Taxation Law and Practice Group Project
ZHAO ZHAO：430064847 YUN ZHOU：430401835 YULING YAN：430048777 HAOHAN：420049283 Stream: 2 (3:00pm-6:pam Tuesday) Lecturer: Antony Ting
Bigshoes Ltd, as a company that incorporated in Australia, meets the requirement of a resident in Australia based on s6 (1) of ITAA 1936. The company incorporated in Australia would become a resident of Australia automatically. Moreover, according to s6-5 and s6-10 of ITAA 1997, a resident of Australia should be taxed on ordinary and statutory income from all sources (Sadiq et al. 2014). S328-110 of ITAA 1997 suggests that if the aggregated turnover is less than $2 million, the entity should be treated as a small business entity. However the annual turnover of Bigshoes is $300 million. Therefore the rules related to small business entity, such as s328-D of ITAA 1997, are not applicable to Bigshoes Ltd. In order to calculate the taxable income, the relevant assessable income and deductible items should be identified. (a)
According to s40-25 of ITAA 1997, a depreciating asset that used for the purpose of producing assessable income is deductible. ‘A depreciating asset is an asset has a limited effective life and the decrease of value can be reasonably expected over the useful life based on s40-30 of ITAA 1997’. Lands, trading stocks and ordinary intangible assets are not depreciation assets. Bigshoes acquired the competitor’s business could be treated as an expansion of business and the main purpose of this acquisition is to make profit. Three assets are acquired by Bigshoes though this transaction. Intangible assets are not depreciating assets. Both goodwill and registered design are intangible assets. According to s108-5 (2) of ITAA 1997, good will is a CGT asset. And goodwill could not be depreciated for tax purpose (Tregoning 2010). However s40-30 (2) (c) of ITAA 1997 suggest that items of intellectual property can be regarded as depreciating assets. As defined in s995-1 of ITAA 1997, the intellectual properties include patent, copyright, registered design etc. Production equipment has limited useful life and the amount of decline in value can be measured and expected reasonably, so it is a kind of depreciating asset. As defined in s40-60 of ITAA 1997, when the owner of the depreciating asset first uses it, it begins to decline in value, or installed it ready for use. Two methods, diminishing value method or prime cost method, can be applied to calculate the decline in value of a depreciating asset in accordance to s40-65 of ITAA 1997. However it should be noted that the diminishing value method does not apply to intellectual property (s40-72 (2) (b) of ITAA 1997), it means that registered design could only use prime cost method to work out the decline in value. In addition, based on s40-130 of ITAA 1997 the method cannot be changed once it has been chosen. In conclusion, the goodwill cannot be deducted and the registered design and production equipment can be deducted as depreciating assets, the amount equals to the decline in value for an income year. (b)
According to the specific deduction provision, any work done to improve the asset over its original state is “improvement” and its cost belongs to capital expenditure. And the way of depreciation for capital expenditures can be divided into two main divisions: depreciating asset and capital works. In line with s43-20 of ITAA 1997, capital works include structural improvement since 27/2/1992 such as sealed road/driveways, bridge, pipelines and dams. In the case of Bigshoes Ltd, the company voluntarily paid $8 million to upgrade a public road for one year, which can be used for 10 years. Therefore, upgrading the road belongs to capital work. Furthermore, s43-10 (2)(a) and s43-10 (2)(b) of ITAA 1997 state that the deduction for capital works applies when the capital works have construction expenditure area, pool of construction expenditure and it is also eligible to use....
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