Income Tax Assessment Act, 1997 (ITTA 1997) is the premier income tax legislation in Australia governing all provisions related to income tax in the country. The specific cases provided in the document shall explain the applicable provisions of income tax to the facts of the cases. IRAC (issue, rules, application and conclusion) model shall be used wherever necessary to illustrate the facts and appropriate provisions applicable in these cases.
Issue:
In this case the issue is to determine whether the annual payment of lottery winnings to the winner of a lottery competition is income to the recipient?
Rules:
As per the provisions of ITAA 1997 the taxable income of a tax payer includes income from salary, profit and gains of business, professional fees received from profession, income from capital gain and other income. As per the act the other income of a tax payer includes income that are not part of any of other mentioned head of income that are not exempted income as per the provisions of the act (Johnson & Breunig, 2016).
Thus, the income that have been specifically excluded from calculating taxable income of an individual as exempted income cannot be considered in determining the taxable income. However, prizes, awards and winning from lotteries from the banks, building societies, credit union and investment bodies of tax payers are not exempted income as per the provisions of ITAA 1997.
Australian Taxation Office, here in after to be referred to as ATO in this document, while explaining the concept of other income that must be included in computing taxable income of a taxpayer has specifically provided that winnings from lottery, prizes and awards from competition shall be considered as part of other income to calculate the taxable income of a tax payer provided that such awards and lottery winnings have conducted by the tax payers’ banks, credit union, building societies and other investment bodies (Dixon & Nassios, 2016).
The tax payers in such case must include such winnings, prizes and awards in their tax returns to ascertain their taxable income. However, the above requirements as the ATO provided in only for winnings of lotteries conducted by tax payers’ banks, credit union, building societies or other investment bodies.
In case the winnings from lotteries, prizes and awards are from ordinary lotteries such as lotto and other ordinary competitions should not be included in computing the taxable income of tax payers (Koessler, Torgler, Feld & Frey, 2016).
Application:
In this case the lotteries commission in Australia has conducted an instant lottery set for life. The winner of the lottery will receive instant payment of $50,000 and thereafter shall receive $50,000 each year with first annual payment of $50,000 shall be made after completion of annual anniversary of receipt of instant $50,000. It is thus, quite clear that the lottery winnings is from ordinary lottery contests. The ATO has made it clear that ordinary lottery winnings shall not be included as ordinary income to compute the taxable income of a tax payer in the country (Gainsbury, 2017).
Conclusion:
Taking into consideration of the above discussion it can be concluded that neither the instant $50,000 received by the winner of set for life of lottery contest nor the annual payment of $50,000 will be included in the taxable income of the winner of lottery contest. This is because the lottery contest was ordinary in nature and not specific which are taxable for tax purposes in the country (Barkoczy, 2016).
Hence, the annual payment is not an income of the winner of lottery contest.
Answer 2:
In Australia the income from sale of medicines, both prescribed as well as over the counter, shall be included in calculating the taxable income of the tax payer. In case the tax payer is an individual the income from pharmacy shall be added along with his other taxable income to determine the total taxable income of the individual. The amount of tax to be paid by the tax payer shall be on taxable income of the tax payer. In case the pharmacy is under the ownership of an entity the amount of income from such shop would be taxed at the corporate tax rate (Nechaev, 2014).
Taking into consideration the provisions of Income Tax Assessment Act, 1997 in relation to income from pharmacy the following calculation has been made.
Computation of taxable amount of Corner Pharmacy.
|
Particulars |
Amount ($) |
Amount ($) |
|
Cash sales |
300,000.00 |
|
|
150,000.00 |
||
|
Reimbursement for credit card sales |
– |
|
|
PBS Billings |
200,000.00 |
|
|
650,000.00 |
||
|
Less: |
||
|
Opening stock |
150,000.00 |
|
|
Add: Purchases |
500,000.00 |
|
|
650,000.00 |
||
|
Less: Closing stock |
200,000.00 |
|
|
Cost of medicines sold |
450,000.00 |
|
|
Gross profit |
200,000.00 |
|
|
Less: Allowable expenditures |
||
|
Salaries |
60,000.00 |
|
|
Rent |
50,000.00 |
|
|
110,000.00 |
||
|
Taxable income |
90,000.00 |
Notes in respect of the revenue included in computation of taxable income:
Generally the amount of revenue earned in the ordinary course of business shall be included in computing the taxable amount of income of any business. Considering that Corner Shop runs a pharmacy business the following revenues shall be included in computing the taxable income of the business (Devos & Zackrisson, 2015).
Allowable deductions for tax purposes:
The ITAA 1997 provides that a business can deduct certain expenditures from revenue to compute the taxable income from business. The expenditures that have been incurred specifically to earn revenue in the ordinary course of business and are in the nature of revenue expenditures will be allowed as deductions (Weygandt, Kimmel & Kieso, 2015). Taking into consideration that Corner Shop runs pharmaceutical shop the following expenditures will be allowed as deductions:
Cost of medicines sold during the period:
To calculate the cost of medicines sold the opening stock of medicines has been added with the purchases made during the period. The resultant amount has been reduced by the amount of closing stock of medicines to calculate the cost of medicines sold for the period (Alstadsæter, Jacob, Kopczuk & Telle, 2016).
Salaries paid to the workers and employees:
Salaries are paid to the three assistants thus, the amount of salaries is business expenditures and will be allowed as deduction for computation of taxable income of the Corner shop. It has been assumed that the entire salary of $60,000 has been paid to the three assistants kept in the shop.
Rent:
Rent of $50,000 will be allowed as deduction from revenue of Corner shop to calculate taxable income as it is ordinary business expenditures incurred to earn revenue in the ordinary course of business (Dyreng, Hanlon & Maydew, 2018).
Answer 3:
IRC v Duke of Westminster [1936] AC 1:
The above case law is often referred to in matters of tax avoidance. The decision in the above case is a landmark decision when it comes to tax avoidance issue. The land mark verdict given in the above case showed the way to the taxpayers that it is allowed to deduct certain expenditures incurred that they are entitled to order his affairs (Deutsch, 2017).
The above case was about the payment of gardener’s wage by the Duke of Westminster. The Duke of Westminster used the services of a gardener and used to pay him from the after tax income of the Duke. However, in order to get tax deduction for the payments made to the gardener the Duke stopped payment of wages to the gardener from his post tax income. Instead a covenant was drawn by the Duke that provided that the equivalent amount would be paid after the completion of each specific period (Phillips, 2018). During that time such amount of covenant was allowed as deduction hence, the Duke was allowed to deduct the amount of covenant to reduce his taxable income. Subsequently, the taxable liability and liability to surtax of the Duke of Westminster reduced due to such deduction of expenditures.
The Inland Revenue challenged the tax deduction of covenant amount from income of Duke to determine his taxable income and resultant tax liability. The Inland Revenue accuses the Duke of tax evasion however, the court decided the case in favour of the Duke. At the time of delivering the judgment on the landmark case on tax evasion Lord Tomlin said that each individual has the right to use existing tax provisions and laws to reduce his or her taxable income and tax liability (Chardon, Freudenberg & Brimble, 2016). Genuine deductions if allowed under the act then no matter what is the amount of deduction it will be allowed to the taxpayer. Use of taxation provisions to reduce income tax liability would not be considered a tax evasion under any circumstances.
Thus, the above case established the principle of allowing deductions wherever such deductions are allowed as per the tax provisions in the country.
Relevance of the principle of the tax evasion case in existing times in Australia:
Though the case is a landmark case and still used as a reference for tax evasion cases. However, the attractive principle established in the above case since then has been weakened as the tax payers have tried to use the principle to avoid payment of valid taxes. Courts now take a look at the overall effect of using different provisions of income tax and use restrictive approach to ensure that there is absolutely no scope for tax evasion. The overall impact of each provisions are considered now before determining whether a particular principle is applicable to any particular case. Thus, the principle of IRC v Duke of Westminster [1936] AC 1 is not very relevant in Australia at present (Bloom, 2015).
Answer 4:
Issues:
There are more than one issue in this case. These issues areas following:
Firstly, to determine whether the terms and conditions of the agreement to purchase rental property as joint tenants by Joseph and his wife Jane are valid.
Secondly, If not valid then how the profits and losses from the rental property shall be apportioned between the tenants. Accordingly, how the loss of $40,000 from rental property would be apportioned between Joseph and Jane (Doerrenberg, Peichl & Siegloch, 2017).
Thirdly, in case the property is sold how the capital gain or loss from such sale would be apportioned between the Joseph and Jane.
Rules:
In case a rental property has been brought by joint tenants then the agreement entered into between the two shall govern the provisions regarding sharing profits and losses from such property provided it is fair. In case the agreement has been made to benefit one particular tenant and there is relation between the joint tenants then only the terms and conditions that are valid shall be applicable. Since the agreement provides that any profit would be apportioned between Joseph and Jane in 2: 8 (20% and 80%) ratio thus, it is not fair to provide than in case of any loss the same would be borne by Joseph only is not fair. Thus, in this case both profit and loss would be apportioned between Joseph and Jane in 2: 8 ratio since it seems fair.
Though the profit sharing mechanisms has been mentioned in the agreement between Joseph and Jane but no such ratio has been provided as to the ownership of the property. In such case the rules provide that the joint tenants would be assumed to be equal right in the property (Australia, 2016).
Application:
Taking into consideration the rules as enumerated above it can be said that both profit and losses from the rental property would be apportioned between Joseph and Jane in 2: 8 ratio. Thus, even though the agreement provides that the entire loss shall be borne by Joseph but the same is unfair as it clearly suggests that there is coalition amongst Joseph and Jane as they are related. Hence, the loss of $40,000 from the rental property would be divided between Joseph and Jane in 2:8 ratio, i.e. $8,000 to Joseph and $32,000 to Jane.
Since the agreement of the rental property does not provide any clarity as to the ownership rights of joint tenants hence, it would be assumed that the entire property belongs to the joint tenants equally and both have equal ownership right in the property. Thus, in case the property is sold then the resultant amount of capital gain or capital loss would be divided between Joseph and Jane equally (Davies, 2015) .
Conclusion:
Taking into consideration the discussion above it is clear that though the agreement of a rental property is supposed to govern the provisions related to sharing profits and losses from such property but since certain terms were not fair thus, such terms will not be applicable in sharing profits and losses of property. The agreement between joint tenants, Joseph and Jane, on the rental property has not provided the proportion of ownership in the property of the joint tenants. As provided in the law in such case it shall be assumed that the property equally belongs to the joint tenants. Hence, Joseph and Jane will have equal ownership right and accordingly, net capital gain or loss shall be apportioned between the two equally.
References:
Alstadsæter, A., Jacob, M., Kopczuk, W., & Telle, K. (2016). Accounting for business income in measuring top income shares: Integrated accrual approach using individual and firm data from Norway (No. w22888). National Bureau of Economic Research.
Australia, C. C. H. (2016). Australian Master Tax Guide: 2016. CCH Australia.
Bajada, C. (2017). Australia’s Cash Economy: A Troubling Issue for Policymakers: A Troubling Issue for Policymakers. Routledge.
Barkoczy, S. (2016). Core tax legislation and study guide. OUP Catalogue.
Bloom, D. (2015). Tax avoidance-a view from the dark side. Melb. UL Rev., 39, 950.
Burton, M. (2018). Extending the tax expenditure concept in Australia.
Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.
Davies, J. (2015). The Income Elasticity of Gambling in Australia and New Zealand. Deakin Papers on International Business Economics, 8(1).
Deutsch, R. (2017). Is there a place for morality and ethics in tax law?. Taxation in Australia, 52(6), 293.
Devos, K., & Zackrisson, M. (2015). Tax compliance and the public disclosure of tax information: An Australia/Norway comparison. eJournal of Tax Research, 13(1).
Dixon, J. M., & Nassios, J. (2016). Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.
Doerrenberg, P., Peichl, A., & Siegloch, S. (2017). The elasticity of taxable income in the presence of deduction possibilities. Journal of Public Economics, 151, 41-55.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2018). When does tax avoidance result in tax uncertainty?. The Accounting Review.
Johnson, S., & Breunig, R. (2016). Taxpayer responsiveness to marginal tax rates: Bunching evidence from the Australian personal income tax system. In 29 th PhD Conference in Economics and Business.
Menk, K. B., Nagle, B., & Coss, D. L. (2017). The disconnect between tax laws, public opinion and taxpayer compliance: a study of the taxation of gambling winnings. International Journal of Critical Accounting, 9(3), 206-227.
Nechaev, A. (2014). Taxation as an instrument of stimulation of innovation-active business entities. arXiv preprint arXiv:1412.2746.
Phillips, M. (2018). Comment on the Decision in RFC 2012 Plc (in Liquidation) v Advocate General for Scotland. Southampton Student L. Rev., 8, 23.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
Whittenburg, G. E., Gill, S., & Altus-Buller, M. (2015). Income Tax Fundamentals 2016. Nelson Education.
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