Taxation Law Assignment: Lotteries Commission, Corner Pharmacy, IRC V Duke Of Westminster, And Joseph And Jane’s Rental Property

HA3042 Taxation Law

Taxability of lottery winnings and annual payment income

1. In this case, a lottery has been sponsored by SET for Life which is particularly a Lotteries Commission; the same sponsored lottery has been given away when any of the people scratch totals of three panels of the set for life would be winning $5000 for all year for 20 years. Furthermore, in case the person dies, the due amount will be payable to the estate of the deceased (Australian Taxation Office, 2018).

If an individual wins anything from lottery or draw sponsored by the credit union, banking institutions, building society or any other investors, then the individual is required to release on their tax return the value of any derived prizes. Prizes might be inclusive of low-interest, free of interest loans, cash, car or holidays. The best aspect is that within Australia, lottery winnings are not imposed on individual income tax. On the other hand, one is not required to make prize declaration won in common lottery like raffles, or lotto draws (Australian Taxation Office, 2018). If an individual gains monetary benefits from a lottery winning, then it will be subjected to tax as per the head Income. Further, the income will be imposed to tax at 30% flat rate, this after cess add will be amounted to 30.9%.

It is not considered if or if not the winner’s income is under tax or not, the distributor of the prize is responsible for making tax deduction during payment. Furthermore, the benefit gained from fundamental exemption as well as the income tax slab rate is non-applicable to this concerned income. Further, the whole derived amount will be taxable at the 30.9% flat rate (Braithwaite, 2017).

Lottery winning or other types of prizes are often assets for the intent of Part IIIA. On the other hand, it is provided by subsection 160ZB(2) that a capital gain should not be considered to have accrued to the person paying tax by the rationale of that they have gained such form of winnings. However, subsection 160ZB (3) states that a taxpayer is not required to incur a capital loss, because of any conducted act or transaction entered by the taxpayer in the manner of doing participation in a lottery or any prizes. Raffle prizes are out of consideration under the subsections 160ZB(2) and 160ZB(3).  

On the basis of cited provisions, it can be articulated that the lottery winning is out of consideration in terms of annual payment income. According to the  provisions related to the taxation law of Australia, income shall not be declared till the time it is held by the banking institution or any other financial institution, due to the reason of lottery prizes which are won in Australia are stated as free of tax in lump sums amount. Related to this, same provision are applicable in the New Zealand, in which the receivable amount from lottery winning is not taxable as their major gaining source is lottery wins. Thus, the total amount of receivable of $50000 is not considered as an element of the yearly income of the taxpayer as these are not covered under earnings (Nichita, 2015). However, when a deceased’s estate is  imposed to the winnings in the situation of winner’s death, then the tax on capital gain appeals, but also the same income will not be entitled as annual payment income.

Taxation of Corner Pharmacy under Pharmaceutical Benefits Scheme

2. By considering the cited vase scenario, Corner Pharmacy is providing chemists with services; the corporation held no tender of credit sales; on the other hand, the payment is acceptable by main credit cards. The business sells off the shelf and by taking the similar proprietor fills conditions into account for cash and for the payments paid as per the Pharmaceutical Benefits Scheme [PBS]. The inherent issue in the case is the tax of the Corner Pharmacy according to the taxability provisions under the Australian taxation office alongside Pharmaceutical Benefits Scheme.

The Pharmaceutical Benefits Scheme (PBS) is said to be a program run by the Australian Government that is engaged in offering subsidised prescription drugs to Australian residents and to some of the foreigners under the Reciprocal Health Care Agreement. The PBS scheme of Australian Government offers relevant, time-based and reasonable accessibility to a broad variety of medicines to all the individual living in Australia (Australian Government, 2018). The claim of items related to PBS/RPBS viable and correct prescription data to be considered into the PDS (Parker, 2018). Further, this assures supportive payment from the side of the department, as well as it guarantees that accurate information is entered for the all the involved persons who are a prescriber, patient and pharmacy. To this note, Pharmacists is required to make sure that there is accuracy in dispensing, stating the intentions of the prescriber while adhering with the Commonwealth legislation and State or Territory laws.

Table 1: Statement showing taxable income of Corner Pharmacy

	Particular	Amount
	Sales from ordinary business (WN 1)	$450,000.00
Less:	Cost of goods sold (WN 2)	($313,636.00)
Less:	Salaries expenses(WN 3)	($60,000.00)
Less:	Rent expenses(WN 3)	($50,000.00)
Add:	Billing under Pharmaceutical Benefits Scheme(WN 4)	$200,000.00
	Assessable Income	$226,364.00
Less :	Non-Taxable Income	($200,000.00)
	Taxable Income	$226,364.00

1	Formula	Calculations	Amount
Total sales	Cash Sales + Bill under PBS scheme+ Credit card reimbursement	=$300,000+$200,000 $160,000	=$660,000.00
Sales under Benefits Scheme			$200,000.00
Other income	Total sales – Sales under Benefits Scheme	=$610,000-$200,000	=$460,000.00
2
Cost of goods sold	= Opening stock + Purchases – Closing stock	$150,000.00 + $500,000.00 -$200,000.00	=$450,000.00
Apportionment of cost of goods sold
Cost of medicines sold for ordinary business	COGS* Sales of ordinary business / total sales	=450,000*$460,000/$660,000	=$313,636.00

Working note 3 and 4

Wages, as well as rental expenditures, are allowable expenditures aiming at the taxable income calculation. Henceforth, the same will be allocated as per the sales category under the Pharmaceutical Benefits Scheme category and the sales held as per the regular business course (Woellner and et al., 2016).

Provided solution is on the basis of the potential assumptions:

• All the rules prescribed by the Pharmaceutical Benefits Scheme has been followed by the Corner Pharmacy
• Governmental aspects provided have not been considered for the private intent.
• If the expense is conducted on a combined basis, then the similar trend will be allocated taking the sales value as a base.
• Accurate records, as well as documents, are to be managed by the corporation for the certificate to make sales as per the Pharmaceutical Benefits Scheme

3. The case of Duke Westminster is often referred to as a case in tax avoidance. Further, the full name of the case is Inland Revenue Commissioners v. Duke of Westminster [1936] A.C.  The Duke of Westminster had appointed a gardener and compensated him for his post-tax income, which was significant. In order to decrease the tax, Duke stops paying the wages to the gardener and in its place drew up an agreement, in which he agrees to pay an equal amount of wages at the end of every specific period. Tax laws of time enable Duke to proclaim the expense like a deduction, therefore decreasing his chargeable income and his liability towards tax and surtax.

Principle established in IRC v Duke of Westminster

The case of The Duke Westminster specifies that tax avoidance will be accepted only if it follows the establish statue law.  In accordance to the case, the general principle of the arrangement of covalent act reduces the liability of Duke when it is pertinent and can proclaim for the yearly compensation for one year.

Moreover, every person has the rights to organize his activities in such a manner, the tax according to proper Acts is less than it otherwise would be (Alldridge, 2015.). In case he succeeds in doing so then, ungrateful the Commissioners of Inland Revenue or his tax-payers associates might be of his ingenuity, he could not be obliged to give an increased tax.  This principle, in essence of tax evasion stalemate and, could be stated the principle of Westminster.  As, after being knowledgeable by the decision, allowing the organizations and entities to build financial arrangements in order to decrease the liability of tax to the extent that these formations are in accordance with law was inappropriate.  Thus,  it can be observed that the decision of Duke Westminster is superseded by the current Ramsay Principle, made by the famous WT Ramsay v. IRC decision the House of Lords.

Moreover, in present time judges considers not to make these issues as a formal rule, since they will make the discussion about the ratio scope in the prior case while not considering being bound by its precise wording.  Though his ruling was attractive for other people also who are looking for to evade tax legally through making difficult structures, it has been deteriorating by subsequent cases wherein the courts have considered complete effects (Bloom, 2015.). The same can be understood by considering an example of Ramsay Principle where if a transaction has predetermined artificial steps that serves no commercial objective except to save tax, the proper approach was to tax the consequences of operation as a whole. As per assertions of QC (2016), the House of Lords rejected to disregard the form of the transaction over the substance and while doing some specified the cardinal principle that every person has the right if he could organize the activities in order that tax connecting under the appropriate Acts is less than it otherwise would be.

In IRC v. WT Ramsay Ltd (1981), the House of Lord’s concern against a series of transactions which are predetermined, included into which steps that has no commercial objective excluding evasion of tax. In addition to this, it was examined that actual strategic planning had not been in subsequent rulings. In case the executive succeeds in doing the same, he will not be penalized under the taxation laws. It became inappropriate later on when courts decide to implement the Ramsay Principle for taxing such remedial actions of the taxpayer.

Allocation of losses and capital gains for tax purposes in Joseph and Jane’s rental property

It can be concluded from the above case law that tax evasion will be permitted only when it has been done according to the law. The same implies that if any organisation executes or adopts any device is absolutely responsible for the tax profit reduction then the same won’t be permissible. Further, courts and committee should notice and judge the economic jurisprudence of the extensive and changed nation to hold concerning the planning of taxes, i.e. anticipated of a tax deduction.

4. The present case is about Joseph an accountant and his wife, Jane. They borrowed the money and purchased a leasing property as a joint tenant. The terms of agreement specify that in the case of profit Joseph is entitled to 20% income and his wife is entitled to 80% income from the rental property. Further, if the property incurs a loss than in that case the 100% loss will be compensated by the Joseph only. There is a loss of $40000 in the present year. Moreover, the case is concerned about ascertainment of taxation of profit and loss on the property which is specified. Along with this, it will also assess the manner in which capital gain or loss should be recorded in case if the property is sold by joint tenants. Ultimately, the problem of the present case is that who will be entitled to pay the tax.

Australian Taxation provision of rental property TR 93/32 ruling specifies the base on which the distribution of net profit or loss obtained from rental property between co-owners will be recognized for income tax purpose (Taxation Ruling TR 93/32, 2017). Further, it only scrutinizes the taxation position of co-owners whose affairs do not result in exercising of a business.

• Co-ownership of a leasing property could be defined as a partnership for the income tax purposes, but in reality it is not a partnership at general law until the ownership amounts to exercising of business.
• If co-ownership is for income tax purpose only, the profit or loss obtained from the leasing property is derived from the co-owned property and not from the distribution of partnership incomes or losses.
• The reason behind same is that co-owners of leasing property are not considered as partners at general law, a partnership contract either oral or in writing, will not influence the distribution of profit or loss relating to the property.
• Hence, the distribution of income or loss from the leasing property should be done in accordance to legal interest of the owners apart from those very limited conditions where there is adequate evidence to establish that the fair interest is diverse from the legal title.

Ownership expresses an entitlement to apply the maximum legally permitted rights over what is possessed (Co-ownership Rental Property, 2017). Furthers, co-owners of leasing property will embrace the property as a joint tenant or as tenants in common. Moreover, these tenancies are a categorization of co-owners interest. The meaning of partnership is much wider for income tax purpose than it is a general law. Further, the subsection 6(1) of the Income Tax Assessment Act 1936 describes the partnership as the union of people exercising business or in receipt of income mutually but does not comprise a company. Whether a partnership exists at general law is of significance for the taxation purposes, the Act takes the income of tax as it finds it, i.e. subject to the general law in all its factors.

After considering all facts and figures of the present case, it is concluded that Joseph and Jane were co-owners rather than partners and that their which loss was derived from the co-owned property and not from the sharing of partnership gains and losses. Since there was no partnership at general law and hence no sharing of profit or losses they had to distribute loss in the fraction to their interest in the property. Further, as joint tenants, they owned property in equivalent shares and sharing of profit and losses from that property in the equal proportion. Thus, the 50% of the loss will be allocable to Joseph for income tax purpose. In addition to this, if the property is sold by joint tenants than in that case also the same provisions will be applied, and Joseph could proclaim 50% of the capital gain loss.

References

Alldridge, P., 2015. 13. Tax avoidance, tax evasion, money laundering and the problem of ‘offshore’. Greed, Corruption, and the Modern State: Essays in Political Economy, p.317.

Australian Government, 2018. About the PBS (Online). Available from < https://www.pbs.gov.au/info/about-the-pbs>. [Accessed on 27 September 2018].

Australian Taxation Office, 2018. Amounts not included as income (Online). Available from < https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/Amounts-not-included-as-income/>. [Accessed on 27 September 2018].

Australian Taxation Office, 2018. Taxation Ruling (Online). Available from < https://www.ato.gov.au/law/view/document?DocID=ITR/IT2584/NAT/ATO/00001&PiT=99991231235958>. [Accessed on 27 September 2018].

Baigell, M., 2018. A Concise History Of American Painting And Sculpture: Revised Edition. Routledge.

Bloom, D., 2015. Tax avoidance-a view from the dark side. Melb. UL Rev., 39, p.950.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Co-ownership Rental Property. 2017.  [Online]. Available through < https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail/Publications/Rental-properties-2013-14/?page=5>. [Accessed on 27th September 2017]

Monteiro, J., 2018. An evaluation of approaches to control tax avoidance. Tax Specialist, 21(3), p.133.

Nichita, R.A., 2015. Knowledge is Power. Improving Tax Compliance by Means of Boosting Tax Literacy. THE ANNALS OF THE UNIVERSITY OF ORADEA, p.770.

Parker, H., 2018. Instead of the Dole: an enquiry into integration of the tax and benefit systems. Routledge.

QC, J.M., 2016. Ethics and tax compliance: the morality of tax avoidance. The good old days. Trusts & Trustees, 22(1), p.166.

Taxation Ruling TR 93/32. 2017.  [Online]. Available through < https://www.ato.gov.au/law/view/document?docid=TXR/TR9332/NAT/ATO/00001>. [Accessed on 27th September 2018]

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.