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Question 1

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

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:

  • Openingbalance $25,000
  • Closingbalance $30,000

- Billings $200,000

- Receipts $195,000

Stock

  • Openingstock $150,000
  • Purchases $500,000
  • Closingstock $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

What principle was established in IRC v Duke of Westminster [1936] AC 1? How relevant is that principle today in Australia?

Question 4

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:

Answer 1

The annual payment is not considered as income in Australia since lottery winnings are not taxable and are considered as prizes. Given that the ‘Set for Life' is a lottery, the winnings though distributed over a long period of time, are not susceptible to taxation. This means that the annual prize is not declared on a tax return. Initially, taxation is done at the point of obtaining the scratches where the scratches are taxable, meaning that tax is paid upon buying a scratch. Though the winnings are evenly distributed over the 20 years, this only implies that upon winning the large sum of money one gets to receive the amount in smaller portion though it's of the same size (Pickernell et al, 2013). It is a simple way for a company stating that one has won a large amount but the company is withholding the winnings and giving it at a designated period of time. This implies that the initial amount that is won at the point of gambling is the same amount that will be distributed over the years, not more not less, and thus is not susceptible to any taxation. In accordance with the law, ordinary lottery winnings cannot be declared as a tax. In the event that the winner dies and the commissioner pays the outstanding income amount to the estate, the amount still remains to be untaxable (Norregaard, 2013). The amount becomes taxable when it earns interest, where the interest is taxable where it is taxed at the same rate as standard income. Tax can be imposed on monthly payments of a lottery winning since it can be assessed as income. Winnings are completely tax-free because under the tax office gambling winnings are considered as "windfall gain or prize" since they can be earned without any skills. This is considered as a lump sum of money won and is not taxable since the annual amounts are derived from it, then it is not taxable. The prize is tax-free but any increase in value subjects it to capital gains tax. Lottery won in Australia is not considered as personal income, so it is not taxed, but a purchase made from a win may be considered as capital gain which must be declared on a tax return.

There could be charge suggestions once you've banked your rewards. The money will frame some portion of your home and be obligated for a legacy charge on the off chance that it takes the estimation of your home over the present edge of £325,000 (Saad, 2014). Gifting millions won't spare you from paying either: HMRC will assess you on a sliding IHT scale should you kick the bucket inside seven long stretches of gifting any money to companions and relatives – a decrease in charge on the off chance that you pass on somewhere in the range of three and four years in the wake of gifting, a 40% decrease somewhere in the range of four and five years, and so on). You can get around this by ensuring the beneficiary consents to an arrangement that they will pay any IHT due in the event that you do kick the bucket inside seven years.

 

Answer 2

Taxable income is the measure of pay used to compute how much expense an individual or an organization owes to the legislature in a given duty year. It is by and large portrayed as gross wage or balanced gross wage (which is less any derivations or exclusions permitted in that expense year) (Daley & Coates, 2015).

Taxable income:

Revenue:

Credit card sells: 150000

Cash sales: 300000

PBS Billings: 200000

Total revenue = 150000 + 300000 + 200000

Total revenue: 650000

Less: expense

Cost of Goods sold = 150000 + 500000 – 200000 (sum of opening cost and purchase minus that of closing stock)

Cost of Goods Sold: 450000

Salaries: 60000

Rent: 50000

Total expenses = 450000 + 60000 + 50000

Total expenses = 560000

Calculating net income = Total Revenue – Total Expenses

Net Income = 650000 – 560000 = 90000

Net Income = 90000

Taxable income is obtained by summing up the total revenue of the year, that is the credit card sells, the cash sales and the PBS Billings then deducting the total expenses of the year that is the cost of goods (obtained by adding up the opening stock, the purchase and then subtracting the closing stock), the salaries and the rent (Parker,2018). Taxable income is the pay you need to make good on regulatory obligation on. It is the term utilized for the sum left after you have deducted every one of the costs you are permitted to guarantee from your assessable wage. Accrual accounting is and bookkeeping procedure that records salaries and costs when they are realized, paying little notice to when cash is exchanged. The articulation "amassing" implies any individual section recording wage or cost without a cash trade (Snape & De Souza, 2016). The common thought is that commercial occasions are observed by synchronizing incomes to costs (the harmonizing standard) at the time in which the altercation happens as opposed to when the installment is made (or got). This technique allows for the present money inflows/surges to be merged with future expected money inflows/outpourings to give a more accurate photo of an organization's present monetary condition (Mellor, 2016). The prerequisite for this approach emerged out of the escalating multifaceted nature of business exchanges and a craving for more exact budgetary data ( Philander, 2013). Offering using a loan and tasks that give income streams over a significant lot of time influence the organization's monetary condition at the purpose of the exchange. In this way, it bodes well that such occasions ought to likewise be thought about the money related explanations amid a similar announcing period that these exchanges happen.

 

Answer 3

The Duke of Westminster used to employ a gardener whom he used to pay from his post-tax income. However, to reduce tax the Duke stopped paying the gardener his salary and instead drew up a covenant, which required him to pay an amount at the end of every specified period. Thus, as per the tax laws, he could claim the expense as a deduction which reduced his taxable income. The department of inland revenue took the Duke to challenge this arrangement. However, the court established the principle that a taxpayer is entitled to use the tax laws to his benefit and the law cannot be enforced to make the taxpayer pay an increased tax (Lang, 2014).

Duke of Westminster executed a deed of covalent with his kindred workers including local assistants, nursery workers, and so on. In the particular deed of covalent, the Duke guaranteed to pay the hirelings some cash for their administrations. A letter was composed and sent to the workers expressing that the Duke would pay them compensations over extra totals, assuming any, as an installment for their administrations as household aides. The Duke attempted to guarantee such installment for an expense conclusion as a plan for charge evasion. A deed is an agreement like authoritative archive requiring a shared assertion of in excess of one individual which is typically used to concede a privilege, for example, the exchange of a benefit or property (Hufnagel, 2016). The fundamental contrast between a deed and an agreement is that a deed is a composed understanding that must be marked and fixed under observer of an outsider, regularly an honest party, for example, a specialist; aside from the assertion must be in composing, a deed dissimilar to an agreement a thought isn't required to be enforceable and an outsider recipient can drive the need to be executed (Isa, 2014). Now and again a deed has a twofold as long enforceable period as a straightforward contract.

For this situation, the issue lies on whether the deed of pledge could be seen or regarded as a work contract. As above all else, the Duke was neither paying the nursery workers and the hirelings in neither a week by week wage premise nor a month to month pay premise as a business contract would mean to, hence there could be said to be no thought towards the agreement which is one of the key factors in the arrangement of a lawfully restricting contract (Harris, 2013).

 


On account of a deed or contract, the installment is just expense deductible in the event that it is a yearly installment to the cultivators and hirelings (Ulbrich, 2013). The Duke would just be qualified to guarantee charge help for the yearly installment or the sum paid for the administration rendered in that particular year.

The sums paid under the deed in regard of periods amid which the people were in the Duke's utilize were compensation for administrations, they were not deductible in registering the Duke's risk for surtax (Gans, 2016). In the event that, then again, the sums were yearly installments, they were deductible. Consequently, the issue was whether the installments under the deeds were compensation for administrations or not. It was undeniable that the deeds were conveyed into reality in order to allow the Duke to decrease his surtax obligation

The Duke of Westminster case recommended that duty shirking can be passable as long as it takes after the statute law built up, for this situation the fundamental standard of the arrangement of the deed of covalent can lessen the Duke's expense obligation on the off chance that it is endorsed and just making case for one year of yearly installment made

The principal in the case was that a man can deal with his budgetary undertakings so that he needs to make good on lesser regulatory expense. On the off chance that he figures out how to do as such, he can't be rebuffed under the tax collection laws (Chalmers et al, 2013).

The principle is not as relevant today as the essence now is to look at the effect of the transaction on the tax as a whole. If the transaction is purely an arrangement to avoid tax, it is not deemed acceptable. It wound up unessential later on when courts chose to present the Ramsay Principle for burdening such remedial activities of a citizen (Slack, 2013).

 

Answer 4

As per the agreement, Joseph is entitled to 20% of the profits from the property while his wife is entitled to 80% of the profits from the property; it means the ownership ratio is 1:4 of Joseph and his wife respectively. From the income tax purposes, they both can claim the tax deduction in the share of income in the property, may be either in the form of rentals or may even be capital gains arising at the sale of such building. If the share of each of the co-owners is clearly defined and is ascertainable, then the respective share of each co-owner shall become taxable in their hand as an individual (Endres & Spengel, 2015).

If they decided to sell the property, then they would be required to account for any capital gain or capital loss in their respective legal interest ratio that is 1:4.

On paying the tax for the loss which is attributed for the rental property, the tax for the year is calculated as a whole and thus can be carried forward to the next year when the company can make capital gains since it cannot be deducted from income. Considering that Joseph is entitled to 100% of the loss than in the year of capital gain, he would be entitled to pay for the loss from his percentage of profit. This means that any loss that occurs from the property does not affect his wife directly in terms of paying its tax. Joseph pays back the tax imposed on the loss to his wife in regards to their agreed ratio (Jeiza, 2018). According to their agreement, Jane is only susceptible to the tax imposed on their summed up profit that is also to be shared in the agreed-upon ratio. Joseph can also deduct net capital losses from current year capital gain if they substantially maintain the same ownership on the same business.

Working out your capital gain (or loss) is as simple as taking the offering cost and subtracting what you paid for the property in addition to any costs you have caused doing redesign works or upkeep. The parity is your capital gain/misfortune and is the sum which the ATO will evaluate. In the event that you a co-posess a property, your capital gain or misfortune will be corresponding to the holding you have in the property. When you deal or generally discard an asset it's well-known as a CGT occasion, which is the minute when you make a capital gain or capital cost It's additionally imperative to set up the planning of a CGT occasion since it lets you know in which pay year to report your capital gain or capital misfortune and may influence how you figure your expense obligation (Eccleston & Woolley, 2014). If you dispose of a CGT asset, the CGT event, generally speaking, happens when you go into the understanding for exchange. By virtue of land, for example, the CGT event, generally, happens when you go into the assertion – that is, the date of the understanding, not when you settle. If you offer a capital resource, for example, land or offers, generally making a capital gain or a capital loss. This is the many-sided quality between what it cost you to get the advantage and what you get when you discard it. You need to report capital augmentations and hardships in your compensation government shape and follow through on administrative commitment on your capital increments. In spite of the fact that it's alluded to as capital increases impose, this is very of your wage charge, not a different assessment.

At the point when a capital gain is made, it is added to your quantifiable salary and may altogether expand the expense you have to pay. As expense isn't suspended for capital additions, you might need to work out how much duty you will be indebted and put aside sufficient assets to cover the significant sum. If a capital loss is made it can be used to reduce a capital gain and cannot be claimed against income (Becker Reimer $ Rust 2015). The cost base and diminished cost base of a property incorporate the summation you waged for it together with some coincidental expenses related with getting, holding and discarding it, (for example, legitimate charges, stamp obligation and land specialist's bonuses). Sums guaranteed as expense reasoning or guaranteed as findings are barred from the property's cost base and decreased cost base (Basu, 2016). Capital gain or loss might be ignored if a rollover applies – for instance, if your property was obliterated or mandatorily procured, or you exchanged it to your previous companion under a family law settlement.

In terms of calculating capital gain and a capital loss if they sell the property, both of them are entitled to share the capital gain and capital loss as per their personal investment. This will be calculated as to how the amount of buying and selling the property varied, in terms of either gaining value or losing value. In this case, Jane and Joseph had obtained the property from a loan and as such their basis of calculation should also include offsetting the loan and interest. The gain or loss made is taxable after the property sell. This eludes that before settling on selling of the property, it is prudent that Joseph and his wife consider financial implication that might result from the same in terms of profits or loss incurred, (Almy, 2014). This will guarantee that they will be on the safe side of taxation law in relation to capital gain or loss. In their current situation considering that the property had just incurred a substantial loss, it is best to avoid selling the property since they will be taxed on capital loss basis causing further financial crisis.

References

Almy, R., 2014. Valuation and assessment of immovable property. Retrieved from:  https://www.oecd-ilibrary.org/.../valuation-and-assessment-of-immovable-property_5jz5...

Basu,S.,2016. Global perspectives on e-commerce taxation law. Routledge. Retrieved from: https://www.routledge.com/Global-Perspectives-on-E-Commerce-Taxation-Law/Basu/p/book/9781138247079

Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.

Chalmers, J., Carragher, N., Davoren, S. and O’Brien, P., 2013. Real or perceived impediments to minimum pricing of alcohol in Australia: public opinion, the industry and the law. International Journal of Drug Policy, 24(6), pp.517-523.

Eccleston, R. and Woolley, T., 2014. From Calgary to Canberra: resource taxation and fiscal federalism in Canada and Australia. Publius: The Journal of Federalism, 45(2), pp.216-243.

Endres, D. and Spengel, C. eds., 2015. International company taxation and tax planning. Alphen aan Den Rijn: Kluwer Law International.

Gans, J., 2016. Modern criminal law of Australia. Cambridge University Press.

Harris, P., 2013. Corporate tax law: Structure, policy and practice. Cambridge University Press.

Hufnagel, S., 2016. Policing cooperation across borders: comparative perspectives on law enforcement within the EU and Australia. Routledge.

Isa, K., 2014. Tax complexities in the Malaysian corporate tax system: minimise to maximise. International Journal of Law and Management, 56(1), pp.50-65.

Jeiza, C., 2018. Effect of Tax Policy on Industry Performance: A Case of the Gambling And Lottery Industry in Kenya(Doctoral dissertation, United States International University-Africa).

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Mellor, P.W., 2016. A Model for a State Income Tax in Australia: Historical Considerations, Key Design Issues and Recommendations (Doctoral dissertation, Monash University).

Norregaard, M.J., 2013. Taxing Immovable Property Revenue Potential and Implementation Challenges (No. 13-129). International Monetary Fund.

Parker, H., 2018. Instead of the Dole: an enquiry into integration of the tax and benefit systems. Routledge.

Philander, K.S., 2013. A normative analysis of gambling tax policy. UNLV Gaming Research & Review Journal, 17(2), p.2.

Pickernell, D., Keast, R., Brown, K., Yousefpour, N. and Miller, C., 2013. Taking the gamble: Local and regional policy issues of access to electronic gaming machines (EGMs): A case study of Victoria, Australia. Australasian Journal of Regional Studies, The, 19(2), p.274.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge

Slack, E., 2013. The Property Tax-in Theory and Practice. Institute on Municipal Finance & Governance, Munk School of Global Affairs, University of Toronto.

Ulbrich, H.H., 2013. Public Finance in Theory and Practice Second edition. Routledge. Retrieved from:

https://www.taylorfrancis.com/books/9781136726194

Daley, J. and Coates, B., 2015. Property taxes. Grattan Institute. Retrieved from:   

https://grattan.edu.au/wp-content/uploads/2015/07/826-Property-Taxes.pdf

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