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Taxation Law Questions

HA3042 Taxation Law

Question 1 (5 Marks) 

The Lotteries Commission conducts an instant lottery called ‘Set for Life’ under which a winner who scratches three ‘set for life’ panels wins $50,000 each year for 20 years. The first $50,000 is payable as soon as the winner is notified, and later amounts are payable on the first anniversary of the first payment. In the event of the death of the winner, the Commission may pay any outstanding amounts to the deceased’s estate.

Requirement: Is the annual payment income? Give reasons for your decision

Question 2 (06 marks) 

Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major credit cards. It sells items off the shelf and the proprietor fills prescriptions for cash and for payments made under the Pharmaceutical Benefits Scheme [PBS].

Three (03) assistants are employed. The following financial data is provided:

Cash sales --------------------------------------------$300,000 

Credit card sales-------------------------------------$150,000 

Credit card reimbursements -----------------------$160,000 

PBS: 

- Opening balance -----------------------------------$25,000 

- Closing balance ------------------------------------$30,000 

- Billings ----------------------------------------------$200,000 

- Receipts ---------------------------------------------$195,000 Stock 

- Opening stock--------------------------------------$150,000 

- Purchases-------------------------------------------$500,000 

- Closing stock ---------------------------------------$200,000 

Salaries ------------------------------------------------$60,000 

Rent ----------------------------------------------------$50,000

Requirement: On the assumptions that an accrual basis applies and the cost of sales and other outlays are allowable deductions for tax purposes, calculate the pharmacy’s taxable income.

Question 3 (04 marks) What principle was established in IRC v Duke of Westminster [1936] AC 1? How relevant is that principle today in Australia?

Question 4 (05 marks) Joseph (an accountant) and his wife Jane (a housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Joseph is entitled to 20% of the profits from the property and Jane is entitled to 80% of the profits from the property. The agreement also provided that if the property generates a loss, Joseph is entitled to 100% of the loss. Last year a loss of $40,000 arose.

Requirement: 

How is this loss allocated for tax purposes? If Joseph and Jane decide to sell the property, how would they be required to account for any capital gain or capital loss?

Answer

TAXATION LAW

Question 1:

Issue

The case deals with the taxation law for the annual payment income. The lottery prize is paid in various installments but is paid annually. Under such circumstances is the lottery payment considered to be the income of the individual. 

Rule 

Money value that has been received from lottery comprises an annual receipt or income of an individual. Such income is subject to tax. As commented by Wickerson, (1994, p.2), there are two ways to treat a lottery income of an individual and the individual has two options open in order to claim the lottery amount won by him. One of the processes is that the individual can claim the lottery amount by the way of the lump sum. The other one is the policy through the annual instalments. 

The given case states that prize money of 50000 dollars has been given to the winner immediately after the name of the winner has been announced. The amount of 50000 dollars is paid immediately and the rest of the money is given in instalments which are dispersed annually. The winner can get tax advantages for both the options which are given by the winner. As per the opinion of Woellner et al. (2010), the winner can avail tax advantages of long-term taxes if the option of the lump sum is selected. It also gives various options to the winner in which investments can be made in profitable portfolios like the share markets and the real estates. 

As stated by Lalli, Casey & Kates (1995, p.261), when a long-term annuity is chosen by the winner, then there are certain important benefits in the various tax-related payments. The taxation authority has brought a reduction in the number of lottery prizes but winners who have opted for annual payments are very close to the prizes won like the jackpots and not the one time or lump sum money. There are many winners who take the option of lump sum payments. the taxation has an important play in creating an influence in the winner's decision which tells which method would be selected by the winner. In addition to this, the winner can get different advantages in receiving different types of annuity payments. Such a law is totally the opposite of the lump sum payments. 

Application

With respect to the application of the laws, it is found that there are many rules in order to consider a payment taxable. The law states that as the annual payment is dispersed at the end of the accounting year the income would be considered for the tax purposes. The taxation would be applicable to the rates that are prevalent under the Australian taxation law. The winner who had chosen the method of the annual payment has an assumption which states that the tax could be less than the current rates but if the winner chooses the method of annuity payment then it is clear that the decision has not been encouraged which is established by them. There is also another option under which the individual can decide to sell a lottery payment.

Considering and evaluation of the different law provision of the Australian taxation law, the amount that has been won by any person is very much similar to the salary received after a month of employment. No matter whatever the amount of prize is the amount of prize won by the individual winner will have to be declared in the income tax return. As per Woellner et al. (2010), if there is any sort of claims regarding the losses in the lottery then the number of claims that are considered to be the losses on lotteries can be brought on the internal deductions which can increase the level of tax. The total of all the deductions is less than the available standard deductions as sanctioned by the taxation authority. 

Conclusion

From the analysis of the different law provisions, it is clear that whether any sort of prize money is considered all, of them, are taxable under the law.

Question 2:

Issue

The Corner pharmacy deals with medicines and operates in credit, cash and PBS scheme where there is the list of transactions. Some transactions comprise incomes while the other comprises of the expenses.

Rule

As per as Australian law the taxable income of the business comprises of incomes fewer deductions. The incomes and the deductions of a business come under section 8-1 of the ITAA 1997 (Smith & Richardson, 1999, p.321). As per incomes of a business are considered there are various items.

At first, sales comprise an essential income subject to tax but the number of sales that includes the GST would not be subject to tax so the amount of GST is deducted from the sale. No matter whether a business has a cash sale or a credit sale all types of sales income are taxable.

The sales are categorized into various types. The cost of sales is a sum total of the sale made by the business in cash and the credit sales.

Accompanied by sales there are other incomes like receipts. Business receipts are an income for the business so any kind of receipt is treated as a collection from debtors and such money forms a part of taxable income. Along with Receipts under the pharmaceutical benefits scheme is considered to be an income for the pharmacy.

The value rise in stock is considered to be capital incomes which are subject to tax. So if there is any value rise in the stock it should be considered. The stock comprises of PBS stock and the normal stock any rise in value would be treated as income.

Accompanied by incomes there are certain deductions. As per Section 8-1 of the ITAA 1997, business expenses can be availed as a deduction. The deduction can be obtained for expenses like salaries, rent and any sort of billings or payments. No private expenses of the entrepreneur can be obtained as deductions (Tran-Nam & Glover, 2002).

When the total deductions are deducted from total income, the income which is taxable is obtained.

Application 

Based on the provisions of the Australian taxation law the taxable income of the Corner pharmacy comprises of incomes less deduction. From the financial data, the company or the pharmaceutical shop has different incomes. Cost of sales is one type of income. Cost of sales comprises of cash sales and the credit sales which are added in the income part.

After the sales, the receipts under the Pharmaceutical benefits scheme is considered. Receipt under the pharmaceutical benefits scheme is followed by a value increase in the stock of normal goods and PBS goods. The total of these is the total income of the Corner Pharmacy.

On the other hand, there are certain business deductions for the pharmacy. Based on section 8-1 of the Australian taxation law expenses like salaries, rent, credit card reimbursements are costs of business which are considered as deductions (Sewell, 2017, p.90). The total of deductions of 470000 4 is deducted from income side total of 700000 which has given a taxable income of 230000 $.

Conclusion

Business taxable income for Corner pharmacy is total incomes fewer deductions. Not all incomes are considered and all business costs are considered as deductions.

Question 3:

Issue

The issue in the case is with respect to the tax avoidance. The Duke of West Minster has paid wages to his gardener but changed its way of payment in order to reduce the tax burden. Such an act was not liked by the Inland Revenue commission who had sued him for hiding taxes and reducing tax. Under such circumstances is it ethical for the duke to change the way of wage payment in order to reduce the tax burden.

Rule

According to the taxation law, income tax is an important category of tax imposed on the incomes of all individuals. The assesse who has the duty to pay tax will be taxed on any incomes that have been earned by him or her from different sources irrespective the nationality, citizenship, of the country. Along with this, the law states that an individual or an assesse cannot refuse to pay tax on any of his or her income but obviously he can adopt alternative options to reduce the tax burden (Bloom, 2015, p.950). The option that is reported by the individual must be legal and ethical. The delay in tax can be considered by any sort of evasion cannot be considered. When a person has adopted legal means to save tax then no one can force him or her to pay more tax.

In order to avoid tax, the amount of payment and the document of the payment must be valid and it should be an enforceable contract. Similarly when remuneration paid to workers in the form of a deed the nature of deed should be legal, According to Blackwood & Aboud (2017), the basic way which can be adopted in order to reduce the tax liability of the Duke of West Minster is by accepting and making a onetime payment. The tax authority of Australia has an aim to make the tax laws better and clear. In order to provide assistance to the countrymen in the proper method to avoid tax, the government of Australia has given a particular guidance in order to include the clearances in various agreements.

However, this system is not well accepted in Australia. The Australian government and the HMRC discourage any sort of reluctance to pay tax.

Application

From the analysis of the tax laws, it is clear that the Duke was not mistaken. The Duke had adopted an ethical way to save tax but had not planned to hide tax. The case states that the duke had made a change in his way to pay tax to the gardener. The payment of the wages in the form of a legal covenant is fully legal and ethical. The duke cannot be forced to pay more tax because the covenant is a legal form of contract.

In order to avoid tax, the amount of payment and the document of the payment must be valid and it should be an enforceable contract. Similarly when remuneration paid to gardener in the form of a covenant which is a legal deed tax liability is ethically reduced for the Duke, According to Beebeejaun (2018), the basic way which can be adopted in order to reduce the tax liability of the Duke of West Minster is by accepting and making a onetime payment. The tax authority of Australia has an aim to make the tax laws better and clear. In order to provide assistance to the countrymen in the proper method to avoid tax, the government of Australia has given a particular guidance in order to include the clearances in various agreements. However, this law is not applicable because there is an excess tax gap in Australia (Sackville, 2004, p.295).

Conclusion

The duke can pay wages in the form of the covenant and as stated by Judge Tomlin the duke has the authority to reduce his tax liability by legal means but due to the high tax gap, the principle of tax avoidance is not acceptable in Australia at present.

Question 4:

Issue

The rental property that has been purchased by Joseph and Jane has an agreement under which Joseph will bear the enter loss and the if profit is incurred Joseph is entitled to 20% of the profits and Jane is entitled to 80% and the property has generated a loss last year. So the issues are, whether this loss is treated and considered for tax adjustment and if it is considered then how.  How to keep a record of capital gain or loss during the sale of the property? 

Rule

The loss can be claimed in the business tax rebate as well as individual income tax. A loss that has occurred in the accounting year has to be carried forward in the next subsequent year. When the loss in business has occurred out of the partnership where there are many owners, the loss amount should be set off from any other type of profits earned by the business in that year.

Losses which are not set off or adjusted in the same year are obviously carried forward. Similarly, losses have the ability to reduce the tax liability of the person who is the owner of the business. The owner has to state the loss in his or her income tax return in order to get a deduction of tax. For a partnership business, the amount of loss will be stated in each owner or partner's individual tax return as per the share of profits and losses. As per the tax ruling 2000/06, if a business which has fulfilled one requirement of non-business loss needs then the proprietor can set off the loss with any other profits but if the needs are not met then the loss would go to the next year (Reinhardt & Steel, 2006).

The requirements needed to be fulfilled by the business are:

Profits arising from business operations have to be less than 40000 dollars.

In the previous five years, the profits are necessary for three consecutive years.

The interest of the business should be existing in the real assets having a value of about 500000 dollars but the property that comprises private use is excluded.

On the other hand, any sort of sale of a property at a higher price than the cost is called the capital gain. Section 104-5 of the Australian taxation law states that any capital gain earned will be taxed and the amount of capital gain would be present in the return (Dunne et al. 2014, p.20). If there is a capital loss from the sale of any property, the amount of loss can reduce the capital gain tax if any. 

As per taxation law of capital gain, any asset acquired after 20th September 1985 is subject to CGT except certain assets of personal uses. Asset-related to personal use does not have any capital gain implication. 

Application

From the analysis of the law provisions, it is clear that the amount of loss incurred by the rental property of Joseph and Jane would be carried forward and adjusted with another income or profit in this year. Accompanied by this there are certain non-commercial losses which needs to be satisfied. If none of the non-business loss requirements are fulfilled by Joseph and Jane the loss of 40000 $ would be carried forward in the next subsequent accounting year.

In order to get the adjustment of the loss from the profits of this year if any they would have to declare it in the tax return. The loss is only borne by Joseph as per the agreement so the loss of 40000 $ is adjusted from the share of profit for Joseph. 

Regarding the capital gain or loss Joseph and Jane would have to pay CGT or capital gain tax if the rental property is sold at a higher value than the cost price but if the rental property incurs a loss capital then that loss can be used to deduct the amount of capital gain tax (Chardon, Freudenberg & Brimble, 2016, p.321)

Conclusion

Any loss incurred is adjusted with taxable profits or income of an entrepreneur in the same year or in next year. Similarly, the loss of the rental property would be carried forward but if there is capital loss then such loss is adjusted with capital gain tax only. Capital gains are taxed for a business.

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