Ha3042 Taxation Law Answers Assessment Answers

Answer:

Issues:

The following study would take into the account the tax position of the year payment that is received by the winner of the lottery. Whether the annual payment should be treated as income is dependent upon the nature of the receipt for the recipient of the payment.

Rule:

The term earnings has been defined under the “sect 6-5 of the ITAA 1997” in the form of the ordinary returns inside the meaning of the ordinary conceptions. There are usually two methods of classifying the income (Nichols and Rothstein 2015). Particularly the income is classified as the ordinary income under “section 6-5” or the statutory income under “section 6-10 of the ITAA 1997”. When a person derives receipts from the wages, salaries, proceeds from the business, proceeds from rendering services and any employment allowance are treated as the income (Robinson, Savor and Sikes 2016). It must be noted that one-off receipt should not be classified as having the character of income.

As per the opinion that is expressed in the circumstances of “Scott v CT (1935)” the ordinary denotation of the term income is reliant on much of the extent to the usual sense. At the time of determining the connotation of the word income the court has often focussed on the conversation of the term income (Ciconte et al. 2016). One of the common characteristics of the income is that it is a gain for those that receives it such income received from the business. Another important characteristics of the income is that it is treated as the return for the services. The opinion expressed by the law court in the circumstances of “Stone v FCT (2002)” income may be treated as the element of gain when the income is ultimately derived.    

Apart from the above stated factors of income there are certain regulatory legislation that governs the characteristics of income (Gordon and Kopczuk 2014). Payment that are periodical, recurrent in nature and involves consistency should be viewed as income. To support the statement the decision of the court in “Dixon v FCT (1952)” evidently made it clear that the annual receipts that are having the characteristics of periodicity, recurrent in nature and involves consistency that should be viewed as income.

While determining the constituents of income, the federal high court have established certain vital attributes of income. Payment received by the taxpayer would be characterised as income and should be in harmony with the regular connotation (Parker 2018). Furthermore, the classification of the payment in the form of income is dependent on the detailed assessment of the relevant facts and by adjudicating the nature of the payment that a person acquires. The final attributes includes judging the objectivity involved in the payment.

Application:

The following case study of lotteries commission needs noteworthy focus on judging the nature of the annual payment. In the current case the classification of the annual payment in the form of income is dependent on the detailed assessment of the relevant facts and by adjudicating the nature of the payment that the lottery acquires (Sammartino, Stallworth and Weiner 2018). The case study establishes the fact that the payment received by the lottery winner requires detailed assessment of the relevant facts and by adjudicating the nature of the payment that a person acquires.

The elucidation of the commissioner in “Scott v CT (1935)” can be referred to explain that the annual payment portrays the characteristic of income within the regular concepts. The character of the annual payment holds the nature of gain for the person that receives it.

Taking into the account the clarification of the commissioner in “Stone v FCT (2002)” annual payment may be treated as the element of gain when the income is ultimately derived by the recipient (Means 2017). By following the decision stated under the case of “Dixon v FCT (1952)” the annual payment is having the characteristics of periodicity, recurrent in nature and involves consistency.

Conclusion:

The payment received by the taxpayer would be characterised as income and because it is in harmony with the regular connotation.  The winning amount of $50,000 is paid annually at the interval of 12 months. The amount is income under the ordinary concepts of the “sec 6-5, of the ITA Act 1997”. The annual payment of $50,000 would attract tax liability.    

In the UK the analysis of the law relates to the avoidance of the taxation that traditionally began with the case of Duke of Westminster that stands with the principle that there is two ways through which the transaction may be impacted and they give rise to different tax outcomes (Levin and Light 2015). The taxpayer is however free from selecting the method of taxation that would pave way for the lesser amount of tax liability. This appears to the amount of unrestricted charter for the avoidance of taxation and a large of the tax liability is vaunted by the tax planning industry.

In the early stages it is fittingly vital to explain the difference between the tax evasion and tax avoidance. The judicial appears to be ambiguous as the court of law might look in the records of the parliamentary to move forwards towards the clear indication with the help of the promoter of the legislation to understand the meaning (Mumford 2017). However, on noticing the meaning of the word is clear then the court of law would generally give an effect to it. It should be noted that the legislation of taxation involves depth and specific and the schemes of tax planning have woven the path successfully. At the times it opens up the path in the artificial manner.

The changing of the limits of the acceptable tax avoidance not anymore makes the principles of Duke valid (England 2017). The court of law have implemented the interpretation with the objective of defeating the artificial structures of tax evasion. Though during the year 1930 the tax avoidance and tax evasion was successful however in the modern age in Australia the difference between the tax avoidance and tax evasion is not any more unclear. The attempt made by the duke in reducing the income tax liability would now in the current age in Australia would be treated as unacceptable and morally invalid.

Even though the law court have regularly casted their sceptical view regarding the conceived avoidance of tax structure but the court of law have never hesitated to scrutinise the evidences as where they stand or to implement the purposive interpretation (Gale, Kearney and Orszag 2015). Despite the fact that the case appears to fall inside the law but it does not fall under the law appropriately in order to reflect the true intention of the parliament.

In current age of the austerity there are large number of emphasis needs to paid towards better pay as there appears a blurring of the traditional differences between the tax evasion and tax avoidance (Gee, Gardener and Wiehe 2016). The language increasingly creates a differences between the acceptable level of tax planning and unacceptable degree of tax avoidance. When the discussion shifts from what constitutes lawful and what constitutes unlawful. The borderline may be not clear and indeed may change over the time. At the same time as the service of lip continues to be paid to the Duke there is a fairly clear description that the taxpayers usually seeks to lower down his liability of taxation by paying the surtax and staff under the deeds of covenant. This may now be treated as the unacceptable avoidance of taxation and morally incorrect.

The principles that comes into the play from the Duke’s event is the description regarding the avoidance of taxation. For a taxpayer they can exploit the income tax legislation with other applicable regulation with their advantage of reducing their tax liability or matters that impacts the liability of taxation (Wolfman, Schenk and Ring 2015). The meaning of tax avoidance and tax evasion should be viewed as the similar philosophy where the planners of tax may arrange their respect affairs of taxation by paying or not paying any amount of tax. Hence such avoidance is usually considered as the tax evasion.

The principles established in the event of Duke suggest that legislation of draft reflects the non-exhaustive indicators of tax arrangement that may be treated as abusive. This principles states that non-exhaustive arrangements leads to income, profits or gains that are expressively lower for the taxation purpose (Dowling 2014). In the current age of Australia if it is noticed that the arrangement are abusive then with the subject to compliance the procedural requirements of the draft legislation provides the taxation authority with the power of doing anything that is just and reasonable to counteract with the advantages originating from such tax arrangements.          

Answer 4: 

Issue:

The following case study would be dealing with the issue regarding the allocation of the income and loss for the rental property owners. The case study would take into the account what constitutes partnership under the general and what constitutes partners for the income tax purpose for the rental property holders.

Laws:

As defined in the sect 1 of the partnership act, partnership usually refers to the association that is prevailing between those that are conducting the commercial actives with the only ultimate intention of earning profits (Slemrod and Bakija 2017). The association among the partners is characterised as contractual association. In determining whether or not there is a relationship of partners among the person involved in the partnership, it is noteworthy to undersand that their partnership is not reliant on the agreement terms but on their commercial obligations towards each other while executing the commercial activities. It is noteworthy to take into the account the necessary factors of the partnership that is prevalent between the partners.

The income tax rulings of 93/32 evidently provides that the guidelines to the taxpayer in determining whether they are treated as the partnership for the income tax purpose or under the general law (King 2016). The ruling clearly states down the principles based on which the co-owners of the rental property should for the income tax purpose divide the net income and loss from the rental property.

According to the sec 51 of the partnership act the partners are not permitted for any kind of deductions simply under the virtue of the agreement that subsists between the husband and wife from indemnifying the wife from the losses (Towery 2017). The explanation denoted under sec 51 (1) of the partnership explains that the arrangement between the husband and wife of indemnifying the loss is not included under the circumstances of deductions.

The income tax ruling TR 93/32 accordingly explains that the losses or incomes derived from the rental property should be shared among the partners in agreement to their interest in the property (Pinto and Evans 2018). The ruling evidently makes clear for the income generating property holders that the co-owners cannot be termed as the partners for the purpose of the general law. As for their agreement of sharing the profit and loss, it is entirely their personal agreement but cannot override their respective entitlements for the purpose of taxation. In other words the co-owners of the rental property are only treated as the partners for the income tax purpose.

The income tax ruling TR 93/32 clarifies that the rental property joint owners must be classified as the joint tenants. A further classification of the rental property owners is the tenancies co-interest among the income producing property holders. Their legal interest stands as the detrimental factor in the division of the rental property income and loss (Gordon and Kopczuk 2014). The profit and loss should be shared among the co-owners of the rental property according to their interest in the property. In other words the owners should be sharing the loss on equal basis.

As held in “McDonald v FCT (1987)” the claim was launched by the taxpayer that there prevailed a partnership among his spouse and in himself both in agreement with the partnership act and under the general law (Thom 2017). The respondent here Mr McDonald claimed that the net profit and loss obtained from the property is ought to be distributed among his wife and himself as per the partnership agreement.

On the contrary the federal court ruled out any partnership between Mr and Mrs under the general law and expressed that the respondents were the partners for the co-ownership purpose. The owners are the joint tenants for the purpose of law and in equity. They were only the partners for the purpose of income and tax and should be only be entitled to deduct only half portion of the loss from the rental property. The private arrangement of profit allocation is not relevant for the purpose of income tax.

Application:

The application of the ruling TR 93/32 should be substantially made in the following state of affairs of Joseph and Jane. It can be effectively stated that in this case Joseph and Jane bought the property for giving it on rent and sharing the profit at the ratio of 80:20 where Joseph gets 20% profit while Jane gets 80% of profit nevertheless the entire absorption of loss should be borne by Joseph. The income generating rental property eventually suffered a loss of $40,000. The reference here should be made to ruling of TR 93/32 to classify the co-ownership of Joseph and Jane as the partners under the terms of the income tax purpose not under the general law terms.

As for their agreement of sharing the profit and loss, it is entirely the couple’s personal agreement but cannot override their respective entitlements for the purpose of taxation. In other words the co-owners of the rental property between Joseph and Jane are only treated as the partners for the income tax purpose (Pinto and Evans 2018). A further classification of the couple’s position of rental property owners is that their tenancies amounts to co-interest of income producing property. Their legal interest stands as the detrimental factor in the division of the rental property income and loss.

The profit and loss should be shared among the co-owners of the rental property according to their interest in the property. In other words Joseph and Jane should be sharing the loss on equal basis. Applying the opinion of the court in “McDonald v FCT (1987)” there is no partnership between Joseph and Jane under the general law. The couple were the partners for the co-ownership purpose (Towery 2017). Joseph and Jane were only the partners for the purpose of income and tax and should only be entitled to deduct only half portion of the loss from the rental property. The private arrangement between Joseph and Jane for profit allocation is not relevant for the purpose of income tax.

On the contrary, if the co-owners Joseph and Jane sale their rental property then capital gains and loss that may arise from such disposal of property. As Joseph and Jane are the joint tenants for the purpose of law and in equity they should allocate capital gains and loss among themselves equally for the income tax purpose.

Conclusion:

Finally, the case establishes that the co-owners of the rental property cannot be termed as the rental property owners under the general law. They are only the partners under the income tax purpose and should distributed profit and loss as per their legal interest in the property.  

References:

Ciconte, W., Donohoe, M., Lisowsky, P. and Mayberry, M., 2016. Predictable uncertainty: The relation between unrecognized tax benefits and future income tax cash outflows.

Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.

England, P., 2017. Comparable worth: Theories and evidence. Routledge.

Gale, W.G., Kearney, M.S. and Orszag, P.R., 2015. Would a significant increase in the top income tax rate substantially alter income inequality?. Economic Studies at Brookings.

Gee, L.C., Gardener, M. and Wiehe, M., 2016. Undocumented Immigrants’ State & Local Tax Contributions. The Institute on Taxation and Economic Policy.

Gordon, R.H. and Kopczuk, W., 2014. The choice of the personal income tax base. Journal of Public Economics, 118, pp.97-110.

Gordon, R.H. and Kopczuk, W., 2014. The choice of the personal income tax base. Journal of Public Economics, 118, pp.97-110.

King, D., 2016. Fiscal Tiers (Routledge Revivals): The Economics of Multi-Level Government. Routledge.

Levin, J.S. and Light, R.S. eds., 2015. Structuring venture capital, private equity and entrepreneurial transactions. Wolters Kluwer Law & Business.

Means, G., 2017. The modern corporation and private property. Routledge.

Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge.

Nichols, A. and Rothstein, J., 2015. The earned income tax credit (eitc) (No. w21211). National Bureau of Economic Research.

Parker, H., 2018. Instead of the Dole: an enquiry into integration of the tax and benefit systems. Routledge.

Pinto, D. and Evans, M., 2018. Returning income taxation revenue to the states: back to the future.

Robinson, L., Savor, P. and Sikes, S., 2016. Do investors view income tax expense as less value-relevant post FIN 48?.

Sammartino, F., Stallworth, P. and Weiner, D., 2018. The effect of the tcja individual income tax provisions across income groups and across the states.

Slemrod, J. and Bakija, J., 2017. Taxing ourselves: a citizen's guide to the debate over taxes. MIt Press.

Thom, M., 2017. Taxing Individual Income: Misunderstood, but Seldom Forgotten. In Tax Politics and Policy (pp. 57-97). Routledge.

Towery, E.M., 2017. Unintended consequences of linking tax return disclosures to financial reporting for income taxes: Evidence from Schedule UTP. The Accounting Review, 92(5), pp.201-226.

Wolfman, B., Schenk, D.H. and Ring, D.M., 2015. Ethical Problems in Federal Tax Practice. Wolters Kluwer Law & Business.