Taxation Law Analysis In Australia: Treatment Of Lottery Winning, Pharmaceutical Benefits Scheme, And Corner Pharmacy

Analysis on Treatment of Lottery Winning as Income

Taxation is the process of collecting contribution from the individual by the government. It is a kind of charges imposed on service rendered or charging fine on breaches. The characteristics of a tax are not linked directly with tax payment or provision of service. The case study is emphasising the law of taxation in Australia based on the distinct scenario and determining the rules that are applied in the significant case. In the first case, a taxation law of Income-tax Assessment ACT of 1978 is applied to the treatment of lottery winning is determined. The Pharmaceuticals Benefits Scheme is recognised for understanding the concept of taxable income under the National Health Act 1953. This law is applied to income and expenditure by the Australian Pharmacy. The issue of tax avoidance was raised in the case of IRC vs Duke of Westminster which determined, whether the applicable principle is relevant or not.  

Issue

A lottery commission conducted a lottery naming ‘Set for Life’ and offered to pay $ 50000 each year for consecutive 20 years to the winner who scratches three lotteries of ‘Set for Life’. The first payment of $ 50000 is allowable when the winner is declared. A second payment is allowable on the anniversary of initial payment. The issue arises in the instance when the payment of the lottery would be made to the deceased estate after the death of winner. The issue requires to be resolved if the annual payment to be paid to deceased estates accounts as income or not.  

Rule 

Each of the lottery winners is taxable for such income by the Federal government. In a case when the winner dies the tax is to be paid by the beneficiaries. As per the Rules of 2014 Registration 24 each of the lottery winnings is not taxable as sources like ordinary income. The HM customs does not consider the lottery prize as income and thus the amount is tax-free. According to the Income Tax Assessment Act 1936, the beneficiary after the death of the winner receives a lump sum amount from a lottery winning. When the amount of lottery winning is banked then the amount could be made taxable from source. The beneficiary would be liable to pay tax on such income at 40% as inheritance tax. A simple drafted agreement with a sign of beneficiaries would save the lottery syndicates from the risk of non- payment of tax on lottery winning amount.

Analysis- the issue of lottery commission determines, whether to treat the lottery winnings as income or not. As per the Australia Income-tax Rules, it is mentioned that cash received by a beneficiary is a part of the estate. The federal estate tax includes the received amount of lottery winning amount after the death of the winner to be valued on a fair market rate. The HM Revenue & Customs (HMRC) would tax the lottery winning amount in the scale of Inheritance Tax (IHT). The scale of taxation is as follows

Calculation of Taxable Income of Corner Pharmacy

Reduction of tax by 20 % is the winner dies after gifting the amount in 3 to 4 years

Reduction of the tax rate by 40 % for year exceeding the death of 4 to 5 years after gifting

The whole matter of taxation on the winning amount depends on the assurance if the beneficiary signed for paying the due tax as per agreement if the winner dies in 7 years.

Conclusion- The above analysis on the treatment of lottery winning is concluded as annual payment income of the beneficiaries if it is banked and liable for payment of tax on such amount as Inheritance tax of 40%. It is concluded after the analysis that the beneficiaries would have to sign an agreement before the winner dies for paying off the remaining tax after the death of winner. The taxable rate on the lottery winning amount reduces as per the death tenure sectioned under the rules of HM Revenue & Customs.  The reduction on taxation rate is 20 % before 3 to 4 years and 40 % reduction if the deaths occur before 4 to 5 years of winning.

Issue

The corner pharmacy is having a chemist shop which does not prefer to operate its business in credit. However, it accepts credit cards for sales and fills up the prescriptions as per the schemes mentioned under Pharmaceutical benefit schemes. The issues arise considering the taxable income that is required is to be paid by Corner Pharmacy. The operational performance recorded for sales or purchases, on stocks, salaries and rents charges made by a pharmacy for the financial year is required to determine its taxable income. The taxable income of Corner pharmacy considers that each transaction on accrual basis applies both costs of sales in cash and credit card sales.

Rules

The Pharmaceutical benefits claims consist of both original and the carbon copy of the claim for reimbursement. The costs of medicines are subsidies as per the Australian government under PBS. The antibiotics are available for Australian at free of cost which was introduced in 1944 by Curtin Labour. The Pharmaceutical benefits scheme is laid down under the National Health Act 1953 for positive results and proper use of medicines. The expenditure under PBS has remained uncapped which could be increased by new drugs and increases the demands. A concession to the patient under the PBS is provided to both the cardholder and general patients. Patient co-payments provide a concession of $6.20 on the purchase of medicine and $ 38.20 for the general patients. 

Analysis 

The taxable incomes of Corner Pharmacy assume each of the recorded transaction to be determined on an accrual basis.

Taxable Income
Particulars	Amount	Amount
Opening balance	$ 25,000
Cash Sales	$ 300,000
Credit card sales	$ 150,000
Credit card reimbursement	$ 160,000
		$ 635,000
Opening stock	$ 150,000
Purchases	$ 500,000
Closing Stock	($ 500,000)
		$ 150,000
Billings	$ 200,000
Receipts	($ 195,000)
		$ 5,000
Salaries	$ 60,000
Rent	$ 50,000	$ 110,000
Net income		$ 370,000
Income tax expenses		$ 166,500
Income after tax		$ 203,500

Table 1: Taxable Income of Corner Pharmacy

(Source: Created by Author)

Under Pharmaceutical schemes, the Corner Pharmacy provides medicine to the patient on both cash sales and accept credit card. It also attempts to provide accurate prescription on the purchase. As per the PBS rules the patients would be provided a concession by Corner Pharmacy which is not mentioned in the record of a financial statement. The net Income approached by Corner Pharmacy in the financial year is $ 370000. As per the income tax slab of Australia, the net income of Corner Pharmacy is taxable at the rate of 45 %. The amount of income tax paid by Corner pharmacy is $ 166500 the net income after tax amounted to $ 203500.

Explanation of Pharmaceutical Benefits Scheme

Conclusion

The case scenario of Corner Pharmacy concluded that the taxable rate incurred on the financial expenditure and income is 45%. The pharmacy was liable to pay the taxable value of $ 166500 at the end of the financial year. The credit card sales and cash sales are the income of the income of the Corner pharmacy; therefore the amount is added for determining the taxable income.

Issue

The case of IRC v Duke of Westminster raised an issue of tax avoidance. The Duke used to appoint gardener and make payment to them out of the income of Post-tax. Which was essential according to the Duke of Westminster for reducing the burden of the tax? The Duke drew a covenant for paying the entire salary to the gardener at the end of a period.

Duke claimed for deduction of expenses and reduction of tax on income. The Inland Revenue department challenged Duke for tantamounting the arrangement for evasion of tax.

Rule

According to Income Tax Act 1936 (Cth), the provision of tax avoidance is complicated which is found in Part IVA of the ITA 1936. The law provides a power to the taxation Commissioner for cancellation of a tax laid under Part IVA. The Commissioner is involved in making an assessment if the taxable income and determine the amount after cancelling the tax benefit. The principles that are applied in the IRC v Duke Westminster 1936 ac 1 was that person is liable to arrange its affairs lawfully in the purpose of reducing the burden of tax liability.  The rules mentioned by Lord Tomlin that every individual is liable to arrange the affairs in order to avoid tax. As per the case scenario, the unappreciative Commissioner is not liable to enforce Duke for payment of extended tax for such arrangement for his ingenuity.  

Analysis

The case studies of IRC vs Duke of Westminster determine the issue of how the Duke appointed a new gardener every year and makes payment to them from the income of pos-tax. The similar issue is observed in the case of (THE BRAIN DISORDERS RESEARCH LTD PARTNERSHIP AND ANOTHER V REVENUE AND CUSTOMS (INCOME TAX – TAX AVOIDANCE SCHEME): UTTC 8 MAY 2017 ). This arrangement is a kind of principle applied by Duke for the purpose of avoiding tax. Later the Duke signed a covenant with the gardener for paying the entire amount after the completion of mentioned period. The Inland Revenue Commissioner accused Duke of avoiding the payment of tax. However, after attending the court, Lord Tomlin sentenced lastly that any individual is liable for arranging the affairs of taxable income for reduction of tax payment. Hence the principle applied by the Duke of Westminster is observed to be relevant.

Conclusion

The case scenario of IRC v Duke of Westminster concluded that the applicable principle of tax avoidance by arranging the income and expenditure issue by itself is relevant in the case. The principle is relevant as per the Income Tax Act 1936 (Cth). The case is thus closed by Lord Tomlin with a sentence that the accuser could not enforce the accused individual for its arrangement of affairs for tax evasion.

Issue

Joseph is an accountant who initiated for acquiring rental house as a joint tenant with his wife Jane. Joseph is entitled to a profit of 20 % whereas Jane would be profited by 80 % from the rental house property. The issues arise that any loss incurred by the rental house property would be carried by Joseph of 100 % or not. Joseph decided to sell off the property for capital gain or loss.

Rule

The joint tenant who has borrowed the rental house property is partners for business or spouse is to be recognised for understanding the applicable law. As per the Australian Taxation law, the division of property income among the joint tenant (excluding the business carrier joint tenants) is, liable for payment of 20 % and 80 % interest. If a case arises that division of interest in the agreement is divided in proportion apart from the equal division would have no effect on the purpose of the tax.  The issues arise that the loss of 100 % would be carried by Joseph, which is not applicable according to the Australian Taxation Law. The decision of selling off the property by Joseph for eliminating capital loss of 100 % is required to offset the capital gain at the initial stage.

Analysis

In case scenario of Joseph, the rental house is borrowed in joint tenancy by Joseph and his wife, which share the profit by a percent of 20% and 80% as per Australian Taxation Rules. However, the loss of $ 40000 was fully incurred by Joseph, which is not relevant to the case. As per Capital gain tax acquisition of property after 19^th September 1985 and selling would incur a capital gain or loss on the property. The gain of the property is calculated by deducting the cost of capital and additional capital expenses with sales cost. However, the capital loss is incurred by the joint tenants in the case is required to be allocated equally as per the Australian Taxation law

Conclusion

The case scenario concluded that if the profits are allocated as per the Australian Taxation law in the proportion of 80 % to Jane and 20 % to Joseph. Then the loss incurred by the Property should be allocated proportionally. The capital loss of $ 40000 incurred by selling of the rental property should be accounted for after the offset of Initial capital gain.

Conclusion and overall synopsis

The different case scenario describes the different types of taxation laws applicable in the district situation. As per the case study, the annual payment by lottery commission to the descendant after the death of winner. The descendant is liable for payment of remaining tax after receiving the winning lottery. The second case scenario determines that Corner Pharmacy is liable for payment of a tax of $ 166500 under the Pharmaceutical Benefits Scheme and provides concession to the patient at a specific percentage. The Corner Pharmacy is required to keep a record of every transaction and provide a prescription to the patient for both cash sales and credit card sales. The second case scenario concluded that IRC lost the accused case imposed on the Duke of Westminster. The principle applied by Duke for tax evasion was proved to be relevant. In the last case studies, it is concluded that the loss incurred by property should be treated equally if the profit on the property is allocated in a proportion.

References

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