Case Study of Exclusive Emerald Gems Pty Ltd †MyAssignmenthelp.com

Question: Discuss about the Case Study of Exclusive Emerald Gems Pty Ltd. Answer: Introduction Exclusive Emerald Gems Pty Ltd or EEG is an Australian resident company which is engaged into manufacturing of jewellery which is then sold directly to the retail stores. The balance sheet of the company has been provided. Further, there are certain transactions that have happened and particular tax advice needs to be tendered to the company underlining the potential implications in light of the applicable tax statutes. Discussion The company has decided to shift the business operations from July 1, 2017 and has sold the business and the underlying capital gain implications need to be estimated for the company. In the given case, there would be capital gains implications as the capital event A1 has happened in line with s. 104-10 ITAA 1997 (Barkoczy, 2017). For computation of the capital gains/(losses) on disposal of a particular asset, it is imperative that in accordance with s. 110-25, the underlying cost base of the asset needs to be determined. The cost base would not only consist of the acquisition cost but would also consider the incidental costs related to buying and selling of asset, title maintaining, the ownership costs along with the capital expenditure incurred for enhancing the value of the asset (CCH, 2013). Business Premises Buying price of business premises = $ 1,310,000 Interest paid on loan related to acquisition of business premises (Cost of ownership) = $ 165,000 Legal fees and agent fees (Incidental cost related to selling) = $ 45,000 Hence, total cost base of the business premises = 1310000 + 165000 + 45000 = $ 1,520,000 Selling price of business premises = $ 1,810,000 Hence, capital gains on disposal of business premises = 1810000 1520000 = $ 290,000 Residential Premises Buying price of residential premises = $ 550,000 Legal fees and agent fees (Incidental cost related to selling) = $ 12,000 Hence, total cost base of the business premises = 550000 + 12000 = $ 562,000 Selling price of residential premises = $ 670,000 Hence, capital gains on disposal of residential premises = 670000 562000 = $ 108,000 Net capital gains for 2017 = 290000 + 108000 115000 = $ 283,000 Thus, the company would have to pay CGT @30% on the capital gains of $ 283,000 for the year ending on June 30, 2016. In relation to the valuation method deployed to represent the value of the trading stock, three options are available in the form of cost, market value and replacement value and any of these may be deployed by the taxpayer (s. 70-45).Also, in accordance with IT2670, trading stock implies goods that the concerned taxpayer has the right to dispose off irrespective of whether the title and physical possession exists or not (Gilders et. al., 2016). For the given situation, the taxable income can be maximised if the inventory valuation is more due to which the amount reflected in cost of goods sold would be lesser. It is apparent that the market value is the highest at $ 245,000 and hence this valuation method must be deployed. Further, in relation to the stock from Malaysia, it is apparent that given the facts even though physical possession and title possession is not confirmed, but still there is right of disposal available with EEG and hence it is appropriate to consider the same as trading stock or inventory as on June 30, 2017. For the writeoff in bad debts to the tune of $ 20,000 a deduction would be available under s. 25-35 since the following four conditions are satisfied (Sadiq et. al., 2016). The debt was in existence The debt in actuality has gone bad The debt has been written off within the given income year The debt contributed to EEGs assessable income For the doubtful debts to have a tax implication and be deducted, it is essential that it must be first written off and only then s. 25-35 could potentially imply. Hence, no tax implications arise at the present for the doubtful debts (CCH, 2013). In relation to the annual leave payments, expenses to the tune of $ 155,000 would be considered as deductible for tax purpose as per s. 8(1) ITAA 1997. The estimates are not important, it is the amount incurred in a given income year that is essentially vital (Woellner, 2014). It is known that the adjustable value of plant and machinery amount to $ 210,000 However, it was sold for $ 190,000 It is apparent that the termination value of the depreciating asset is lesser than the adjustable value of the asset. Hence, there would be a loss which could be available as a capital deduction that could be adjusted against any potential capital gains. However, it is noteworthy that the same cannot be deductible directly for tax purposes as it is not an revenue expense but rather a capital adjustment (Nethercott, Richardson and Devos, 2014). Hence, capital gain deduction to the extent of $ 20,000 would be available. It is apparent that in the given case, the vintage motor vehicle would be recognised as a collectible and also the cost price of the car is more than $ 500. Hence, capital gains need to be computed. Cost price of the car = $50,000 Ownership Costs (Interest) = $ 1,500 Total cost base of the car (s. 110-25) = 50000 + 1500 = $ 51,500 Selling price of the car = $ 77,000 Hence, capital gains realised = 77000 51500 = $ 25,500 Also, in line with s. 115-25, owing to the individual taxpayer (Mrs. Smith) and long term capital gains, 50% discount would be available. Thus, $12,750 would be the taxable amount for CGT application. For foreign tax residents, CGT is applicable only if the underlying property is taxable in Australia (s.855-10). Also, discount of 50% as per s. 115-115 is applicable for foreign residents provided the acquisition of property was before May 8, 2012 and also 12 months had elapsed as on that date (Barkoczy, 2017). Shares in EEG The couple has acquired shares in 2004 and hence for the capital gains derived on the sale, the discount method would be applicable and the remaining gains would be taxable in Australia despite the couple being foreign tax residents. Motor Vehicle For motor vehicle, no CGT is applicable irrespective of the underlying tax residency and hence the details are not relevant. Shares in ABC For shares, assuming that these were purchased more than a year before May 8 2012, the discount method would be applicable and 50% capital gains would be exempted while the remaining would be levied CGT in Australia. The implications of the share sale assuming foreign tax residency has already been outlined above. Since, the couple has acquired shares in 2004 and hence for the capital gains derived on the sale, the discount method would be applicable and the remaining gains would be taxable in Australia despite the couple being foreign tax residents (Deutsch et. al., 2016). Total buying price for the shares of one member = 100*100 = $ 10,000 Selling price for the shares of one member = 500*100 = $ 50,000 Hence, capital gains realised by one member = 50000 -10000 = $ 40,000 Further, as per s.115-115, 50% discount would be availed. Thus, it is apparent that for each of the shareholders, a capital gains of $ 20,000 would arise on which CGT would apply. Conclusion Using the relevant tax statute along with the concerned tax rulings, the advice has been provided to EEG and the owners in relation to the respective tax implications for the various proposed transactions. It is expected that the same would be adhered to by the company and requisite tax payments would be made on a timely basis to avoid any adverse consequences in relation to winding up businesses and shifting to New Zealand. References Barkoczy,S. (2017), Foundation of Taxation Law 2017, 9thed., North Ryde: CCH Publications CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook 8th ed., Pymont: Thomson Reuters, Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths. Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) ,Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia