Taxation Flashcards
Explain the tax implications if land was bought for use not business initially but ended up venturing into business activity?
Taxpayer gets to elect if land was sold at mkt price or its cost (at commencement of development) : taxpayer with pre-CGT would elect mkt val as that gives the highest value for deduction when land is sold; taxpayer with large unrealised CG would elect cost to defer tax on gain (although given avail of discount on CGs, calc needs to be done to see which election is more beneficial)
Can a taxpayer claim tax deductions for expenses incurred outside the process of earning assessable income?
NO! outgoings must be incurred in gaining or producing assessable income, or incurred in carrying on a business for the purpose of gaining/producing assessable income.
Briefly describe how foreign resident individuals pay tax on their income derived from re investment in Aus?
Not entitled to tax-free threshold; generally taxed at 32.5% (aus source of income $90k, excess gets taxed at aus resident rates) ; income from re, gains from selling re -> treated as aus source of income
Margin Scheme: GST = 1/11 of the margin payable instead of 10% , define margin?
- if bought pre 1/7/2000, then margin = sale price incl. GST - value of land at 1/7/2000
- if bought after 1/7/2000, then margin = sale price incl. GST - acquisition price incl. GST
- if supply/acquisition between members of the same GST group, then may have to use deemed market value rules
How is land treated for tax purpose if it was bought for development but development didn’t proceed?
Then that land is not trading stock, and profit on sale is assessed under the ordinary income section (as per s6-5 ITAA1997)
If re is sold under a contract and CG/CL is concerned, when is the profit assessable? When contract is entered? or when settlement happens?
When contract is entered is when when profit (calculated under CGT provisions) becomes assessable.
Timing of GST i.e. when is GST accounted for by the supplier?
- cash basis -> GST payable on receipt of consideration
- accruals basis -> GST payable on receipt of part of consideration or issue of an invoice, whichever comes earlier.
- supplies made for a tax period/on a progressive basis -> supply is deemed a separate supply attributed to each period/progressive component (think rental payment under a lease) -> this is so that we ensure matching b/w GST liability and consideration (otherwise GST is payable right when the lease is granted rather than over the life of the lease). supplier then get to work out net GST liability over a tax period by offsetting GST paid for business inputs against GST payable on supplies
If commercial lease is being supplied, when (timing issue) is GST applied?
Lease is supply of re. a prop can be leased out for many years, so what’s being supplied is a continuous service and rental payments are continuous too. this means in each supply period, landlord must remit GST liability to the ATO
Why is it important that the owner of the re knows if the tenant is a domestic residential tenant or carrying on a business?
owner of the re must know if the tenant is a domestic residential tenant (cannot claim refund of GST paid for the prop) or carrying on a business (entitled to refunds of all GST paid on goods and services for commercial re but commercial re owners are also obliged to charge GST on rent and on sales of prop, purchaser entitled to refund of that GST paid though)
What makes the supply taxable supply?
- Consideration - payment of money or property or any act of forebearance in connection with a supply (so payment of land purchase price, paymen of rent, payment under construction contract each constitute a consideration making supply of the goods taxable supply
- Enterprise - supply must be made in the course of furtherance of an enterprise i.e. any activity that in the nature of trade on a regular or continuous basis .
- Connection with Australia - supply must be connected with Australia (goods delivered/made avail in aus to supplier’s customers , or supplier imports goods to aus , or installs or assembles goods in aus, or there is supply of re in aus
- Registration - supplier must be registered /required to be registered (person carrying on a business with annual turnover > =75k , then required so that business can claim input credits )
If a re developer sold some props and became entitled to income in June FY20 but not receiving it till July FY21, in which FY is that income assessed?
FY20 income it is
How is GST applied to Sales of Commercial RE?
Generally vendor liable to pay GST on sale of commercial re i.e. 10% of value of consideration for the commercial prop unless prop is a going concern.
As per GST legislation, **Deposit** - has to be either forfeited (at termination of a K of sale) or applied as all/part of consideration of supply (of commercial re) to be treated as actual consideration for a supply
- **Vendors collect GST** -> vendor requires payment of GST on the deposit when deposit is paid . if deposit is forfeited, then GST collected on the deposit will be payable by vendor to the ATO.
- **Time of supply** / when is the commercial re actually supplied? -> **occurs at settlement**
What makes a tst incentivised to fully dist income to unitholders?
if tst doesn’t dist income, then tst is liable to pay tax on the income at the highest rate for the individuals
What is the main advantage of using a trust structure?
Generally popular to hold prop in a tst over the long term. and tst’s taxable income is distributed directly to beneficiaries/unitholders. where there’s dist of excess though (generally not taxable , and known as tax diferred dist ), you check if that excess amt exceeds cost base of units, if so, then the tax-dferred dist may reduce unitholder’s cost base in the units (taxable for CGT purposes)
A tst can make a gain on prop sale and get the 50% discount to CG , which gives rise to tax-deferred component of CG - main ADVANTAGE of tst structure is that tax-deferred dist is **not assessable** income in the hands of the beneficiaries.
individuals with >$180k income pay 45% in tax (ignoring medicare levy), so would be better off using a coy structure from a taxation point of view. BUT then holding the prop in individual name or in partnership still has pros. What are these pros?
- losses from holding the prop (think negative gearing) can be claimed as tax deduction to offset other assessable income like salary and wages
- for Individuals and TSTs: asset sales after 21 sep 99 -> only 50% of CG (or 33% for super funds) on sale are assessable (long as asset was held >12 mos) .
- **no discount CG for coys !** recall that coy doesn’t get to enjoy discount treatment to CG at all, they either get to index up the cost base for assets bought pre-21sep99 to reduce cg or include whole cg as assessable gain. but individuals holding prop get to choose either index up cost base or discount cg by half (if bought b/w 20 sep 85 and and 21 sep 99 ) or disc cg by half (if bought on/after 21 sep 99) even if individual is receiving the cg as a beneficiary from a tst
In general, how are lease incentives treated for tax purposes?
Lessor/owner generally can claim the actual cost of the incentive incl. fit-out costs (paid by the owner and ownership is retained) which will be just as depreciable as plant and equipment or as part of the capital cost of the building. Incentives received is assessable in the hands of tenants.
Note: Landlords do generally own the fit-outs although there are also cases where tenants own the fit-outs
When there is lease incentive offered by the landlord, who is the supplier and who is the recipient of supply under the GST legislation?
Lease incentives are paid by landlord to tenant i.e. tenant makes a supply to landlord, meaning GST is payable by tenant on the incentive (if tenant registered or required to register for GST)
In timing income and determining when/which FY income is assessed, which does the ATO permit? Cash basis or accruals basis?
generally, biz income’s returned on an accruals basis (ATO does not permit cash basis but in some limited circumstances yes e.g. small business, individuals not carrying on a biz or some sole practitioner)
What is statutory income?
All amounts that are not ordinary income but are included in your assessable income e.g. tst dist.
How may lessee claim capital works deduction?
if lessee incurred expenditure on construction, then lessee may qualify for deduction, as do assignees of the original lease based on original cost of construction incurred by original lessee.
If sale proceeds not considered income, how will it be treated for tax purposes?
if sale proceeds not considered income, a CG will be assessed or a CL allowed (if prop bought on/after 20 sep 1985), net CG gets included in assessable income and subject to the same rates as other income (discount may apply tho for individuals and superfunds)
Rationale for choosing coy as the legal entity for tax purpose?
if you are making large amounts of profits (e.g. huge profits from land development) then better to go with coy structure than individual as coys pay 30% flat tax rate and don’t have to pay divs
note: coys are usually preferred by non-residents, as coys shelter non-residents from tax in their home jurisdiction till profits are paid out as divs
How can we depreciate plant and equipment for tax purposes?
2 methods of depreciation: straight line basis and diminishing value basis
- *straight line basis** - item cost $100, 10 yr life -> deducted at $10 p.a.
- *diminishing value basis** - bought on/after 10/5/06, cost claimed at 200% of the straight line basis -> item cost $100, 10 yr life, deductible at $20 in yr1, then 20% of $80 in yr 2, 20% of $64 in yr 3…) depreciation calculated on the written down amount (undeducted balance of expenditure)
Note though: if bought for <= $300, then can be immediately written off
small buys $300-$1,000 - can aggregate these to a low value pool, depreciate under the diminishing value method at 37.5% on the pool value. but assets added to the pool will be depreciated at 18.75% in yr 1
If re is sold under a contract and CG/CL is concerned, when is the profit assessable? When contract is entered? or when settlement happens?
When contract is entered is when when profit (calculated under CGT provisions) becomes assessable.
A commercial re owner received rent in the form of cash, and there is no provision for refund or abatement in the lease contract. In this case, when is the income assessable?
The rental income becomes assessable as soon as the cash is received.
What’s the rationale for a negatively geared prop to be held outside a trust?
If it is losses tst has made, then can’t be passed onto unitholders for use against their other income. tst losses only to be utilised against tst income - that’s why if you wanna get the benefits of negatively geared prop then that prop shouldn’t be held in a tst.
In general terms, how does GST apply to businesses? Name some common examples of taxable supply?
Supplier of goods and services are liable for remitting 10% on the non GST inclusive value of a taxable supply to the ATO.
Most forms of economic activity are taxable supply: supply of goods/services, sale of land, construction contracts, grant, assignment or surrender of a lease, dealings involving creation of rights and obligations .
All biz >75k turnover needs to register for GST
Regarding income-producing prop, there will be repairs and improvements being carried out from time to time. Explain if the costs associated with these are deductible or not?
Repair costs (long as it’s for restoring efficiency of function) are deductible;
Cost of improvements (which can be virtually endless) are NOT deductible, hence have to be added to cost base.
Explain if finance costs i.e. interests are tax deductible?
comes down to the purpose of loan. if money was borrowed for constructing or financing acquisition or holding of income-producing prop, then yes **interest costs** deductible. **But if loan secured over income-producing prop but used for non-income producing purpose, then interest costs NOT deductible**
What is tax ‘ flow through’ status?
The tax ‘flow through’ status describes how tst income is not taxable at tst level and flows right through to unitholders and only get taxable in their hands.
Tst (if a public trading tst) then will be treated as if it were a coy, hence loses its tax flow through status, and ofc lose discounted CGT treatment on sale of prop, and also ofc tax deferred component also doesn’t flow through to unitholders.
not a separate legal entity for tax purposes, hence dist of income to unitholders not taxable at tst level, only taxable in the hands of unitholders at their individual marginal tax rates. as a unitholder you can use your own losses to offset the income you get from the tst though.
Give examples of ordinary income?
salaries, sages, trading profit from carrying on a business, sale of goods, trading stock, lease rental, interest, passive prop income, divs
Who pays the GST?
supplier “whoever made money hands over a cut to the govt. you can’t pass that onto a recipient of a supply, but the supplier can recover its GST liability by imposing a contractual obligation on the recipient “the customer” to pay GST
* note: as at 1/7/18, buyer (supply recipient) of new resi or potential resi land required to withhold GST of K price, pay the GST directly to ATO as part of settlement process