LAWS20023: Taxation Law -Seller Pty Ltd -Jojo - Assessment Answer

December 14, 2018
Author : Ashley Simons

Solution Code: 1CII

Question:Taxation Law

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Taxation Law Assignment

Assignment Task

lease read Taxation Ruling TR 2009/5 and answer the following questions. Taxation Ruling TR 2009/5 can be found on the ATO website at www.ato.gov.au.

1 . Seller Pty Ltd makes a payment of $10 000 to Buyer Pty Ltd to cover the cost of in-store promotional activities relating to its products. What is the appropriate tax treatment of the payment in the hands of both Buyer Pty Ltd and Seller Pty Ltd?

Seller Pty Ltd provides a volume rebate discount of 10% when Buyer Pty Ltd purchases more than $50 000 worth of product in a calendar month. Buyer Pty Ltd has qualified for this discount ten times in the past twelve months.

What are the tax implications of the information given in (b) above?

2 . Jojo spends between 15-20 hours per week writing blogs about saving money. She has a part time job to supplement her income, teaching money management at evening classes and works Wednesdays and Thursdays at the local cafe. Jojo does not have a formal business plan but tries very hard to promote her blogs. She is widely known and recognized in her local town because some of her blogs are printed as columns in the local newspaper. She has won four prizes from writing competitions. Jojo has a Master’s degree in creative writing graduating two years ago. In the two years since graduating she has earned advertising revenue from her blog sites amounting to between $8,000 and $10,000 per year with her writing related expenses typically around $6,000 a year. Jojo works from a granny flat on her property and all her blogs are kept on sites which she actively promotes through social media. Jojo is a diligent bookkeeper and keeps record of all her writing related income and expenses. She is a member of two professional writing associations and has been reviewed on a number of other websites to which she is unrelated.

3.Brigitte arrives in Australia on 30 December 2015 from Germany. She is enrolled in the Master of Accounting program at a Brisbane university. She comes to Australia from Germany with the intention of studying for two years in Australia. She manages to get a part-time job working in a restaurant with one of her friends. Brigitte lives in a flat near the university that she shares with two of her classmates. Brigitte has an active social life and is part of a close knit community of theatre enthusiasts. Brigitte excels in her studies and is well-liked by her friends and patrons of the restaurant where she works. Unfortunately, Brigitte’s mother is struck down with a serious illness and she has to return to Germany on 30 June 2016 to care for her. This means she has to leave her university studies and friends behind and will be unable to return.

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Solution:

1 . Taxation in the business environment is treated differently that of individual people. In the business environment, taxes are paid on the profits that are made, and not the expenses that are incurred by the firm. When conducting the accounting information of a company, the information about the business expenses is captured. This information is divided into profit/loss and expenses. After the costs are deducted from the overall income of the business, the pre-tax profit is then determined. The remaining profit amount is then computed to determine the amount of tax payable to the government. In the case of Seller Pty Ltd, payment of $10,000 was made to Buyer Pty Ltd for the purpose of in-house advertisements of the company (Wanna, 2007). However, this income will be treated as income due to various reasons. The incentive will be treated as income in the event that it does not reduce the cost of the buyer to acquire stock items. This is possible on the basis that the buyer files returns on an accrual basis. For this reason, the income will be derived from the year that income was generated. In this scenario, the Seller Pty Ltd paid money for advertisement purposes. This will be treated as additional income on the part of the Buyer (Ballard, Cline, Neubig & Phillips, 2012). From this point of view, the income earned by Buyer Pty Ltd will be taxed because it is general income for the company. If Buyer Pty Ltd has some company expenses that it is engaged in, then they will not be taxed as well. However, the money it received in the form of payment will have a portion of it taxed. The company will deduct the expense of maintaining and servicing the advertisement area that will be used by Seller Pty Ltd. The remaining of the money will be termed as profit for the company. This is the portion of the income generated by the company that will be taxed.

Companies also offer some discounts to its most loyal customers as a way of keeping them in place. Discounts are treated as a marketing strategy that can be used to attract more customers to the business. Also, they help in creating loyal customers to the business. There are ways in which the discount functions are treated within the business setting. When companies give discounts to some customers, they are not counted as income. Discounts are a way for the business to reduce the cost of their products in a bid to attract more customers to their products (Evans & Tran-Nam, 2010). Seller Pty Ltd gave a 10% discount to Buyer Pty Ltd on the products that the company has bought from the company. When conducting the accounting functions of Seller Pty Ltd, 10% will be deducted from the sale value of the products sold to Buyer Pty Ltd. The rebates that would be applicable to the next 20,000 items will not result in a reduction of cost on the part of the Seller Pty Ltd. The cost of acquiring stock items will still be the same for the Seller Pty Ltd. Also, the rebates are subject to some conditions. They are only applicable if the Buyer is satisfied with the condition of the products during the time of the sale. In a practical sense, a sale is only made when the buyer is satisfied with the products at the time of the sale (Selway & Williams, 2005). In normal sense, the seller treats the rebates as a form of cost reduction for the buyer. This is in accordance with the taxation principles that have been set out in the taxation Ruling TR 96/20. A reduction of the sale cost will be categorized as income for the Buyer Pty Ltd. Under the taxation laws, the income generated is taxed. The cost of products is crucial in determining the amount of taxes that should be remitted to the government. The Buyer has qualified to receive this discount for a period of twelve years. The additional amount of rebates does not constitute a necessary reduction in the cost of products. For this reason, this amount of money will be included in the tax bracket when the accounting calculations for Buyer Pty Ltd are done.

2 . Various factors are used to determine the existence of a business. The definition of a business varies from one person or agency to another. In the case of Jojo, it is crucial to define whether her activities constitute to a business or not. Various factors are assessed to determine whether an activity is a business or not. Different activities can be regarded to be a business or a hobby. Therefore, the main function is to differentiate between a business and a hobby. The ATO has set out some guidelines that are used to define a business from a hobby. There are various characteristics that are associated with businesses (Cooper & Wenzel, 2009). According to the ATO, a business should have the following characteristics.

Whether the activity has a significant commercial purpose of the character

According to the case by Jojo, she did not have a registered business name. This means that she did not make a decision to start a business. In this case, Jojo is just practicing something that she stumbled upon. There is no indication that the activity is of commercial purpose. However, she stumbled upon something that turned out to earn her income in addition to her full-time employment job. She did not intend to start a business for commercial purposes. Stumbling on to this activity made her view it as an avenue to generate some income alongside her remuneration from the places where she was employed. However, the activity has a potential of becoming commercial in nature and can be used as a source of income.

Whether the taxpayer has more than just an intention to engage in business

According to the ATO, an individual should have the intention of making a profit from the activity that they are engaged in. According to Jojo’s case, there is no indication that she had the intention of making a profit from the operations of her blog network. She started writing the blog as a hobby and eventually begun earning her some income. She has two other part-time jobs that she works at. This is a clear indication that there was no intention to earn any income from the blog writing exercise. She uses the blog to write articles about saving money (Roles, O'Donnell & Fairbrother, 2012). According to the ATO, one is required to actively and genuinely believe that they will earn a profit, even if there are reduced chances of this becoming a reality. In the case of Jojo, there is no indication that she intended to make a profit.

Repeating the similar types of activities

According to the ATO, this refers to the process of regularly repeating the same activities that are being conducted. According to this description, Jojo falls well within the category. She has been engaged in the writing of articles for about 15-20 hours in a day. Jojo has been doing the same thing repeatedly in a regular manner (Dilley, 2013). A business activity is regularly determined by the engagement of the same activity. The activities shave to be similar for it to show that it is a business that is being conducted it shows a sign of determination. In this scenario, Jojo is involved in the same activity on a daily basis. Based on this classification, Jojo is regarded to be conducting a business and not a hobby.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

A taxpayer should intend to make a profit before they are considered engaging in a business activity. The main purpose of engaging in business is to ensure that a profit is earned. It can be regarded as a source of income for the proprietor (Dilley, 2013). According to Jojo, she does not indicate any intention to earn a profit from the activity. Having a purpose of earning profit would require that the business be started solely for making a profit. For this reason, Jojo would have to quit her job and place more focus on the blog and on increasing revenue collection streams from the writing, she posts on the website. Also, capital would need to be used to start a business.

Thesize, scale and permanency of the activity

The size of the business is compared with other businesses within the same industry to determine whether they are of a similar size. If they are similar in size, the activity will be regarded to be a business setting as well. In the case of Jojo, her blog was earning her an income of $8,000 to $10,000 a year. However, the expenses related to this activity were $6,000 per year. This left about $2,000 in profits every year. This showed that her blog was still relatively small when compared to other businesses within the same industry.

The activities are carried out in a business-like manner.

According to the ATO, business-like activities involve record keeping, having a bank account, operating from business premises, having licenses and a registered business name. Out of all these activities, Jojo only engages in the bookkeeping process. She does not have a separate bank account in which proceeds from the blog are deposited. Also, she does not have a registered business name for her blog. According to this guideline, Jojo’s activities will not be regarded as a business activity.

Whether the activity is better described as a hobby, a form of recreation or a sporting activity

There is a difference between a business activity and a hobby. Hobbies are done for passing time. Hobbies are skills that one is most comfortable with and enjoys doing just for fun. A business activity is done with the intention of earning a profit. The proprietor of the business may not necessarily be interested in the business activity they are doing. They are only interested in earning some profit from the business activity they are engaged in. In Jojo’s case, the blog she runs is considered to be a hobby because there is no indication that she started it with the intention of making profit from the activities it is engaged in. Also,

After an analysis by the ATO, the most likely conclusion they will up to is that the activities engaged in by Jojo do not constitute to be termed as a business undertaking. The activities done by Jojo do not meet the threshold of being categorized as a business activity. As a result, her undertakings would be categorized as a hobby (Mills, 2006). This is despite the fact that she earned some revenue from the undertakings.

3 . All individuals working within the borders of Australia are entitled to income tax payments, every year. Whether a person is a resident or not, they are required to pay their income taxes to the government if they live and work within Australia. In the case of Brigitte, she had flown to Australia from Germany to seek further education in a field she was specializing in. In the duration of her stay, she secured a part-time job, where she worked during the times when she was free from school. In her part-time job, she was earning an income. Brigitte was working in a restaurant with one of her friends. The restaurant is a business undertaking and is recognized as so by the ATO. Therefore, the restaurant is required by law to remit all taxes to the government during its accounting period. Also, the restaurant is required to file all the income tax returns for each of the employees working at the establishment.

Being an employee of the same restaurant, Brigitte is required to file income tax returns for the period she has been working there during a year. However, Brigitte is not an Australian citizen. This is not taken into consideration when the income tax returns are being filed by the individuals. Income tax returns do not necessarily require one to be an Australian citizen for them to be filed. All they require is that a person is working within the borders of the country and is earning revenue. The type of establishment does not matter (Body, 2008). The amount of remuneration given is important because it will determine the amount of income tax that will be deducted from the individual. Income tax refers to a percentage of the total income, being deducted and remitted to the government. Therefore, the higher the remuneration, the higher the income tax will be. The lower the remuneration, the lower the income tax will be.

Because she has to fly back to Germany and take care of her mother, Brigitte is concerned about how her income tax filings will be done. I will advise her that she does not have to be and Australian citizen for this to take place. Therefore, citizenship registration is not necessary at this juncture. However, she can still be able to file her income tax returns before leaving the country for Germany. However, the income tax return period is for the year 2015/2016. Brigitte did not finish a complete financial year. This means that she will have to file returns for the duration in which she has been working in the restaurant before travelling back to Germany. During the schooling experience, she has been staying and working in the country through a student visor, which gives her a work permit as well. These documents allow her to live and work in Australia. In return, she is expected to file income tax returns and pay the amount to the Australian government.

Income tax is only a percentage of the total income generated. For this reason, Brigitte can save up some cash and go back home with it, to Germany. The tax is filed to help the government conduct its operations, which include improving the lives of the people living in Australia (Hayashi, 2014). Being a resident of Australia, one is expected to perform certain duties as well. However, a resident is not accorded the privileges of voting in the national voting exercises. This privilege is accorded to persons who are citizens of the country. However, being a resident, one is expected to pay taxes. For this reason, it is advisable for Brigitte to remit her income tax returns for the period she has worked, before returning to Germany. Failure to do so will cause the ATO to blacklist her and will be caught up when she decides to continue with her studies later.

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