Taxation Law: Essay On Ordinary Income And Felicity Conditions.

Discuss about the Taxation Law. In the lottery discussed in this project the winner had to choose a set of three numbers which had clicked with the winning numbers.

Set for Life Lottery: An Example of Ordinary Income

Here the case to be discussed is about the Lottery Commission. The lottery commission hosted a lottery called the “Set for life”. This lottery is the official lottery of Australia. In this type of game the winner has to choose a set of numbers and these chosen numbers has to click with the winning numbers (Woellner et al., 2016).

In the lottery discussed in this project the winner had to choose a set of three numbers which had clicked with the winning numbers. The winner of the lottery held by the Lottery Commission got a prize of $50,000 per year for 20 consecutive years. The winner is paid the prize money every year on the anniversary of him winning the lottery “Set for life”. In case if the winner of the lottery dies the remaining sum of money is given to person who deals with the properties of the winner (Tan, Braithwaite and Reinhart, 2016).

Issue

The problem here is to find out whether the money received is considered as an ordinary income for the person who pays tax on it as per Section 6-5, ITAA 1997.

Rule

Any earning a person makes on which he has to pay tax is bound to give the income tax on his earning. As per Section 6-5, ITAA 1997 even an income which is ordinary is bound to bear tax on it. Most of the earnings on which tax are to be paid is of ordinary nature for the person who pays tax. Whether a receipt is ordinary in nature or not is all dependent on the receiver as per the Federal Court of Law. In order to determine the nature of receipt the whole event is to be taken into consideration. At first the nature of a gain is to be determined before deciding the nature of the income (Snape and De Souza 2016).

Any type of income not fulfilling the cash or its equivalent or which is of any gain to the person paying the tax is not considered as an ordinary income. Thus a receipt is an ordinary income only if it is in cash or related to cash or only if it is providing any benefit to the person paying the tax. Only if the discussed criteria is fulfilled the gain can be considered of an ordinary nature. That is only if the gain is earning something for the person paying the tax (McGregor-Lowndes, 2016).

The most important is to clearly understand the nature of the gain. It needs to be clear that whether the profits being made is regular in nature or does it go with the flow only. Any gain which is continuous or periodic that is the tax payer is getting the benefits at regular interval is classified as an ordinary income. The benefits or gains a person gets at one go that is a lump sum amount is not considered as an ordinary income (Gupta and Sawyer, 2015). In the same way if the tax payer gets a receipt at regular intervals then it is classified as ordinary income for him and if he gets the receipt in the form of a lump sum amount then it is not regarded as an ordinary income as per the Federal Court of Law. If it is generating profit then it is an ordinary income otherwise it is not considered as an ordinary income as said by the Federal Court of Law.

Calculating Total Income in an Accrual Form

Hence considering the example of “Set of life” lottery, the $50,000 amount which the winner got is consistent in nature as the winner is receiving it periodically is an income ordinary in nature.

The next discussion it is required to calculate the total income in an accrual form in which all the expenditures are reported when the expense occurs and not when the money is paid in cash for it (Frecknall-Hughes and Kirchler, 2015).

This discussion is about the rules formed in IRC v Duke of Westminster (1936) AC 1. The rules established is still important to people of Australia or not.

Facts

According to the report the Duke implemented a deed with all is employees including his gardener also. According to the deed the Duke had to pay an amount every week to his employees for seven consecutive years or till both the parties are alive. The bond also read that this amount was paid to the employees in return of the service they provided to the Duke. In such a case the employees should a certain amount of money for their future service or they would stop giving the required service to the Duke (Davison, Monotti and Wiseman, 2015).

Later all the employees were made to understand that they claim their salary or wages for their future work even. But it was assumed that the employees would be satisfied if the amount was paid to them on weekly bases as mentioned in the deed and not claiming for a lump sum amount at once (Burton and Karlinsky, 2016).

Issue

Here the problem is to find out that if the amount paid to the employees as per the deed also includes the remuneration given to them in exchange of their service given to the Duke. When calculating the liability of the surtax it was observed that the amount paid to the employees in the form of remuneration was not an allowable deduction. While the payment made to the employees every year was an allowable deduction. It was also observed that the amount paid to the employees based on the period they were working in the form of remuneration was not treated as an allowable deduction while the calculating the liability of the surtax. This deed was made by the Duke in an attempt to reduce the amount of liability of surtax.

The deposition

The lords did not accept the fact that the amount given to the employees by the Duke was not in exchange of their service given to the Duke. Among the five lords three of them did not agree that the letter in which all the details were mentioned was a deal or a contract (Braithwaite, Reinhart and Job, 2018). Four among the five lords believed that the deal was just a list of as to what was expected from the employees by Duke. However the letter was actually a deal, in which it was clearly mentioned that no employee would be paid a lump sum amount together but the payment will made in a supplementary form that is on weekly bases. The last lord even disagreed to the letter that it is a contract of current scenario but it can also be changed.

Rules Established in IRC v Duke of Westminster

All the five lords disapproved the deal because according to them the principles of a legal position is not taken for granted by the court. Only a matter of substance that is only the report arising from the legal rights is taken into consideration by the court.

The department of Inland Revenue stated that the Duke made the contract in attempt to escape tax. This brought the Duke to the court where the Duke won the case.

The current case of the Duke of Westminster in Australia was a case of escaping taxes. This deal seemed to be attractive to others because the tax is being escaped in a legal way. The complicated pattern of this deal started to diminish by the other cases when the total impact of the case was taken into consideration. The difference between the tax which the payer tax thinks he has to pay and the amount he actually pay has been reduced by the current Australian government.

Here the case to be discussed is about a married couple Joseph and Jane. Joseph is an accountant by profession while Jane is a housewife. The couple had taken loan to buy a property on rent. They wanted to buy it in a joint venture. For this purpose they made a deal in which it was mentioned that if they get any profit from the property, then Joseph will only get 20 percent of the profit while Jane will get the rest eight percent. In case of any loss Joseph will have to bear the full 100 percent of the loss. In this case there was a loss of $40,000 last year (Braithwaite, 2017).

Issue

Here the issue is to discuss the distribution of loss on the property. That is if the loss incurred is going to distributed as per the legal interest of the person who is paying the tax.  

Rule

The Taxation ruling of TR 93/32 provides the steps in which the profit or loss incurred on the property is distributed among the co-owners. It also mentions the way in which the Taxation Commissioner will accept the distribution of profit and loss arising from the property on rent.

More than one person owning the rental property is termed as their partnership in the property. But as the taxation ruling of TR 93/ 32 this type of co ownership does not form a partnership because it is not conducting any business activity (Basu, 2016). The profit or loss incurred from the joint procession of the land will distribute in the interest of the landlord as per the taxation ruling of 93/32.

Both the owners of the property will be benefited with the same interest in a legal way. The interests of the co-owners should be the same in relation to their length, characteristic and total time taken. The law of the tax only recognizes partnership as per the ATO, and arises in the joint ownership of properties brought on rent.

Mr. and Mrs. Mcdonald were co-owners of a rental property in another case. As per the deed if there is any profit, then the husband will get 25 percent of it while the wife will get 75 percent of it. In case of a loss the husband has to bear full 100 percent of it.

Case Study on Joint Venture

In cases where both the husband and wife has a co ownership in the rental property, both of them should include half of their expenses and income in the payment of the taxes. If the couple enters into any other sort of agreement, which will decide the percentage in which the profit or losses incurred will be distributed will not be considered valid for the purpose of income tax.

Thus in the case Joseph and Jane the deal they entered into will not be regarded valid as per the law. They are in a partnership only for the purpose of co owning the rental property, but they are not in a partnership in the eyes of the law as the Taxation ruling of TR 93/32. Therefore, the profits and losses incurred from the rental property will be distributed equally among them.

The taxpayers in this case were just the partners in co owning the rental property, so they need to share the profit and loss equally among them. The loss of $40,000 in this case will be divided equally among the taxpayers for the income tax purpose.

As Joseph and Jane the co-owners decided to sell off their rental property, any gain or loss on their property will be equally shared between them. So that each of them gets a 50 percent of profit in case of gain on the capital and 50 percent of the loss in case of loss on the capital. This all is done for the purpose of income tax (Basak, 2016). The proportion mentioned in the deed for the sharing of capital gain and capital loss will be invalid for the income tax purpose.

Conclusion

Thus, the proportion in which the profit and loss are shared by Joseph and Jane are not valid for the income tax purpose. This is just a personal arrangement between the husband and the wife for purchasing the property in partnership. This partnership is not valid in the eyes of the law. Thus any profit or any loss incurred on the rental property purchased by them is to be shared in equal proportion and not as per the contract on which they entered.

Reference List

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Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Braithwaite, V., Reinhart, M. and Job, J., 2018. Getting on or getting by? Australians in the cash economy. In Size, Causes and Consequences of the Underground Economy (pp. 55-69). Routledge.

Burton, H.A. and Karlinsky, S., 2016. Tax professionals’ perception of large and mid-size business US tax law complexity. eJournal of Tax Research, 14(1).

Davison, M., Monotti, A. and Wiseman, L., 2015. Australian intellectual property law. Cambridge University Press.

Frecknall-Hughes, J. and Kirchler, E., 2015. Towards a general theory of tax practice. Social & Legal Studies, 24(2), pp.289-312.

Gupta, R. and Sawyer, A., 2015. The costs of compliance and associated benefits for small and medium enterprises in New Zealand: Some recent findings. Austl. Tax F., 30, p.135.

McGregor-Lowndes, M., 2016. Lawyers, reform and regulation in the Australian third sector. Third Sector Review, 22(2), p.33.

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

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.