HI6028 Taxation Theory Practice and Law- FC of T v McDonald
1. Over the last 12 months, Eric acquired the following assets: an antique vase (for $2,000), an antique chair (for $3,000), a painting (for $9,000), a home sound system (for $12,000), and shares in a listed company (for $5,000). Last week he sold these assets as follows: antique vase (for $3,000), antique chair (for $1,000), painting (for $1,000), sound system (for $11,000) and shares (for $20,000). Calculate his net capital gain or net capital loss for the year.
2. Brian is a bank executive. As part of his remuneration package, his employer provided him with a three-year loan of $1m at a special interest rate of 1% pa (payable in monthly instalments). The loan was provided on 1 April 2016. Brian used 40% of the borrowed funds for income-producing purposes and met all his obligations in relation to the interest payments. Calculate the taxable value of this fringe benefit for the 2016/17 FBT year. Would your answer be different if the interest was only payable at the end of the loan rather than in monthly instalments? What would happen if the bank released Brian from repaying the interest on the loan?
3. Jack (an architect) and his wife Jill (a housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Jack is entitled to 10% of the profits from the property and Jill is entitled to 90% of the profits from the property. The agreement also provided that if the property generates a loss, Jack is entitled to 100% of the loss. Last year a loss of $10,000 arose. How is this loss allocated for tax purposes? If Jack and Jill decide to sell the property, how would they be required to account for any capital gain or capital loss?
4. What principle was established in IRC v Duke of Westminster [1936] AC 1? How relevant is that principle today in Australia?
5. Bill owns a large parcel of land on which there are many tall pine trees. Bill intends to use the land for grazing sheep and therefore wants to have it cleared. He discovers that a logging company is prepared to pay him $1,000 for every 100 metres of timber they can take from his land. Leaving aside any capital gains tax issues, advise Bill as to whether he would be assessed on the receipts from this arrangement. Would your answer be different if he was simply paid a lump sum of $50,000 for granting the logging company a right to remove as much timber as required from his land?
Answers
1: Issue:
The question takes into consideration the issues which shows is a taxpayer able to make assessment for capital gain or capital loss which needs to be set off under “Section 108-10 of the ITAA 1997”.
Laws:
- “Section 108-20 of the ITAA 1997”
- “Section 108-10 of ITAA 1997”
Applications
| Asset Description | Cost Base | Capital Proceeds | Capital gains | Capial loss |
| Antique Vase | 2000 | 3000 | 1000 | |
| Antique Chair | 3000 | 1000 | 2000 | |
| Painting | 9000 | 1000 | 8000 | |
| Home Sound System | 12000 | 11000 | 1000 | |
| Shares in listed company | 5000 | 20000 | 15000 |
| Computation of net capital loss for the year | |
| Particulars | Amount ($) |
| Loss on sale of Antique Chair | 2000 |
| Loss on sale of Painting | 8000 |
| Less: Gain on sale of Antique Vase | 1000 |
| Total Collectable loss to be carried forward | 9000 |
| Computation of Net capital gains for the year | |
| Particulars | Amount ($) |
| Gains on sale of shares | $15,000 |
Application:
The present circumstance of the tax payer has been state on the losses which has been sustained as per the sale of the sound system which has been not seen to be approved for the purpose of set off. This has been mainly depicted due to the losses which have taken place due to the selling of the home sound system as it is having the characteristics of personal asset and will not be allowed for set off. The main form of the guiding ruling has been suggested with “section 108-10 of ITAA 1997” providing the main evidence which are seen to be collectible in nature and not considered for offsetting of ordinary gains obtained with the selling of the shares and will not be allowed for the setting off. The “section 108-10 of the ITAA 1997”, has been identified with the consistency. It has been further discerned that Eric has been able to produce the profit in terms of the sale of the assets which are ordinary in nature with no existence in any form with the pertinent reductions. This has been consequently seen with the capital gains for Eric observed with $15,000 (Rootes 2014).
Conclusion:
The various conversations has showed that Eric was not able to set off the loss sustained with the collectibles and solely derived from the selling off the assets and are seen to be ordinary in nature.
2: Issue:
The introduction of the issue has been able to deal with the computation of the FBT has been defined with the “fringe benefit act as per 1986” (Ti?n and Mba 2013).
Laws:
- “Fringe Benefit Tax Act 1986”
- “Taxation Rulings TR 93/6”
Applications:
Computation of Fringe Benefit Tax
| Taxable value of the loan fringe benfit | ||
| In the books of Brian for the year ended 2016/17 | ||
| Computation under statutory interest rate and actual Interest rate | ||
| Statutory rate | Actual rate | |
| Particulars | Amount ($) | Amount ($) |
| Amount of Loan | 1000000 | 1000000 |
| FBT Amount 40% business use | 400000 | 400000 |
| Statutory Interest rate @ 5.65% | 2825.00 | 500.00 |
| (Amount of loan x Statutory interest rate) - (Amount of loan x Actual interest rate) / 12 x 60% business use | ||
| Taxable value of the loan fringe benfit | 2325 | |
| FBT on end of the loan on payment of interest at the end of loan | ||
| Statutory rate | Actual rate | |
| Particulars | Amount ($) | Amount ($) |
| Amount of Loan | 1000000 | 1000000 |
| FBT Amount 40% business use | 400000 | 400000 |
| Statutory Interest rate @ 5.65% | 33900.00 | 6000.00 |
| (Amount of loan x Statutory interest rate) - (Amount of loan x Actual interest rate) x 60% business use | ||
| Taxable value of the loan fringe benfit | 27900 | |
Applications:
The rulings has been based on the understanding of the guidelines as per the “Taxation Rulings of the TR 93/6”, financial institutions such as loan making companies or banks which have been considered with the offsetting of the interest taken with the customers. The various types of the rulings has been taken with the incurring of profit which would not be required to make the tax payments which from the derived income. The account of the guidelines which has been defined under the “Taxation Ruling of the 93/6” as per the circumstance which showed that Brain has been able to discharge the amount from the bank based on the payment of the interest at the end loan period and as Brian has been not identified with the will to pay tax (Armstrong et al. 2015).
Conclusion:
The given conversation has showed the understanding of the loan interest which is seen to be payable at the end of the loan period and not income tax needs to be paid to the bank.
3: Issue:
The given matter has been seen to be associated with the distribution of loss which is sustained as per the ownership by the tax payers along with the context of the rental property.
Laws:
- “FC of T v McDonald”
- “Section 51 of the ITAA 1997”
- “Taxation ruling TR 93/23”
Applications:
The main conformity with the “Taxation Ruling TR 93/32”, seen with the rulings which has been provided with the different types of the explanations based on the income or the loss derived with the property rent and the joint property owners. Additionally, the various types of the discussions have been able to show the guidelines gauging as per the assessable position of the co-owners and is not seen to be accountable for the purpose of carrying of the business as per the defined objectives. In the given context Jack and Jill has been able to evaluate the various types of the considerations which has been able to show the assessable position as per the rented property. In the given context Jack has been seen to be eligible with 10% of the profits derived from the Jill in getting of 90% of the rented property (Richardson, Taylor and Wright 2014).
The various types of the considerations has been further seen to be defined under the “TR 92/32”, with the joint ownership considered with the property rented as per the partnership and defined as per the general notion of the general law. The ruling has been further seen to not include the various types of the joint ownership of any business which has been able to comply with the taxable income. The loss of the income has been seen to be sustained with the ownership of the rented property with the foundation of the income tax and was not taken into account as per the partnership and the principles of the general law (Hasseldine and Morris 2013).
The taxation ruling has been further able to state about the ruling of the “TR 92/32” which has been provided with the explanation has per the joint ownership of the property rented and not treated as per the partnership with the general law. The agreement of the partnership has been taken with Jack and Jill who has been contained with the written, ethical or oral agreement, which is not seen to be having any effect on the share of the income as per the property rented (Taylor, Richardson and Taplin 2015). The clause of the agreement has been accountable with 100% of the total loss which has been derived as per the rental property. It has been further discerned that the various types of the considerations for the case of “FC of T v McDonald (1987)”, has been considered with the agreement as per the Mr McDonald entitled with 25% of the profits, on the contrary McDonald has been seen to be entitled with 25% of the profits whereas Mrs McDonald is seen to be acquiring 75% of the total profit derived from the property. The loss of Mr McDonald needs to be shouldered with 100% of the total loss. The same has been primarily done as per the advancement of the income to wife and indemnifying such loss (Whait 2014).
Comparably, the present aspect of the partnership has been seen to be taken between Jack and Jill and this partnership is not considered as per the legal aspects and the losses arising with such rented property, which needs to be shared between them equally (Taylor and Richardson 2014).
Conclusion:
The discussion of the scenario has been seen to be understood as per the share of loss arising out of Jack and Jill considered on equal basis with the joint ownership and does not account for the partnership.
The present age principle has been further able to define the purpose of obtaining of the result with ingenuity of not forcing the individual to pay the increased sum of the tax. The various decisions of the individual have been seen with the opportunity to reduce the tax liability in agreement of the financial framework with the law (Lennox, Lisowsky and Pittman 2013).
5: Issue:
the important question has shown with the application of “subsection 6 (1) of the ITAA 1997” for the curtailment of timber.
Laws:
- “Subsection 6 (1) of the ITAA 1936”
- “McCauley v FC of T”
Application:
Based on the present assessment it has been seen that Bill has been considered to be owner of the land with several pine trees. In the initial stages the land has been subjected to clearance for grazing sheep however on being approached by the logging companies, which has agreed to pay a total amount of $1000 for every 100 meter of the timber acquired from logging of the firm form the Bill’s land (Richardson, Taylor and Lanis 2015).
The “Taxation ruling TR 95/6”, has been seen to determine the income tax rulings based on the activities taken from the primary production and forestry. It has further defined that the various types of the considerations made with the individual deriving income has been further defined based on the forestry activities which is assessable. The various rulings have been further seen to be applicable as per the individual taxpayers, who are seen to indulge in the various types of the forestry activities like disposing of timber. The consideration of the explanation as per “Subsection 6 (1) of the ITAA 1936”, the individual taxpayer is seen to be associated with the operations of forest and the same needs to be treated as per the producer of income tax and the forest activities which are viewed with the performing of the business activities (Meng and Pham 2017).
The primary production activities has been further seen to be referred with the planting of the trees and tending down of the trees in a particular plantation as per “subsection 6 (1) of the ITAA 1997” aimed to be considered as per the cutting down of the vegetation. As per the present context, the primary production for tending down of the pine trees has been considered with the large portion of the land which is owned by him. In addition to this, the forest operations are seen to be usually considered for the operations with the planting or tending of the trees in the vegetation and taxpayer was not seen to originally plant the trees.
Based on the context of the above the explanation, Bill has not seen to plant trees and the sum is received with the selling of the timber and the same which has been considered for the assessment. Despite of this, the sales has been comprised with the portion of assets having commercial values and receipts of the taxable income considered as per “subsection 36 (1)”.
The alternate scenario has been further seen to be regarded with the taxpayer paying a large amount of $50,000 by the simple assignment of the right for the logging company to cut down the necessary quantities which has been able to receive the timber considered under “Royalties”. As defined in section 26 (f), the loyalties has been seen to be tending of the timber and the same will be treated in the assessable income included in the income year. The various types of the royalties received by Bill have been considered with felling of timber and the same is to be treated with the carrying of the forest business operations. Considering the rulings under the case of “McCauley v The Federal Commissioner of Taxation”, the payments have been procured with assignment through the right of tending the timber. Henceforth, the total amount will received by Bill in the various types of the alternative scenario considered from the selling of timber and which needs to be included in the taxable income comparable to “section 26 (f)” (Hasseldine and Morris 2013).
Conclusion:
The aforementioned analysis has been seen to be considered based on the amount defined with the amount received by Bill and the consideration has been seen to be based on the alternative scenario for the sum received for the granting right and the amount which needs to be treated as royalties.
Reference list:
Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D. and Larcker, D. F. (2015) ‘Corporate governance, incentives, and tax avoidance’, Journal of Accounting and Economics, 60(1), pp. 1–17. doi: 10.1016/j.jacceco.2015.02.003.
Hasseldine, J. and Morris, G. (2013) ‘Corporate social responsibility and tax avoidance: A comment and reflection’, Accounting Forum, 37(1), pp. 1–14. doi: 10.1016/j.accfor.2012.05.001.
Lennox, C., Lisowsky, P. and Pittman, J. (2013) ‘Tax Aggressiveness and Accounting Fraud’, Journal of Accounting Research, 51(4), pp. 739–778. doi: 10.1111/joar.12002.
Meng, S. and Pham, T. (2017) ‘The impact of the Australian carbon tax on the tourism industry’, Tourism Economics, 23(3), pp. 506–522. doi: 10.5367/te.2015.0514.
Permani, R. (2013) ‘Optimal export tax rates of cocoa beans: A vector error correction model approach’, Australian Journal of Agricultural and Resource Economics, 57(4), pp. 579–600. doi: 10.1111/1467-8489.12011.
Richardson, G., Taylor, G. and Lanis, R. (2015) ‘The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia’, Economic Modelling, 44, pp. 44–53. doi: 10.1016/j.econmod.2014.09.015.
Richardson, G., Taylor, G. and Wright, C. S. (2014) ‘Corporate profiling of tax-malfeasance: A theoretical and empirical assessment of tax-audited Australian firms’, eJournal of Tax Research, 12(2), pp. 359–382.
Rootes, C. (2014) ‘A referendum on the carbon tax? The 2013 Australian election, the Greens, and the environment’, Environmental Politics, 23(1), pp. 166–173. doi: 10.1080/09644016.2014.878088.
Taylor, G. and Richardson, G. (2014) ‘Incentives for corporate tax planning and reporting: Empirical evidence from Australia’, Journal of Contemporary Accounting and Economics, 10(1), pp. 1–15. doi: 10.1016/j.jcae.2013.11.003.
Taylor, G., Richardson, G. and Taplin, R. (2015) ‘Determinants of tax haven utilization: Evidence from Australian firms’, Accounting and Finance, 55(2), pp. 545–574. doi: 10.1111/acfi.12064.
Ti?n, N. and Mba, T. (2013) ‘A Review of Factors impacting Tax Compliance’, Australian Journal of Basic and Applied Sciences, 7(94), pp. 476–479.
Whait, R. B. (2014) ‘Exploring innovations in tax administration: A Foucauldian perspective on the history of the Australian Taxation Office’s compliance model’, eJournal of Tax Research, 12(1), pp. 130–161.
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