The character of the annual payment will be addressed in this issue that is received in the hands of taxpayer.
There are certain indicators of the ordinary income. This includes the character of the payment received in taxpayer’s hands. Another vital indicators of ordinary income are the periodicity, constancy and reappearance. Further indicators of ordinary income under “sec 6-5, ITA Act 1997” includes that the income should be cash or convertible to cash and should “come in” during the relevant income year to the taxpayer (Cohen, Manzon and Zamora 2015). The character of the payment in hands of the taxpayer means that one should judge character of the payment that is received by the taxpayer.
As a general rule when the payment that is made is regular and periodical, it would be treated as the income. As held in “FCT v Blake (1984)” where the bank agreed to pay the retired bank employee with the additional top up payment for his pension (Mares and Queralt 2015). The commissioner held the payment was the ordinary income since the payment was regular and made periodically.
The character of the annual payment discussed in the issue denotes that an amount of $50,000 is paid to the winner for 20 years. The winner here is paid annually within the span of 12 months each year. By virtue of “sec 6-5, ITA Act 1997” the payment is ordinary income because it “comes in” to the taxpayer during the relevant income year (Dahlquist, Robertsson and Rydqvist 2014). The annual payment of $50,000 is the indicators of ordinary income and the character of the payment in taxpayer’s hands.
To further support the indicators of ordinary income for the annual payment of $50,000 the position of “FCT v Blake (1984)” should be quoted to understand the character of the payment in the hands of taxpayer (Hanlon and Hoopes 2014). The payment is made periodically in the span of 12 months. The sum of $50,000 involves recurrence and regularity. Therefore, the amount is the ordinary income since the requisite of the ordinary concepts are satisfied. As a result of this, the annual payment will be treated as the ordinary income in terms of the ordinary conceptions.
Conclusion:
After taking into the account the character of the payment of $50,000 a conclusion can have made by treating the sum as the ordinary income under the “sec 6-5, ITAA 1997”. The payment comes in to the taxpayer in the relevant income year and it is often received by the taxpayer at regular intervals of every 12 months.
As understood from the Duke’s case it is regularly treated as the case that lends supports against the attempts that is made by the authorities of revenue to impose taxes based on the situation when it found that the taxing provision language is not directly applied on the provision of taxpayer state of affairs (Armstrong et al. 2015). Eminent from the central principle of taxation law, reference has been made by the law court regarding the inconvertible truth. Nevertheless, in the recent years the jurisdiction of taxation has moved the landscape towards the application of the economic substances. The dependency of the court in the issue of Duke has turned out to be contradictory and confusing.
As the decision was handed down in 1935 the decision of the house of lords is regularly referred in the cases that is concerned with the attempts made by taxpayers in lowering down their tax liability. Succeeding cases has stated Duke as the setting down of cardinal principles under taxation law (Faulkender and Smith 2016). The case of Duke is itself concerned with the inventive scheme of remuneration set up by the duke for his staff. The duke for his servants used annuities that would enable the duke in paying each of his servants with the set amount of periodic fees. Similarly, the wages that was to be paid to the servants by duke was reduced by same amount in order to enable the employee to receive the identical sum of remuneration under the new set up.
The annuities cannot be treated as the direct replacement since the employees that were working under the duke would yet be entitled to make the lawful claim for wages relating to the services provided (Coricelli, Rusconi and Villeval 2014). Nevertheless, the duke completely expressed his hope to his servants that the they would be receiving the amount under the annuity scheme. The main purpose of setting up such alternative is for simply saving the tax. Under the prevailing taxation act, the payments that is made by the Duke under the schemes of annuity will be allowed for deductions only for the taxation purpose to determine the liability of surtax whereas the payments that is made as the wages is not allowed for deductions.
The principle of fiscal legislation has been established is that if the person is required for taxation within the scope of the law the person would be treated for taxation irrespective of the great is the hardship for the person (Gokalp, Lee and Peng 2017). If the court seeks to recover the sum of tax, the taxpayer cannot be subjected to taxation within the law. If the decision of the court follows the rule that the court is looking scope of letter of law, then the taxpayer falls inside the language of the scope and the law would be applicable. However, on noticing that the taxpayer does not falls within the scope of the law then the law is not applied (Bernasconi, Levaggi and Menoncin 2015). From the viewpoint of the taxpayers the purpose would be to be directly inside the terms of the relieving provision, despite the fact they would be avoiding any tax provisions.
In the case of the duke the house of lords provided an explicit identification of the taxpayers right of arranging the taxation affairs in compliance with the motivation of lowering the tax (Ivanyna, Moumouras and Rangazas 2016). This may be termed as unprincipled for the taxpayer to pay the less amount of tax. Until and unless the taxpayer does not takes up any illegal intention of reducing the tax liability the principle in the case of Duke stands with the proposition that there is nothing wrong in this.
In pursuit of the particular arrangement with the expressed objective of reducing the tax that was sanctioned in the case of Duke by the house of lords (Pickhardt and Seibold 2014). The consequence of such principle is that there is no requisite for business purpose for any type of transactions or series that are conducted by the taxpayer.
In Australia currently the law court does not support the principle given in Duke by expressly repudiating the attempt of using the doctrine of substance for over-riding the lawful form (Markle, Mills and Williams 2018). It is responsibility of the court in assuring that the lawful nature of any kind of transaction for attaching tax is to noticed that the tax consequences paves way for the combination of the transactions (Marjit, Seidel and Thum 2017). Presently the court of law goes further than the legal nature of the transactions by looking for the non-tax purpose. It is evident for the court that the economic substance analysis has now become endeavour because the economic result or the actual result would be treated as one of the factors that the court would look into so that it can discern the actual purpose of the transaction.
The issue will be outlining the interest of the partnership property and their respective rights in relation to the partnership in compliance with the terms and rules of the partnership agreement for the taxation purpose.
The partnership under the general might be created without any formality and it might be desirable for the practical reasons to have the written agreement of partnership which is neither definitive nor essential (Sheehan and Glinka 2018). The questions relating to whether the partnership is existent becomes the mixed question of law and fact. Mere words do not represent or create any kind of partnership between the partners. The only proof that the partnership is existent is the proof relating to the relations of the agency and community relating to the sharing of profit loses and profits in one or other form.
As per the “division 5 of the PT III ITAA 1936” there are certain general partnership agreements are provided (Keenan 2014). The provision contained are applicable to all forms of the partnership. The purpose of this division is to impose tax on the partners instead of the partnership that deems not to be the separate taxpayer. As per the requirement of “section 90 of the ITAA 1936” partnership is required to calculate the net income and the net losses of the partnership (Drahos 2017). As per the “section 92 (1)” the taxable income of the partners is based on the individual interest in the net income of the partnership. Under “section 92 (2) of the partnership act 1936” the partners are allowed for deductions for their legal interest in the loss.
The discussion can be supported by gauging into the explanation given under “ruling TR 93/32”. The ruling describes that when the instance of co-ownership for the rental property is noticed then it can be assumed that the partnership exists for the income tax purpose instead of assuming it for general law purpose (Ricketson and Creswell 2015). The ruling evidently makes it clear for the rental property holders that since they are classified as the co-owners not by virtue of general law but for the income tax purpose their agreement be it in written or oral hardly creates any impact on the sharing of profit and loss. In other words, co-owners of revenue generating property would be usually holding the property under joint tenancy.
The vital feature that is laid down under the para 11 of the “ruling TR 93/32” is that co-owners would hold the revenue producing property in their legal interest. For the reason of the ruling, the co-owners legal interest forms the determinant factor in the allocation of net income and loss (Broderick 2015). Provided that the requisite feature of the co-ownerships is present then the joint tenants of such revenue producing property should distribute the profit in the equal proportion.
The nature of the partnership has been defined by the court in “FCT v McDonald”. The taxpayers particularly the husband and wife held two revenue producing properties as the joint tenants (Blakeney 2014). The court held that there prevailed no partnership among the couple for the general law purpose. The commissioner further said that the activities of the taxpayer should be better classified as the investment instead of carrying on the business. Nevertheless, the commissioner arrived at the conclusion to stated that there was the partnership between the husband and wife only for the tax purpose based under the second limb of the definition with the taxpayer being the recipient of the rental income jointly. Therefore, each of the party is liable for one-half of the loss that occurred from the rental property.
The recipient of the joint rental income here in this are Joseph and Jane who borrowed from the banks to invest in the revenue producing property. The partnership agreement though not expressively in written format but stipulated husband with the share of 20% of net profits from the property while the losses would be entirely taken by the husband. Jane on the other hand would be taking 80% of the profit made from the rental property with no liability of bearing losses.
The situation provided from the case results in the application of “ruling TR 93/32”. The application of the law can be supported by stating “section 92 (1)” of partnership act that the taxable income of the couple should based on their individual interest in the net income of the partnership (Webb 2016). Subject to “section 92 (2) of the partnership act 1936” the couple here are allowed for deductions for their legal interest in the loss. The requisite of co-ownership for the rental property is present between Jane and Joseph.
Presently for Joseph and Jane the partnership exists for the income tax purpose instead of assuming it for general law purpose. The requisite feature of the co-ownerships results in joint tenancy of revenue producing property for Joseph and Jane. The partners here should distribute the profit and loss in the equal proportion.
The nature of the partnership between Joseph and Jane can be further supported by bringing up the case facts of “FCT v McDonald”. There was the partnership between the husband (Joseph) and wife (Jane) only for the tax purpose based under the second limb of the definition with the taxpayer being the recipient of the rental income jointly (Ricketson and Creswell 2015). The activities of the Joseph and Jane should be better classified as the investment instead of carrying on the business. The couple here should share the loss among themselves in equal proportions.
On the alternative the couple makes up the mind of disposing of the property, then there may be instance where they report the capital gains or capital loss. However, by virtue of the “ruling TR 93/32” they are treated partners for income tax purpose, they must allocate the loss and gains made any thereof among themselves in their respective legal interest.
Conclusion:
The relation that subsists between Joseph and Jane is partnership for income tax. They private arrangement hardly holds relevance in the division of net profit and loss. They profit and loss sharing is vested upon their partnership legal interest.
References:
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.
Bernasconi, M., Levaggi, R. and Menoncin, F., 2015. Tax evasion and uncertainty in a dynamic context. Economics Letters, 126, pp.171-175.
Blakeney, M., 2014. The protection of geographical indications: law and practice. Edward Elgar Publishing.
Broderick, P., 2015. SMSFs, trusts and property development: part 2. Taxation in Australia, 49(7), p.400.
Cohen, J., Manzon, G.B. and Zamora, V.L., 2015. Contextual and individual dimensions of taxpayer decision making. Journal of Business Ethics, 126(4), pp.631-647.
Coricelli, G., Rusconi, E. and Villeval, M.C., 2014. Tax evasion and emotions: An empirical test of re-integrative shaming theory. Journal of Economic Psychology, 40, pp.49-61.
Dahlquist, M., Robertsson, G. and Rydqvist, K., 2014. Direct evidence of dividend tax clienteles. Journal of Empirical Finance, 28, pp.1-12.
Drahos, P., 2017. Global law reform and rent-seeking: the case of intellectual property. In Copyright Law (pp. 43-59). Routledge.
Faulkender, M. and Smith, J.M., 2016. Taxes and leverage at multinational corporations. Journal of Financial Economics, 122(1), pp.1-20.
Gokalp, O.N., Lee, S.H. and Peng, M.W., 2017. Competition and corporate tax evasion: An institution-based view. Journal of World Business, 52(2), pp.258-269.
Hanlon, M. and Hoopes, J.L., 2014. What do firms do when dividend tax rates change? An examination of alternative payout responses. Journal of Financial Economics, 114(1), pp.105-124.
Ivanyna, M., Moumouras, A. and Rangazas, P., 2016. The culture of corruption, tax evasion, and economic growth. Economic inquiry, 54(1), pp.520-542.
Keenan, S., 2014. Subversive property: Law and the production of spaces of belonging. Routledge.
Mares, I. and Queralt, D., 2015. The non-democratic origins of income taxation. Comparative Political Studies, 48(14), pp.1974-2009.
Marjit, S., Seidel, A. and Thum, M., 2017. Tax Evasion, Corruption and Tax Loopholes. German Economic Review, 18(3), pp.283-301.
Markle, K., Mills, L.F. and Williams, B., 2018. Implicit corporate taxes and income shifting.
Pickhardt, M. and Seibold, G., 2014. Income tax evasion dynamics: Evidence from an agent-based econophysics model. Journal of Economic Psychology, 40, pp.147-160.
Ricketson, S. and Creswell, C., 2015. The law of intellectual property: copyright, designs and confidential information. Thomson Reuters (Professional) Australia Limited.
Sheehan, J. and Glinka, C., 2018. 12 Compulsory acquisition of private property rights for densification in Australia. Compulsory Property Acquisition for Urban Densification.
Webb, E., 2016. Strata Titles Reform in Western Australia. Australian property law bulletin, 31(1).
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