Taxation Law

Question 1 (a)

According to the statutory law s 4-10(3), tax payable is calculated by multiplying taxpayer’s taxable income by the tax rate and subtracting tax offsets. While taxable income is calculated by subtracting deductions from assessable income. Therefore, taxable income will increase if assessable income increases. In the case of ABC Ltd, assuming the company makes profit in the next financial year, the company will have higher taxable income and therefore pay more tax even though deductions have already been deducted. In addition, due to ‘value of money’, the company will benefit more from claiming the deductions in 2012-2013 than in the next financial year.  

Question 1 (b)

The transaction between the two businesses is called debt factoring. The business buys the debt from another business and receives $8000 once it is collectible from the debtor. According to the statutory law s 6-10(1) ITAA97, “statutory income is amounts that are not ordinary income but are included in assessable income by a provision of the Act”. Capital gain, benefits paid by a superannuation fund, lump sums and dividends paid to shareholder are said to be the most important types of statutory income by the Act. In this case, the difference of $3000 received by the business is claimed to be a capital gain as the business receives profit from the security (debt) it held. Therefore, the $3000 is an assessable income.

Question 1 (c)

In this case, McDonalds receives an incentive of $200,000 from the prospective new landlord as an inducement to change its premises. As in common law, according to the case of FC of T v Cooling, when a company moves from one premises to another and leases new premises, these “are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer’s assessable income”. In Cooling case, the lease payment made to the firm to induce it to change its premises was said to be assessable as ordinary income. There is a similarity between Cooling case and McDonalds, which is, the taxpayers receive payment as an incentives from the landlord. The incentives given is said to be an ordinary incident by the law and the incentive payment is an ordinary income. Moreover, assuming the incentive received by McDonalds is said to be a profit-making scheme, then the incentive is also an ordinary income because the transaction is part of the business activity. According to the statutory law s 6-5, ordinary income is said to be assessable.