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.
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].
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.
What principle was established in IRC v Duke of Westminster  AC 1? How relevant is that principle today in Australia?
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.
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?
According to “s 6-5, of the ITA Act 1997”, is the yearly payment considered as the ordinary income?
The ordinary income and statutory income is considered under the taxable income, although, the ordinary income is not falling under the explanation of taxation acts. The ordinary income is defined as the earnings from the case law and is contingent on the rules those are formed through the decisions (Mattozzi and Snowberg 2018). The taxation incomes are responsible for managing the value of ordinary income and these values are determined through the case laws those are made for ascertaining the principles of case law. According to the “s 6-5 ITAA” the sum of income will be considered as taxable. Under the section of “s 6-5, ITAA 1997”, the ordinary income is considered as taxable income (Ramsey 2015). The ordinary income calculated for an individual is calculated according to the receipts received for their services. So if the income is considered as to be ordinary income for the taxpayer then this amount will be taxable, so we have to measure first if the income is falling under ordinary income or not.
In accordance with “Scott v CT (NSW) (1935)”, the taxation commissioner stated that income is not indicates a term of art this is comprehensive for its valuation (Ihori 2017). This requires the submission of proper principles those are fit for the ordinary concepts and its usages. The high court in “Scott v FC of T” highlighted that ordinary income are reliant on the quality of the receipts.
Severe amounts are considered as the ordinary income, specifically the salary and wages as these incomes shows the characteristics for reappearance, uniformity and periodicity. However, these incomes should be considered as general flow of income (Saez and Stantcheva 2018). The functionality of the receipts must be determined by depending upon several important factors with the quality in the recipient’s hands. In fact the payment received in regular period of time does not fall under the category of ordinary income. The receipt is not considered as the ordinary income until that is a real gain or cash for the taxpayer. Both the fundamentals should be considered as the ordinary income if the payments are held to be regular and contains the procedure of regular flow for the taxpayer.
In comparison with the lump sum payments, the periodically paid payments are considered as the ordinary income for the taxpayer. The federal court in “Blake v FCT (1984)” written off as regular reception of payment is considered as an income (Kennedy 2018). Similarly, in “Dixon v FCT (1952)”, stated that these payments should be in yearly basis and character of income stream will be known as income.
The lottery commissioner arranges the instant lottery where commission delivers the payment of $50,000 each every year for 20 years’ time. The first amount is paid to the winner along with the winning notification and later the rest of the amount is paid in instalments every year in a regular basis. Mentioning the verdict in “Scott v C of T (NSW) (1935)” this is necessary to evaluate the characteristics of the annual payment to the recipient. Citing the event of “Scott v FCT” the yearly payment of $50,000 is considered as ordinary income as this has the characteristics of reappearance, uniformity and periodicity (Saez 2016). The amount is paid every year of to the winner, where the condition is applied that the outstanding amount will be paid to the nominee if the winner dies during this period of time.
The yearly payment of $50,000 can be segregated as income as the payment is a real benefit for the taxpayer. Knocking the event of “Blake v FCT (1984)” the yearly payment of $50,000 fulfils both the conditions of the income to be ordinary as this meets the characteristics of reappearance, uniformity and periodicity along with this income is coming in a regular flow in every year (Gonzalez and Wen 2015). Hereafter, citing the occasion of “Dixon v FCT (1952)”, the yearly payment of $50,000 is paid in regular instalments. Therefore, this income will be considered as an ordinary income for the taxpayer.
This can be concluded that the above examination of the annual payment for the lottery will be considered as an ordinary income and this will be evaluated under the section of “s 6-5, ITAA 1997”. So as this income is paid in regular intervals to the receiver the receiver this bound to considered this an ordinary income.
IRC v Duke of Westminster (1935)
Instances from the case of “IRC v Duke of Westminster (1935)” suggest that the duke had executed the deed of solemn promise or in other words the deed of covalent with the servants that included the domestic helpers and the gardeners (Fleurbaey and Maniquet 2015). The duke in the deed of covalent specified that the promise of paying the servants some amount of money for their services. The duke sent the written letters to his gardener and servants that stated that the duke would be paying the servants with the remuneration and on top of this an additional amount to the servants that are domestic helpers. The Duke tried to claim the expenses for income tax purpose in the form of arrangement for tax avoidance.
A covenant is regarded as religious word that is regularly regarded as the promise of indulging in the specified action of a sacred agreement amid the god and man. The deed of covenants is regarded as the lawful document recording the responsibility of one personnel to pay the amount to another person on the basis of no less than six years (Rothschild and Scheuer 2014). An individual that makes the payment can apply for the income tax deductions based on the basic rate and hence pay the net sum of tax relief. In the current case the problem lies in whether the deed of covenant could be treated as the employment contract.
As the matter of fact, the Duke was neither paying the gardeners any salary nor the servants were paid any weekly wages based on their employment contract. Therefore, it can be stated that there was no consideration towards the contract that forms the key factor in the creation of the lawfully binding contract (Nekoei, Shourideh and Golosov 2016). In the situation of Deed of covenant, the payment is only regarded as deductible for taxation purpose given the payment was the annual payment to the servants and the gardeners. The duke will only be allowed to claim deductions for the annual payment or the sum that is paid to the servants for the services that is rendered during the particular year.
The case of the Duke suggest that the avoidance of tax can be considered allowable as long as the process is within the established statute law (Wanless 2018). In the current case the principle that is established in this case is the format of the deed of covalent that can lower the liability of tax if it is approved and the taxpayer can claim only deductions for a year of the annual payment.
The principle obtained from the case of Duke of Westminster stated that tax avoidance is no longer sacred. The court of law have largely implemented the purposive interpretation of defeating the tax avoidance scheme of the artificial nature (McCluskey and Franzsen 2017). The principles of tax avoidance to lower the tax liability by legal means has traditionally been distinguished from the tax avoidance. The principle established in the case of Duke stated that every taxpayer are allowed to command their affairs of taxation under the corrective acts may be less than would have been otherwise. The tax evasion is and would always remain the illegal practice of avoiding tax. The government and minister has publicly criticized that the entertainers and multinational corporations that have completely inside the law as the measure of minimizing the tax liabilities.
In recent times, Australia is working towards the tax avoidance by using the law to obtain the tax advantage which has never been done by the parliament. The principle that is stated in the case that an individual taxpayer is entitled inside the law to organize their affairs as the measure of reducing their tax liability is not anymore accepted in Australian without a question (Weinzierl 2014). The Australian federal court have challenged most of the cases and has also won the tax avoidance cases where judgement has been given. The Australian taxation commissioner believes that the marketed schemes of reducing the tax liability would fail if a challenge is presented in the court. The parliament has reacted to the tax avoidance situation by closing the perceived loopholes and have further attempted to give warning to the tax advisors regarding their latest thinking of the tax avoidance.
Whether the income and loss obtained from the rental property should be shared in accordance with the legal interest?
As per the “Partnership Act 1891” the definition of partnership is provided in numerous state and territories as the relation that subsists among the partners that carry on the business with the common objective of obtaining profit. Paragraph 3 to 5 of the “Taxation ruling of TR 93/32” is relevant in ascertaining whether the letting of the property results in carrying on of the business (Chambers and Moreno-Ternero 2017). The joint tenancy or tenancy in common does not itself creates any kind of partnership as to anything that is held or owned or does not share any profits that is made from thereof.
The sharing of the gross earnings cannot create a partnership whether the individuals that are sharing the profits have or do not have joint tenancy or interest in the property from which the profit is derived (Wanless 2018). Under the general law the co-owners of the rental property are not treated as the partners under the general law based on the result that they are not subjected to any relevant partnership laws along with the dividing of the profits and loss that originates from the property. However, this does not signifies that the co-owners of the rental property cannot perform the business of property renting and therefore be partners under the terms of general law.
For the purpose of income tax law the meaning of partnership is much wider than that stated in the general law. Denoting the explanation made in “subsection 6 (1), ITA Act 1936” partnership generally refers to the association of the persons that carries on the business as the partners or receives the returns jointly (Stiglitz 2018).
Ordinary Income under ITA Act 1997
Under the extended definition of the partnership it is not essential that the individuals that carry on the business based on their associations to be considered as the partners for the purpose of income tax. They are only required to be receiving the income jointly (Sterner 2017). For that reason, the co-owners of the rental property falls within the definition of the partnership for the purpose of income tax not because they are considered as the partners under the general law but because they receive the profits or returns jointly.
The explanation made in “Taxation Ruling TR 93/32” the co-owners of the rented property will be the holder of the property as the joint tenants (Revesz 2018). The partnership agreement whether it is in writing or oral does not has any binding on the sharing of the loss or profit derived from the property. The rental property owners should be similar in the nature and should equally share the profits and loss.
In “FCT v McDonald” the husband and wife acquired the two rental properties as the joint tenants. There was an agreement between them that returns from the property should be split 75% to the wife and 25% to the husband and the husband will be responsible for all the amount of loss (Gilley 2017). The court of law held that there was no partnership on the basis of general law. The loss that was reported by the respondents must be shared equally. The each of the respondents were accountable for only half of the loss. Their private arrangement of sharing the profits and loss will be ineffective and cannot modify their respective entitlement for the purpose of income tax.
The issue in question of Joseph and his spouse Jane is related to the division of the net income and loss from the rental property. The husband and wife on loan purchased the rental property under joint tenancy. Their partnership agreement of distributing returns from the property should be split 80% to the Jane and 20% to the husband and the Joseph will be responsible for all the amount of loss. Denoting the explanation made in “subsection 6 (1), ITA Act 1936” their partnership does not amounted to partners under the general law rather they would be treated as the partners in terms of the income tax purpose (Sattinger 2017). For that reason, Joseph and Jane being the co-owners of the rental property falls within the definition of the partnership for the purpose of income tax not because they are considered as the partners under the general law but because they decided to share the profits or returns jointly.
Principles of IRC v Duke of Westminster
Citing the explanation made in “Taxation Ruling TR 93/32” the co-ownership of Joseph and Jane of the rented property will be the holder of the property as the joint tenants. Their partnership agreement whether it is in writing or oral does not has any requisite on the allocation of the loss or income resulting from the rental property.
Alluding to the conclusion that was made in “FCT v McDonald” there was no partnership between Josepha and his spouse on the basis of general law (Weinzierl 2018). The loss of $40,000 that was occurred during the previous income year from the rental property by Joseph and his spouse must be shared equally. Joseph and Jane’s private arrangement of sharing the profits and loss will be in vain and cannot alter their individual right for the purpose of income tax. Their partnership reflected Joseph’s spouse contribution in managing all the properties and provide her with the larger financial independence.
If there is the alternative event that the decision of sale of property is made by Joseph and Jane they must account for the capital gains or the capital loss based on their legal interest in the property. Based on the common grounds that Joseph and his spouse are beneficially entitled to the premises as the joint tenants. Being the joint tenants, they are entitled to equal amount of shares of rents and profits.
Ultimately the analysis draws up the conclusion that Joseph and Jane are the co-owners instead of classifying them as the partners. Their income is obtained from the joint ownership of the property and not from the distribution of the partnership profits and loss. They must share the profits and loss in proportion to the legal equitable interest in the property.
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