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Computation of Short-term Capital Gain or Loss for the Year Ended

Discuss about the Tangled Web of Granny Flat Arrangements.

In this assignment, the researcher has aimed to demonstrate the taxation system of a particular country with the help of five different case studies. It has also been aimed to seek complete understanding of implications of taxation with these given case references. In addition to these, the researcher has decided to take help from rules and laws provided by the governing body and certain legislations.

Eric has purchased certain assets and shares over the last 12 months and he sold these assets and shares last week in the same year (Piketty & Zucman, 2014). If the assets or shares are held for a year or less than a year will be called as short-term assets. Similarly, if the assets are held for more than a year, will be called as long-term assets. In this case, Eric has held them for less than a year and sold them in the same year. Computation of short-term capital gain or loss for the year ended

List of assets purchased:

List of assets sold:

Shares of a listed company for $ 5,000

A home sound system for $ 12,000

A painting for $ 9,000

An antique chair for $ 3,000

An antique vase for $ 2,000

Shares of a listed company for $ 20,000

A home sound system for $ 11,000

A painting for $ 1,000

An antique chair for $ 1,000

An antique vase for $ 3,000

Total assets purchased = $ 31,000

Total assets sold = $ 36,000

Short term capital gain for the year ended = total assets sold - total assets purchased

= $ 36,000 - $ 31,000

= $ 5,000

In this case reference Brian has received a loan as a part of his remuneration package for three years, because he is a bank executive, he received loan amounted to $ 1 million at a special rate of 1%. 40% of the loan was used for income-producing purposes and for meeting all interest payment obligations. In this case, Brian has received fringe benefit on the loan amount for the year 2016-2017. In addition, it can also be seen that loan has been provided on 1 April 2016. The computation of taxable income of Brian for the year ended 30 June 2017 is given below.

Date of receiving loan = 1 April 2016 for 3 years

Amount of loan = $ 1 million

Rate of interest on loan = 1% (special interest rate or fringe benefit)

Actual rate of interest on loan in the country is around 15%

Mode of repayment of loan = Monthly installment

Use of loan amount = $ 400,000 (40% of $ 1 million)

Computation of installment for 15 months = ($ 1,000,000 * 1% / 12 months) * 15 months

= ($ 10,000 / 12) * 15 months

= $ 12,500

Computation of taxable income for the year ended 2016-2017

Computation of Taxable Income for the Year Ended

Income = $ 1,000,000

Less: expenses = $ 400,000

Less: repayment of installments (interest) = $ 10,000

Less: repayment of installments (principal) = $ 250,000 ($ 333,334 - $ 83,334)

Total taxable income = $ 340,000

In this case, Brian has to pay tax on the taxable income amounted to $ 340,000, where the monthly installment (principal + interest) on the loan is $ 21,667 ($ 250,000 + $ 10,000). Hence, it can be concluded that Brian should pay for installments and due to this his taxable income is reduced by $ 21,667. On the flip side, if he has to repay the installment at the end of the loan, his taxable income would be different (Cerqueiro, Ongena & Roszbach, 2016).

The computation is given below.

Income = $ 1,000,000

Less: expenses = $ 400,000

Total taxable income = $ 600,000


Thus, it can clearly be seen that monthly repayment of installment is beneficial for Brian, because in this case, he should pay tax on $ 340,000. However, on the other hand, he has to pay tax on $ 600,000, which could be very high (Hodgson & Pearce, 2015).

On the contrary, if in case bank releases Brain from repaying the interest on loan, he would then have to pay only the principal amount. In this case Brian’s expenses would slightly go down, but he then cannot claim fringe benefit on the loan and he must pay tax on the taxable income, which is computed below.

Computation of taxable income for the year ended 2016-2017

Income = $ 1,000,000

Less: expenses = $ 400,000

Less: repayment of installments (principal) = $ 250,000 ($ 333,334 - $ 83,334)

Total taxable income = $ 350,000

Therefore, it can clearly be seen that Brian has to pay tax on three different cases. If he has to pay installment (both principal and interest), he has to pay tax on $ 340,000. On the other hand, if was released from paying interest on loan, he has to pay tax on $ 350,000. However, in case if the installment should be paid at the end of the loan tenure, he has to pay tax on $ 600,000.

Jack who is an architect and his spouse is only a housewife, together borrowed money to purchase a property for renting purpose as joint tenants. Interestingly both husband and wife have entered a contract where, it has been decided that if any profit arises 10% of that profit will be entitled to Jack and rest will be entitled to his wife Jill. On the contrary, if any loss occurs, Jack will bear 100% of the loss. However, in the last year the rental property has generated loss of $ 10,000 and as per agreement, Jack will bear the whole loss.

Benefits of Monthly Repayment of Installment for Brian


According to the Section 35(2) of Relationship Act 2008, a person is not said to be the domestic partner of another person on the ground of relationship of co-tenancy (Johnstone, 2014). However, according to the Section 5(1) of Partnership Act 1958, partnership may be defined as the relationship between two or more parties, who are carrying on a same business with an aim to earn profit. Australian Partnership Act also describes the nature of partnership in case of joint tenancy and provides certain provisions regarding the nature of tenancy or property related to the joint tenancy, where it is said that Joint occupancy tenure in like manner joint property normal property or part proprietorship does not of itself make an organization as to anything so held or possessed whether the inhabitants or proprietors do or don't share any benefits made by the utilization thereof (Bennett, 2016).

The sharing of gross returns does not of itself make an association whether the people sharing such returns have or have not a joint or basic right or enthusiasm for any property from which or from the utilization of which the profits are inferred. Moreover, the receipt by a man of an offer of the benefits of a business is at first sight confirm that that individual is an accomplice in the business, however the receipt of such an offer or of an installment dependent upon or differing with the benefits of a business does not of itself make that individual an accomplice in the business (McCullagh, 2015).

However, in this case it has been found that Jack and Jill have domestic relationship and came into a contract of joint tenancy where both are entitled to profit of 1:9 ratio, but in case of loss only one partner is entitled to bear the full amount of loss. With respect to the provisions made in Relationship Act and Partnership Act, it can be said that Jack and Jill are no doubt in domestic relationship but in case of relationship of Joint tenancy, Partnership Act gets attracted, where they are considered to be in partnership relation since the nature of business is same, also both are entitled to profit, but in case of loss, only Jack has to bear the whole loss. In fact, in partnership act, only provision for partnership is given that all the partners are entitled to profit and not loss. If any partner alone bears the whole loss but also gets share of profit will be also be called partner (Willis, 2015).

Implications of Loan Release for Brian

Therefore, the loss of $ 10,000 will completely be borne by Jack and he is entitled to get tax benefit on loss for the year ended. On the flip side, if both the partners decide to sell the property, they first have to recover loss arose from that property then they can sell the property. However, in this case, there is no scope for recovery of loss, thus they have to sell the property for capital loss. Further, this capital loss will be adjusted with the long-term or short-term capital gain.

The Duke executed deeds with people then in his utilize (counting his planter) in which he covenanted to pay to them certain week by week aggregates for a time of seven years or the joint existences of the gatherings. The deeds recounted that the installments were made in acknowledgment of past administrations dependably rendered to the Duke and that the Duke wanted to make arrangement for the individual despite that he may proceed in the Duke's administration (in which occasion he will be qualified for compensation in regard of such future administration) or may stop to work for the Duke (Evans, 2015).

Letters of clarification (which were recognized by the representatives) were sent to every worker illuminating him that he could assert full compensation for future work however that it was normal by and by that he would be content with the arrangement made by the deed in addition to such aggregate (assuming any) as may be important to convey the aggregate installments up to the level of the pay or wages he had of late been getting (AbdulRazaq & Adam, 2015).

The beneficiaries at the time the deeds were executed were accepting settled wages or compensations and after execution of the deeds proceeded in the Duke's business and kept on getting such aggregates as, with the whole payable by the deed, made up the measure of the wages or pay payable before the deed and no more.

On the off chance that the sums paid under the deed in regard of periods amid which the people were in the Duke's utilize were compensation for administrations, they were not deductible in figuring the Duke's risk for surtax. In the event that, then again, the sums were yearly installments, they were deductible. Subsequently, the issue was whether the installments under the deeds were compensation for administrations or not (Bloom, 2015).

Exploring Domestic Relationship and Joint Tenancy

It was indisputable that the deeds were conveyed into reality in order to allow the Duke to lessen his surtax obligation.

The installments were not compensation for administrations. Three of the five Lords reasoned that the letter was not an agreement, just an outflow of expectation or reckoning and four of the five Lords presumed that, regardless of the possibility that it was an agreement, it was simply an agreement that the individual's compensation for future administrations won't be full compensation yet just the extra entirety alluded to in the letter. The fifth Lord, in contradict, inferred that the deed and letter ought to be seen together as a basically keeping up the current contract of administration instead of drastically adjusting it (Halberda, 2014).

The majority of the Lords dismissed the recommendation that in income cases there is a principle that the court may overlook the lawful position and respect the substance of the issue. The substance is what comes about because of the lawful rights and commitments of the gatherings found out upon customary lawful standards.

There is a particular offense identifying with the 'deceitful avoidance of wage impose' in the Taxes Acts, which was initially presented in 2000. Be that as it may, this enactment is not much of the time utilized, as the Revenue frequently wants to depend on the custom-based law when they indict (Krebs, 2016).

Occasionally, you may find that a citizen is indicted under the Theft Act for false bookkeeping (or perhaps the Fraud Act 2006) yet the greater part of tax avoidance cases is brought under the customary law criminal offense of 'swindling general society income.

There is no greatest punishment for such an offense if discovered liable so a respondent could be condemned to life detainment and in addition repaying the Revenue (Collins, 2016). The past Chancellor, Dennis Healey, broadly portrayed the distinction between impose shirking and tax avoidance as being "the thickness of a jail divider".

In this case it has been found that the Bill wants to graze sheep in the land which he owns. But the problem here arises is with the tall pine trees in his land which needs to be cleared off. Later, Bill found that a logging company is ready to pay him $1,000 per 100 meters of timber which can be taken from his land. According to the relevant provisions of sale of goods act 1954 (Australia) the contract of sale can be made in writing which can be with or without seal or by word of mouth or partly in writing and partly by word of mouth. The price in the contract of sale can be considered as fixed if both the parties agree with each other. In simple words, it can be said that both the parties have to get into a contract of sale where they must follow some rules regarding purchase and selling (Vitry & Roughead, 2014). One problem arises here, the buyer may not get the payment after fulfilling sellers need. Now in this case Bill is considered as seller who will be getting paid by a logging company for the clearance of trees in his land. If Bill agrees upon the payment offered to him by the company he will be getting good amount. For instance, let the measurement of Bill’s land be in meters, and it is assumed that the timber covers 4500 meters then he will get,

Partnership Act and Loss Recovery for Joint Tenancy

for 100 meters Bill will be paid $1,000

for 1-meter Bill will be paid $(1,000/100) = $10

now for 4500 meters of land Bill will be given $(4500*10) $45000.

Hence, as per assumed calculations it has been observed that for the clearance of 4500 meters of timber the company will be giving $45000 to Bill. Without investing any funds, the amount Bill is getting from the logging company is huge and can be a better deal (Leipold et al. 2016).

Here another phase of the deal has been found where, if Bill will be given a lump sum of $50,000 by the logging company for the clearance of timber as per the requirement of the company (Douglas, Hall & Gartner, 2015). The company offering him such a huge amount for the clearance, what if the owner of the land agrees upon this where both the parties have no idea about how much area does timber covers or how much timber the company needs. In this case may be the company is giving less amount for the timber that covers the land, or it may happen that the bill is getting more amount for less timber. Now it can be said that this deal may or may not be beneficial for one of the either parties.

Therefore, according to observations which have been found studying the above case, it can be said that if Bill is offered a lump sum of $50,000 by the company for the clearance of timber it will be the best deal. Because if Bill agree to get paid $1,000 for every 100 meters then it would be a loss for him as per the assumed calculations above where he will be getting only $45,000 for 4500 meters of land that timber covers.

Conclusion

Efforts have been made to evaluate the different case references with respect to the taxation law. Based on the evaluation it has been found that in the first case reference Eric has earned capital gain of $ 5,000 and from the second case study, it can be concluded that in case if the installment should be paid at the end of the loan tenure, Brian has to pay tax on $ 600,000.

References

AbdulRazaq, M. T., & Adam, K. I. (2015). Anti-Avoidance Legislations: Issues & Doubts in the Application of Tax Rules in Nigeria. AGORA Int'l J. Jurid. Sci., 1.

Bennett, R. J. (2016). Interpreting business partnerships in late Victorian Britain. The Economic History Review, 69(4), 1199-1227.

Bloom, D. (2015). Tax avoidance-a view from the dark side. Melb. UL Rev., 39, 950.

Cerqueiro, G., Ongena, S., & Roszbach, K. (2016). Collateralization, bank loan rates, and monitoring. The Journal of Finance, 71(3), 1295-1322.

Collins, J. (2016). Fraud by Abuse of Position and Unlicensed Gangmasters. The Modern Law Review, 79(2), 354-363.

Douglas, H., Hall, W., & Gartner, C. (2015). E-cigarettes and the law in Australia. Australian family physician, 44(6), 415.

Evans, S. (2015). It's' Clean Hands' Again: The Dirtiness of Not Paying Tax Considered in the Supreme Court.

Halberda, J. (2014). Mistake of law and mistake of fact in English law of restitution. Tijdschrift voor Rechtsgeschiedenis/Revue d'Histoire du Droit/The Legal History Review, 82(3-4), 261-283.

Hodgson, H., & Pearce, P. (2015). TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), 819.

Johnstone, P. (2014). Planning reform, rescaling, and the construction of the postpolitical: the case of The Planning Act 2008 and nuclear power consultation in the UK. Environment and Planning C: Government and Policy, 32(4), 697-713.

Krebs, M. (2016). Analysis of the CSARS v NWK case and its effect on the substance over form-doctrine.

Leipold, S., Sotirov, M., Frei, T., & Winkel, G. (2016). Protecting “First world” markets and “Third world” nature: The politics of illegal logging in Australia, the European Union and the United States. Global Environmental Change, 39, 294-304.

McCullagh, R. (2015). The tangled web of Granny flat arrangements. LSJ: Law Society of NSW Journal, (17), 82.

Piketty, T., & Zucman, G. (2014). Capital is back: Wealth-income ratios in rich countries 1700–2010. The Quarterly Journal of Economics, 129(3), 1255-1310.

Vitry, A., & Roughead, E. (2014). Managed entry agreements for pharmaceuticals in Australia. Health Policy, 117(3), 345-352.

Willis, J. (2015). Fraud and the indefeasibility of a joint tenant's title. Bar News: The Journal of the NSW Bar Association, (Winter 2015), 14.

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