO/00001
4. Sec 13, Historic Shipwreck Act 1976; http://www.comlaw.gov.au/Details/C2012C00174
5. Taxation Ruling No. 97/11 – Income Tax: am I carrying on a business of primary production? Sections 68-69; http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9711/nat/ato/00001#P8
6. Douglas R A, Improving the Efficiency of Taxation of Livestock in Australia; http://ageconsearch.umn.edu/bitstream/12536/1/63010164.pdf
7. Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26
8. ATO Tax Depreciation Methods – Diminishing Value and Prime Cost, 2012; http://www.mcgqs.com.au/blog/ato-tax-depreciation-methods-diminishing-value-and-prime-cost/
9. Guide to Capital Gains 2010-11; http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00270251.htm&page=7&H7