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Law300 Taxation Law Assignment Management

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  • Course Code: LAW300
  • University: Charles Sturt University
  • Country: Australia

Question:

Procedural fairness and tax compliance Economic analysis and policy.

Mid-market focus: Income or capital?

United States of America and Hong Kong: what lessons can we learn?

Public Rulings as Explanatory Materials to the Income Tax Act 1967.

The income tax exemption of charities and the tax deductibility of charitable donations:

 

Answer:

Income Tax Computation

 

Accounting

Income tax

Gross salary

50,000

50,000

PAYG

 

(3,250)

Performance bonus

25,000

25,000

Clothes allowance

4,500

4,500

ICA ANZ annual membership

1,250

1,250

Trip charges

 

(4,650)

Taxi expense

 

(4,000)

Billed income

45,000

45,000

Video

 

550

Tax services (expenses)

 

(31240)

motor vehicle expense

 

(2340)

Rental income

12,500

12,500

Construction cost

 

(75,000)

expenses

 

(3525)

Deductible cash donation

 

(2000)

Dividends

10,500

10,500

Share profit

10,000

10,000

Taxable income

$158,750

$33,295

Tax

 

$2868.05

Tax less deductions

 

$243.05

 
 

Calculation of dividend credit

Here the assumption is both CBA and BHP have paid a tax of 30%

CBA= 7000

BHP=

The total dividend credit is 8750 (7000+1750).

Dividend tax credit is

Jane can deduct this amount from her tax

Deductible Donations

She can only deduct $2000 from her taxable income since $1500 is below the required amount for a deductible cash gift.

Taxation Services Expenses

Rental Income Deductions

Water rates and cleaning expenses are supposed to be catered for by the Tenant. On the motor vehicle expense, only 90% is used for business purposes and only deduction related to the business. We have 2340 (2600x0.9) as the actual deduction.

Tax Computation

The tax payable by Jane is $243.05

Proposition 12 of the taxation laws talks of how to handle dividends and profit earned in the sale of shares. Jane has dividends amounting to $10,500 and $10,000 from the sale CBA share all of which must be included in the tax computation.

The tax law allows for a tax-free gift that does not exceed $15,000 annually hence the gifts Jane received will not be subjected to taxation (Martin and Todd, 2018).  The construction cost on the rental income can now be deducted from the rental income as the construction is now complete. The tax law allows the landlord to deduct the cost incurred for the construction only after the construction is done.

Fringe benefits are not included in the employee’s assessable income. Assessable income refers to all ordinary income (Johansson at al. 2008). Jane’s assessable income is the gross salary, billed taxable service fee, and the rental income in accordance with section 25(1). According to section 26 AB, Rental income is taxable since Jane has other income other than rental. If it was only rental income, she may get an exemption for rental income (Johansson at al. 2008)

 

Income Tax Case Analysis

The appeal filed by the Federal Commissioner of Taxation was heard and determined by Brenna J, Deane J, and Toohey JJ of the supreme court of victory on 16th April 1980. The issue of contest was whether to include the value of the holidays provided to and enjoyed by Mr. and Mrs. Cooke, and Mr. and Mrs. Sherdon should be included as part of their taxable income. Several precedences were mentioned in the court proceedings that supported the commissioner’s claims while others were in favor of the appellants.

The Facts

The court proceedings were joint together since the cases were similar in nature. Mr. and Mrs. Cooke sold soft drinks manufactured by Loy Bros in a Melbourne suburb. The business agreement was such that the Cooke’s distributed Loy Bros soft drinks at the required market price within the specified location. They were required to keep a detailed record of their sales while the client list would be shared with the main company as part of the agreement. The partnership agreement also required the Cooke’s to maintain a detailed record of all their business transactions with Loy Bros.

The Sherdon’s sold soft drinks manufactured by Sharpe Bros. They had an agreement with the company just like the Cooke’s. They were to retail soft drinks within the specified region at the required market price. Their client list was also to be shared with the company as part of the agreement. There was also a non-compete clause where the couple could not set up a similar business to distribute similar products like the ones produced by the company. They sold the drinks to the retailer at a discount when a large order was placed and never sold goods above the market price. The Cooke’s, on the other hand, sold large orders on discount and occasionally sold the drinks at a price higher than the market price set by the company.

In both companies, the dealers were entitled to a holiday between the months of June and July. This was an incentive by the companies to try and improve on their sales by paying for an all round trip for the distributors. The appellants took a one week trip in the winters of 1970, 1972, and 1973 after the holiday committee had approved their application. Each trip was more expensive than the last.

These holiday schemes were controlled by the manufacturers in the fact that the couple could not sell or give away the trip tickets. Only two tickets were provided per dealer and they were not transferable. The couples could derive any monetary value from selling the tickets. It is either they went or they do not apply. Children above 12 years were not catered for by the companies (Iknow.cch.com.au, 2019). Not every distributor qualified for the trips. Any misconduct like the transfer of stock would lead to immediate disqualification by the committee.

 

The Arguments

The commissioner wanted the decision made to include the trip costs as part of the appellant's income tax to be upheld based on section 25(1) and section (26e) of the Income Tax Assessment Act of 1936 (Woellner et al, 2010). The argument was that the value of the holidays constitute income according to the ordinary concept and it is a benefit given to taxpayers. This could have been the case if the term Income was clearly defined in the tax law but it is not. The definition relied upon was from the precedence, Jordan. C. J vs F.C of T (1935) which defines income as “determined by the ordinary concept and usage of mankind.” Section 25 separates gross income into assessable income and exempt income (Thampapillai, 2014). The Precedence, Tennant vs Smith (1892) defines income to include what is received in the form of money. Going by this precedence the trip benefits cannot be treated as income since there is no way of getting any monetary benefit (Hoopes, Robinson, and Slemrod, 2018).

Section 6(1) of the Income Tax Act deals with income for personal use. It states that income consists of earnings, salaries, wages, commissions, fees, bonuses, and pensions. Basically, it defines income as any revenue generates from the sale of good and provision of services (Jones, 2017). At this point, it is important to note that the Cooke’s and the Sherdon’s are not employees of the respective companies they are associated with. They are partners tasked with the distribution of goods with a payment for each product sold. The same section defines taxable income in terms of assessable income and allowable deduction (Saad and Udin, 2016). Taxable income in our case is the income earned from the distribution and sale of soft drinks less the allowed deductions. The commissioner's claim was not supported by this section the financed holiday was more of incentives to the distributors and they could not derive any cash benefits from privileges they received.

Section 19 of the Taxation Act recognizes the precedence, Cross vs London and Provincial Trust Ltd where income was defined to include the capital directed by the taxpayer on how it is going to be spent without the taxpayer having any contact with the revenue. At this point, the commissioner was trying to prove that the appellants had a participation in the revenue used to sponsor the trip since they worked together with the manufacturers (Hartner et al. 2008). This argument could have merit is the couples were given the chance to choose the destination they wanted to visit. If this was also true in this case, there could have been no limitation as to who gets to attend the trip which is one of the rules in the holiday scheme.

The appellants claimed that the trip was only an incentive for the work they had done in service to the manufacturers. They derived no monetary benefit and received no revenue or cash incentive during the holiday. They had no capability to turn the offered trip into money as it was a restricted event where only the couple could attend. Given these facts, there was no standing precedence where such an incentive was subjected to taxation. The commissioner had no legal justification for adding the trip value as part of the appellant’s taxable income. 

The Decision.

The judges summarized that the respondents offered no service to the manufacturer but their successful business sales advanced the manufacturers financial positions. These sales were for the benefit of the respondent and they did so in the aim of fulfilling the contractual obligation they had with the manufacturers. The issue of sharing their client's information with the manufacturers was decided by the judges to be an obligation towards the agreement in their respective contracts (Saad, 2014). The benefit could not be considered an income since it was not convertible into money. The judges concluded that the appellants did not receive income as the term is understood according to ordinary concepts and usage.  

 

The Relevance of the Case Today

The set precedence in the case of FCT vs Cooke and Sherdon is only relevant under the condition with which it was set. If a contract clearly states that partners are entitled to a paid vacation, the revenue spend is part of the individual taxable income since it will be considered a benefit of an association to a particular organization. Section 6 defines income for personal use to include bonuses, pensions, and allowances. As long as an individual is employed in an organization, all benefits are taxable in according to the income tax laws using the rates set by Parliament (Burton, 2017). A similar case to that of FCT v Cooke and Sherdon would need to use this ruling as long as the conditions in both cases are similar and clearly proven in a court of law. The presiding judge would probably rule in favor of the appellant but only if the standards set in this case proceedings are met.

 

References.

Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. Australian Taxation, 19, p.50.  

Hartner, M., Rechberger, S., Kirchler, E. and Schabmann, A., 2008. Procedural fairness and tax compliance. Economic analysis and policy, 38(1), p.137.

Hoopes, J.L., Robinson, L. and Slemrod, J., 2018. Public tax-return disclosure. Journal of Accounting and Economics. (Vol. 20, p.66)

Iknow.cch.com.au. (2019). CCH iKnow | Australian Tax & Accounting. [online] Available at: https://iknow.cch.com.au/document/atagUio552255sl16866643/federal-commissioner-of-taxation-v-cooke-and-sherden  [Accessed 13 Feb. 2019].

Johansson, Å. Heady, C., Arnold, J., Brys, B., and Vartia, L., 2008. Taxation and economic growth, P.25

Jones, D., 2017. Mid-market focus: Income or capital?: Taxpayer draws a blank. Taxation in Australia, 51(7), p.357.

Martin, F. and Todd, T.M., 2018, August. The income tax exemption of charities and the tax deductibility of charitable donations: the United States and Australia compared. In Australian Tax Forum (Vol. 33, No. 4).

Martin, F., 2018. The major tax concessions granted to charities in Australia, New Zealand, England, the United States of America and Hong Kong: what lessons can we learn?. In Research Handbook on Not-For-Profit Law. Edward Elgar Publishing.

Saad, N. and Udin, N. (2016). Public Rulings as Explanatory Materials to the Income Tax Act 1967: Readability Assessment. Advanced Science Letters, 22(5), pp.1448-1451.

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

Thampapillai, D. (2014). The Income Tax Assessment Act 1936 S23AG and Double Tax Avoidance Agreements. SSRN Electronic Journal.

Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation law. CCH Australia.

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