HI6028 Taxation Theory, Practice And Law

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? 

Answers:

Issues

The scenario given in this case highlights the problem of capital gains or loss estimation that is given under the section 108-10 of ITAA 1997.

Legislation

1. Section 108-10 of ITAA 1997
2. Section 108-20 of ITAA 1997

Asset Description	Cost Base	Capital Proceeds	Capital gain	Capital loss
Antique Base	2000	3000	1000
Antique Chair	3000	1000		2000
Painting	9000	1000		8000
Home Sound System	12000	11000		1000
Shares in listed company	5000	20000	15000

 

Estimation of net capital loss for the given year
Particulars	Total Amount ($)
Loss on the sale of Anitque Chair	2000
Loss on the sale of Painting	8000
Less: Profit on sale of Antique Vase	1000
Total Loss to be carried forward	9000

 

Estimation of net capital gain for the given year
Particulars	Total Amount ($)
Profit obtained from sale of shares	$15,000

Applications of legislations

By the section 108-20 of ITAA 1997, it can be put forward that huge loss has been incurred by Eric from sale of home sound system (Piketty 2012). This loss is not permitted to offset as it depicts private utilization of asset by Eric. This section illustrates that no loss is allowed for subtraction as against sale of market shares. On the contrary, the collectibles are offset against gains that Eric obtains from common asset only as stated under this legislation (Furnivall 2014).

Conclusion

The above case shows that Eric attains capital gains from common asset and cannot offset loss from personal asset sale. 

Issue

This case elucidates FBT concept accompanied with FBT ascertainment under FBT Act 1986.

Legislations

1. a) Taxation Ruling  of TR 93/6
2. b) FBT Act 1986

Evaluation of FBT

Taxable value of the loan fringe benefit
In the books of Brian for the year ended 2016/17
Estimation under statutory and actual rate of interest rate
	Statutory Rate	Actual Rate
Particulars	Total Amount ($)	Total Amount ($)
Loan Amount	1000000	1000000
FBT Amount 40%use in business	400000	400000
Statutory rate of interest @5.65%	2825	500
(Loan Amount *Statutory rates of interest)-(Loan Amount*Actual rate of interest)/12*60%business use
Taxable value of the loan fringe benefit	2325
FBT at the end of loan on payment interest at the end of loan
	Statutory rate	Actual rate
Particulars	Total Amount	Total Amount
Loan Amount	1000000	1000000
FBT amount 40% use in the business	400000	400000
Statutory rate if interest @5.65%	33900	6000
(Loan Amount*Statutory rate of interest)-(Loan Amount*Actual rate of interest)*60%business use
Taxable loan value fringe benefit	27900

Application of Legislation

In accordance with Taxation Ruling TR 93/6, it is apparent that any financial organization can set off  the interest on loan that taxpayers is liable to pay (Oats 2012).  From this case, it can be illustrated that Brian will not have any liability to pay the loan interest or income tax on such loan amount.

Conclusion

This case elucidates that Brian will not pay any income tax or interest rate on loan that he acquires. 

Issue

This issue deals with estimation of loss that Jack and Jill suffers from that property which they rents

Legislation

1. FC of Tv Mc Donald (1987)
2. Section 51 of the ITAA 1997
3. Taxation Rulings of TR 93/23

Application of legislation

The taxation Rulings TR 93/23 illustrates co-ownership of properties that individual rents as partners. This case reflects that Jack and Jill were partners of the rented property who made an agreement for sharing profit(Wagner 2013). This agreement shows that Jack will have to carry the loss obtained from rented property.  The  FCof TV Mc Donald defines that both the taxpayers were considered as joint owners of rented property. Under common law, it can be said that Mr Mc Donald and his wife had no partnership agreement between them.

Conclusion

It can be said that as Jack and Jill were joint owners, the losds amount incurred by them will be allocated between them in equal way. 

The IRC v Duke of Wetminister [1936] AC 1 elucidates tax avoidance incidence. The WT vs IRC principle holds the fact that court will have more restriction in the coming years (Mellon 2016). This case reflects that arrangement of transacted amount is done artificially and is not utilized as commercial purpose. 

Issue

The issue presented here is income computation from sale of felled timber that is defined under subsection 6(1) of Income Tax Assessment Act 1936.

Legislation

1. Subsection 6(1) of the Income Tax Assessment Act 1936
2. Mc Cauley v The Federal Commissioner of Taxation

Application of legislation

Under this situation,. Bill aspired to used the land for grazing sheep and planned to remove the planted trees. Subsection 6(1) reflects that taxpayers gets involved in activities of forest.  The receipts that Bill obtains involve earnings from tax payers, which has been considered as Royalties (Schreiber 2013). Hence, trade of forest operations will be carried by Bill and receives royalty that includes assessable income.

Conclusion

Amount obtained from timber is termed as taxable proceed under this subsection 6(1). 

References

Schreiber, U., 2013. International company taxation: an introduction to the legal and economic principles. Springer Science & Business Media.

Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.

Picciotto, S., 2012. Towards unitary taxation of transnational corporations(pp. 1-17). Tax Justice Network.

Wagner, R.E., 2013. Charging for Government (Routledge Revivals): User Charges and Earmarked Taxes in Principle and Practice. Routledge.

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

Dubin, J.A. and Wilde, L.L., 1988. An empirical analysis of federal income tax auditing and compliance. National tax journal, pp.61-74.

Oats, L. ed., 2012. Taxation: A fieldwork research handbook. Routledge.

Piketty, T. and Saez, E., 2012. Optimal labor income taxation (No. w18521). National Bureau of Economic Research.

Furnivall, J.S., 2014. Colonial policy and practice. Cambridge University Press.

Piketty, T. and Saez, E., 2012. A theory of optimal capital taxation (No. w17989). National Bureau of Economic Research.

Piketty, T. and Saez, E., 2013. A theory of optimal inheritance taxation. Econometrica, 81(5), pp.1851-1886.

Rothschild, C. and Scheuer, F., 2014. A theory of income taxation under multidimensional skill heterogeneity (No. w19822). National Bureau of Economic Research.