HA3042 Taxation Law
T2 2018 Individual Assignment
Due date: Week 10
Maximum marks: 20 (20%)
This assignment is to be submitted by the due date in soft-copy only (Safe
assign – Blackboard).
The assignment is to be submitted in accordance with assessment policy
stated in the Subject Outline and Student Handbook.
It is the responsibility of the student submitting the work to ensure that
the work is in fact his/her own work. Ensure that when incorporating the
works of others into your submission that it is appropriately
Question 1 (5 Marks)
The Lotteries Commission conducts an instant lottery called ‘Set for Life’ under
which a winner who scratches three ‘set for life’ panels wins $50,000 each year
for 20 years. The first $50,000 is payable as soon as the winner is notified, and
later amounts are payable on the first anniversary of the first payment. In the
event of the death of the winner, the Commission may pay any outstanding
amounts to the deceased’s estate.
Is the annual payment income? Give reasons for your decision
Question 2 (06 marks)
Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major
credit cards. It sells items off the shelf and the proprietor fills prescriptions for
cash and for payments made under the Pharmaceutical Benefits Scheme [PBS].
Three (03) assistants are employed. The following financial data is provided:
Cash sales ——————————————–$300,000
Credit card sales————————————-$150,000
Credit card reimbursements ———————–$160,000
– Opening balance ———————————–$25,000
– Closing balance ————————————$30,000
– Billings ———————————————-$200,000
– Receipts ———————————————$195,000
– Opening stock————————————–$150,000
– Closing stock —————————————$200,000
On the assumptions that an accrual basis applies and the cost of sales and other
outlays are allowable deductions for tax purposes, calculate the pharmacy’s
Question 3 (04 marks)
What principle was established in IRC v Duke of Westminster  AC 1? How
relevant is that principle today in Australia?
Question 4 (05 marks)
Joseph (an accountant) and his wife Jane (a housewife) borrowed money to
purchase a rental property as joint tenants. They entered into a written
agreement which provided that Joseph is entitled to 20% of the profits from the
property and Jane is entitled to 80% of the profits from the property. The
agreement also provided that if the property generates a loss, Joseph is entitled
to 100% of the loss. Last year a loss of $40,000 arose.
How is this loss allocated for tax purposes? If Joseph and Jane decide to sell the
property, how would they be required to account for any capital gain or capital
HA3042 Taxation Law Assignment
Is 20 years annual payment from lottery commission income Australian Law?
Taxable income according to Income Tax Assessment Acct 1997 (ITAA97) is obtained by subtracting deductions from assessable income. Assessable income comprises of statutory and ordinary income. Ordinary income according to s 6-5 does not have a standard definition, but mostly defined based on court cases. According to s 6-5(2), assessable income include ordinary income sourced indirectly or directly from all sources in or out of Australia in a financial year. The court cases identify ordinary income based on its source, whether the income exempted or not, whether it is periodical, expected, or recurrent. Based on this, the most common examples of ordinary income include wages, and salary. An income that is expected and recurrent from recognizable sources is acknowledged an income tax. Based on s 10-5, statutory income refers to income that serves a specific purpose. The ITAA97 Div 10 list statutory income to include employment related allowances, trading stock, payment for work in progress, dividends, unused leave compensation, superannuation benefits, stock trading recoupments, annuities and return to work payment among others. Any income not regarded as assessable is not taxable. According to a payment can be regarded as ordinary income or capital based on the regularity or recurrence of the payment. According to Barkoczy (2017, p.276) income from gambling is regarded as non-assessable since the law regards it as a pastime or hobby engagement whose income is unpredictable. Unless gambling is a full time job with well-structured operation plan, it is normally not perceived as a business but as a hobby. Based on Trauntwein v FC of T gambling can be regarded as a business if it is done systematically and regularly and the main economic activity of a person. In such case the court ruled that a taxpayer income should be taxed and losses deducted from individual income tax. In addition, based on the case of Prince v FC of T when gambling is more than a hobby or pastime activity.
Based on the current case, a winner in lotteries commission is entitled to $50000 annual payment for a period of 20 years. The amount is paid on regular basis at the anniversary of the first payment every year. In case of death, any outstanding commission is paid to the winner’s estates. The income originates from lottery which is regarded as a non-assessable source of income, since it is done as a hobby or pastime activity. The total amount originated from a single pastime act. The act of gambling in this case cannot be regarded as business as per Trauntwein v FC of T or Prince v FC of T since there is no aspects of regular, systematic involvement. Being a lottery, the winner may have engaged in the gambling just once and won by sheer luck, which makes the source of the money non-assessable. However, it has income characteristics of consistency where it is paid yearly every time during the anniversary of the first payment. This aspect of consistency creates expectation such that the winner will be always anticipating for 50000 dollars on yearly basis. This makes it more as a regular income, than it could have been if the payment was made once. It also caters on aspect of what would happen in case of death. Although the source is not regarded as assessable, the nature of payment qualifies for being an income.
The lottery payment is not regarded as an assessable source of income, but a reward from a hobby or pastime activity. However, in this case, the lottery activity results to provision of regular, consistent yearly payment for a period of 20 years. This makes the payment to posse income nature, and hence making it even susceptible to taxation
What will be the taxable income of the BPS Company?
Taxable income according to Income Tax Assessment Acct 1997 (ITAA97) is obtained by subtracting deductions from assessable income. The company ordinary income is the sale of the inventory as per s 6-5. The main deductions according to Barkoczy (2017) in business operations include the cost of goods sold, salaries and wages paid to workers, other bills or expenses which include rent, utility bills, repair and maintenance costs. Accrual accounting basis involves recording transaction of revenue and expenses when they happen and not when their accounts are settled.
In this case the company sources of income are the sales of its products. The sales are either paid in cash or using credit card. Thus the total sales of the company include cash sales, credit card sales, and credit card reimbursement. In total, the company earned an income of $610,000 from the sales. The main deductions in this case include the company expenses. According to accrual accounting basis, expense is documented when earned and revenue is documented when earned and not when paid. In this regard, the computation of profit will include all sales made but not paid for. One of the main deductions is the total cost of investment for the business which is in form of stock. The company opening stock was $150000, a purchase worth $500000 was done and a closing stock of $200000 was obtained. This means the capital used to obtain the income was worth (500000 + 150000 -200000) =$450000. The difference between opening and closing balance is $5000. And the difference between receipts revenue earned and billings cash received is -$5000. This section means the actual cost-earning difference of $0 and hence it does not have any effect on the taxable income. To compute taxable income, the company deductions which include cost of goods sold, rent and salaries are subtracted from earnings through sales and reimbursements. Thus, taxable income = $610000 – ($450000 +$60000 + $50000) = $55000. The company taxable income will thus be $55000 for that particular year.
The income tax for the PBS will be $55000
IRC v Duke of Westminster  AC 1 was a case between the Inland Revenue commissioners and the Duke of Westminster. The Duke had an employee he used to pay wages on weekly basis. He however entered into an agreement with the gardener to be paying equivalent amount at the end of every particular period other than weekly basis. The arrangement ensured that the gardener manages to get his equivalent payment at the end of the agreed period and that the Duke based on the tax laws of the region was able to claim deduction on his employee expenses. This made it possible for the duke to lower his taxable income and his surtax and income tax liability. This was interpreted as tax evasion by the Inland Revenue Commissioners (IRC), and they subsequently sued the Duke for the same. IRC lost the case where by the judge Lord Tomlin clearly stated that each individual is entitled to organize his affairs where possible so that the tax involved under the suitable Acts is reduced. The judge claimed that if an individual succeeds in organizing his affair and obtain the anticipated outcome, then one cannot be compelled to pay extra tax despite the unappreciative the IRC or other tax payers are on his cleverness. This case established the principle of tax avoidance. According to this principle one can use legal methods to avoid tax. The case also affirmed that tax avoidance through creative legal means cannot be regarded as tax evasion. The law has been trying to seal loophole that promote tax avoidance in Australia. However, this is an ideal situation that cannot be achieved. As a result the law permits people to plan their taxation and enhance avoidance where possible. The governments try to minimize avoidance though avoidance still remains legal in the country. Thus the tax avoidance principle is still relevant in Australia, especially in a situation where one would be able to apply it without invoking evasion aspects.
How loss is allocation for taxation purposes and how to account for capital loss or gains after selling the property
According to s 102-5, any capital gains managed in the income year are minimized by capital losses managed during the year. Any outstanding capital gains are then minimized by any net capital losses carried forward from past years. Any remaining capital gains which are discounted are then lowered through the discount percentage. Any capital gains remaining which qualify for the concessions of small business are then lowered under those concessions. Any remaining amount of capital gains is the net capital gain of the tax payer for the year. In addition, based on section s 102-10(2). Net capital loss can however be carried forward to lower future net capital gains based on s 102-15. In case of partnership, capital loss or capital gain from Capital Gain Tax (CGT) event taking place in association to partnership or one of the partnership assets is carried out individually by partners, instead of jointly as a partnership as per s 106-5. Partners according to Barkoczy (2017, p.598) partners maintaining partnership are capable to establish how to share losses and profits between themselves based on contract law. The tax law will normally tax general law partnership partners with regard to their interest in the partnership agreement. However, in case taxpayers are engaged in ‘mere tax partnerships’ where the partners are not involved in any business and hence they are not partners based on general law. These partners thus need to share their losses and profits for purpose based on their interest funded on the property. Based on a 50% investment co-owner, property has to account for 50% of the losses or income from the property regardless of any contrary agreement. This is demonstrated in the case of FC of T v McDonald where the husband had to only take 25% profit and 100% loss in a house he co-shared with his wife. In a situation when the partner losses the court ruled that the husband was just entitled to 50% deduction of losses based on the husband interest on the property. The court also stated that although the wife and husband were in jointly receipt of income, they were not conducting any business and hence they were just partners for purpose of taxation.
Joseph and Jane have created a partnership which is not business based. They have purchased a rental property in which they are supposed to share losses and profits. Although the two are recognized as legal partners, their partnership according to FC of T v McDonald is mere tax partnerships and not necessary for sharing losses and profits as per the contribution in running and establishing a business. The partnership agreement is respected in sharing of losses and profits under the common law, where the computation of losses and gains is done individually for each as per s 106-5, and not jointly. In this regard, each partner will have independent tax evaluation for capital loss or capital gain. In addition, the initial unbalanced profits and losses sharing strategy is not regard by the law and hence, a 50-to-50% sharing of the capital losses or capital gains will be ensured.
The partnership is not business based and hence not guided by any business principle such as sharing of profit and losses based on how the capital cost was shared. The partnership is family based and not business founded and hence it is merely done for taxation purposes. The tax gains and losses in this kind of partnership are not conducted jointly, but individually. Thus each party will return individual taxation and not jointly.
Income Tax Assessment Act 1997 (Cth)
FC of T v McDonald 87 ATC 4541
IRC v Duke of Westminster  AC 1; 19 TC 490
Prince v FC of T (1959) 12 ATD 45
Trautwein v FC of T (1936) 56 CLR 196,
Barkoczy, S (2017). Foundation of Taxation Law 2017, (10th edition), Oxford University Press.