Taxation Laws - Case Study Analysis Online Sample

Analysis Of Taxation Laws

Submitted To

Submitted By

Table of Contents Case Law 1:............................................................................................................ 3 Case Law 2:............................................................................................................ 5 Case Law 3:............................................................................................................ 7 Case Law 4:............................................................................................................ 8 Case Law 5:............................................................................................................ 9

Case Law 1:
Introduction

An individual named Eric made sale of certain assets. The sold assets were acquired within period of 12 months before the date of sale.

Issue

How much loss or gain was made by Eric on such assets?

Rules

ITAA 1997 provides various rules for the sale transactions of capital assets. Such rules are explained as below:

(a) The assets sold by an individual may fall in any of the three categories which are collectables, personal assets and other assets. The gain or loss on sale of collectables is not considered when it was purchased for $500 or less value. The loss on sale of collectables is also not to be used for setting off the capital gain on any other assets but it can be used to set off the gain on capital assets within the same category. If capital gain is left unused or unadjusted within any financial year, the balance can be used in the next tax year (Colemon, 2016).

(b) ITAA 1997 provides that the gain on personal assets is taxable but loss is of no benefit to taxpayer from taxation point of view as it can’t be used to set off the gain on any asset (ATO, 2016).

(c) The assets which are purchased and sold with a minimum difference of 12 months of time period, the benefit of discounting is given where the revenue is reduced by 50%. No such benefit is given in case of assets disposed of within a period 12 months from the date of its acquisition (Barkoczy, 2017).

Analysis

Eric disposed of his assets in the given case within 12 months from the acquisition date so he will not get discounting benefit. He disposed of antique pieces, personal items and financial instruments. Their loss or gain has been computed by taking the difference between revenue and purchase price. This is as follows:

Antique vase = Capital gain of $1000

Antique Chair = Capital loss of $2000

Painting = Capital loss of $8000

Eric’s net capital loss on his collectables = -$9000. This loss will not be taken in to consideration while setting off gain from other assets.

Eric’ Home system is a personal asset. Its value is greater than $10000. So he will be assessable on its loss or gain on sale. Eric’s loss on personal item is $1000. This loss will also not be taken in to consideration.

He earned gain of $15000 when he sold his shares

Conclusion

Eric’s loss or gain summary is as below

Case Law 2:
Introduction

The employee of a bank received loan at reduced interest rate in the form of loan fringe benefit. He was charged interest @1% and loan was for the term of 3 years. The employee invested 40% of loan value on which he was able to get returns.

Issue

How much loan fringe benefit was given to the employee in first year?

How much loan FB was given to the employee if he was allowed to pay interest after the expiry of loan term?

How much loan FB was given to the employee if he was charged no interest?

Rules

ITAA 1997 provides for a statutory interest rate at which the notional interest on the loan amount is computed. It is 5.65% (ATO, 2017). This notional interest is compare with the actual interest payable for computing the value of benefit. The difference is reduced with the deductible rule, if the employee has used any part of loan for profit making purpose (ATO, 2017).

If the employee is provided with loan benefit without any interest payment, the actual interest rate is 0.

If the employee has been permitted to pay interest after the period exceeding 6 months, a new loan will come into existence. It will be on account of unpaid interest and will remain in existence till the payment is made. No interest is payable on this new loan.

Analysis

The value of benefit provided by employer to his employee in the above three situations is shown as below:

(i) Loan benefit in first situation

(i) Loan benefit in second situation

It will be same computed in same situation but as the interest is being paid after a period exceeding six months so two new loans will come into existence in the first year.

(ii) Loan benefit in third situation

Case Law 3: Introduction

Jack and Jill co-owned a property. They were the joint owners and the property was rental property. They made a deed in which they decided to share profit as to 1/10th by Jack and 9/10th by Jill. There was loss of $10000 on property. The deed also provided that in case of loss, Jack will bear the entire loss

Issue

The share of each co-owner in loss is to be computed.

How each of the co-owner will share capital gain or loss if any if the property is sold?

Rules

The legal interest in a rental property which is held by co-owners is equal if the following conditions are satisfied:

• The co-owners are the joint tenants.
• They are holding rental property as their investment and not in the course of their business (ATO, 2017).

They can’t change their ratio even through making any agreement. If any such agreement has been made, it will have no effect.

The gain or loss arising from the sale of such property is liable to capital gain tax and the resultant benefit or loss is also shared in legal interest by the joint tenants.

Case analysis

Jack was architecture and his wife was a housewife. Both bought a rental property. Their legal interest was equal as they held the property as joint tenant. The facts of the case depicts that the rental property was not their business. It means they owned the property as an investment. The loss of $10000 will be shared by both of them in their legal interest which was equal as per the provisions of ITAA 1997. Their deed in which they decided to that entire loss will be shared by husband, has no relevance. This loss will be a rental loss and both will show $5000 in their tax assessment.

When they will sell the property, they will have to pay capital gain tax if there is profit on sale. The profit or loss on such sale will also be borne in their legal interest ratio i.e. equal ratio.

Conclusion

There can be no change in the legal interest of joint tenants of rental property if they own it for investment purpose. This interest which is equal can’t be even changed by an agreement by the co-owners.

Case Law 4:

There is a Westminster which was established in the case of IRC v Duke of Westminster. This principle provides that the tax payers can take necessary steps or arrangements which help them to reduce their tax. The arrangements should be legal or lawful. If the steps are unlawful, the benefit of tax reduction will not be available to the tax payer. Tax avoidance is the right of any tax payer and this right cannot be taken away from them (Colemon, 2016).

The principle originated from this case as Duke changed the sequencing of his expenses which helped him to reduce his tax liability. Earlier he used to deduct wages of his gardener from his after tax income. He decided to deduct the wages of gardener from his before tax income so that the deduction for expenses can be claimed. His arrangement or change in ordering of expenses was held valid and benefit was made to him available.

Though this principle had great relevance during the time it was established, as decision of many cases was taken on the basis of this principle only. But however, the principle has become dead in the context of Australian economy. The lawful nature of the arrangements is now not the only criteria for determining whether the benefit of tax reduction should be given to the taxpayer or not. The term tax evasion has become so much prevalent that many restrictions have been put to the principle of Westminster. The overall scenario will be taken into consideration to determine whether to provide the benefit of tax reduction. The arrangements made by the tax payer should be commercial relevance. If they have no business relevance or significance, the arrangement will be assumed to be of the nature of tax evasion.

Case Law 5 Introduction

Bill wanted to graze his sheep on land owned by him. It had long pine trees which he wanted to sell to make grazing of sheep possible. He decided to sell the trees to logging company for $1000 /100 meter.

He also has the option to give right to logging company to take away the standing timber for fixed amount of $50000. The quantity to be sold is not determined. It means they can take as per their requirement.

Issue

The sale proceeds of timber will be assessed in what manner in both the situations as mentioned above.

Rule

ITAA 1997 states that if standing timber is sold, the proceeds of sale are taxable. It will be taxable as business income in the hands of owner if he is a trader of timber and as capital income in the hands of owner if he is a non-trader of timber.

If the owner passes the right to the logging company to take away the any amount of timber for fixed sum of amount, the proceeds are taxable as ordinary receipt. The provision of right to the logging company has been mentioned to get covered under the provisions of section 25(1) of Income Tax act (Cassidy).

Analysis

In the given case, the owner of land is not the trader of timber. He wanted to make land useful grazing sheep. So he agreed to make sale of timber. The amount determined was $1000 for 100 meter. This sale proceed will be put under the heading of capital receipt for the land owner.

In the second situation, where the owner of land if sells the timber for $50000, the proceeds will be put to tax in his hands as his ordinary receipts.

Conclusion

Standing timber’s sale proceeds are always taxable in the hand of seller whether he is a trader of timber or not. The facts of the case will decide whether it is taxable as business income, capital gain or ordinary receipt.

References

ATO. (2016). Collectables and personal use assets. Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Restrictions-on-investments/Collectables-and-personal-use-assets/#Definitionofcollectablesandpersonaluseas

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

ATO. (2017). Fringe benefits tax – rates and thresholds. Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/Rates/FBT/

Australian Government. (2017). Fringe benefits tax (FBT). Retrieved from https://www.ato.gov.au: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/

Barkoczy, S. (2017). Foundations of Taxation Laws (8th ed.). Oxford Publishing House Ltd.

Cassidy, J. (n.d.). The Taxation of Isolated Sales under Section 25 (1) ITAA: TR 93/2 v Joint Submission. Revenue Law Journal. Retrieved from http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1044&context=rlj

Colemon. (2016). Principle of Taxation Law. Thomson Reuter.