Good day! Following is your assignment and please submit your answers on Wednesday, 19 February 2014. Than you.

TAXATION 2 ASSIGNMENT: 1. Explain the tax-benefit rule. TAX BENEFIT !"E #tate# that the taxpa$er i# %bli&e' t% 'e(lare a# taxable in(%)e #ub#e*uent re(%+er$ %f ba' 'ebt# in the $ear the$ ,ere (%lle(te' t% the extent %f the tax benefit en-%$e' b$ the taxpa$er ,hen the ba' 'ebt# ,ere ,ritten-%ff an' (lai)e' a# a 'e'u(ti%n fr%) in(%)e. It al#% applie# t% taxe# pre+i%u#l$ 'e'u(te' fr%) &r%## in(%)e but ,hi(h ,ere #ub#e*uentl$ refun'e' %r (re'ite'. The taxpa$er i# al#% re*uire' t% rep%rt a# taxable in(%)e the #ub#e*uent tax refun' %r tax (re'it &rante' t% the extent %f the tax benefit the taxpa$er en-%$e' ,hen #u(h taxe# ,ere pre+i%u#l$ (lai)e' a# 'e'u(ti%n fr%) in(%)e. 2. .h% i# le&all$ re*uire' t% pa$ the in(%)e tax %n frin&e benefit/ the e)pl%$er %r the e)pl%$ee0 Explain. It i# the e)pl%$er ,h% i# le&all$ re*uire' t% pa$ an in(%)e tax %n the frin&e benefit. The frin&e benefit tax i# i)p%#e' a# a FINA" .IT11O"2ING TAX pla(in& the le&al %bli&ati%n t% re)it the tax %n the e)pl%$er/ #u(h that/ if the tax i# n%t pai' the le&al re(%ur#e %f the BI i# t% &% after the e)pl%$er. An$ a)%unt %r +alue re(ei+e' b$ the e)pl%$ee a# a frin&e benefit i# (%n#i'ere' tax pai' hen(e/ net %f the in(%)e tax 'ue there%n. The per#%n ,h% i# le&all$ re*uire' t% pa$ 3#a)e a# #tatut%r$ in(i'en(e a# 'i#tin&ui#he' fr%) e(%n%)i( in(i'en(e4 i# that per#%n ,h%/ in (a#e %f n%npa$)ent/ (an be le&all$ 'e)an'e' t% pa$ the tax. 5. Explain the rati%nale %f the rule pr%hibitin& the 'e'u(ti%n %f (apital l%##e# fr%) %r'inar$ &ain#. It i# t% in#ure that %nl$ (%#t# %r expen#e# in(urre' in earnin& the in(%)e #hall be 'e'u(tible f%r in(%)e tax purp%#e# (%n#%nant ,ith the re*uire)ent %f the la, that %nl$ ne(e##ar$ expen#e# are all%,e' a# 'e'u(ti%n# fr%) &r%## in(%)e. The ter) 6NE7ESSA 8 EX9ENSES6 pre#upp%#e# that in %r'er t% be all%,e' a# 'e'u(ti%n/ the expen#e )u#t be bu#ine## (%nne(te'/ ,hi(h i# n%t the (a#e in#%far a# (apital l%##e# are (%n(erne'. Thi# i# al#% the rea#%n ,h$ all n%n-bu#ine## (%nne(te' expen#e# li:e per#%nal/ li+in& an' fa)il$ expen#e#/ are n%t all%,e' a# 'e'u(ti%n fr%) &r%## in(%)e 3Se(ti%n 5;3A4314 %f the 1<<= Tax 7%'e4. The pr%hibiti%n %f 'e'u(ti%n %f (apital l%##e# fr%) %r'inar$ &ain# i# 'e#i&ne' t% f%re#tall the #hiftin& %f 'e'u(ti%n# fr%) an area #ub-e(t t% l%,er taxe# t% an area #ub-e(t t% hi&her taxe#/ thereb$ unne(e##aril$ re#ultin& in lea:a&e %f tax re+enue#. 7apital &ain# are &enerall$ taxe' at a l%,er rate t% pre+ent/ a)%n& %ther#/ the bun(hin& %f in(%)e in %ne taxable $ear ,hi(h i# a liberalit$ in the la, be&%tten fr%) )%ti+e# %f publi( p%li($ 3 ule %n 1%l'in& 9eri%'4. It #tan'# t% rea#%n theref%re/ that if the tran#a(ti%n re#ult# in l%##/ the #a)e #h%ul' be all%,e' %nl$ fr%) an' t% the extent %f (apital &ain# an' n%t t% be 'e'u(te' fr%) %r'inar$ &ain# ,hi(h are #ub-e(t t% a hi&her rate %f in(%)e tax. 37hirel#tein/ Fe'eral In(%)e Taxati%n/ 1<== E'.4 >. I# there a 'ifferen(e bet,een ?Ex(lu#i%n fr%) Gr%## In(%)e@ fr%) 62e'u(ti%n# Fr%) Gr%## In(%)e60 Explain. Gi+e an exa)ple. EX7"!SIONS fr%) &r%## in(%)e refer t% a fl%, %f ,ealth t% the taxpa$er ,hi(h are n%t treate' a# part %f &r%## in(%)e/ f%r purp%#e# %f (%)putin& the taxpa$erA# taxable in(%)e/ 'ue t% the f%ll%,in& rea#%n#: 314 It i# exe)pte' b$ the fun'a)ental la,B 324 It i# exe)pte' b$ #tatuteB an'

354 It '%e# n%t (%)e ,ithin the 'efiniti%n %f in(%)e. 3Se(ti%n ;1/ N%. 24. 2E2!7TIONS fr%) &r%## in(%)e/ %n the %ther han'/ are the a)%unt#/ ,hi(h the la, all%,# t% be 'e'u(te' fr%) &r%## in(%)e in %r'er t% arri+e at net in(%)e. Ex(lu#i%n# pertain t% the (%)putati%n %f &r%## in(%)e/ ,hile 'e'u(ti%n# pertain t% the (%)putati%n %f net in(%)e. Ex(lu#i%n# are #%)ethin& re(ei+e' %r earne' b$ the taxpa$er ,hi(h '% n%t f%r) part %f &r%## in(%)e ,hile 'e'u(ti%n# are #%)ethin& #pent %r pai' in earnin& &r%## in(%)e. Exa)ple %f an ex(lu#i%n fr%) &r%## in(%)e i# pr%(ee'# %f life in#uran(e re(ei+e' b$ the benefi(iar$ up%n the 'eath %f the in#ure' ,hi(h i# n%t an in(%)e %r 15th )%nth pa$ %f an e)pl%$ee n%t ex(ee'in& 95C.CCC ,hi(h i# an in(%)e n%t re(%&niDe' f%r tax purp%#e#. Exa)ple %f a 'e'u(ti%n i# bu#ine## rental. E. .hat are re*uire)ent# in %r'er that '%nati%n# t% n%n-#t%(:/ n%n-pr%fit e'u(ati%nal in#tituti%n )a$ be exe)pt fr%) the '%n%rF# &ift tax0 2%nati%n t% the 9.!.9. Alu)ni A##%(iati%n i# exe)pt fr%) '%n%rF# tax if it i# pr%+en that the a##%(iati%n i# a n%n#t%(:/ n%n-pr%fit (haritable a##%(iati%n/ pa$in& n% 'i+i'en'#/ &%+erne' b$ tru#tee# ,h% re(ei+e n% (%)pen#ati%n/ an' 'e+%tin& all it# in(%)e t% the a((%)pli#h)ent an' pr%)%ti%n %f the purp%#e# enu)erate' in it# arti(le# %f in(%rp%rati%n. N%t )%re than 5CG %f the &ift #h%ul' be u#e' f%r a')ini#trati%n purp%#e# b$ the '%nee. ;. 2eter)ine if the f%ll%,in& ite)# are 'e'u(tible fr%) &r%## in(%)e f%r in(%)e tax purp%#e#. Explain. a. Intere#t %n l%an# u#e' t% a(*uire (apital e*uip)ent %r )a(hiner$. b. .%rthle## #e(uritie# (. 2epre(iati%n %f &%%',ill. '. e#er+e# f%r ba' 'ebt#. Intere#t %n l%an# u#e' t% a(*uire (apital e*uip)ent %r )a(hiner$ i# a 'e'u(tible ite) fr%) &r%## in(%)e. The la, &i+e# the taxpa$er the %pti%n t% (lai) a# a 'e'u(ti%n %r treat a# (apital expen'iture intere#t in(urre' t% a(*uire pr%pert$ u#e' in tra'e/ bu#ine## %r exer(i#e %f a pr%fe##i%n. 3Se(ti%n 5>3B4 354/ NI 74. 24 2epre(iati%n f%r &%%',ill i# n%t all%,e' a# 'e'u(ti%n fr%) &r%## in(%)e. .hile intan&ible# )a$be all%,e' t% be 'epre(iate' %r a)%rtiDe'/ it i# %nl$ all%,e' t% th%#e intan&ible# ,h%#e u#e in the bu#ine## %r tra'e i# 'efinitel$ li)ite' in 'urati%n. 3Ba#ilan E#tate#/ In(. +/ 7I / 21 S7 A 1=4. Su(h i# n%t the (a#e ,ith &%%',ill. 2epre(iati%n %f &%%',ill i# all%,e' a# a 'e'u(ti%n fr%) &r%## in(%)e if the &%%',ill i# a(*uire' thr%u&h (apital %utla$ an' i# :n%,n fr%) experien(e t% be %f +alue t% the bu#ine## f%r %nl$ a li)ite' peri%'. 3Se(ti%n 1C=/ e+enue e&ulati%n# N%. 24. In #u(h (a#e/ the &%%',ill i# all%,e' t% be a)%rtiDe' %+er it# u#eful life t% all%, the 'e'u(ti%n %f the (urrent p%rti%n %f the expen#e fr%) &r%## in(%)e/ thereb$ pa+in& the ,a$ f%r a pr%per )at(hin& %f (%#t# a&ain#t re+enue# ,hi(h i# an e##ential feature %f the in(%)e tax 1 ESE HE FO BA2 2EBTS are n%t all%,e' a# 'e'u(ti%n fr%) &r%## in(%)e. Ba' 'ebt# )u#t be (har&e' %ff 'urin& the taxable $ear t% be all%,e' a# 'e'u(ti%n fr%) &r%## in(%)e. The )ere #ettin& up %f re#er+e# ,ill n%t &i+e ri#e t% an$ 'e'u(ti%n. 3Se(ti%n 5>3E4. NT 74. 2.O T1"ESS SE7! ITIES/ ,hi(h are %r'inar$ a##et#/ are n%t all%,e' a# 'e'u(ti%n fr%) &r%## in(%)e be(au#e the l%## i# n%t realiDe'. 1%,e+er/ if the#e ,%rthle## #e(uritie# are (apital a##et#/ the %,ner i# (%n#i'ere' t% ha+e in(urre' a (apital l%## a# %f the la#t 'a$ %f the taxable $ear an'/ theref%re/ 'e'u(tible t% the extent %f (apital &ain#. 3Se(ti%n 5>3243>4/ NI 74. Thi# 'e'u(ti%n/ h%,e+er/ i# n%t all%,e' t% a ban: %r tru#t (%)pan$. 3Se(ti%n 5>3E4324/ NI 74. =. Explain the tax treat)ent %f the f%ll%,in& in the preparati%n %f annual in(%)e tax return#: a. In(%)e realiDe' fr%) #ale %f (apital a##et#

b. In(%)e realiDe' fr%) #ale %f %r'inar$ a##et# In(%)e realiDe' fr%) #ale %f (apital a##et# i# #ub-e(t t% the final ,ithh%l'in& tax at #%ur(e an' theref%re ex(lu'e' fr%) the In(%)e Tax eturn 3Se(. 2>I7J an' I2J/ NI 74B 3ii4 In(%)e realiDe' fr%) #ale %f %r'inar$ a##et# i# part %f Gr%## In(%)e/ in(lu'e' in the In(%)e Tax eturn. 3Se(. 52IAJI5J/ NI 74 K. Explain ,hether the f%ll%,in& ite)# are taxable %r n%n-taxable: a. &ain ari#in& fr%) expr%priati%n %f pr%pert$B Taxable. Sale ex(han&e %r %ther 'i#p%#iti%n %f pr%pert$ t% the &%+ern)ent %f real pr%pert$ i# taxable. It in(lu'e# ta:in& b$ the &%+ern)ent thr%u&h (%n'e)nati%n pr%(ee'in&#. b. taxe# pai' an' #ub#e*uentl$ refun'e'B Taxable %nl$ if the taxe# ,ere pai' an' (lai)e' a# 'e'u(ti%n an' ,hi(h are #ub#e*uentl$ refun'e' %r (re'ite'. It #hall be in(lu'e' a# part %f &r%## in(%)e in the $ear %f the re(eipt t% the extent %f the in(%)e tax benefit %f #ai' 'e'u(ti%n. Taxable if taxpa$er i# u#in& the ite)iDe' 'e'u(ti%n an' if #u(h tax pai' i# in(lu'e' in the 'e'u(ti%n. It i# taxable be(au#e the taxpa$er a(*uire# benefit# b$ re'u(in& it# taxable in(%)e b$ the tax pai'. (. in(%)e fr%) -ueten&B Gr%## in(%)e in(lu'e# 6all in(%)e 'eri+e' fr%) ,hate+er #%ur(e6 3Se(. 52IAJ/ NI 74/ ,hi(h ,a# interprete' a# all in(%)e n%t expre##l$ ex(lu'e' %r exe)pte' fr%) the (la## %f taxable in(%)e/ irre#pe(ti+e %f the +%luntar$ %r in+%luntar$ a(ti%n %f the taxpa$er in pr%'u(in& the in(%)e. Thu#/ the in(%)e )a$ pr%(ee' fr%) a le&al %r ille&al #%ur(e #u(h a# fr%) -ueten&. !nla,ful &ain#/ &a)blin& ,innin&#/ et(. are #ub-e(t t% in(%)e tax. The tax (%'e #tan'# a# an in'ifferent neutral part$ %n the )atter %f ,here the in(%)e (%)e# fr%). Taxable/ all in(%)e are #ub-e(t t% tax ex(ept ,hen ex(lu'e' b$ la, %r treatie#. In(%)e fr%) ille&al a(ti+itie# are al#% #ub-e(t t% tax '. &ain %n the #ale %f a (ar u#e' f%r per#%nal purp%#e#B Taxable. Sin(e the (ar i# u#e' f%r per#%nal purp%#e#/ it i# (%n#i'ere' a# a (apital a##et hen(e the &ain i# (%n#i'ere' in(%)e. 3Se(. 52IAJI5J an' Se(. 5<IAJI1J/ NI 74 e. re(%+er$ %f ba' 'ebt# pre+i%u#l$ (har&e' %ff. Taxable un'er the TAX BENEFIT !"E. e(%+er$ %f ba' 'ebt# pre+i%u#l$ all%,e' a# 'e'u(ti%n in the pre(e'in& $ear# #hall be in(lu'e' a# part %f the &r%## in(%)e in the $ear %f re(%+er$ t% the extent %f the in(%)e tax benefit %f #ai' 'e'u(ti%n. 3Se(. 5>IEJI1J/ NI 7. Thi# i# #%)eti)e# referre' a# the E7A9T! E !"ES. <. Maria e$e#/ an %ffi(ial %f 7%rp%rati%n X/ a#:e' f%r an 6earlier retire)ent6 be(au#e #he ,a# e)i&ratin& t% Au#tralia. She ,a# pai' 92.CCC.CCC.CC a# #eparati%n pa$ in re(%&niti%n %f her +aluable #er+i(e# t% the (%rp%rati%n. "%rna 7ruD/ an%ther %ffi(ial %f the #a)e (%)pan$/ ,a# #eparate' f%r %((up$in& a re'un'ant p%#iti%n. She ,a# &i+en 91/CCC.CCC.CC a# #eparati%n pa$. Ai'a Bauti#ta ,a# #eparate' 'ue t% her failin& e$e#i&ht. She ,a# &i+en 9ECC.CCC.CC a# #eparati%n pa$. All the three 354 ,ere n%t *ualifie' t% retire un'er the BI -appr%+e' pen#i%n plan %f the (%rp%rati%n. Explain the tax treat)ent %f the #eparati%n pa$ re(ei+e' b$ e$e#/ 7ruD an' Bauti#ta. S!GGESTE2 ANS.E : 14 The #eparati%n pa$ &i+en t% e$e# i# #ub-e(t t% in(%)e tax a# (%)pen#ati%n in(%)e be(au#e it ari#e# fr%) a #er+i(e ren'ere' pur#uant t% an e)pl%$er-e)pl%$ee relati%n#hip. It i# n%t (%n#i'ere' an ex(lu#i%n

fr%) &r%## in(%)e be(au#e the rule in taxati%n i# tax (%n#true' in #tri(ti##i)i -uri# %r the rule %n #tri(t Interpretati%n %f tax exe)pti%n#. 24 The #eparati%n pa$ re(ei+e' b$ 7ruD i# n%t #ub-e(t t% in(%)e tax be(au#e hi# #eparati%n fr%) the (%)pan$ ,a# in+%luntar$ 3Se(. 2K b 3=4/ Tax 7%'e4. 54 The #eparati%n pa$ re(ei+e' b$ Bauti#ta i# li:e,i#e n%t #ub-e(t t% tax. 1i# #eparati%n i# 'ue t% 'i#abilit$/ hen(e in+%luntar$. !n'er the la,/ #eparati%n pa$ re(ei+e' thr%u&h in+%luntar$ (au#e# are exe)pt fr%) taxati%n. 1C. Explain the tax treat)ent %f the f%ll%,in& in the preparati%n %f annual in(%)e tax return#: a. 15th )%nth pa$B b. 'e )ini)i# benefit#. The 15th )%nth pa$ n%t ex(ee'in& 95C/CCC.CC #hall n%t be rep%rte' in the in(%)e tax return be(au#e it i# ex(lu'e' fr%) &r%## in(%)e 3Se(. 52IBJI=J/ IeJ/ NI 74 The a)%unt %f the 15th )%nth pa$ in ex(e## %f 95C/CCC.CC #hall be rep%rte' in the annual in(%)e tax return. 2e )ini)i# benefit# ,hi(h '% n%t ex(ee' the (eilin&# are ex(lu'e' fr%) &r%## in(%)e/ an' n%t t% be (%n#i'ere' f%r 'eter)inin& the 95C/CCC.CC (eilin& hen(e n%t rep%rtable in the annual in(%)e tax return. 3Se(. 2.=K.1IAJI5J/ . . 2-<K a# a)en'e' b$ Se(. 2.55 I7J an' further a)en'e' b$ . . N%. K-2CCC4