Taxation Law Case Studies: Capital Gains/Losses, Fringe Benefit Tax, Rental Property, And Partnership

1. Over the last 12 months, Eric acquired the following assets: an antique vase (for $2,000), an antique chair (for $3,000), a painting (for $9,000), a home sound system (for $12,000), and shares in a listed company (for $5,000). Last week he sold these assets as follows: antique vase (for $3,000), antique chair (for $1,000), painting (for $1,000), sound system (for $11,000) and shares (for $20,000). Calculate his net capital gain or net capital loss for the year.

2. Brian is a bank executive. As part of his remuneration package, his employer provided him with a three-year loan of $1m at a special interest rate of 1% pa (payable in monthly instalments). The loan was provided on 1 April 2016. Brian used 40% of the borrowed funds for income-producing purposes and met all his obligations in relation to the interest payments. Calculate the taxable value of this fringe benefit for the 2016/17 FBT year. Would your answer be different if the interest was only payable at the end of the loan rather than in monthly instalments? What would happen if the bank released Brian from repaying the interest on the loan?

3. Jack (an architect) and his wife Jill (a housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Jack is entitled to 10% of the profits from the property and Jill is entitled to 90% of the profits from the property. The agreement also provided that if the property generates a loss, Jack is entitled to 100% of the loss. Last year a loss of $10,000 arose. How is this loss allocated for tax purposes? If Jack and Jill decide to sell the property, how would they be required to account for any capital gain or capital loss? 

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

5. Bill owns a large parcel of land on which there are many tall pine trees. Bill intends to use the land for grazing sheep and therefore wants to have it cleared. He discovers that a logging company is prepared to pay him $1,000 for every 100 metres of timber they can take from his land. Leaving aside any capital gains tax issues, advise Bill as to whether he would be assessed on the receipts from this arrangement. Would your answer be different if he was simply paid a lump sum of $50,000 for granting the logging company a right to remove as much timber as required from his land? 

Net Capital Gains or Losses Calculation

The main issue that is under consideration deals with the intention of discovering the capital gains and the losses that have been obtained from the asset sales that has been explained in “Section 108-20 of the ITAA 1997”. There are various laws that are associated with it and they are given below:

• “Section 108-20 of the ITAA 1997”
• “Section 108-10 of the ITAA1997”

In accordance to “Section 108-20 of the ITAA 1997”, there was a loss of $1,000 when the home sound system was sold. This loss that has been experienced will not be granted for the regarded set off, as no such losses can be granted by depending on the disposal of the individual utilisation of the assets. “Section 108-10 of ITAA 1997”, has cited that the gathered losses may not be set off with the gains from capital that can be undertaken with the help of share selling. In addition, the offset is under “Section 108-10 of ITAA 1997”. Due to the fact that Eric has incurred profit by disposing of the ordinary assets and there is no existence of ordinary capital or any other sorts that can be applicable for deductions (Fjeldstad 2013). Moreover, the capital gains for Eric have the present standing of $15,000.

Conclusion

By looking at the case study it can be explained that Eric does not have the ability to offset the losses that has been obtained from the collectibles as Eric has only obtained profit on the ordinary asset disposal.

The issue that is under consideration in this question is related with the determination of the Fringe Benefit tax that is in regards to the “Taxation Ruling of TR 93/6”. The laws that are applicable to this case study has been given below:

• “Taxation Rulings of TR 93/6”

                                           

The taxation rulings of TR 93/6 have tried to depict that financial firms distinctly establishes strategies and policies for the offsetting of the account of the loan that has been declared within the interest offsetting contract. These products are framed for interest offsetting, which is experienced by the consumers. Hence, the consumers are not accountable for giving any any kind of amount as a payment for income tax in accordance to the profits that the client has received from the account (Fraser et al. 2015). In conformity to “Taxation Ruling of TR 93/6”, if the companies related to financial profession aids Brian from refunding of the interest out of the loan then Brian will not be responsible for income tax payments.  

Conclusion

By looking at the above case study, it can be defined that Brian will not need to pay any sort of money for the accountability of income tax if Brian is exempted from any bank interest.   

In this question, the issue that will be discussed deals with the allotment of the losses that has been gained from the rented property that is under the dual ownership of jack and Jill. The laws that would be applicable to this scenario involves:

• “Taxation Rulings of TR 93/32”
• “Section 51 of ITAA 1997”
• “FC of the T.v Mc Donald (1987”)

Taxable Value of Fringe Benefits for 2016/17 FBT Year

It is seen that “Taxation Rulings of TR 93/32”, discloses of the explanation of the net income segmentation and the loss generated from the rented estate among the co-owners of the concerned property. Furthermore, the taxation ruling has been primarily regarded with the assessment of the taxable condition of the joint owners who are not accountable transporting their values in the actions. The present condition of Jack and Jill has the aim of considering the assessment of the taxable condition of the property that is rented. It is perceived that Jack is quantifiable for 10% of the overall estate and Jill is accountable for the rest 90% of the estate that is in nature rented.

With respect to the “Taxation Rulings TR 93/32”, the joint ownership of the rented property is regarded as a kind of partnership for the intention of income tax but this is not regarded as an individual partnership at the common law where the joint partnership is regarded as the kind of partnership for fulfilling the income tax intention only (Phangand Mahzan 2017). The loss incurred from the income gained from the rented property is handled and supervised with the assistance of the joint ownership of the rented property and even from the profit and loss distribution of the partnerships. The present scenario of Jill and Jack discloses the joint ownership for the rented property among themselves, which is dependent on the intention of the income tax and therefore cannot be considered as a partnership with respect to the standard law.

The “Taxation Ruling of TR 93/32” has explained that joint owner of the rented property are generally not regarded as any partners with the standard law. In this scenario, the agreement of the partnership is either orally or in the nature of writing that does not have an impact on the income shared value and even the loss that is obtained said property (Millerand Oats 2016). Thusly, the dual owners of the rental estate, Jill and Jack will have the right to hold the estate as they are considered as dual renters in a common manner.  

In accordance to the case of “F.C of T.v Mc Donald (1987) 18 ATR 957”,he himself and his spouse or the wife are the holders of two sections units of titles as being the co-renters. The agreement is constructed between states that the net gains that are attained from the rental estate would account for 25% to Mr. McDonald and 75% to Mrs. McDonald. In this scenario, the entire amount of loss that would be incurred has to be beared by Mr. McDonald.  

Conclusion:

The assessment of the scenario has underlined that Jack and Jill requires sharing out the losses equivalently and on the other hand the dual ownership is not treated as partnership venture.  

4. The case of “IRC v Duke of Westminster [1936] AC 1” has been stated as an example in order to highlight incidence of tax avoidance. The concerned case study has constructed one principle that explains that each and every man is permitted to order their activities for permitting the taxation allotment, which has been constructed in the Act that is appropriate. This allotment of taxation is lower the the before. Even though it may be regarded that this process of ruling has been very much striking for the other individuals who are looking for the tax avoidance in regards to the intricate framework of the laws and these are destabilized with the help of the succeeding case studies where the legal system or the courts have observed the entire effect (Schofieldet al. 2015). With the help of giving providing an example of the court in the future phases that were more preventive and were incorporated under the “WT Ramsey v. IRC principle”. In this scenario, the dealings has been arranged at an earlier phase in an artificial manner and this has been assisted not in the manner of any commercial intention. The effective rule has been to levy tax for lengthening the transactions as an overall evidence.

In the condition that is contemporary in nature, this rule and principle within the country of Australia explains that in case an individual accomplishes victory or success for ensuring that this outcome has been safeguarded, the Inland Revenue can be due to their initiative and they may not be compelled to pay out any additional taxable amount(Wilkins 2015). Furthermore, the knowledge has been gained that this component permits the organizations and the individuals for frame working the financial contracts in regards to the aims and objectives that are fixed of lowering the liabilities of tax that is dependent on their frameworks under the various law frameworks.

Allocation of Rental Property Losses

According to the case study provided in this question, the scrutiny of the income from sales of the log that is slaughtered with an idea of grazing the sheep falls within “Subsection 6(1) of the Income Tax Assessment Act 1936”. The laws that are associated with this case study are explained as follows:

• “McCauley v. The Federal Commissioner of Taxation”
• “Subsection 6(1) of the Income tax Assessment Act 1936”

In the current business condition, it has been observed that Bill is the owner of huge portions of lands within which there a numerous pine trees. Bill has mainly looked to utilise the land for the purpose of grazing his sheep and thereby wanted the land to be cleared of the pine trees. Bill has revealed that there exists a logging organization that is ready to pay Bill an amount of $1000 for each 100 meters of wood. The logging organization can thereby grab hold of Bill’s portion of land. The “taxation ruling to 95/6”, has underlined the income tax impact generated from the activities of production in forest industry. This process of ruling proposes the limit to the extent to which the incomes that is depicted from the timber sales (Zhanget al. 2015). This component comprises of the earnings that is assessable and whether the individuals who are paying taxes are engrossed into the operations of the forestry industry. By having a look at the “Subsection 6 (1) of the Income tax Assessment Act 1936”, the primary manufacturing is commonly defined as tree planting within a specific region or a boundary, and the planted trees are used to obtaining wood when they grow. The present case history is similar as Bill is taken as the elementary holder of the land as he has been busy in his plantation where there is presence of numerous pine trees, which is similar to “Subsection 6(1) of the Income Tax Assessment Act 1936”. The activities within the wood are inclusive of cutting down the trees with within a plantation or in a wood even though the taxpaying individuals are not worried about the trees that have been planted.

Bill being the holder of the huge segment of the land has not planted the trees within his plantation but on the other hand the entire amount of the earnings that was earned by Bill due to the sale of the wood has been observed as the disposable income of the highlighted tax payer and has concentrated for the objective of sales has formed as the segment of the income that is assessable (Hauser. and Featherman 2013).

However, if the taxpaying individuals was just paid the total amount of $50,000 by submitting right of cutting down the necessary amount of trees to the logging firm, then in that scenario, the total amount that would be received would be regarded as royalties. In “Section 26 (f)”, which has been discovered to be identical to the case study where the earnings from the royalties by the individual on achieving the selling rights of the pine trees that have been cut from the land of the tax payer. With such, circumstances, Bill would not be regarded for undertaking a trade for the activities in the forest. In this respect, it has been regarded that the taxpaying individual did not plant the trees for the intention of undertaking benefit out of them. The scenario of “McCauley v. The Federal Commissioner of Tax” payments gathered by the lender are under the authority of doing the same. The similar amount that are earned by Bill as a form of royalty is combined with the income that is assessable with respect to “Section 26 (f)”.

Conclusion

The assessment of the case study depicts that earning receipts from the tree cutting would be regarded as the proceeds that are taxable with respect to “Subsection 691) of the ITAA 1997”.

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