Taxation Law Essay

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Taxation Law

Patents satisfy the definition of ‘intellectual property in s 995-1 of OTTAWA and will be regarded as depreciating assets provided that they are not also trading stock: see s 40-30(2)(c). Goodwill: Since the term ‘intangible asset’ in s 40-30(1)(c) is not defined in OTTAWA, such assets are defined according to their ordinary meaning. Because dowdily is ordinarily regarded as an intangible asset (see, for example, Statement of Accounting Concepts SACS), it will not be a depreciating asset as it is an intangible asset not covered by s 40-30(2): see s 40-30(1)(c).

Land: Pursuant toss 40-30(1)(a), land is excluded from the definition of a depreciating asset. Trading stock: Pursuant to s 40-30(1)(b), an item of trading stock is excluded from the definition of a depreciating asset. 3 Activity 10. 2 Read the extracts of Items 5, 6 and 10 in the table in s 40-40. Who do you think will be the holder of the depreciating asset in the following circumstances? Here a o the asset passes to the bank subject to the mortgagor’s equity of redemption; where the legal owner of an intangible depreciating asset (egg, a patent) grants a call option over the asset to another person; where a tangible asset is held subject to a bare trust in favor of a single sue Jurist beneficiary; where a tangible asset is in the process of being acquired under a hire- purchase agreement; where a tangible asset is held subject to a unit trust for several beneficiaries where the trustee has active duties to perform.

Mortgaged tangible asset: Under the arrangement, legal title in the tangible asset passes to Big Bank Ltd. Assuming that the mortgagor retains possession of the tangible asset (as is normally the case under a mortgage agreement), Item 6 will apply so that the mortgagor, as the economic owner of the tangible asset, becomes the holder of the asset. This is because the mortgagor possesses the tangible asset and has the right to have the legal title in the tangible asset transferred back to him or her when he or she makes the final payment due under the mortgage agreement.

It is reasonable to expect that the mortgagor will make the repayments under the mortgage agreement when they fall due with the exult that, ultimately, legal title in the tangible asset will be transferred back to the mortgagor. As a result, the legal owner of the tangible asset (Big Bank Ltd), who would otherwise be the holder under Item 10, is not the holder of the tangible asset (see Item 6). This is because an entity identified in column 3 of the table in s 40-40 as not holding a depreciating asset cannot hold the asset under another Item.

Call option over asset: Item 5 does not apply to make the grantee of the call option the holder of the intangible depreciating asset. This is because the very nature of a call option suggests that it is not reasonable to expect (as required by Item 5): (I) that the grantee will become the legal owner of the intangible depreciating asset (since this depends on whether the grantee exercises the option which is a discretionary entitlement and not something that the grantee is necessarily reasonably expected to do); or (ii) that the intangible depreciating asset will be disposed of at the direction and for the benefit of the grantee.

As a result, Item 10 will apply so that the legal owner of the intangible depreciating asset is regarded as the asset’s holder. Tangible asset held subject to bare trust: Although the trustee is the legal owner of the tangible asset, the single sue Jurist beneficiary of the bare trust will be the holder of the asset pursuant to Item 6. This is because the beneficiary, if not currently in possession of the asset, effectively has an immediate right to possession of the asset since the beneficiary of the bare trust can demand that the trustee convey the tangible asset to the beneficiary.

When the beneficiary exercises the right to have the tangible asset conveyed to him or her, the beneficiary would become the holder of he tangible asset under Item 10 in the table in s 40-40 (since the beneficiary will be the legal owner of the property). Given the nature of the beneficiary rights under the bare trust, it is reasonable to expect that the beneficiary will become the holder by exercising the right to have the property conveyed to him or her, or that the asset will be disposed of at the direction of and for the benefit of the 0 2012 Reed International Books Australia Pity Limited trading as Lexis’s. Inefficacy. As a result, the criteria in Item 6 would be satisfied in favor of the beneficiary and the beneficiary would be the holder of the tangible asset. Although the legal owner is the holder under Item 10 of the table in s 40-40, the effect of Item 6 is that the legal owner is not the holder. Hire-purchase agreement: The user of the tangible asset (that is, the hirer) under the hire-purchase agreement is also the holder of the asset under Item 6 of the table in s 40-40.

Although the hirer is not the owner of the asset until he or she exercises his or her option to purchase (since the facts state that the tangible asset is in the process of being acquired), the hirer possesses the tangible asset now and can exercise an option to become its legal owner. The hirer is reasonably expected to exercise this option because the final payment should be below the expected market value of the tangible asset at the end of the hire-purchase agreement.

Although the legal owner is the holder under Item 10 of the table in s 40-40, the effect of Item 6 is that the legal owner is not the holder. Tangible asset held subject to unit trust: Unlike the bare trust situation, the beneficiaries of a unit trust do not have a right, as against the trustee, the exercise of which would make them the holders of the tangible asset under an Item in the table in s 40-40 (apart from Item 6). As a result, Item 6 in the table would not be satisfied in the current situation and the trustee would be the holder of the tangible asset pursuant to Item 10 of the table in s 40-40.

This analysis is consistent with the approach taken in ID 99/DID where the Commissioner states that a unit holder in a unit trust is not capable of being absolutely entitled to a trust asset as against the trustee for the purposes of OTTAWA s 106-50. Activity 10. 3 Refer to Examples 10. 1 and 10. 2. Assuming the facts in those examples, complete the following chart showing the decline in value under the prime cost method and the minimizing value method in each year of Rosary’s ownership. What differences do you note between the two methods?

To work out when this deeming revision would be most likely to be triggered you need to look back at s 40-40 discussed in the text at 10. 17. Also refer back to the suggested solution for Activity 10. 2 at 10. 17. Until the hirer decides not to exercise his or her option to purchase the depreciating asset, the hirer will be the holder of the depreciating asset under Item 6 in the table in s 40-40. When the hirer decides not to purchase the depreciating asset (that is, normally at the expiration of the hiring period), then the finance company will become the holder of the depreciating asset.

The cost of the depreciating asset to the ender Item 7 in the table in s 40-180. 2. Here you need to refer to the terms of Item 8 of the table in s 40-180. The additional requirement is that apart from Item 8 the first element of the asset’s cost would exceed its market value. That is, the deeming is directed at overvalued transactions not at undervalued transactions. There is no deeming of market value where the non-arm’s length price is less than market value. 3. The CAT acquisition rules (discussed at 6. 80 and 6. 81) may suggest at least one possible way that you may commence to hold an asset that is not dealt with in the able.

That is, you, or your agent, may construct or create an asset. 6 Activity 10. 5 Antonio borrows $500,000 from Shylock. Antonio purchases a 50% interest in a boat that Bassoon uses in his fishing business. Assume that Antonio and Bassoon thereafter conduct independent fishing businesses in which the boat is used as an asset. Antonio pays Bassoon $500,000 in cash (using the money borrowed from Shylock), forgives a debt of $100,000 that Bassoon owes him in relation to a previous fishing venture and undertakes to provide Bassoon with 20% of Notation’s fishing thatch for the next six months.

Three months later Bassoon accepts an offer from Antonio to release Antonio from his obligation to provide Bassoon with 20% of Notation’s fishing catch for the remaining three months in exchange for a new set of scales for use in Bassoon’s business. What will be the cost of the interest in the fishing boat to Antonio? What will be the cost of the new set of scales to Bassoon? The cost to Antonio of the interest in the fishing boat will be the sum of the following applicable amounts (see s 40-185(1)(b)): 1 .

The $500,000 that Antonio pays Bassoon or his 50% interest in the boat is included based on Item 1 of the table in s 40-185(1). According to Item 2 of the table in s 40-185(1), if you incur or increase a liability to pay an amount then that amount is to be included in the cost of the depreciating asset. Based on this, it could be argued that the $500,000 that Antonio borrowed from Shylock might be included in the cost of the depreciating asset under Item 2 of the table.

However, Antonio did not incur the liability to pay $500,000 to hold the 50% interest in the boat (which is the requirement in the present circumstances for s 0-185 to apply). Instead, Antonio incurred the liability of $500,000 in order to pay the amount to Bassoon. Therefore, the $500,000 that Antonio borrowed from Shylock would not be included in the cost of the boat. This is the right outcome as it would otherwise produce an absurd result if the $500,000 was included in the cost of the depreciating asset twice. 2.

The amount of the forgiven debt ($100,000) would be included in the cost of Notation’s 50% interest in the boat when the obligation for agreeing to provide Bassoon with 20% of his fishing catch for the next six months, Antonio is undertaking to provide Bassoon with a ‘non-cash benefit’ as defined in s 995-1. According to Item 5 of the table in s 40-185(1), the market value of this non- cash benefit would be included in the cost of the boat to Antonio when he incurred the liability to provide the non-cash benefit (that is, on the date that Antonio and Bassoon entered into the agreement to provide the fish).

However, the example exposes a practical difficulty with the legislation in that it is difficult to ascertain the market value of the noncoms benefit in the present situation given that the market alee of the benefit is presumably contingent on the amount of fish actually caught over the six-month period (which cannot be determined at the date that the liability to provide the non-cash benefit was incurred). 4. The cost of the new set of scales to Bassoon will be calculated in accordance with Item 6 of the table in s 40-185(1).

By Antonio undertook to provide Bassoon with a ‘non-cash benefit’ as defined in s 995-1. In releasing Antonio from his obligation to provide this non-cash 7 benefit for the remaining three months of their agreement, using the language of Item 6 of the table in s 40-185(1), Bassoon terminates’ Notation’s liability to provide the non-cash benefit. As a result, the effect of Item 6 is that the cost of the scales to Bassoon will be the market value of the non-cash benefit on the date that the liability is terminated.