Taxation Of Dividend, Interest, Capital Income And Fringe Benefit

Introducation

Discuss About The Taxation Dividend Interest Capital Income?

The above mention assets were sold by Eric last week in the following manner: antique vase: $3000; sound system $11000, painting for $1000; antique chair for $3000 and shares of the listed company for $20000. Further net capital gain or loss is to be ascertained for above transactions.

According to Alpanda and Zubairy (2016), holding period plays the significant role in ascertaining the capital gain tax liability for an assessee.  As per the provisions of Australian taxation; in case an asset is held for more than the period of twelve months than discounting or indexation method is applied for ascertaining capital gain profit or loss on sale of the asset. However, in case the asset is held for a period of fewer than twelve months than other method is applied for ascertaining capital gain or loss (AO, 2015). Computation of gain or loss in other method is ascertained by reducing purchase cost from selling price, and in case any loss arises than the same can be adjusted from a gain of other similar transactions.

In the present case, as it has been specified that Eric has held assets for a period less than twelve months; thus computation of capital gain will be done in accordance with other method. As per Arnold, Bateman, Ferguson and Raftery (2014), calculation of capital gain or loss will be performed in the following manner:

Antique Vase

Gain = Selling price – acquisition cost

=$3000-$2000

=$1000

Antique Chair

Gain = Selling price – acquisition cost

= $1000-$3000

= – $2000

Home sound system

Gain = Selling price – acquisition cost

= $11000-$12000

= – $1000

Painting

Gain = Selling price – acquisition cost

=$1000-$9000

= – $8000

Share of listed company

Gain = Selling price – acquisition cost

= $20000 -$5000

= $15000

Total capital gain

= $1000+ ($2000) + ($1000) + ($8000) + $15000

= $ 5000

Thus, from above calculation, it can be calculated that for above transaction net taxable amount of capital gain for Eric relating to specified transactions is $ 5000 (Bankman, Shaviro, Stark and Kleinbard, 2017).

A three-year loan has been provided by the Brain as part of his remuneration package of amounting $ 1 million at a special interest rate of 1% per annum payable in instalments. The loan was provided in the year 2016. However, forty percent of the provided funds were applied for income-producing purposes and for accomplishing the obligation regarding interest payments.

Provisions and Regulations relating to capital gain

The provision relating to fringe benefits tax: In accordance with the specified provisions in case of a transaction relating to the loan, fringe benefit takes place in less interest or no interest in comparison to statutory rate has been charged by the lender. The taxable amount of fringe benefit is ascertained by the determining the difference between interest rate at which loan is provided and statutory rate of interest.  The existing statutory rate has been specified below:

Statutory Interest Rate for the year ended 31^st March 2017                          5.65%

Statutory Interest Rate for the year ended 31^st March 2016                          5.65%

In the present scenario, it has been specified that loan has been provided to brain @ 1%; however statutory rate for the same period is 5.75%. Thus, as the loan has been provided at an interest rate which is lower than existing statutory rate (Barkoczy, 2016); the difference will be taxable as a fringe benefit.

Calculation of taxable amount

Interest as per statutory rate – Actual interest payable * % of amount allocated for producing income

= $1 million *5.75% – $ 1 million *1% *40%

= ($ 56500 – $ 10000) *40%

=$18600

Further, in case, the interest was paid at the year-end; then there would have been no change in the taxable amount of fringe benefit as the manner in which interest is paid (i.e. whether monthly or quarterly) does not have any effect on the taxable amount of fringe benefit (Barkoczy, 2017.).

However, in case of bank releases the whole amount of tax liability than the whole interest would have been charged as a taxable fringe benefit. As per the words of Blakelock and King 2017, the reason behind this is that when no interest has been charged by the lender; no deduction is allowed.

Jack and Jill who are husband and wife have borrowed money for purchasing a rental property as joint tenants. A written agreement has been signed by both of them and according to same Jack is entitled to 10% of the profits and Jill is entitled to 90% of profits. However, in case any loss jack will be entitled to all losses. Last year a loss of $ 10000 had occurred.   The manner of allocating loss has to be ascertained for taxation purpose. Further, if the property is sold than the manner of determining a capital gain or capital loss is also required to be provided.

Facts of the case

According to the words of Bloom, (2015), TR 93 /32 deals with transactions relating to rental property; the specified ruling explains the basis on whose accordance the division of net income or loss from rental property between co-owners is acceptable for income tax purposes. Further, the activities which are not considered as carrying business are also explained in this ruling.

Income Tax Assessment Act specifies partnership as a group or association of person carrying on business as a partner of receiving income jointly but does not include the company. However, it is necessary to ascertain whether a partnership exists as a general law for the significance of taxation purpose (Tax Ruling TR 93/32). A decision was held in case of McDonald’s case at ATR p 967, ATC p 4550 that no partnership existed as the agreement which was made for partnership entitled him to claim loss incurred in the business. The facts of the present case are similar to McDonald case in which taxpayer and his wife were legally and beneficially joint tenants. Further, it was provided that profits will be distributed in the ratio of 25: 75 and in case any loss occurs then the same will be borne by Mr McDonald (Braverman, Marsden and Sadiq, 2015). However, it was concluded by the court that loss and profits would be borne equally by both the partners for income tax purposes even though the partnership agreement states different ratio relating to the allocation of profit and loss.

In present scenario the partnership agreement provides following profit and loss sharing ratios:

                                                Jack                 Jill

Profit                                       90%                 10%

Loss                                         100%               0

As renting of single premises cannot be said as operating business; thus Jack and Jill cannot be regarded as co-partners under general law. As per the views of Halberda (2014), income and loss relating to rental property should be allocated equally between both of the partners for income tax purposes. Hence, partnership agreement will have no effect for income tax purposes, and Jack will be able to claim 50% loss relating to the rental property. As the decision provided in McDonald case will be applied in present scenario and equal profit and loss will be provided to Jack and Jill for taxation purpose. In case the property is sold in future than capital gain or capital loss will be equally allocated to Jack and Jill for income tax purposes.

Case Law: Duke of Westminster v CIR 19 TC 490. In specified case, Duke promised to pay his servants additional amount to his servant in case if he provides additional services. The specified promise for written in the form of agreement.  Further, no payment was made to the servant, but Duke received an additional deduction for taxation purpose.

Provisions and Regulations

Previous year provision has been formulated by the constitution in order to assess the scheme which can result into tax evasion (Harding, 2013). Further, it was concluded in a settlement that the specified kind of ruling serves as an originator for developing new provisions rather that assessing existing rulings.

The case of Duke Westminster was resolved by Lord Wilberforce which concluded that the ruling of the specified case restrained the court from assessing actual transaction to allege basic nature of transactions. Thus, it was specified that legal nature of transactions should be ascertained and in case a variety of transactions are available than the same is required to be assessed by legal authorities (Woellner and et al. 2016). It can be concluded that the scheme was aimed at avoiding tax liability and as no commercial justification was available, it was followed for a long time.

 Presently, regulations have been established in order to assess other schemes which may lead to economy tax evasion methods. Thus, presently current ruling is emphasized more in comparison to previous provisions which has faded the major impact of specified case law.

A large piece of land of pine trees is owned by Bill. Bill wishes to use the land for grazing sheep and for the same land requires being cleared out. Further, he comes to know that a logging company provides him offer of $1000 for each 100-meter land. The other option available to him is to receive a lump sum payment of $ 50000 for granting lodging company right for removing the required quantum of timber from land.

Taxation Ruling 95/6 specifies the provision relating to taxation of receipts obtained from the sale of timber constituting assessable income. The taxpayer engaged in forest industry or not both are covered under this provision. In accordance with provision specified in point 25 taxpayer  runs the forest  operations might sale the standing  the timber by providing the right to an individual or in some other manner. The specified income is taxable under subsection 25 (1) of specified taxation ruling. Further, royalty relating to same will also be considered as income and taxed as similar provisions.

Conclusion

From above provisions, it can be concluded that in the first scenario when standing timber is disposed and sold for $1000 per 100 meter which is not ordinary course business will be taxed under section 36 (1). In the second case when he received lump sum income for selling rights relating to disposing of timber the same will be assessed under section 25 (1).

References

Alpanda, S. and Zubairy, S. 2016. Housing and tax policy. Journal of Money, Credit and Banking. 48(2-3). Pp.485-512.

AO, M.D.A. 2015. Modernising the Australian Taxation Office: Vision, people, systems and values. eJournal of Tax Research. 13(1). P.1.

Arnold, B.R., Bateman, H., Ferguson, A. and Raftery, A. 2014. The size, cost and asset allocation of Australian self-managed superannuation funds.

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D. 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Barkoczy, S. 2016. Foundations of business Law 2016. OUP Catalogue.

Barkoczy, S. 2017. Core Tax Legislation and Study Guide. OUP Catalogue.

Blakelock, S. and King, P. 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6). P.18.

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

Bond, D. and Wright, A. 2017. A Snapshot of the Australian Taxpayer.

Braverman, D., Marsden, S. and Sadiq, K.  2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17. P.1.

Halberda, J. 2014. Mistake of law and mistake of fact in English law of restitution.  The Legal History Review. Psychology. Pp.261-283.

Harding, M. 2013. Taxation of dividend, interest, and capital gain income.

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