1.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.
Is the annual payment Income? Give reasons for your decision
a). Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major credit cards. It sells items off the shelf and the propnetor fills prescriptions for cash and for payments made under the Pharmaceutical Benefits Scheme [PBS].
Three (03) assistants are employed. The following financial data is provided:
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.
3.What principle was established in IRC v Duke of Westminster [19361 AC 1? How relevant is that principle today in Australia?
4.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 200/0 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 1000/0 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?
Prerequisites of Ordinary Income
Is the annual payment a real gain for the taxpayer that is received periodically by the taxpayer or annually?
If the receipts are not the genuine gain it cannot be classified as the ordinary income (D'Ascenzo 2015).
In “Myer v FC of T (1987)” held that it is not necessary that the income should be received in this manner (McGregor-Lowndes 2016). In “Dixon v FC of T (1952)” the law court held that the periodical payments made were to make up for the lost earnings that resulted in the character of the income under ordinary concepts (Hashimzade and Epifantseva 2017).
The prerequisites of the ordinary income states that a receipts cannot be viewed as the ordinary income till it is cash or actually a gain for the taxpayer (Martin and Connor 2017). On meeting the two requisites the gains will be classified as the ordinary income given it has portrayed the character of regular or periodical receipts or has the regular flow concept.
In “Blake v FCT (1984)” held that payments that is received by the taxpayer regularly or periodically is more likely regarded as the ordinary income than the gains paid in lump sum (Peiros and Smyth 2017).
The central issue obtained from the case provides that winners of “Set for Life” are given a sum of $50,000 by the lottery commission every year for 20 years. In “FC of T v Cooke and Sherden (1980)” the annual payment should be characterised as the ordinary income (Shaw 2017). Further reference can be made to the case of “Myer v FC of T (1987)” to classify the annual payment as the income depending upon the quality of the receipts that is received in the hands of the recipient.
The annual payment of $50,000 is a genuine gain for the taxpayer. Referring to “Dixon v FC of T (1952)” the sum of $50,000 fulfils prerequisites of the ordinary income under the ordinary concepts of “section 6-5, ITAA 1997” because it shows the satisfactory characteristics of regular or periodical receipts and satisfies the flow concept (Chung 2017). Therefore, the amount will be treated as the income.
The quality of the annual payment satisfies the perquisites of ordinary income and constitute gain for the recipient. The payment is received periodically each year following the payment of first instalment and hence it is an income under ordinary meaning.2.
The principle of the Duke of Westminster has been over the years the underlying principles in avoiding the tax (Sharma 2016). Most of the companies have regularly used the number of ways for avoiding the tax and when schemes does not work the commissioner does not simply spare the taxpayer (Stiglitz and Rosengard 2015). This is because the taxpayer is allowed to structure their matters of taxation in an attempt of reducing the tax liability and when the taxpayer arranges the affairs of taxation to attract minimum tax liability the taxpayers in such a situation are ready to bear the repercussions.
Principle of Duke of Westminster in Avoiding Tax
As understood in the case of “Duke of Westminster v IRC”, the house of lords has affirmed the taxpayer that they are entitled to structure their affairs of taxation in a manner that enables them to take the advantage of the numerous options that is offered by the legislation in order to attain the minimum possible liability (Kemme, Parikh and Steigner 2017). The principle established in the case was that the law should be relatively certain to provide confirmation to the principles surrounding the rule of law (Kasper et al. 2017).
Currently Australia has adopted anti-avoidance rules to address the challenges related to the tax avoidance (Pakpahan and Butler 2018). Currently the provision of anti-avoidance has been successful in diminishing the practices of tax avoidance by imposing further penalties for unpermitted tax avoidance. The current Australian government has backed the corrective actions by imposing penalties as the disincentive to prohibit the unpermitted anti-avoidance practices.
The central issue that surrounds the case is determination of the partnership for distribution of net rental property income and loss for the income tax purpose.
The owners of the rental property are the not the partners for general law purpose as explained in the TR 93/32. The owners of the property are only the partners for the tax levy purpose. Any kind of partnership agreement of sharing profits and loss is not effective be it in writing or oral (Duncan et al. 2018).
Regarding the distribution of rental property net income and loss situation of McDonald’s case be considered (Yuan 2016). As per the defendants argument the husband shared 25% income but the wife used to get the most of the income and her share included 75 of the investment property profits. The whole amount of the net loss should be shouldered by Mr McDonald.
The commissioner contended that there was not any partnership based on the general law (Long, Campbell and Kelshaw 2016). The losses incurred in subletting the premises must be shared equally with the consequences that the respondents were entitled to share the loss equally.
Joseph and Jane created the agreement of sharing the profit and loss where Joseph will be entitled to sharing 20% profits from the property while Jane will be taking 80% of the property. Their partnership agreement required to Joseph to shoulder 100 per cent of the loss. During the last income year, the couple reported a loss of $40,000.
There is an application of TR 92/32 to describe the position of Jane and Joseph. The explanation of the ruling is referred in this case to understand that there is no partnership between the couples as per the general law. The couples here Joseph and Jane are the associates for the tax purpose. (Brydges and Yuen 2018).
Current Anti-Avoidance Rules in Australia
Quoting the case of “McDonald v FC of T (1987)” the couple are the joint tenants based on law and in equity. The loss of $40,000 incurred in subletting the premises must be shared equally (Santhanam 2016).
If the alternative situation of selling the property is made by the couple, then the taxpayer in such situation should share the net gains and loss originating from the property should be shared in equal manner (Peiros and Smyth 2017). Their partnership agreement whether oral or in writing does not has any impact on the sharing of profit and loss (Dumiter, Turcas and Opret 2015).
Joseph and Jane are not the partners in terms of the general law even though their relationship is regarded as the partnership for income tax purpose. Net profits and loss obtained from the rental property must be shared in the similar proportion as their interest of ownership.
Brydges, N. and Yuen, K., 2018. A matter of trusts: Trusts, income tax, CGT and foreign residents. Taxation in Australia, 53(2), p.80.
Chung, E., 2017. What you want to know about negative gearing but are too afraid to ask. REIQ Journal, (Mar 2017), p.38.
D'Ascenzo, M., 2015. Modernising the Australian Taxation Office: Vision, people, systems and values. eJournal of Tax Research, 13(1).
Dumiter, F., Turcas, F. and Opret, A., 2015. Australian Tax System: Double Taxation Avoidance Conventions, Structure and Developments. Journal of legal studies, 16(30), pp.1-17.
Duncan, A., Hodgson, H., Minas, J., Ong, R. and Seymour, R.G., 2018. The income tax treatment of housing assets: an assessment of proposed reform arrangements.
Hashimzade, N. and Epifantseva, Y. eds., 2017. The Routledge Companion to Tax Avoidance Research. Routledge.
Kasper, M., Olsen, J., Kogler, C., Stark, J., Kirchler, E., Hashimzade, N. and Epifantseva, Y., 2017. Individual attitudes and social representations of taxation, tax avoidance and tax evasion. The Routledge companion to tax avoidance research, pp.289-303.
Kemme, D.M., Parikh, B. and Steigner, T., 2017. Tax havens, tax evasion and tax information exchange agreements in the OECD. European Financial Management, 23(3), pp.519-542.
King, A., 2016. Mid market focus: The new attribution tax regime for MITs: Part 2. Taxation in Australia, 51(1), p.12.
Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia. St Mark's Review, (235), p.94.
Martin, F. and Connor, M., 2017. Using Blended Learning to Aid Law and Business Students' Understanding of Taxation Law Problems. J. Australasian Tax Tchrs. Ass'n, 12, p.53.
McGregor-Lowndes, M., 2016. Lawyers, reform and regulation in the Australian third sector. Third Sector Review, 22(2), p.33.
Pakpahan, C. and Butler, D., 2018. Superannuation: Proposed SG amnesty raises opportunities and risks. Taxation in Australia, 53(1), p.36.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor's commission. Taxation in Australia, 51(7), p.394.
Santhanam, R., 2016. 51_Salaries and Income-Tax.
Sharma, A.K., 2016. How to Axe a Double Taxation Avoidance Agreement: Analysing Section 94A of the Indian Income Tax Act. Intertax, 44(11), pp.838-844.
Shaw, A., 2017. Tax files: Why small really is better: Accessing the lower corporate tax rate for small business entities. Bulletin (Law Society of South Australia), 39(10), p.39.
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the public sector: Fourth international student edition. WW Norton & Company.
Yuan, H., 2016. Mid market focus: The sharing economy and taxation. Taxation in Australia, 51(6), p.293
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