LAW6001 Taxation Law - Case Study

Answer 1

The legislative right of the Parliament to make laws with respect to taxation and to bring effect to them is derived by clause (ii) section 51 of the Australian Constitution. It states that the Parliament shall make laws relating to taxation for the good governance of Commonwealth and shall not discriminate between States or parts of States in making such laws.
The Commonwealth Constitution provides for the separate of the 3 powers of government namely – legislative, executive and judicial. These are respectively performed as follows:
1. The Parliament drafts the law relating to matters of taxation and revenue generation for the economy and enacts them after the approval of the Senate;
2. Once the law has been framed it is put into force and the Australian Taxation Office (ATO) acts as a steward of the tax system and helps the government by effectively administering the tax laws and supports the development of procedural requirements relating to tax legislation;
3. Judiciary including the High Court and the Federal Courts are responsible for interpreting the statute and decide on the cases brought before it for disposal of justice.

Answer 2

The opinion is sought on whether the business profits earned by the US-based manufacturer from sales within Australia are taxable in Australia. The answer reside inside the provisions of conventions between the United States of America and Australia for the avoidance of double taxation. In particular Article 7 of the USA-Australia Treaty states that business profits of an enterprise shall be taxable only within the State in which it is incorporated / based. However, such profits could be taxable in the other State if it carries on business in the other State through its permanent establishment (PE) in that other State.

According to Article 5 of the Treaty, PE is any form of fixed place of business through which business of the enterprise is carried on whether wholly or partially. This ‘place of business’ may include an office, branch, place of management, or factory, workshop etc. In the instant case, the US based manufacturer has effectively been operating in Australia through a serviced office through which its sales representative is able to engage with public and obtain new orders from customers. In our view, this would constitute a fixed place of business in Australia as the same has not been expressly excluded from sub-section (3) of Article 5.

In view of above, the profits of US enterprise to the extent of orders procured in Australia (i.e. by the PE in Australia) shall be taxable in Australia, and the US-based entity would be able to claim foreign tax credits on those profits under the US tax laws.

Answer 3

Dear Indianna,

You have informed us that the 22 hectares of land that is the subject matter of the CGT event has always been used by yourself for generating taxable income (rather than being your main residence). Hence it’s disposal will result in CGT event and give rise to capital gains tax. CGT introduced on 20 September 1985, therefore gain made on disposal of assets acquired before 1985 are disregarded and treated as exempt for the purpose of CGT computation.

PART 1 – The issues involved in both cases are as follows:

Land acquired on November 1, 1979

1. Since 20 hectares undeveloped land is sold, no CGT event shall arise. You should continue to record the remaining 2 hectares of land in your books.
2. Same as above in case (a). Capital proceeds shall be taken as per auction bids.
3. In this case, you choose to construct residential buildings through a developer on your land. In accordance with the provisions of subsection (2) of section 108.55 of the Income Tax Assessment Act 1997, you shall treat the building as a separate asset as the construction began after 1985, provided the asset’s cost base exceeds both the improvement threshold ($150,386 for 2018-19), and 5% of the capital proceeds received from disposal. Accordingly, capital gain on the building upon its disposal sha