Introduction
Taxation has been present since the late nineteenth century and plays a significant function in society. Every administration in each country needs revenue to sponsor its activities. With no taxes, governments would be unable to operate effectively as they are required to raise revenue, and the most efficient method of implementing this is by obligating individuals and businesses by gathering taxes. In his studies, (Stephenson, 2009) states that taxes manage to pass on economic resources from the citizenry to the government for utilization in its expenditure programs. Additionally, taxation is employed as an influential social and political apparatus. Administrations apply various forms of the tax system to manipulate or adjust characteristics of societal conduct. An illustration of this is how the past administration established a Medicare levy surcharge on high-income earners to promote private cover to reduce the load on the publicly sponsored systems (National Library of Australia.1981).
William Petty and Adam Smith theories
According to Sir William Petty, In the taxation procedure, one must tell between three conceptions. Firstly, taxation may be obligated on some individual, subsequently, it may be transferred from them to a second individual and finally, it may be in the end be born by this second individual. It could also be reassigned to others by whom it is finally assumed. This means that the individual who initially forfeits the tax may not be the one who bears its burden in the last illustration. The progression of the transfer is identified as the shifting of the tax, as the payment of the burden on the final taxpayer is categorized as the incidence of the tax. The occurrence of the tax is thus the consequence of the shifting.
Adam Smith was able to able contribute to better the William proposal and make taxation principles more effective. Smith’s debate recommends that every state should donate towards the maintenance of the Government. This should be in a manner that is in proportion to their abilities; i.e. in proportion to the income which they correspondingly benefit from under the protection of the state. Adam also affirmed that the tax which each individual is bound to pay should be definite, and not illogical. The time that tax is levied should be in the manner in which it is most apt and suitable for the donor to pay. Every tax should be engineered both to take and keep out of the individual’s pocket as few times as possible.
3 major aspects outline the call for taxation: The first aspect is governments all over have the responsibility to supply social and merit supplies. The second reason is that there is a constant requirement for the promotion of a free market economy. This is implemented through a variety of instruments. Imperfections are handled by various taxation systems.
His book, (Thorne, 2006) comments that tax may be expressed as “simple” if the costs of official management, accumulation, and conformance expenditures are low. An efficient system should encourage the payment of tax through ease in the way reimbursement is done. Examples of how governments utilize taxes are through the day-to-day running of the estates such as to finance low-cost housing together with other issues related to infrastructure and to aid funding of schemes.
According to (Stenzel, 2007) it is usually levied on the property of organizations or persons, income, production costs, or the sales price of goods or services. Tax in Australia is used to finance government expenditure, redistribute income and achieve the economic aims of government. Collection and assessment of tax in Australia are guided by the Income Tax Act 2007 (ITA 07) and the Goods and Services Tax Act 1985 (GST 85). Tax collection is done by the Inland Revenue commission under the guidance of the Tax Administration Act 1994 (TAA 94).
Income tax
The Income Tax Act 2007 (ITA 07) imposes a tax on the income of individuals and organizations. In comparison with other Organization for Economic Cooperation and Development (OECD) countries, Australia is a relatively high taxing country. People pay about 43% of the total tax directly in form of income tax. In his book (Shuman, 2007) states that many changes have been seen in the Australian taxation system since the 1980s after being realized that the economy depended much on direct taxation rather than indirect taxation. Income of individuals and organizations that are taxed include income from business or trade like activities; holding property; equity; employee or contract income; living allowances, government grants, and compensation; recoveries; attributed income from foreign equity; life insurance; superannuation funds; specific entities; exempt income; excluded income and terminating provisions. According to Australia high court, income has three features. In his book (Johnsons, 2002) reports that first income is something which comes in form of money or that has money worthy. Second, income has periodicity, recurrence, or regularity. Finally, income has quality in the recipient’s hands.
In his book (Kotelnikov, 2010) states that in Australia income tax is usually imposed on taxable income at a rate or rates of tax which are usually fixed by the yearly taxing Act. This tax is payable to the crown. The income tax liability of a person must be calculated and satisfied by the person as stated in the income tax subsection BC. The income tax liability of a taxpayer who is non-filling refers to the sum of tax withheld from annual gross income for the year. On the other hand tax liability of a filling, the taxpayer is usually calculated as stated in subsection BC2 to BC6. Under this situation, the taxable income is usually the net income after subtracting annual total deductions from the annual gross income. The income tax liability of a filling taxpayer is thus a product of taxable income and the basic tax rate. Persons with negative or zero income tax liability usually have a zero income tax liability for that year. According to Australia’s law, a non-filling taxpayer is not supposed to file a return of income. Those people who are liable to pay provisional tax are expected to pay provisional tax for each tax year. However, those people who have withholding liability are supposed to do so by subsection BE of the income tax of Australia. Furthermore, anyone who has an obligation about another ancillary tax is expected to satisfy the law by subsection BF of the income tax law. In addition, subsection BB3 of income tax law empowers the commissioner to counteract a tax advantage from tax avoidance arrangements as stated in subsection BG.
According to (McConnell, 2003) therefore, if Arthur is a resident of Australia, his taxable income will be annual gross profit from his business minus annual total deductions. The product of this difference and the annual tax basis rate will be his payable tax. If the product is negative or zero then Arthur will not be expected to pay income tax. Thus Arthur will have to include all the income earned by his business in his tax return on 31st march which will be due on 7th July. Arthur could also claim tax deductions from the expenses incurred in the course of running his business and can also claim losses against the income that he receives in the year. The employed wife will also pay tax which will be the product of taxable income after deductions and the annual tax basis rate. In addition, family allowances and child allowances will constitute her gross income.
GST issues
The Goods and Services Tax Act 1985 imposes a tax on the supply of goods and services within Australia. GST is a form of indirect tax which was introduced in Australia in 1986. This changed the system of taxation in Australia whose revenue was mainly from direct taxes. The introduction of GST saw a drop in income tax from 66% in the 1980s to 33% in 2010. Most goods and services sold in Australia attract a GST rate of 12.5 percent. It is estimated that GST comprises about 19 percent of the government’s revenue. Those businesses which have registered for GST usually charge GST on all products and services they transact in. Before 1986, Australian government revenue was mainly from direct tax. Thereafter, goods and services tax which is a form of indirect taxation was introduced. Even though the direct tax is still the major revenue for the government, the amount of indirect tax now accounts for about 19 percent of the government revenue. The introduction of GST saw a drop in income tax from 66% in the 1980s to 33% in 2010. The taxation laws that guide taxation of income and GST differ in Australia. All persons and organizations which have any form of income are expected to pay income tax. However, those individuals or organizations whose tax liability is zero or negative do not pay tax. In his book (Scheftel, 2009) states that on the other hand businesses which supply services and goods in Australia and have a turnover which is greater than $60,000 per year are expected to register for GST and charge GST on all the goods or services that it supplies. In addition, a business that has a previous residual tax that exceeds $2,500 is expected to pay provisional tax.
Taxation in Corporate Mergers and Acquisitions
The process of disposition and acquisition of any company can impact both parties in any M&A process. This greatly affects the amount of tax that they will pay to the Government. Tax to be paid is determined by the form of merger and acquisition between the companies. The codes normally governing this process are however complex and are always changing due to the geographical location that the businesses are located. However, with proper tax strategies and structures in place, each party can take the advantage of opportunities that can allow them to achieve their financial objectives with no negative impact o the other party.
Tax Consequences
As espoused by Ianca in her paper “Tax Implication of Structuring and Financing Mergers and Acquisitions.” There are several issues involving tax that accompany mergers and acquisition talks. The first issue that is discussed is the financial structure that will be implemented by the parties involved. Will the company be bought through shares or its assets? This is one of the issues that any parties in any M&A talks have to contend with. If the financing is through stock, a tax-free restructuring plan can be implemented. This can only be done if the purchaser has a higher concentration of stock (Ianca, 2004). I the company has been acquired through stock, opportunities will be available to the acquiring company through capital gains tax. Normally, ordinary tax rates will apply in cases where the transaction is through the selling of assets including inventory as factors such as the depreciation of the assets are taken into consideration. There is also the issue of capital gains tax liability that is normally deferred by cooperating with a special purpose company. According to (Gordon, 2007) another issue is that purchase price allocation is an important aspect of any M&A as it may attract tax benefits such as goodwill among others. The parties should also discuss any transfer of taxes and sales costs which are frequently disregarded until the last minute. The acquisition vehicle that will be used for the process of the merger or acquisition is another issue that is looked at and discussed during the talks. By choosing the kind of vehicle structure the parties will be in a better position to benefit from any tax advantages that may accompany each type of structure (Ianca, 2004).
Summary of Main Tax Issues
As espoused by the Australian taxation office website, hindrances to acquisition activity are present but are handled by the compliance program of 2008-2009 is concerned with three main issue categories; issues related to the target company, issues related to the shareholders of the target company, and issues related to acquiring company.
Issues related to target entity
The compliance program takes into consideration many factors such as the event that there are activities related to pre-restructuring; a consideration is taken as to whether the process of restructuring is being done to generate tax benefits. When a new head entity is formed out of the two companies, the compliance program checks as to whether the goal was to raise the cost of the tax paid on its assets. There are times that companies have been seen to have been unsuccessful at passing the principal asset test to qualify for the exemptions on the non-resident CGT (“Mergers, acquisition and restructures.”). When this happens the compliance program will consider if there has been any manipulation of the company’s assets. Another issue dealt with by the compliance programs, is that of several merger and acquisition transactions. The program states that it will seek to confirm if the overall effect of tax provisions led to any unintentional result. There are also features such as hybrid securities that are covered by the program and it is stated that the effect of tax on the variation linking tax and accounting treatment. Where there is the payment of the cost of the transaction, consideration is taken on whether there has been a correct characterization of cost as capital and whether it has been calculated correctly.
Issues related to shareholders of the targeted company
The program also addresses the issues that could be facing shareholders in the firm that is about to be acquired. In cases where dividends are being awarded out after the M&A transaction, the compliance program dictates that consideration will be if the dividend is part of the clearance of the share. Also, the extent to which the inclination of the shareholder towards preferred distribution is also well-thought-out. Whether profits have been realized by the company, the program investigates if share capital has been given back to the shareholders. In cases where the shares have been swapped over for securities, the Australian taxation office checks whether the swap was driven by the wish to replace preferred distributions with trust distributions. In his book (Waddell,2004) concludes that there have been reported cases where there has been a change of ownership of the entity after new shares have been distributed and others canceled. The Australian office will look into whether compensations made for the share revocation can be termed (Lang & Hofbauer, 2005)
Issues related to the acquirer Company
The compliance program through officials in the Australian office have the duty of deliberating on these tax issues. There are numerous issues involving the company that is acquiring another. An instance is when; a new company is formed after the amalgamation of two others. Official check if the intention was based on raising the tax cost of the company’s assets. If the acquiring company is made up of various other companies, the officials will check if the calculated tax worth of the newly obtained assets has been properly determined. Finally, where there is the presence of transactions that are outbound and are constituted in a manner to obtain exempt income and produce interest subtractions in Australia, the Australian tax office will consider the monetary value of financing.
Conclusion
The efficiency of governments is dependent on the compliance of the governed individuals to give in or substitute a part of their power over their personal property. This is done in exchange for their security and other amenities. Taxation is one method of this exchange. In his book (Scully & Caragata, 2000) reports that in planning tax systems, a government can, as a rule, mull over 3 essential pointers of taxpayers’ capability to shell out: what they possess, their expenditure, and earnings. These sorts of taxes that governments raise for revenue are abundant
For a tax renegade to function successfully, several fundamentals have to be enacted. Fairness: the regime has to be fair, i.e., the citizenry ought to be taxed in the same manner to their capacity to shell out.
- Clarity and Certainty: Convenience: the purpose of a tax should be apparent and definite. If the purpose, is in doubt and illogical the wider public will lack the assurance in the system. Agreement with national tax laws could be enhanced if the system is made easy and suitable.
- Efficiency: An excellent tax scheme should be constituted so that it can be managed competently and economically. In his studies (Reuters, 2009) reports that taxes that are complex or expensive to administer redirect resources to useless intentions and lessen assurance in both the rates and governments.
Historically, taxation was considered exclusively as a means of financing the essential responsibilities of governments. In his book (Storey,1996) reports that The funds were utilized in paying elected administrators, upholding state defense, constructing road and rail networks, bridges, and public construction; and paying for amenities. In recent times, the function of taxation extended significantly, as have the tasks of societal governments.
Reference List
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