Federal Tax Consequences of Ordinary Transactions

Question: Discuss about the Federal Tax Consequences of Ordinary Transactions. Answer: Introduction: In this section, I give an advice to Eric following his request to advise him whether he would be required to include any amount in his assessable income as a result of the sale of the land if land is subdivided and sold in separate 50 lots for a total of $3,000,000 or if the land is sold in one transaction for $2,500,000 without subdivision into 50 lots. The land is subdivided and sold in separate 50 lots for a total of $3,000,000 The subdivision of land would either fall under, one-off profit-generation undertaking, mere realization of a capital asset or property development enterprise which is mutually exclusive and are not determined by choice (Cassidy 1994). This implies that the facts circumventing a particular subdivision project dictate the manner the project is featured. Nevertheless, despite the mutual exclusivity of the above categories, it is possible that two or more categories can apply to one block of land during its possession period, although the classifications can never overlap and apply to the particular time (Hamilton and Downie 2008). The mere realization context is the best category that provides the best tax outcome where the land for sale has been owned at least 12 months; that implies that lest the land is held by the Company, any capital gain realized will be eligible for the CGT discount. There is surely an incentive for characterizing a subdivision project as the mere realization of a long-run CGT property. Nevertheless, Eric should know that whereas the law permits him to realize a CGT asset in the most enterprising manner, there exist a level at which the operations of the subdivision project would surpass a mere realization circumstance and shift to either a one-off profitmaking transaction or a property development operation. This means that the subdivision project will be converted effectively from being a capital nature to revenue. However, Eric needs to take note of challenging task of this legal principle that the line distinguishing the capital and revenue circumstances is never defined and the facts circumventing particular project has to be discretely as well as closely examined to hit a deduction on balance. The tipping point is determined by the magnitude of the activities being undertaken on the underlying land. From my examination of Erics scenario, it is concluded that the subdivision has shifted to being revenue in nature after considering the time of the land disposal, Erics significant intention or purpose of selling the subdivided land, commercial transaction, the magnitude of the amount of money and profit involved. The profit drawn from the sale of the subdivided land could either be capital gain or ordinary income based on the scenarios. Where one subdivides his land, for example, the land on which he lives, and then subsequently dispose the recently established subdivided block, any profit is treated as the capital gain remains a subject to CGT. Nevertheless, where a given profit generated has to be treated as ordinary income rather than as a capital gain, the certain two condition must be applied. One of the conditions is that either intention or purpose of engaging in the contract was to generate a gain or profit. The second condition is that one entered into the transaction, and the profits were realized, in the process of undertaking business or undertaking a business activity or commercial deal. The fact in Erics case is that his intent or purpose is to generate sale proceeds of approximately $3,000,000 compared to selling the land in a single block that would fetch approximately $2,500,000. We can examine the taxation ruling TR92/3 to help in understanding whether the profits on exclusive transactions are income. The above ruling established guidance in the determination of if the profit realized from the isolated transaction is revenue, and, hence assessable as anchored in s25(1) of the Income Tax Assessment Act 1936. The ruling regards the isolated transactions in two ways. In one perspective, isolated transaction describes those outside the ordinary progress of a business of a taxpayer undertaking business. The other view is that these are transactions entered into by the non-business taxpayer. Perspective one fits Erics situation since he the sale of land is to be done outdoor the ordinary course of business of Eric. The above ruling has set out the understandings as to the applicability of the conclusion made by the Full Court of the High Court of Australia in FC of Tv. The Myer Emporium Ltd (18987) 163; 87ATC; 18 ATR 693. In the above case, the underlying amount remained a profit gained from a deal that, even though outside the ordinary progression of the business of taxpayer, was engaged into with the intent of generating a gain or profit as well as in the progression of the business of the taxpayer. The Court ruled that for the dealings with a profit-generating intent, whether a profit from the isolated deal is income by the ordinary terms and utilization of humanity hinge greatly on the cases context. Nevertheless, a profit from the isolated deal is basically revenue where the taxpayers intent or purpose in participating in the transaction was to generate profits or gains and when the deal was arrived into, and the gain or profit was generated, in the process of undertaking the business or in undertaking the business activity or commercial deal. It was noted that the taxpayers relevant purpose or intent (of generating a gain or profit) does not amount to subjective purpose or intent of the taxpayer but instead, it remains the intent or the purpose of the taxpayer distinguished from the objective regard of the evidences as well as the scenario of the case. Moreover, it is never essential, ha the purpose or the intention of the profit-generation be the exclusive or overriding intent or purpose for partaking the deal but rather it remains adequate if profit-generation is a substantial intent or purpose. The person paying tax has to possess the essential intention or purpose at the point of engaging into the relevant deal or activity. Since Erics case involved the sale of property (land), it is usually that the Erik has the intention or purpose of profit-generating at the point of attaining the land. Indeed it is true that Eric had the intention of making the profit when he acquired the land. Relating the above case to Erics case, it is true that the main and sole intention or purpose of Eric was to generate more profit by subdividing the land and selling it into 50 blocks at $ 60,000 each. Moreover, the deal is outdoor the ordinary progression of Erics enterprise and it is apparent that the intention or purpose of profit-generation did exist about the underlying operation. It is also true that the process to be undertaken by Eric in this isolated transaction amount to a commercial transaction because of the underlying huge amount of cash in the subdivision as well as the degree of profit that Eric seeks to acquire. It is also a commercial transaction because it involves disposal of property (land), and hence the nature of the land and the timing of the transaction characterizes a typical commercial transaction. From the above information, my advice to Eric is that he would be required to include assessable income where land is sold with the subdivision in Australia. This is because Eric is involved in an isolated commercial transaction which will generate a profit amounting to income (Hart 2007). This is because this operation is regarded as an ordinary course of the Eric since any gross receipt from the above transaction is not income. Moreover, the operation is not regarded to have happened in the course of Erics business, but his intention or purpose in entering transaction was to generate a profit or gain. Moreover, this transaction would be entered into, and the profit would be realized, in undertaking the commercial transaction of sale of property (land). Even if this circumstance is viewed as not to occur as Eric is not undertaking the business and makes profit, the profit would still be an income since the intention or purpose of Eric in entering into the profit-generating transaction was to make a profit and that the transaction would be entered into, and the profit would be made, in undertaking the commercial transaction. Therefore, I would urge Eric to subdivide land and sell it in fifty lots since he will still make more money even after paying the 2.5% commission ($75,000) compared to selling the land in a single block at $2,500,000. The land is sold in one transaction for $2,500,000 without subdivision into 50 lots Where the land is sold in one transaction for $2, 500, 000 with no subdivision into fifty lots at a profit will still amount to a long term capital gain since Eric has held the land for more than 12 months (Ewing 2010). Eric will have to be taxed on the capital gain from the disposal of land which is the difference between what it cost him and what he received when he disposed of it. He will pay the tax on his capital gains as this forms part of his income tax and is not regarded as a distinct tax even though it is regarded as capital gains tax (CGT). Eric must know that every land acquired by him since the tax on capital commenced on 20th September 1985 is subject to CGT except particularly excluded. By selling or disposing of his land, Eric will have engaged in a CGT event where he makes the capital gain (Black 2012). Erics calculation of tax liability will thus be affected by the timing of the CGT event as it gives information on which income year to report his capital gain. Since Eric intends to dispose of his CGT asset, the CGT event will occur when he enters into the contract for disposal (Carbone 2010). According to the Australian residence law, one can be in Australia as a non-permanent residence or a permanent residence holding a permanent visa. Individuals holding a permanent visa can stay in Australia, enjoy employment rights in the country as well as other services such as education. Even though these persons enjoy such rights, there is exist a variation between them and other Australian citizens (Robertson 2008). Contrasting to a citizen of Australia who enjoys an automatic right to entry to Australia, a permanent resident is limited to international travel and can only do so with a valid travel authority in case a permanent resident wishes to return to Australia. Another difference relates to the right to vote in Australian Government elections. An ongoing resident in most cases is restricted and has to be enrolled to vote as a British subject before 1984 to be eligible to vote. In the current study George as an employee of global information technology based in Australia in Sydney. Mr. George is married with three kids and a wife, together with a family, they reside in Sydney Australia. George and his wife own a house which they jointly purchased in Coogee in Sydney. George is also a shareholder in Google Inc. which is an American multinational technology company whose list of shares are found in New York Nasdaq. George also has a joint bank account with his wife at Bendigo Bank, Coogee branch, where his monthly salary is being paid. From the discussion and critical view of the case, it is apparent that George is legally allowed to reside in the country indefinitely and it is upon him to make a decision as for whether to leave his family to live in Sydney or take the family overseas where he will be executing his duties for three years. Either of choice made by George will have an impact on the determination of his taxable income. Statham and Anor v FC of T 89 ATC 4070 In the case above the court contended that owners did not participate in the issue of offering land after the application of various standards of law to set up the certainties. The Court ruled that the acknowledgment of the land through deal did not sum to wage being earned by the proprietors for subsections 25(1). The Court further held the standpoint that it was not an occurrence of advantage which rose up out of the continuing or completing any benefit producing plan or undertaking, therefore, achieving the acknowledgment of the benefit which the proprietors had on their properties at the time they relinquished the goal of cultivating the citizen property. McCurry and Anor v FC of T 98 ATC 4487 The court apprehended that the valuation was applicable and complied with various guidelines and the application must be rejected. A request was therefore made by the court asked that the application is dismissed with the incidentals. The choice relied upon the dispute set out by the accountant which did not result in consensus with the Bradley and Brett's McCurry proof in the procedure. Since George is a permanent residence of Australia, he will be taxed by the government regardless of where he operates according to the legislations. 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