Ha3042 Taxation Law For Receipt Assessment Answer
The taxable income is subjected to income tax and it is usually added to the taxable income. Ordinary income refers to the income with respect to the ordinary concepts and it is considered taxable under the “S 6-5, ITAA 1997” (Barkoczy 2018). Usually much of the earnings that comes in the taxpayer is treated as earnings within the ordinary concepts. The judicial concept of ordinary income is explained through the case law approach. The Federal Court of law in “Scott v FC of T (1935)” held that whether or not the particular receipt constitute income under the ordinary concepts is reliant on the characteristics in the recipient’s hand (Grange, Jover-Ledesma and Maydew 2014). Appropriate regards should be paid to the entire circumstances where the payment is received. The commissioner of taxation held that the gains require characterisation in determining whether the gains carries the character of income.
A receipt cannot be characterised as the ordinary income unless it meets the prerequisites of cash or convertible to cash or gains to the taxpayer. On noticing that both the requisites of earnings are satisfied, a gain will be treated as the ordinary earnings if it holds relevant features of earnings (Jover-Ledesma 2014). This includes whether the gain is regular or intermittent proceeds or the flow concept.
A gain which is consistent or periodic in nature are most likely to be treated as the ordinary income than the gains that are paid in the form of lump sum. The Federal Court of law in “Blake v FC of T (1984)” held that regular receipts are treated as the income nature (Kenny 2018). An element of earnings character is obtained when it comes home to the taxpayer. The court of law in “FC of T v McNeil (2007)” held that the nature of the item in the form of income should be adjudicated under the conditions of the derivation by the taxpayer and without paying regard to the nature it may have been given it was derived by other person (McCouat 2018). Furthermore in “Hochstrasser v Mayes (1960)” the court held that in order to possess the nature of income the item should be the gain for the taxpayer that derives it. The court in “FC of T v Dixon (1952)” held that an income stream that is paid periodically or at least annually will be treated as income (Sadiq et al. 2018).
As evident in the current case of Lotteries commission conducts lotteries where a sum of $50,000 is payable to the winner for a period of 20 year annually. On the death of winner at any time, the lottery commissioner may pay the outstanding amount to the deceased estate. Citing the reference of “S 6-5, ITAA 1997” the amount from the lottery can be treated as ordinary income under the ordinary concepts.
Furthermore, it is noticed that the sum of $50,000 will be treated as income of annual payments since it has satisfied both the prerequisites of cash and gains to the taxpayer. The annual payment of $50,000 will be treated as the ordinary income because it holds relevant characteristics of income. Citing the reference of “Blake v FC of T (1984)” the gain of $50,000 is a regular or periodic receipts.
With reference to “FC of T v McNeil (2007)” the sum of $50,000 represents the nature of the item in the form of income that should be judged under the circumstances of the derivation by the taxpayer and without paying regard to the nature it may have been given it was derived by deceased estate (Taylor et al. 2018). Therefore, quoting the reference of “FC of T v Dixon (1952)” the sum of $50,000 constitute annual payment since the payment was regular and periodical.
The annual payment of $50,000 will be viewed as income under the regular concepts of “section 6-5, ITAA 1997” since the payment was periodic and regular.
The case facts obtained suggest that the Duke executed deeds with persons which were his employee together with his gardener. The deeds stated that the covenanted to pay them with the certain weekly amount for the time of seven years or till the joint life of the parties (Woellner et al. 2018). The recitation of the deeds stated that the payment made were for the recognition of past service which was faithfully rendered to the Duke and the duke preferred to create provision for the person irrespective of the fact that he might continue the service of Duke. However, in such a situation he would be entitled to remuneration in relation to the future services or might stop working for Duke.
An explanation letter was sent to every employee to make him aware that he may claim the entire amount of remuneration relating to the future work (Coleman et al. 2014). However, it was anticipated that in practice he may be satisfied with the provision that is made by the future deeds together with an amount that might be essential to bring the entire sum of payment to a certain level of salary or the wages that he had been getting lately.
The time when the deeds were executed by the recipients were getting fixed amount of wages or salaries (Basu 2016). After the deeds were executed the gardener continued the employment of duke and continuously received such sums, in respect of the amount that was payable by the deed. This made up the sum of wages and the salaries that was payable prior to the deed.
On noticing that if the sum was paid under the deed in relation to the period in which the person was the employee of Duke were remunerated for the services. The amount paid for such remuneration were not treated as the allowable deductions while computing the liability of the surtax. Whether, on the other hand, the amount constituted yearly payments which were allowed as deductions (Miller and Oats 2016). Consequently, the issue was whether the payments made under the deed constituted remuneration for services or not. It was undeniable that the deeds were bought into the existence in order to allow the Duke to lower down the liability of surtax.
The payments that was made by the Duke was not regarded as the payment for services. Three out of the five lords arrived at the conclusion that the letter did not constituted a contract. Four out of five lords arrived at the conclusion by stating that the contract was only the expression of hope or anticipation (Snape and De Souza 2016). Furthermore, even though the letter was the contract, it was not more than the agreement that the remunerations of the person’s for the future years will not amount to full payment but only the supplementary amount of sum that is denoted in the letter. The fifth lord, in disagreement, provided its conclusion by stating that the deed and letter must not be considered together as merely preserving the current agreement of service instead of fundamentally changing it.
All the lords overruled the proposal by stating in income cases there are doctrine of legal position which may be ignored by the court and may only regard the matter of substance . The substance includes those results originating from the legal rights and responsibilities of the parties that are determined on the ordinary legal principles.
A challenge launched by the department of Inland Revenue stated that the arrangement was particular made for evading tax and took the Duke to the court. The Duke eventually won the case.
In the present age of Australia the Duke of Westminster’s case is often regarded as the case of tax avoidance. Even though the ruling was regarded as the attractive for others that sought to avoid tax lawfully by creating the complex structure, however since then it has been weakened by the subsequent cases where the court of law have viewed upon the overall effect from such cases (Schenk 2017). In the modern age of Australian the government has been stepping up with its efforts in reducing the tax gap which states that the amount of tax that the taxpayer thinks to be paid and the amount that is originally paid. In the present age of Australia the case the principles established in the case suggest enables an individual taxpayer to order their tax affairs by attaching under the relevant acts. If an individual is successful in ordering them in order to obtain the secure results the taxpayer in all their ingenuity cannot be compelled to pay an increased amount of tax liability (Schmalbeck, Zelenak and Lawsky 2015). An assertion can be bought forward by stating that the principles enables the taxpayer as well as the company to prepare their financial statement in the manner that they lawfully reduce their income tax liability within the meaning of the act.
Answer to question 4:
The present issue is based on ascertaining whether the loss that is incurred from the rental property will be allocated in proportion of the legal interest of the taxpayer.
The “taxation ruling of TR 93/32” provides guidance relating to the division of net profit or loss between the co-owners of the rental possessions (Murphy and Higgins 2016). The ruling provides guidance on the basis of which the taxation commissioner for the purpose income tax will accept the division of profit and loss originating from the rental property among the co-owners of the rental property.
According to the “taxation ruling of TR 93/32” the co-ownership of the rental property is regarded as the partnership for the purpose of taxation but does not constitute partnership under the general law unless the co-ownership is treated as performing of business activities (Simmons et al. 2017). As the co-owners of the rental property are usually not the partners based on the common law, the partnership agreement whether in writing or in oral does not has any effect relating to the sharing of income or loss from the property.
According to the “taxation ruling of TR 93/32” the profits and loss originating from the rental possessions should be shared in terms of the lawful interest of the landlords (Pinto and Evans 2018). The co-owners of the rental possessions will usually hold the rental possessions as the joint tenants or tenants in common. A noteworthy feature of the joint tenant and renter in common is the lawful interest of the renter. The lawful interest ultimately controls the rental property co-ownership and the splitting up of net income or losses originating from the property.
Joint owners of the rental property that are joint renters of the property will hold the property in the same legal interest. Their interest should remain the same in terms of the extent, nature and duration. The tax law partnership generally originates in the partnerships of rental property that are jointly owned and are identified as partnerships by ATO. Mentioning the citation of “McDonald v FC of T (1987)” the taxpayer and his wife both owned two units of the property that were rented out (Robin 2017). An agreement was made between them in which they agreed that the net proceeds would be dispersed to Mr McDonald at 25% while Mrs McDonald would be taking 75% of the shares with Mr McDonald bearing the entire amount of loss originating from the rental property.
The question that originated in the case was whether the operational loss on the possessions was entirely incurred by Mr McDonald or shared among them. The federal court held that the there was no partnership based on the general law and taxpayer were simply the joint owners with profits and losses should be shared at equal proportions (Blakelock and King 2017). The court further stated that the sharing or profits and loss between Mr and Mrs McDonald does not create any impact on their respective entitlement for the purpose of taxation since it was entirely a private arrangement between the co-owners.
In brief, where the husband and wife are the joint owners of the rental property, each of the owners should include in their tax return half of the income and expenses (Schenk 2017). Any form of agreement that the couple might draw up of dividing the income and expenditure in proportion apart from the equal share does not has any effect for the purpose of taxation.
In the current case of Joseph and his wife it is noticed that they borrowed money to acquire a rental property as the joint tenants. An agreement was entered into by Joseph and his wife Jane that provided Joseph will be entitled to a 20% of the rental profits while the remaining 80% will be taken by Jane from that rental property. The agreement further contained that on the event of loss Joseph will be entitled to 100% of the loss. As a matter of fact the taxpayer reported a loss of $40,000 from the rental property.
The “taxation ruling of TR 93/32” will be applicable in the case of Joseph and Jane since they are the joint owners of the property. With respect to the “taxation ruling of TR 93/32” the joint ownership of the rental property is regarded as the partnership for the purpose of taxation but does not constitute partnership under the general law for Joseph and Jane (Snape and De Souza 2016). Since the co-owners of the rental property are usually not the partners based on the general law, the written partnership agreement between Jane and Joseph does not has any effect relating to the distribution of income or loss from the possessions.
Citing the case of “McDonald v FC of T (1987)” it can be held that the there was no partnership based on the general law between Joseph and Jane (Coleman et al. 2014). The taxpayer in the current situation were simply the joint owners with profits and losses should be shared at equal proportions. As the general rule, the loss of $40,000 that is reported by the taxpayer will be allocated in equal proportion for income tax purpose between Joseph and Jane.
In the late events if Joseph and Jane makes the decision of selling the property, they will be entitled to each have 50% of the interest in net capital gains and net capital losses of the partnership for income tax purpose. The agreement between Joseph and Jane of sharing the profit and loss in different proportion will be ineffective for income tax purpose.
On a conclusive note the sharing or profits and loss between Joseph and Jane does not create any effect on their individual entitlement for the purpose of taxation since it was entirely a private arrangement between the co-owners. Their partnership constitute co-owners and the profits and losses should be shared in equally.
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.
Barkoczy, S. 2018. Australian Tax Casebook 2018 14e ebook. Melbourne: OUPANZ.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Orbist, W. and Sadiq, K., 2014. Principles of taxation law. THE AUSTRALIAN TAFE TEACHER.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. Principles of business taxation.
Jover-Ledesma, G. 2014. Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.
Kenny, P., 2018. Blissenden, M. and Villios, S. (n.d.). Australian Tax.
McCouat, P. 2018. Australian master GST guide.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.
Pinto, D. and Evans, M., 2018. Returning income taxation revenue to the states: back to the future.
Robin, H., 2017. Australian taxation law 2017. Oxford University Press.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A. 2018. Principles of taxation law.
Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.
Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.
Simmons, D.L., McMahon, M.J., Borden, B.T. and Ventry, D.J., 2017. Federal Income Taxation. Foundation Press.
Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.
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Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2018. Australian taxation law.
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