Taxation Law Sample - Taxation Theory

HI6028 Taxation Theory, Practice & Law






Submitted To

Submitted By

















Table of Contents

1 Question........................................................................ 3

Case Introduction and Issue....................................................... 3

Legal provisions or rules......................................................... 3

Analysis.......................................................................... 4

Conclusion........................................................................ 5

2 Question........................................................................ 6

Case Introduction and Issue....................................................... 6

Legal provisions or rules......................................................... 6

Analysis.......................................................................... 7

Conclusion........................................................................ 8

3 Question........................................................................ 8

Case Introduction and Issue....................................................... 8

Legal provisions and rules........................................................ 8

Analysis.......................................................................... 9

Conclusion........................................................................ 9

4 Question........................................................................ 10

Issue............................................................................. 10

Legal provisions or rules......................................................... 10

Analysis.......................................................................... 10

Conclusion........................................................................ 11

5 Question........................................................................ 11

Case Introduction and Issue....................................................... 11

Rule.............................................................................. 12

Analysis.......................................................................... 12

Conclusion........................................................................ 13





1 Question

Case Introduction and Issue

The capital gain or loss is to be calculated for certain assets which Eric purchased over a period of last 12 months. The particulars of assets, purchase price and selling price are given as below:

Assets Purchase Price ($) Selling Price ($)
Antique Vase 2000 3000
Antique Chair 3000 1000
Painting 9000 1000
Home sound system 12000 11000
Shares 5000 20000

What is the net amount of capital gain or loss?

Legal provisions or rules

The income tax provisions as specified under ITAA 1936 related to taxation of capital assets as covered above are given as below:

(i) Antique vase, chair and paintings are covered under the category of collectibles. These are exempt from capital gain tax if their value is less than $500. Otherwise any gain or loss on these items is taxable. (Subsection 118-10(1))

(ii) Home sound system is an asset which is covered under the category of personal assets. These assets are exempt from capital gain tax up to the value of $10000 otherwise any loss or gain on their sale is taxable.

(iii) Gain or loss on the sale of investment in share is fully taxable.

(iv) The capital losses of collectibles can be used to reduce the capital gains on collectibles only (ATO, 2017).

(v) Capital loss on any personal use asset is always disregarded. It means the capital loss on any of the personal use asset cannot be used to reduce the capital gain on other personal use assets (ATO, 2017).

(vi) The benefit of application of method of discount rate or indexation is not applicable in case of assets for a period less than twelve months (ATO, 2017).

(vii) Collectibles and personal use assets are special category of assets, the gain or loss of which can’t be adjusted with gain or loss on ant other asset.

Analysis

In the given case, there are three categories of assets.

(i) Collectibles which includes antique vase, chair and painting. The computation of capital gain or loss is given as below:

Assets Purchase Price ($) Selling Price ($) Capital gain/loss = Selling price – Purchase price
Antique Vase 2000 3000 1000
Antique Chair 3000 1000 (2000)
Painting 9000 1000 (7000)
Net capital loss (8000) - Loss

This loss can be carried forward to the nest year.

(ii) Home sound system is a personal use item and is purchased for value greater than $10000. Any gain on it will be taxable and loss will be disregarded

Assets Purchase Price ($) Selling Price ($) Capital gain/loss = Selling price – Purchase price
Home sound system 12000 11000 (1000) – Loss

(iii)The computation of capital gain on sale of shares is as follows

Assets Purchase Price ($) Selling Price ($) Capital gain/loss = Selling price – Purchase price
Share 5000 20000 15000 (gain)

Conclusion

The net capital gain for the year is $15000. Though there is loss in sale of collectibles and personal use assets but this loss cannot be used to reduce the capital gain on other items.

2 Question

Case Introduction and Issue

Brian, a bank employee, was provided three years term loan of $1m at interest rate of 1% on 1st April 2016. Brian used 40% loan for income producing purpose and paid interest in time.

  1. What is the taxable value of fringe benefit for 2016-17?
  2. What is the taxable value of fringe benefit for 2016-17 if interest is paid at the end of term period?
  3. What is the taxable value of fringe benefit for 2016-17 if interest is exempted by employer?

Legal provisions or rules

  1. The loan provided at special interest rate which is less than the normal interest rate is called fringe benefit.
  2. The taxable value of loan fringe benefit will be the difference between the interest that is payable to employer (at special interest rate) and the notional interest calculated using the statutory interest rate.
  3. The statutory interest rate as per the guidelines of ATO is 5.65% for the year 2016-17.
  4. The value of loan fringe benefit is reduced when the interest payable on loan is claimed as deduction for income tax purpose.
  5. If the interest on loan is waived, the taxable value of loan fringe benefit will be the notional interest computed on the basis of statutory interest rate (ATO, 2017).

Analysis

(i) Steps

Interest on loan @1% = 1000000 *1% = 10000

Interest on loan @5.65% = 1000000*5.65% = 56500

a. Taxable value of loan fringe benefit value without the deductible rule = 56500-10000=46500

b. Taxable value of loan if it was interest free = 1000000*5.65% = 56500

c. Interest which would have been claimed as tax deductible expense (statutory interest) = 56500*40% = 22600

d. Interest which would have been claimed as tax deductible expense (special interest) = 10000*40% = 4000

e. Deduction to be made from loan fringe benefit as calculated in step (ii) on account of investment in income producing securities = 22600-4000 = 18600

f. Net loan fringe benefit = 46500-18600 = $27900

(ii) There will be not fringe benefit will in the first year. It will be computed at the end of third year when the interest will become due.

(iii) If interest is exempted, the loan fringe benefit will be the total amount of

a. Interest on loan at statutory rate = 56500

b. Deduction to be allowed on account of interest expense claimed as deduction = 22600

Net loan fringe benefit = 56500-22600 = 33900

Conclusion

The net loan fringe benefit will be $27900 in the first situation and $33900 in the third situation. In second situation there will be no fringe benefit in the first and second year of loan

3 Question

Case Introduction and Issue

Jack and Jill are husband – wife and are joint tenants of a rental property. Their written agreement provided that profits on property will be shared by Jack and Jill in the ratio of 1:9. Any loss will be suffered by Jack only.

(i) How the loss of $10000 will be treated which arose last year?

(ii) How will they account for capital gain or loss, if they sell this property?

Legal provisions and rules

The provisions of holding interest in a property by joint tenants are given as below:

a. The joint tenants of a property always hold equal interest in the property. Any profit or loss on such property is always divided in the equal ratio among all joint tenants.

b. They cannot change this equal ratio through any agreement between them which may be either in writing or oral. Such agreement will be held void (ATO, 2017).

Analysis

In the given situation, Jack and Jill are joint tenants of a rental property. It means they will all losses or profits arising out of this property in the ratio of 1:1. The agreement entered in to between them which provides that profit from such rental property will be shared by jack and Jill in the ratio of 1:9 or any loss will be borne by Jill only will be held void.

(i) Therefore the loss of $10000 will be divided between Jack and Jill in the equal ratio. Both will show capital loss of $5000 while showing their assessable income. This capital loss can be used to reduce the capital gains on other assets.

(ii) The profit or loss on sale of house property will also be shared by Jack and Jill in their legal interest which is 1:1

Conclusion

Jack and Jill, being joint tenant of a property, will share all profits or losses arising from the rental property in the ration of 1:1. The agreement entered in to between them is invalid.

4 Question

Issue

(i) Which principle was established in IRC v Duke of Westminster [1936] AC 1?

(ii) How relevant is that principle today in Australia?

Legal provisions or rules

The Westminster principle was established in the case of IRC v Duke of Westminster. This principle relates to tax avoidance. According to this principle every person has the right to make lawful arrangement of his affairs in such a manner which has the impact of reducing his tax liability. Though it will lead to reduction in the revenue of taxation department but as long as the action is lawful it is allowed.

Analysis

In the case of IRC v Duke of Westminster, Duke had employed a gardener to whom wages were paid from post-tax income. Duke stopped paying him wages and entered in to a contract with him under which same amount of wages were payable but they were payable from before tax income. It enabled Duke to claim wages of gardener as deductible expense and reduce his tax liability. IRS (Inland revenue Commissioner) filed case and lost it in favor of Duke.

The relevance of this principle has been weakened in context of Australian economy. Initially this principle seemed to very attractive as the tax payer was able to reduce his tax liability through lawful manner. But over a period of time its relevance has been weakened by the hearing of subsequent cases. The court has considered the overall effect and gave the decision in favor of revenue department (Oxford Index, 2001).

Take for example in one of the case the principle of Ramsay was developed. This principle has put a restrictive approach to Westminster’s principle.

In a case of Ramsay v IRS, the court held the company made large amount of capital gain and entered in to self-cancellation of transactions that generated artificial capital losses so that the tax can be saved. It was decided that when there are pre-arranged artificial steps in a transactions with no commercial purpose, there will be no benefit given to the tax payer.

Conclusion

The Westminster’s principle provide for use of lawful ways for reducing tax liability are allowed as it is tax avoidance. But when unlawful means are used to reduce tax liability, it is not allowed as it become tax evasion.

The principle of Westminster is applied with restrictions as people started taking benefit through unlawful ways.

5 Question

Case Introduction and Issue

The land of Bill has many tall pine trees which he wants to get cleared as he wants to use land for the purpose of grazing sheep. A logging company offers him to pay $1000 for every 100 meter of the timber taken from land.

(i) Whether Bill would be assessable on the sale receipts taken from the logging company?

(ii) Whether Bill would be assessable if he receives $50000 from the logging company when they are asked to remove as much timber as they require.

Rule

(i) Any amount realized by the land owner on the sale of standing timber will be assessable in his hands. In case where the forestation is not the business of land owner, whether the amount will be taxed in the way of capital gain or business profits will be decided by ATO on the basis of facts of the case.

(ii) The person who owns the timber can grant the right to third party to cut and remove the timber for certain amount of money. Section 25(1) of ITAA 1936 provides that the amount received by granting a right to third party is known as royalty and it will be taxable in the hands of the owner of land whether or not he indulges in the business of forest operations.

(iii) The price of or royalty calculated is not based on the amount of timber taken from the land, it means the special feature is absent. The amount received by the land owner will not constitute assessable income (ATO, 2010). This decision was established in the case of “ Stanton v . The Federal Commissioner of Taxation (1955) 92 CLR 630.”

Analysis

(i) In the given situation Bills has many pine trees which he has decided to sell to a logging company @$ 1000 for every 100meter of timber. Here the amount received by Bill will be included in his assessable income as the standing trees have been sold. The price has been fixed for the certain quantity.

(ii) In this situation Bill has decided to sell timber for lump sum of $50000 without determining and quantity to be taken. The amount received by Bill will not be included in his taxable income.

Conclusion

The sale of standing timber is taxable in the hands of owner even though he may not be carrying on the operations of forests and plantation. But when the contract is for lump sum amount without determining any quantity, it is not taxable in the hand of land owner.

References

ATO. (2010). Taxation Rulings. Retrieved from http://law.ato.gov.au: http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR956/NAT/ATO/00001

ATO. (2017). CGT assets and exemptions. Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/

ATO. (2017). Co-ownership of rental property. Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/Forms/Rental-properties-2013-14/?page=5

ATO. (2017). Fringe Benefit Tax - A guide . Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/law/view/document?DocID=SAV/FBTGEMP/00009&PiT=99991231235958/?page=3#LawTimeLine

Oxford Index. (2001). http://oxfordindex.oup.com. Retrieved from http://oxfordindex.oup.com: http://oxfordindex.oup.com/view/10.1093/oi/authority.20110803121911242