HI6028 Taxation Theory Practice and Law Understanding taxation law

f an asset are higher than initial outlay 50% Discount method can be applied in case calculating capital gain for assets which have been held for more than 12 months. The discounted method can be applied if:

• Assessee is individual
• Event of CGT has incurred after 21^stSeptember 1999
• Asset has been held for more than 12 month
• Indexation method has not been applied.

Further, in accordance with provision available in section 139(1) of ITAA 1997, a capital loss can be set off against capital gain only, and short term capital loss can be adjusted against long term capital gain as well as short term capital gain (QC, 2016). Further the same can be forwarded for eight years immediately after the year in which loss has incurred.

Analysis

 In the present case, as the assets have been held for more than twelve months thus discounting model on same can be applied for ascertaining capital gain tax. By applying the same, the capital gain will be reduced to half of the existing amount.

The same can be calculated in the following manner

Antique Vase

Antique Chair

Painting

Home Sound System

Shares

Conclusion

In the present case, the capital loss incurred in case of home sound system and antique chair will be adjusted against a capital gain of another asset. Further, the remaining amount of capital gain will be taxable as per discounting method. Thus, the $6000capital gain will be taxable. As no detail regarding other income has been provided, it has been assumed that it is the only income. For income under ($0-$9323) 10%, capital gain tax rate is chargeable. After applying discounting method taxable gain is $6000*50%, i.e. 3000. Thus, the capital gain tax payable in the present case is 3000*10% =$300.

Question 2

Issue

The brain has been provided with a three-year loan of $1 million at a special interest 1% p.a. payable. Further 40% of borrowed funds were applied to income producing purposes and met all obligations relating to interest.

Rule

Fringe benefit arises relating to loan arise in case loan is provided to an employee where no or nominal interest is charged from the loan (Frecknall-Hughes and Moizer, 2015). The taxable value of loan fringe benefit is ascertained as the difference between the rate of interest rate charged on loan and statutory interest rate.

Analysis

 In the present case, as the loan has been provided @1% interest which is lower than the existing statutory rate of 5.65%. Thus in present scenario, the difference between same will be accountable as fringe benefits taxable value.

Conclusion

The amount of interest payable by Brain

$1000000*1% = $10000

The amount of interest as per statutory interest rate

$1000000*5.65%= $56500

The taxable value of loan fringe benefit without providing effect of deductible rule is

$56500 -$10000

$46500

As in present case, 40% of borrowed funds have been applied for income producing purpose

Interest on amount which has been applied for income producing purpose at statutory interest rate

=$1000000*40%*5.65%

=$22600

Interest on amount applied for income producing purpose at rate on which loan has been provided

=$1000000*40**1%

=$4000

The amount by which taxable value of fringe benefit will be reduced

=$22600-$4000

$18600

The taxable value of fringe benefit is

$46500 - $ 18600

= $ 27900

In case interest is payable at the end of the year rather than monthly instalments, there will be no change in interest. However, in case the bank released Brain from paying interest than the whole interest @5.65%, i.e. $56500 will be treated as a taxable value.

Question 3

Issue

Jack and Jill had borrowed money to purchase a rental property as joint tenants. Further, a written agreement has been entered which provides that Jack is entitled to 10% of property and Jill is entitled to remaining part of profits. In case loss occurs that the whole loss will be entitled to Jack. Last year arose a loss of $10000.

Rule

As per the provisions provided in TR 93/32 “Income Tax: rental property – division of net income or loss between co-owners” which explains the basis on which the division of net income or loss from rental property between co-owners will be accepted for income tax purpose (Tax Ruling TR 93/32, 2017).

Ruling

• Co-ownership of rental property can be specified as a partnership for income tax purpose, but the same cannot be referred as a partnership at general law unless it is for carrying on of business (Alldridge, 2015).
• In case of co-ownership is only for income tax purposes, i.e. the income or loss relating to rental property is derived from co-owned property and not from the distribution of partnership profit and loss (Wallace, Hart and Evans, 2013).
• Further, co-owners of rental property are not partners in general. Thus a written or oral agreement has no effect on sharing of income or loss relating to the property.

Analysis

In the present scenario, as the case is relating to co-owners relating to the distribution of property income; the following ruling will be applied for ascertaining the manner in which loss will be allocated. The same will also be applied in case the property is sold, and capital loss has been incurred. The fact of the case is similar to case “McDonald’s Case at ATR p 967; ATC p 4550”. It was concluded in the case that for taxation purpose, the Act assesses the taxpayer and if it assesses that it is subject to the general law in all aspects; it will take the position at law and in equity modified by any relating or specified position and including the provision of Act itself. Another case in which the same provision was applied is “MacFarlane v. FCT (1986)17 ATR 808; 67 ALR 624 at 636.”

Conclusion

As per the above provision, it can be concluded that only 50% of loss will be allocable to Mr Jack for income tax purpose. Further, in case they sell the property than the same provisions will be applied, and Jack can claim 50% of the capital gain loss.

Question 4

Issue

The Duke of Westminster recruited a gardener and remunerated him from the significant post tax income of Duke. In order to make a reduction in tax, the wages of gardener were stopped by him and rather drag a covenant in favour to pay an equal amount. In accordance with the tax laws, that permitted Duke to allege deduction in relation to reduce his income of tax, Further reducing the liability to surtax and income tax.

After losing the case in opposition to Duke, in particular, this was said by Lord Tomlin.

Rule

The case The Duke of Westminster stated that the tax evasion can be acceptable only if it pursues the establish statue law, according to the case, the general principle of the format of covalent act decrease the tax liability of Duke, when it is applicable and can make a claim for the yearly payment made for one year (Sedjo and Sohngen, 2015).

Analysis

Every individual is liberal to order his/her affairs for attaching tax under the most appropriate acts that would less than it was before. In case he won in regulating them in order to save the result. However, no gratitude shown by the Commissioners of Inland Revenue and the members of taxpayers might be of his cunningness, however, he is even not obliged to pay out an increased tax (Yong and Cheng, 2013).  

This principle, in essence of tax avoidance- tax evasion impasse and can be stated the principle of Westminster. Being informed of the decision, permitting the companies and individual to make a formation in financial arrangements to decrease the liability of tax, as much as these formations are in accordance with law (Crabtree et al. 2013). It can be noticed across the present Ramsay Principle. Made by the well known WT Ramsay v. IRC decision of the House of Lords, (1982) AC 300

Judges kept in mind that not to make this matter as a formal rule, as they will make the discussion about the ratio scope in the prior case while not considering being bound by its precise wording.

Conclusion

It is concluded in accordance with the decision of above case that tax avoidance can be allowed to the extent it is being done in accordance with statute law. Such as in case any company, implements or adopts any device is exclusively responsible for the tax profit reduction, but wouldn’t be allowable.  Courts and committees must observe and judge the economic jurisprudence of the extensive and changed nation to hold regarding the planning of taxes that is proposed for tax evasion. This should be rolled back by the court, and this principle put down in Duke of Westminster [1936] AC 1 is not valid. 

Question 5

Issue

Bill owns a large parcel of land of pine trees. Further, he intends to sell the land for grazing sheep. For the same purpose, he discovers that a lodging company is ready to pay him $1000 for every 100 meters of timber land.

Rule

Another option available to him is to grant a right to a logging company for removing the required amount of timber from his land for $50000.

As per the provision of Federal Income Tax in case the income is received from the sale of logs or other products relating to timber, the income is treated as ordinary income (Besley, Jensen, and Persson, 2015).

In case the income has been received from the disposal of standing timber or electing to cut as a sale, the income is qualified for capital gains treatment and will be taxed at a lower rate in comparison to ordinary income.

Analysis

 In the present scenario, in the first option when Bill is selling trees for $1000 for every hundred meters, he is selling the trees, but they are not served from there by cutting roots. Stumpage or standing timber is exactly the trees which have been served and not yet removed by roots (Clark, 2014). Therefore, it can be said this procedure does not result of any process and same will taxed as capital gain. The same is in another case in which he sells right to a logging company in order to remove the required timber. It will also be assessed as a capital gain tax.

Conclusion

In the present case, it can be concluded that as in both the option timber has not been sold after cutting and the same will be considered as stumpage (standing timber). In both cases, the amount received will be taxed as capital gain and not as ordinary income. Thus, as details regarding other income are not available the capital gain tax will be calculated in accordance with long term capital gain tax rate which is as follows:

References

Alldridge, P., 2015. 13. Tax avoidance, tax evasion, money laundering and the problem of ‘offshore’. Greed, Corruption, and the Modern State: Essays in Political Economy, p.317.

Besley, T.J., Jensen, A. and Persson, T., 2015. Norms, enforcement, and tax evasion.

Bloom, D., 2015. Tax avoidance-a view from the dark side. Melb. UL Rev., 39, p.950.

Clark, J., 2014. Capital gains tax: historical trends and forecasting frameworks. Economic Round-up, (2), p.35.

Crabtree, L., Blunden, H., Phibbs, P., Sappideen, C., Mortimer, D., Shahib-Smith, A. and Chung, L., 2013. The Australian community land trust manual.

Frecknall-Hughes, J. and Moizer, P., 2015. Assessing the quality of services provided by tax practitioners. eJournal of Tax Research, 13(1), p.51.

QC, J.M., 2016. Ethics and tax compliance: the morality of tax avoidance. The good old days. Trusts & Trustees, 22(1), p.166.

Sedjo, R.A. and Sohngen, B., 2015. The Effects of a Federal Tax Reform on the Timber Sector.

Taylor, W.B., 2016. Can We Clean This up: A Brief Journey through the Rules to Taxing Business Entities. Fla. Tax Rev., 19, p.323.

Wallace, M., Hart, G. and Evans, C., 2013. An evaluation of the contribution of Justice Hill to the provisions for the taxing of capital gains in Australia. Austl. Tax F., 28, p.123.

Yong, S.E. and Cheng, A., 2013. New Zealand and capital gains tax: a tax experts' perspective.

Tax Ruling TR 93/32. 2017. Income tax: rental property – division of net income or loss between co-owners. (Online). Available through < https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9332/NAT/ATO/00001#P24>. [Accessed on 25^th August 2017]