Income taxation Law

Income taxation Law

Question 1                                                                                                     

Personal exertion is also referred to as personal services income. This is a type of income which is mainly generated from individual efforts and application of skills in trade or any profession (Andrews, 1972 p 309). These skills include; engineering, technological services, medical practitioners, and construction woks. Incomes are classified as personal service income if more than 50% of  the income come from contracts which are earned through skills or by providing and expertize service. It first requires working out if any income generated is classified as personal service income. It any of the income is classified as Personal service income, then, it is checked out if there is any special tax that apply to the income in question (Andrews, 1972 p 309). If personal service income apply, it is important to note that, any provisional report must include how personal service income should be presented and the deduction that one should claim.

When working out if personal service income rules apply, it is good to look at each contract and evaluate if the rules apply to the stated contract. To determine if the rules apply to each contract, a number of steps has to be followed but in correct order (Andrews, 1972 p 309). These steps will be used to compare the given scenario. The first step is to evaluate if the income comes from personal services income. If yes, the next step would be to result test which means; one should be paid to produce specific results, is also required to provide the equipment required or tools and also required to fix all the mistakes that may be there. Step three would be to apply the 80% rule which involves evaluating the amount which comes from personal service income in each of the given client. If the income is less than 80%, one has to proceed to step 4 (Andrews, 1972 p 309).

The remaining tests which involves three other tests. These steps are; unrelated clients test, employment test and business premises test (Andrews, 1972 p 309). If any of the rules is passed, the personal service income do not apply to the tested personal service income.

From the above explanation, it is very clear that, all of the three payments of income come from personal service income. Simply because they meet all the conditions that are required for any income to be classified as personal service income. If Hilary wrote the story for own pleasure and publish it without the need for sale, it would be a different case. That could be a paper that can be published for free for use by any interested party or keep it as an acknowledgement of research done in life. The scenario would only change if Hilary changes the perspective of publishing the paper. When the paper is turned into income generating article, it would now change and become a personal income generator. It can be published for sale or for use as internet resource by other scholars.

Question 2

The contract upon an employee lending her son a short-term loan is an example of partnering agreement. In this case, the two are involved in moral agreement which are completed in addition to the normal contractual agreements. The parent and the child meet the requirements of the Partnership Act which provides that parties involved, in this kind of contract should explicitly agree with each other to cooperate in order to achieve timely completion and assist each other to overcome all underlying difficulties. However, it is evident that the child pays extra amount on top of the exact amount lent by the client regardless of the idea that this is an informal agreement on which no security is attached. This in turn has effect on the assessable income of the client.

Normally, the assessable income of this client should include; amounts from outside the ordinary course. In addition, the income should incorporate lease payment, incentive payment, dividends and ranking credits among other services. The Internal revenue Service considers giving money to a family member as a gift to a debtor and as subject to tax if the amount involved plus other gifts exceeds $14000 (Long et. al, 2016  P.94). In this case, the amount involved is $40000 and therefore the client is liable to interest charge on her salary. The amount lent is treated as an interest and therefore tax is imputed on the ordinary income of the client. It does not however matter if the client receives the money or not. It can be easily concluded that the parent should not be taxed over the same but as long as the loan is lend on no interest, she is liable tax.  IRN recommends that when advancing loan to a family member, may it be legal or social, the minimum interest rate should at least be charged in order to evacuate the burden of paying imputed tax (Long et. al, 2016 P.94). However, the parent can acquire as much money as possible and the whole amount is excluded from federal gift taxation as dictated by federal law. The annual exclusions are not carried to the following year and therefore clients need not to file the returns.

The case involving the parent and the son is a Non-business bad debt and it is deducted from the parent’s Assessable Income as short-term capital losses. For this issue to be validated, the client would also be required to attach a statement describing the nature of the debt and the name it occurred, the name of the debtor and the family connection between the two and finally a list of efforts made to collect the debt. Although the son pays full amount after two years with some additional amount equal to 5%, the loan remains to be unsecured with the following facts according to Australian Tax Income Law act; the loan is based on the personal credit rating, financial status and amount borrowed. Secondly, an unsecured loan is taken to consolidate debts into one possibly less expensive loan and finally the lender must look to your personal credit before giving out loan.

According to Income Tax Assessment Act, the extra amount paid by the son to her mother is said to reduce the tax imputed on income. Therefore, the parent will be deducted less amount from her assessable income. Comparatively, if by calculations all the son’s deductions equal or exceeds his assessable taxable income, he would not have taxable income. The reason behind this is that Income Assessment Act 1997 provides that a taxpayer does not have taxable income if after comparison all his deductions exceeds the assessable taxable (Woellner et al, 2016 P.48). There is fear that informal loans would result to defaults. However, this happens if the taxpayer fails to follow the recommended procedure of acquiring informal loans. If a personal loan turns to be treated as a bank loan, it is always advisable that the terms, time frame and interest of the loan are put in writing rather than in talk. Also, repayment plan should be specified to cater for borrowers’ payment default.

There are various tax implications for informal lending. First, if lender gets any interest on loan, they have to inform HM Revenue because this amount might be liable for taxation as income (Taylor $ Richardson, 2014 P.12). Secondly, lenders must indicate received interests on their self-assessment assessment forms as a taxable form of income. Finally, if the transaction involves giving money inform of gifts, then it inheritance tax exclusive.

Question 3

(a)

This implies that, the price of land from the year 1980 to the year 1986 has gone up by rate of 0.752

Then, the long term capital gain from land can be calculated as follows;

Short term capital gain =Selling price-(cost of acquisition + all expenses+ exemption + long term capital gain)

The short term gain may mean lower price than long term gain but may also mean that short term gain has more advantage than long term gain due to profit realized.

(b)

The different would arise due to difference in capital gain from the two sets of calculations. The capital gain in (a) would higher than capital gain in (b). This would be due to difference in cost of selling the land.

Here, the capital gain index would be=

The indexation factor of (a) would be lower compared to that of (b). When indexation factor is less, it means that the capital gain for case in (b). If Hilary sold the land and the building to her daughter, it would affect the capital gain due to its lower selling price that he would have sold to her. Due to even lower capital gain, the results, may end up being capital loss when calculating short term capital gain. This is simply because, short term capital gain is calculated by deducting all the expenses involved and any other capital which is exceptional.

(c)

If the land was sold to a company, corporation tax would be charged instead of cost inflation tax. The cost inflation tax is only charged if the case involved is a sole proprietor or if your company is not resident of UK, it is controlled by 5 people or fewer and has made a gain on UK residential property. On the other hand, corporation tax on chargeable gain is paid by limited companies and most unincorporated taxation. During calculation of cost inflation tax, indexation factor, cost of acquisition and cost of purchase are considered while on the other hand, professional income, capital allowances and investment are factored.

References

Andrews, W.D., 1972. Personal deductions in an ideal income tax. Harvard Law Review,            pp.309-385.

Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia. St Mark’s Review, (235), p.94.

Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting:             Empirical evidence from Australia. Journal of Contemporary Accounting & Economics,            10(1), pp.1-15

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. Oxford University Press.