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HA3042 Taxation Law

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HA3042 Taxation Law

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Course Code: HA3042
University: Holmes Institute

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Country: Australia


Question 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
Question 2
Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major credit cards. It sells items off the shelf and the proprietor fills prescriptions for cash and for payments made under the Pharmaceutical Benefits Scheme [PBS].
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.
Question 3
What principle was established in IRC v Duke of Westminster [1936] AC 1? How relevant is that principle today in Australia?
Question 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 20% 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 100% 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?


Question 1;
Australian Tax Office classifies income or rather awards or prizes from gaming draws, lottery and raffle ticket win as part of other incomes for tax purpose. This is due to the nature in which these incomes are earned i.e. mainly based on once time event. The regulation likewise claims for tax declaration of this income except where the income is exempted from tax if any. However inclusion of this incomes as part of income tax return for that year ideally depends with our often is that draw conducted and who are the sponsors of the draws.For instance,Australia Tax Office has outlined that all prize awards or gift of any form whether as cash or as good that is earned as a result of an activity conducted by any investment company, building societies, banks, financial institution like credit union and business tycoons has to be declared as part of income for tax purpose in that year of tax.
The latter award won on this bodies that are in investment is considered income simply because there is a guarantee payment of the award and likewise the outlets awarding are venture in business though the main sole purpose is surety of being awarded in case of a draw. It should likewise be known that the awards to be declared are not only those which are in cash form, not really even those discounts allowance given on goods and cash, interest free loan awards, low interest loan issuance, goods like cars, houses and free holidays trips, tickets offered and any other form of prize should be declared. These prizes that are in tangible goods form its declaration is expected to be done in value form i.e. as per the cost of the item i.e. purchase consideration of that asset.
Likewise let it be known that incase where show games are conducted and the contestants in the arena are the same regularly clients who regularly recognized and thus receive appearance or game showing winning as a result of the regularly appearance i.e. on loyal customer perspective, these appearance fees award and game showing prizes has to be declare for tax purpose as a return simply because the regularly appearance dictates the speculation for award.
Although all the above prizes and awards won are worth declaration of that tax as part of income, there exist very special considerations given to ordinary lotteries. Australian Tax Office (Blakelock and King,2017.Pg.52) has exempted all prizes, gifts and awards that are won as a result of ordinary lotteries conducted with examples being lotto lotteries and raffle ticket. These awards on ordinary lotteries are exempted from tax since the participants are never aware of outcome in any case they play in draw whose outcome is unknown since it is based on probabilities or chances.
It is from this exemption of ordinary lottery prizes that we factor in this case of Set For Life. In a nutshell the party that is involved in conduction of this Set For Life lottery draw is Lottery Commission which in actual sense is deemed as an ordinary lottery firm hence by virtual of this ordinarily aspect automatically any awards or prizes earned from any draw conducted by this ordinary lottery commission of ”Set For Life icon” has to be exempted from tax declaration without fail. It is therefore very certain that the $50000 prize that will be payable for the next 20years to the person winning the Set For Life lottery draw will enjoy tax exemption whether as the person himself/herself or as estate as depicted in the current regulation on this.
The $50000 prize winning as mentioned in the question in query is therefore not subjected for tax purpose since it is classified as tax exempt in the Australian Tax Office regulation. However if this amount of $50000 from the Set For Life lottery draw that is ordinary is used to acquire an asset whether cumulative or as an installment, in case of disposal of that asset that resulted from the lottery win any gain or loss on disposal has to be declared as capital gain or loss on the grounds that awardee was now certain that he or she would earn or gain from that disposal.
Conclusively I wish to state that there is tax exempt on ordinary lottery awards thus excusing the person who wins the Set For Life voucher of $50000 from being taxed no declaration of this income as part of taxable in his or her income with reasons well known on the ground of an ordinary lottery (Philander, 2013.Pg.2.)
Question 2;
Australian Tax Office declares that by use of accrual method all gain or losses are expected to be allocated on the ground from which a financial arrangement was built between entities (Tretola, 2013.Pg.4.) It is therefore clear that the allocation of gain or loss is only applicable upon approval that the financial arrangement results to a benefit whether it is current or future. It is likewise applicable if the entities who are involved in the financial arrangement have a proof that in the next rest part of the business life there will be future financial benefit resulting from it.
It is from this financial arrangement of accrual basis that we see revenue or income or gain are recognized and earned as soon as a sale transaction is passed in the books of accounts as an invoice hence not waiting when payment is received. Similarly to expenses whereby they are only recognized as soon as they are incurred and not when they are paid off. Accrual basis is mainly applicable to transaction whose sales are done on credit basis hence the need to have an agreement that as soon as that sale as recognized in an invoice as credit sale automatically is deemed as part of sales similarly to any expense.
It is therefore from this accrual basis that the aspect of tax issue arises. Many will argues that it is an unfair for a company to declare and pay tax for sales that are indeed pending payments hence some wish to do so as soon as payment is done. Some are likewise seen to argue that only those sales done on cash basis are the one that ought to be paid tax for , an argument that accrual basis method came to resolve hence the tax office require payment of these tax as soon as invoicing done since that is when is recognized (Woellner, Barkoczy, Murphy, Evans and Pinto,2010.Pg.32.)
Going with the above definition and analysis of accrual basis for tax purpose thus exist the need to calculate Corner Pharmacy taxable income for that year based on this method. It is deemed on accrual basis since a big part of it is on financial arrangement between the bank and the Pharmaceutical Benefit Scheme Body.
Analysis of items to be considered in calculation of Corners Pharmacy Taxable Income (Freedman and Crawford, 2010.Pg.85);
Note 1.Cost Of Sales  =  Opening Stock=150000
                                    =   Purchases        =500000
                                  =   Closing Stock =(200000)
Cost of Goods Sold =450000, ideally this is the cost incurred on the items that were sold it is the cost of sales that indeed has to be factored in a business income calculation so as to get the gross profit margin. It is mostly deducted from the total sales for it to get the gross margin. Cost of sales is likewise deemed as allowable items for tax purpose since these costs are directly incurred to generate the Corner Pharmacy revenue.
Note 2. The sales for Corner Pharmacy are cash sales, credit card sales and PBS billing icon sales on credit card sales we are only to consider the credit card sales of $150000 and not the reimbursed amount simply because this is what is recognized as sales the $10000 extra reimbursement would be of course as a result of wrong entry conducted.
Note.3.The salary and rent are fixed expense which of course are allowed for tax purpose and indeed are used to reduce the amount of the taxable income on basis of matching concept since they match the revenue they generate hence need to allow them.
Note.4.The items under PBS i.e. opening balance ,billing, receipts and closing balance just shows analysis of Corner Pharmacy stock that are under PBS hence it is only the billing part that is to be factored in as part of sales thus=25000(opening balance)+200000(billing)-30000(closing stock)=195000(receipts received or paid amount)
NB; for purposes of reporting it is assumed that Corner Pharmacy Year End of tax occurs on 30Th June 2017.
                                                   Corner Pharmacy Ltd
                                                 Taxable Income Statement
Revenue Sales;                                                                                                                                $
                   Sales from Credit Card (note2)                                                                           150000
                   Sales on Cash (note2)                                                                                         300000
                   Sales on PBS (note4) billing option                                                                   200000
Total Sales Revenue                                                                                                             650000
                     Cost Of Sales (Note1)                                                                                    (450000)
Gross Profit                                                                                                                           200000
                    Other Allowable Deductions;
                                                                     Rent (Note3)                         (50000)
                                                                     Salary (Note3)                       (60000)             (110000)
Corners Pharmacy Taxable Income                                                                                     90000
Corners Pharmacy Income is therefore $90000 dollars that has to be declared as income for tax purpose. i.e. together with other income if owned by an individual and if it is a company by itself  the amount has to be declared by the company as taxable income for tax purposes as calculated as per Australian Tax Office regulation on taxable income declaration.
Question 3;                        
In this context we are expected to outline the principle that resulted from the case law of Inland Revenue Commission v Duke Westminster and like relate this principle with its current application in Australia. This is possible but it is prudent to summarily discuss what entails this case (Mumford, 2017. Pg.36.)
Duke Westminster had a gardener whom he used to pay him substantial amount of salary from his post tax income that he used to earn. Upon realizing that he has an alternative way of minimizing or rather reducing this tax burden, Duke decided to stop paying his gardener the salary and instead opted to get into an agreeable covenant that stated that he would pay the gardener a similar and very equivalent amount at the end of every specified period within that year of tax (Cachia, 2017.Pg.45.)
According to Inland Revenue Tax Office regulation at this time of Duke Case, the law allowed Duke to claim this equivalent amount he was to pay the gardener as an allowable expense for tax purpose hence reducing the tax liability burden and surtax in totality (Likhovski,2006.Pg.45.) This indeed did not sound legally friendly to Inland Revenue Commission for tax purpose hence opted to file a suit against Duke Westminster with the case citing that Duke was evading paying tax by claiming allowable that were not within the regulation of the tax man (Hayward, 2014.Pg.52.)
Upon hearing the case, judge Lord Tomlin ruled in favor of Duke claiming that this arrangement had no traces of tax evasion hence ruled further by saying that every tax payer is allowed by the law to conduct his or her own local arrangements under his works so as to free himself from any tax attached to his venture if he legally succeeds in that arrange no body in whatsoever means is allowed to compel him to pay the tax whether it is appreciative or not to the Inland Commissioner or not his arrangement is legally accepted in the law (Christians, 2014.Pg.39.)
This case therefore resulted to a principle of tax avoidance which is defined as an arrangement of financial affairs that is legal in nature that sees into it that tax burden is minimized as per the set regulation (Ostwal and Vijayaraghavan, 2010.Pg.35.) In Australia tax avoidance has not been fair to the tax man at all over the recent years; this is so due to conversion of this policy to tax fraud and at some point tax evasion. Tax payers have taken advantage of tax avoidance to a point whereby they are seen engaging themselves in tax fraud activities hoping that they will get relieve in court on aspect of tax avoidance.
Over the years Australian courts have seen litigation suits that involved tax payers who have evaded tax as others fraudulently engage themselves in actions that are seen to shift tax burden to unlawful tax bracket. This ideally has minimized revenue being collected by the tax man in Australia hence causing deficit in countries revenue. It is through these activities of fraud and evasion that has indeed affected Australia to a point that they were forced to introduce agencies that would help them curb tax evasion and fraud (Dyreng, Hanlon and Maydew, 2008.Pg.80.)
Over the years tax avoidance has never been fair for Australian Tax Office since these agencies were given full support to secure the tax man i.e. Australia Tax Office its initial position on tax collection. Tax avoidance has affected Australia task office till 2016 when these agencies were formed (Martins, 2018.Pg.75.) The first agency to be formed was Tax Avoidance Task whose core purpose was to scrutinize tax related issues of multinational firms, wealthy investors, large groups i.e. both private and public to a point where these entities a paying the right tax and within the right period.
Tax avoidance task force had to ensure that there exist tax compliance by these entities hence a great improvement in the integrity of Australian Tax System. This tax avoidance agency indeed brought this into books to a point that the citizens came to appreciate the essence of indeed complying with tax department requirement hence on revenue bases the government was able to redeem back their tax collection capacity (Desai and Dharmapala, 2009.540.)
This achievement by Tax Avoidance Task agency that saw into it the bouncing back of tax compliance as well as tax collection was as a result of multinational anti-avoidance legislation and legislation on diversions of profits. It is therefore clear that the principle of tax avoidance that resulted from IRC V Duke Westminster negatively affected Australian Tax Office on tax collection due to tax fraud and evasion swap advantage to a point of introduction of agencies to curb the monster (Sikka, 2012.Pg.25.)
Question 4;
Australian Tax Office is very keen on losses that are deemed business related since most tax payers are seen to fraud the tax man and use loss that are not related to net off other incomes they earn (Slemrod, 2009.Pg.390.) ATO on losses is likewise very categorical that only those business loss incurred on business related aspect is deemed ready to be carried forward. In the context rental loss the law requires rental owners to proof that the loss is indeed i.e. genuine by clearly indicating that indeed it deed all that was required to control the loss.
It is likewise clear that for a rental loss to be netted off one income it must proof that there is proper connection to the operation of that firm. For instance in this case of rental loss Joseph has to proof that he entirely controls and manage the operations of the rental such that the loss incurred was not out of malice for operation (Isa, 2014.Pg.60.) In this case if Joseph indeed has incurred the loss out of his efforts of ensuring the rental business property operates in a manner that was to earn him income, since the agreement to have all the 100% portion of the loss be incurred by Joseph he is indeed allowed by the law to net off his accountant professional income less the loss on rental. However if he has not been taking care of the rental property thus the cause of the loss he is barred by the regulation to claim this loss as allowable deduction.
In case of disposal of this rental property of Joseph and Jane ideally it is expected that a capital gain or loss occurs hence the agreement ratio policy stands whereby if it is again on disposal a capital gain has to be disclosed by Joseph at 20% the amount as addition in his accountancy income while the 80% has to be declare by Jane as her rental income (Piketty, 2015.Pg.50.) However the agreement seems to do some tax avoidance relieve simply because when it comes to gain sharing and the fact that Joseph has an extra income his portion of income is less while Jane is more similarly to what happens in cases of loss (Mellon, 2016.Pg.56)if it is a business loss Joseph is allowed the 100% portion so as to minimize the taxable income from his accountancy professional amount and incase of capital loss the 100% portion is seen to minimize his capital gain (Burman, 2010.Pg.4) but of course on future basis.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18
Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed. Brookings Institution Press.
Cachia, F., 2017. Aggressive Tax Planning: An Analysis from an EU Perspective. EC Tax Review, 26(5), pp.257-273
Christians, A., 2014. Avoidance, evasion, and taxpayer morality. Wash. UJL & Pol’y, 44, p.39.
Desai, M.A. and Dharmapala, D., 2009. Corporate tax avoidance and firm value. The review of Economics and Statistics, 91(3), pp.537-546.
Dyreng, S.D., Hanlon, M. and Maydew, E.L., 2008. Long-run corporate tax avoidance. the accounting review, 83(1), pp.61-82.
Freedman, J. and Crawford, C., 2010. Small business taxation.
Hayward, R. ed., 2014. Valuation: principles into practice. Taylor & Francis.
Isa, K., 2014. Tax complexities in the Malaysian corporate tax system: minimise to maximize. International Journal of Law and Management, 56(1), pp.50-65.
Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster
Martins, P., 2018. TD 2017/20. Taxation in Australia, 52(10), p.562.
Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.
Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge
Ostwal, T.P. and Vijayaraghavan, V., 2010. Anti-Avoidance Measures. National Law School of India Review, 22(2), pp.59-103.
Philander, K.S., 2013. A normative analysis of gambling tax policy. UNLV Gaming Research & Review Journal, 17(2), p.2.
Piketty, T., 2015. About capital in the twenty-first century.American Economic Review, 105(5), pp.48-53.
Sikka, P., 2012. The tax avoidance industry. Radical Statistics,107, pp.15-30.
Slemrod, J., 2009. Lessons for tax policy in the Great Recession. National Tax Journal, pp.387-397.
Tretola, J., 2013. Turning gambling silver into tax gold?.Revenue Law Journal, 23(1), p.5.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation law. CCH Australia.

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