The main purpose of this report is to explore the different aspects in the law of taxation in context of the Australian legal consideration. This report also focused on the determination of annual income in case of lottery or jackpot winning. The legal aspects of tax exemption in calculation of annual income are also assessed as per the given cases of situation arises. This report also includes the several types of issues related to the law of taxation as it demonstrate the accrual basis income and cost of sales with respect to the deductions for the taxation objectives. In addition to this, the principles in the case of IRC v Duke of Westminster [1936] AC 1 are also discussed in relevant manner. The loss allocation in the tax purpose is also assessed in case of selling the property at loss.
The annual income for the people is determined as the gross income which is earned in a specified time annual period of accounting. As per the given scenario, a client as winner wins the amount of $50,000 for a year and he will get the amount for 20 years from the lotteries commission. The income from the lottery will be earned by the client on annual basis. In relation to this case, Australian government has established the rules and policies in the taxation management of federal government (Bankman et al., 2017). As per the rules of taxation, the lottery winner earns the amount by lottery but he is liable to pay to capital gain tax on his annual income.
Apart from this, the Australian laws state that if a person has won any amount in a lottery or a prize draw operated by any organization, that person is legally required to include this amount in his annual income under head ‘other income’, and to pay tax on the received price. This price does not necessarily include cash amount but can also be interest free or low interest loans, cars or holidays. However, if any amount is won in ordinary lotteries like raffles, the winner is not allowed to declare that amount as his /her annual income. In addition to this, if a winner disposes or transfers the amount won from the lottery, it would also be regarded as capital gain and would be stated on his/her tax return (Blunden, 2016). In this context, since the winner is earning $50,000 every year for 20 years, this would be considered as ‘deemed income’ in the eyes of Australian tax laws.
The basic concepts of taxation state that the incomes and expenditures on accrual basis are accounted by an individual only at the time of their occurrence, and not at the time of cash receipt/payment. Also, the income is then matched with the costs. The expenses are reported when they are occurred and not when the cash is paid. According to the Australian laws, the taxable income is the that part of amount received by an individual or an organization, they require to pay tax on. The taxable income therefore consist of salary, bonuses or income from investments earned by an individual during a year. It also represents the receipts used for the amount remaining after the deduction of all the relevant business expenses that is allowed to claim from computable income (Frecknall-Hughes, and Moizer, 2015). Thus, it refers to a gross income which is adjusted against the any allowed exemptions in the taxable year. In contrast to this, the taxable income, in case of a corporation, comprises of the revenues earned from the sale of goods and services. It also takes in the subsidies or concessions offered to the customers. On the other hand, it does not cover the expenditures of the company to arrive at the taxable income.
The Pharmaceutical Benefits Scheme (PBS) is a program organized by the Australian government under the Public Health Law 1953. This program was introduced in order to provide subsidized lifesaving medications to the residents of Australia. The objective was to make purchase of medicines affordable for all the residents of Australia. In the given scenario, Corner Pharmacy is a chemist shop makes sales on cash but accepts major credit cards as well under PBS. In this context, the taxable income of Corner Pharmacy is estimated as below:
|
Particulars |
Amount ($) |
|
Credit Card Sales |
150000 |
|
Cash Sales |
300000 |
|
(160000) |
|
|
PBS |
|
|
Opening balance |
25000 |
|
Less: Closing balance |
(30000) |
|
Less: Billings |
(200000) |
|
Receipts |
195000 |
|
Less: Rent |
(50000) |
|
Less: Salaries |
(60000) |
|
Taxable Income |
170000 |
Note: According to Australian taxation policy in pharmaceutical industry, the taxes are applicable only on business net gains, or income less expenses. The value of stock is not taxable directly until it is sold out (Braithwaite, 2017) . However, the value of opening and closing stock is included while estimating the cost of goods sold for the purpose of computing assessable income on inventory sold.
The taxation rules of Australia encompass an anti-avoidance law for tax, which is applied in the cases where it appears that the only objective of conducting a transaction is to evade from paying tax. In this regard, a case was highlighted in Australia, named IRC vs Duke of Westminster 1936 AC 1 (Monteiro, 2018). The principle laid down in the case was that an individual has the right to control his/her fiscal matters in a manner that he/she becomes able to pay less amount of tax. If an individual is able to do so, she/he would not be punished or panelized under the taxation laws (Kujinga, 2016). However, this principle became immaterial in the later years when the court gave decision to apply Ramsay Principle to impose tax on this alternative action of the taxpayer.
The case of IRC VS. Duke of Westminster is also regarded as the case of ‘tax avoidance’. The Duke of Westminster hired a gardener and paid salary to him from the income remaining after deducting tax, which was significant amount. In order to avoid tax payment, the Duke ceased to pay gardener’s salary and instead entered a contract and promised to pay an equal amount at the closing of specified period. The tax laws allowed him to claim tax exemption on the expenses thereby increasing his non-taxable income as well his obligation towards income tax.
Later, the Department of Inland Revenue of Australia opposed this decision of tax evasion, and filed a suit against Duke in the House of Lords. Although, they lost the case, the judge declared that every individual is allowed to manage his/her affairs only if he or she can, so that tax attaching under the relevant statues is less than it otherwise would be (Kujinga, 2016). In case the individual becomes successful to manage, he or she would not be held liable to pay more tax, disregarding how much his/her associate tax payers or Commissioners of Inland Revenue are.
Relevance of principle in Australia:
Although the ruling principle from IRC VS. Duke of Westminster case was favorable for others who were planning to avoid tax officially by creating intricate situations, it has since been prohibited by the new cases where the courts were looking for the long term effect (Doerrenberg et al., 2017). Today, the Australian courts apply more restrictive approach such as ‘the Ramsay principle’ where, if a contract had agreed artificial steps that fulfilled no business purpose other than to avoid tax, the entire transaction would be imposed to taxation. When the discussion shifts from what is legal to what is morally tolerable, the borderline is not always perfect and, certainly, may vary over time.
According to Australian taxation laws, the manner in which the rental income and costs are allocated between co-owners of a property depends on whether the co-partners are joint renters or tenants in sharing or there is any joint venture operating a rental property business. The law states that if a person co-occupies a rental property or many rental properties, that person is regarded as an investor who is not running a rental property business either individually or with others. This is mainly due to the restricted scope of the rental property operations and the inadequate extent to which a co-owner participates actively in rental property business (Cesarini et al., 2017).
In addition to this, the co-owners who do not run a rental property business are required by the law to allocate the revenues and expenditure for the rental property according to their legal interest in the property. If they held the property as:
Thus, in case of co-ownership, the rental income and expenditure have to be distributed among the co-owners in line with their authorized stake in the property, regardless of any covenant between them, either verbal or in writing, stating otherwise.
The facts in the given case are as same as the case of FC of T v McDonald (1987) 87 ATC 4541. In the present case, a husband and wife owned a rental property, where husband is an accountant and his wife is housewife. In a written agreement, both of them agreed to share the profits from the property in the ratio 80:20 and that all losses would be borne by the husband (Martin, 2018). From the scenario, it can be said that the effect of this was to give more income to the wife (Jane) as she was not earning any income, and allocate losses to the husband in order to balance the other income. The House of Lords held that the husband should only permitted to 50% of the share of the losses incurred from the property as he was simply a unreal partner for tax purposes and not an actual partner in the eyes of the law. This signifies a share of Joseph’s ‘individual stake’ in the partnership. Consequently, in accordance with the codes established in by the court, Joseph and Jane would be deemed to be in a legal partnership under section 995-1 ITAA97. Joseph would only be allowed to a deduction for the loss to the degree of his ‘individual interest’ in the partnership i.e., his possession stake of 80%. As a result, both Joseph and Jane would require to share the loss of $40,000 equally.
Implications of Sale of Property:
In case Jane and Joseph sell out or transfer the rental property purchased, the capital gain earned or loss incurred would be a part of their taxable income individually rather than at the joint venture level (Hu et al., 2018). However, that capital gain would not be incorporated in the net income of the partnership as defined under section 106-5 ITAA97 however, it would be allocated to each partner to the amount of their ownership stake in the rental property.
Conclusion
From the above analysis, it can be concluded that the an income tax is a charge forced on persons or organizations (taxpayers) that differs with the respective income or profits, known as taxable income. According to Australian Taxation laws, income tax usually is estimated as the product of a tax rate times taxable income. In general, the net gain from sale of property, and sale of goods, is considered as a part of taxable income. Also, the income tax system of Australia permits residents to decrease their gross income by business and other specific types of deductions. Tax evasion is also not very easy for the taxpayers in Australia due to strict regulations and high penalties. The discussion also concludes that in case of co-ownership in rental property, each of the partner is legally required to share the profits as well as the losses in the ratios agreed by them through an agreement.
References
Blunden, H. (2016) Discourses around negative gearing of investment properties in Australia. Housing Studies, 31(3), pp.340-357.
Hu, X., Xia, B., Skitmore, M. and Buys, L. (2018) Providing a sustainable living environment in not-for-profit retirement villages: A case study in Australia. Facilities, 36(5/6), pp.272-290.
Doerrenberg, P., Peichl, A. and Siegloch, S. (2017) The elasticity of taxable income in the presence of deduction possibilities. Journal of Public Economics, 151, pp.41-55.
Cesarini, D., Lindqvist, E., Notowidigdo, M.J. and Östling, R. (2017) The effect of wealth on individual and household labor supply: evidence from Swedish lotteries. American Economic Review, 107(12), pp.3917-46.
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D. (2017) Federal Income Taxation. USA: Wolters Kluwer Law & Business.
Frecknall-Hughes, J. and Moizer, P. (2015) Assessing the quality of services provided by UK tax practitioners. eJournal of Tax Research, 13(1).
Kujinga, B. (2016) The UK general anti abuse rule: Lessons for Australia?. eJournal of Tax Research, 14(3), p.624.
Martin, C. (2018) Clever Odysseus: narratives and strategies of rental property investor subjectivity in Australia, Housing Studies, pp.1-25.
Monteiro, J. (2018) An evaluation of approaches to control tax avoidance, Tax Specialist, 21(3), p.133.
Braithwaite, V. (2017) Taxing democracy: Understanding tax avoidance and evasion. UK: Routledge.
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