BULAW5916: Taxation Law & Practice Report

Posted: January 6th, 2023

BULAW5916: Taxation Law & Practice Report – ABC Ltd. Case Study

Assignment Task:

Purpose

The purpose of this assignment is to enable you to explore and communicate your understanding of relevant aspects of taxation law. These include:
Taxable income: In Australia, individuals and businesses are taxed on their taxable income, which is the amount of money they earn after deductions and exemptions have been applied. Taxable income includes things like wages, salaries, and business profits.
Tax rates: In Australia, tax rates are progressive, meaning that the more you earn, the higher your tax rate will be. There are several tax brackets in Australia, with different rates applied to each one.
Tax deductions: In Australia, individuals and businesses can claim tax deductions for certain expenses that are incurred as a result of earning income. This can include things like business expenses, charitable donations, and certain types of education expenses.
Tax credits: In Australia, tax credits are reductions in the amount of tax that an individual or business must pay. There are several types of tax credits available, including credits for things like charitable donations and research and development expenses.
GST: Australia has a goods and services tax (GST) of 10%, which is applied to most goods and services in the country. Businesses that are registered for GST are required to collect the tax from their customers and pay it to the government.
Capital gains tax: In Australia, capital gains tax is applied to the profits that are made from the sale of certain assets, such as real estate and shares. There are exemptions and concessions available for certain types of assets, such as the family home.
In the future some of you will work as accountants. In the course of doing so, you may have clients who ask for tax advice. They may ask you how transactions they have entered into might be regarded for tax purposes (for example, is a transaction likely to be regarded as income or capital?). You may therefore be faced with clients in real-life situations and be asked to give advice to them about how they should treat these situations for the purpose of their tax returns.

Question 1

ABC Ltd. is an Australian company carrying on a diversified merchandising and financial business, including an agency arrangement with an Indian shipping company. This agency arrangement was documented by a contract which ABC Ltd. and the Indian shipping company signed on 1 August 1985. The period of the contract was for 30 years. 

As a result of the reorganisation of the Indian shipping company’s affairs, the agency contract was terminated after it had been in operation for 24 years. ABC Ltd. calculated the profits which it had expected to earn from the agency contract during the subsequent six years, and negotiated a cancellation of the contract in consideration of the payment by the Indian shipping company of $4 million. The Indian shipping company paid this amount, without questioning how it had been calculated. 

The contract with the Indian shipping company had provided ABC Ltd. with business which equated to 60% of its profits. When the contract was cancelled, other minor activities of ABC Ltd. which also related to shipping were terminated.

Part 1- Advise the directors of ABC Ltd. of the income tax consequences of the above arrangements. For the purpose of your answer to Part 1, you will be required to mainly refer to case law regarding income tax.

Part 2- What difference would it make if the agency agreement had been entered into on 1 August 1993? For the purposes of your answer to Part 2, you will be required to mainly refer to the Income Tax Assessment Act 1997 where relevant.

Your combined answer to parts 1 and 2 of Question 1 will be marked out of 20 marks.

Question 2

The directors of ABC Ltd. also consult you about some land that the company acquired in January 1995 as a possible site for a future warehouse and sales office. Following an increase in its lease payments, the company decided in February 1997 to erect a building on the land. Construction commenced on 14 April 1997. The building was completed in December 1998 and the company took up residence of the building on 20 January 1999. The land cost $1.33 million and the building cost $5 million.

On 2 January 2020, the company received an offer to buy the land and buildings for $11 million. Given the termination of the agency contract, the company accepted the offer. Contracts were signed on 14 January, and settlement took place on 18 February. A profit of $4.58 million relating to this transaction is included in the company’s profit and loss statement. ABC Ltd. is continuing to operate, but again from leased premises.

With reference mainly to the Income Tax Assessment Act 1997, please advise ABC Ltd. of the tax implications of the above transactions. What is the capital gain or capital loss of the company? Has the company overstated or understated its profit?