Taxation of Awards and Prizes
In every society there exist persons who try their luck in gaming draws, casinos, lotteries, raffle tickets, betting and many other. The participants engage themselves in this activity with the hope that they will win awards and prizes from the draw. They stake an amount expecting return while others do not steak anything depending on the nature of the draw. These prizes and awards are paid to inform of cash, holidays, trips, cars, gift vouchers, interest-free and low credit facilities, discounted allowance, promotions, houses and many other forms (Goewey, 2014.Pg.79.)
The awards and prizes won are considered income since it is a benefit the participants enjoy as a result of the draw. However, it is classified as other income since it is not an income that is based on employment or business operation instead it is that activity whose return on investment is based on probability. In the actual sense no one knows the outcome of the draw it is a game of chances and trials hence no regret. Unlike in the other forms of income, this income on gaming draws contrary different since an accounting perspective the method of accrual basis does not apply since no one is certain of the result hence the classification other income.
The tax office in Australia has advised that all awards and prize draws that are run and conducted either wholly or partly by investment group, financial credit institutions, banks, government institution agencies as well as organized building and cooperative societies must be declared and filled for tax purposes unless there is a proof that the outcome of the award or prize was as a result of a sponsorship of an entity that was doing so to improve the community and not for own benefit. Prizes and awards from the high bodies are taxed mainly because the parties conducting the draw will claim this as the allowable expense. They will claim this as an expense primarily because the event draw may be held for marketing and advertisement purpose other might be to know to access customer response on products while the government and public sector will do so obtain information and matter of public interest.
As the above prizes and awards outlined are taxed there are no those which are exempted by the law from being taxed. The law on tax-exempt allows all prizes and awards that are won from conduction of ordinary lottery draw with the excellent example being lotto draw and raffle ticket be exempted from tax. Australian Tax Office on other income, therefore, dictates that no tax return and payment declaration that should be made on any winnings done on any ordinary lottery event (Cachia,2017.Pg.260.) It exempts this income primarily because the player and secondly never know its winning outcome because the competition is conducted once in a while, not on a regular basis. This therefore likewise bars the lottery commission from the claim the payment as an allowable deduction at her end.
Taxation Exemptions on Ordinary Lotteries
‘Set for Life’ is an ordinary lottery draw that is conducted by Lotteries Commission it is mainly played by scratching three panels hence no one knows the outcome of the content of the panel. The unknown concept of the scratching and the ordinary lottery aspect by default makes any award or prizes that are won in this ‘Set for Life’ lottery as tax exempt. The $50000 is therefore awarded to the winner and his estate in case of death for the next 20years without any tax levy on it. The winner is thus allowed by tax man to enjoy the tax-free award at his pleasure for the time span agreed in the agreement terms and condition page (Philander, 2013.Pg.2.)
Exempting ordinary lottery awards from income is a concern over the years that have raised issues in Australia. Some are even seeing arguing that on morality grounds it is affecting the society negatively hence the urge by some people to have it taxed (Christians, 2014.Pg.30.) However Australian Tax Office is exercising the equity and equality concept that since the player of the draw was not aware of the outcome hence risking it will be unfair to tax the awards that were not expected by the player, ordinary lotteries are likewise seen to be conducted so as to raise funds for charity and societal projects an aspect that similarly makes it exempted from tax.
The $ 50000 prize win from the Set for Life draw is exempted from tax hence no declaration of tax is expected at all on this over the next 20 year payment period. Although the regulation exempts ordinary lottery award as a tax item, it has likewise ruled that if the $ 50000 grant cash is converted to an asset and disposal is done on the same, any gain or loss must be declared as capital for tax purpose. For instance if the winner of Set for Life award converts or uses the $ 50000 to buy a land worth $30000, and after 1 year he sells the property at $ 50000 he is expected by the taxman to declare the $20000 as capital gain for tax purposes and in case of loss he should report the same for future capital gain net off.
Ordinary lottery prizes and awards are therefore exempted from paying tax in Australia if done on the piecemeal basis and not in lump sum form as depicted in Set for Life draw as well as if conducted by an ordinary lottery commission that did so for societal aid agenda. It should likewise be known that although the awards are tax exempted any gain or loss on sales of an asset property acquired from lottery property is declarable for tax purpose and the amount included as capital gain and loss respectively (Tretola, 2013.Pg.5.)
Taxation on Lottery Property Disposal
According to AASB 101 on the accrual basis, revenues and expenses are recorded and accounted for as soon as they are earned without considering when the actual money is received or paid (Woellner, Barkoczy, Murphy, Evans and Pinto, 2010.Pg.7.)For tax purposes, accrual basis is seen to affect the tax year in which expenses are to be recognized. Accrual method of accounting changes taxation drastically because you end up paying taxes on revenue that indeed you have not been paid for. Assuming a credit sale of $20000 is made on December 29th, 2016, this sale will be included in the 2016 revenue for income taxes purposes though it is not received. This is likewise seen in expenses whereby if a business is started in Dec 28 expenses like rent has to be included in that tax year though it is not paid (Freedman and Crawford, 2010.Pg.51.)
Corners chemist shop is a small business entity that is seen to exercise the accrual basis on when it comes to sales conducted on Pharmaceutical Benefits Scheme and the cost of sales, salary and rent expenses if is to be paid on a later day. Using the accrual basis method of accounting Corners chemist revenue and expenses are going to be actualized as soon as they are recognized in the books (Burnheim and Bobbin, 2017.Pg.32.) and not by when the amount was received or paid. Therefore all the items while calculating taxable income have to be used since all items though not told except sales done on the cash basis are deemed accrued.
The fact that Corners Chemist Shop is a small entity enterprise that is involved in sales of pharmaceutical products calculation of taxable income is the calculation of its profit or loss on income using the accrual method. Therefore the income is calculated in two parts, i.e., the revenue part and expenses part. The revenue part involves sales which are in cash form hence no credit on them and they amount to $300000, then we have credit card sales which are too actual sales but not in cash form instead it is in soft paper form which amounted to $150000 and finally we have sales that are on accrual basis, i.e., that which are done by Pharmaceutical Benefit Scheme whereby they are seen to purchase on behalf of Corner Sale. These sales are presumed to be calculated using stock movement hence the billed amount of $200000 is the amount of sales of on PBS.
Accrual Method of Accounting
Concerning credit card sales we have only factored that part of the billed amount showing in the credit card sales and not what indeed is receipted because the $150000 is what was recorded in the books, and hence the $160000 has extra $10000 sales which are not part of the recorded sales thus forming part of reconciling items in the cash book and bank statements recordings. On matters Pharmaceutical Benefits Scheme I wish to say that we have considered the $200000 amount simply because this is the billed amount actualized in the books as PBS sales and not the receipted amount (Osofsky, 2012.Pg.25.)
Cost of goods sold on the other hand is the cost of the items that were sold hence form part of allowable expenses for tax purpose. It is likewise presumed to occur as items in accrual form. It entails the movement of stocks, i.e., the difference between what was issued and what was left behind as closing thus Cost Of Goods Sold = Opening Stock + Purchases – Closing Stock. It is seen to reduce revenue hence a determinant in gross profit calculation. The other allowable expenses are rent and salary which indeed to me I term them as fixed expenses since Corner Pharmacy can’t operate without employees who are eligible for salary payment. Rent expense is on the hand unavoidable cost because the business stocks and operations have to be sheltered in a safe and recognized environment hence has to be considered priority too (Martins, P,2018.Pg.562.)
Using the above analysis explaining and discussing the application of the items used in the calculation of Corners Taxable Income and by assuming that Corners end of the year for tax purpose ends on 31St Dec 2017 we are therefore set to calculate the taxable income as follows;
The 90000 Australian Dollars is what Corners pharmacy is to declare as taxable income in the owner’s salary if an individual resident owns it for tax purpose and if the shop is registered as an individual legal person for tax purpose it is expected to declare the same $90000 as taxable income for small business enterprise tax concession (Deegan, 2012.Pg.21.)
In summary form, this case of Inland Revenue Commissioner V Duke Westminster has to be analyzed to outline the principle of tax that emerged from the ruling. From the evidence we see Duke organizing on how he is to reduce burden by stopping paying his gardener on the weekly basis as he used too instead he opts to come up with a deed that termed the earnings as annual payments being spent on a weekly basis and not wage as initially termed. This seemed a disturbing issue to the Inland Revenue Commission hence sued Duke by defiling tax rule with attempts of tax evasion and fraud. The court, however, looked at the matter and ignored the legal position of the matter and instead ruled by the substance of the matter. Lord Tomlin the judge rule in favor of Duke by stating that the substance of the issue is that Duke’s annuitant served him for an amount that was equivalent to the former salary or wage what has changed is the means of payment whereby they have mutually agreed to make the payment on the installment basis.
Example of Accrual Basis Accounting for Small Business
The judge, therefore, ruled that the substance of the matter in this arrangement of Duke and his gardener was a local and legal one that enabled him arranges his affairs hence able to claim the expense on salary as tax deduction expense therefore reducing his liabilities and surtax. The ruling was however never appreciated by IRC since to them it was a loss and indeed subsequent suits were done to weaken the ruling precedence application. Everyone is thus allowed by the law to organize his or her finance affairs legally to have his or her tax burden reduced as depicted in this case of IRC V Duke Westminster (Likhovski, 2006.Pg.56.)
The tax principle that originated from this case is tax avoidance principle that is defined as the legal, financial arrangement method that is used to lower tax burden. It is used by the creation of allowable tax deductions and tax credits that are seen to the net of tax liability in a firm or individuals income. This financial arrangement is the reference in Duke Case whereby he decided to arrange his affair of paying wage and salary once into equal installments to be able to claim the amount as an allowable tax deduction. Legally tax avoidance principle came into place to relieve and enable taxpayers to legally arrange their financial affairs for tax purposes.
Tax avoidance implementation came into place in Australia although it did not work well for Australian Tax Office. It has been a challenge for them since taxpayers have been taking advantage of this principle and instead evade and fraud the state its portion of the tax (Mellon, 2016.Pg.33.) Most taxpayers illegally avoided tax by shifting profits while others overstated allowable deduction and the worst of all others are seen not to declare incomes at all. This has been a challenge over the year in Australia since there was no regulation curbing tax avoidance hence being hard for the tax office to compel individuals who were using tax avoidance shield as a weapon for tax evasion and fraud (Mumford, 2017.Pg.390.)
Australian Tax Office indeed felt the pitch of tax avoidance principle since it made them fail to collect enough revenue (Keen, Klemm and Perry,2010.Pg.50) an aspect that indeed forces them to seek litigation that allowed them to come up with agencies whose legislation was to curb and control tax evasion and fraud. The introduction of Tax Avoidance Task Force and Multination Anti-Tax Avoidance Agency greatly helped Australia relieve itself from the problem of illegal use of tax avoidance by malicious tax evaders (Slemrod, 2009.Pg.390.) These agencies worked hard to ensure that there was full scrutiny of multi-national enterprises tax affairs and full compliance in the correct amount of tax being declared and done at the right time without delay.
Calculation of Taxable Income for Small Business
The use of multinational anti-avoidance law to facilitate correct taxation of the number of profits earned by entities greatly helped to curb tax avoidance. What application of the regulation profit diversion ideally has supported the tax man equates the economic substance of enterprise activities with the profit they declare for tax. These agencies have played a significant role in ensuring that there is strict compliance in Australia and that taxpayers are not negatively using tax avoidance rule to deny the tax man his share of tax hence a significant level of relief to the tax man (Sikka,2012.Pg.5.)
Rental loss and gain on disposal have special treatment on tax basis depending on what efforts led to the loss or profit. Rental property is deemed a vital asset venture whose loss is rarely expected on its activities hence the introduction of analysis that sees into it that the loss is genuine or not. Some conditions are to be fulfilled to be able to classify rental injuries as allowable deductions or not. The first one is on ownership whereby the rental owners must proof that indeed they are owners of the property and the second one is on rental management and operational control. The regulation is precise on this because it states that only real owners who fully participate and due proof care of the rental property is allowed to claim the allowable deduction for tax purpose. They consider the aspect of the due consideration of control of the property to curb and prevent people who have another source of income from maliciously failing to curb loss to net off their taxable income.
Jane and Joseph own the rental property jointly thus sharing profit at the ratio of 80:20 and loss at 0:100 respectively. This ration sharing indicates that the two declare incomes for tax purpose separately and on own grounds. Joseph is an accountant by profession while Jane is a housewife thus meaning that no one among them entirely works in the rental property because Joseph concentrates on accountancy job and Jane on her household chores. This indicates that the level of engagement the two are tied to this rental property is so low generally because it is not easy to serve to master and in any case we are not told of any action the two are taking to manage the rental property.
Considering the above analysis neither Jane nor Joseph is allowed to claim the $40000 rental loss they incurred and more so Joseph because though they are the owners they fail to prove that indeed they managed the operations of the rental property diligently and that the loss was as a result of economic issue and not on human fail aspect. However, if either Joseph or Jane showed due care interest in the venture by default Joseph would claim the $ 40000 loss as the allowable tax deduction in his accountancy professional income.
There is, however, a big difference when the two decides to disposal the property. Destruction of this rental property ideally is deemed capital hence any gain or loss on disposal of the asset is deemed capital gain or loss (Chengm and Yong, 2013.Pg.13.) The regulation requires that any capital gain is declared as taxable income and loss be carried forward for future capital gain net off hence if increase Jane should report 80% and Joseph adds 20% of the profit into his accountancy salary (Hayward, 2014.Pg.44.) By applying Australian Tax Office regulation on CGT, the 100% Joseph’s share of the $40000 capital loss incurred by the two on disposal of the rental property is allowed to be carried forward to net off any capital gain in future (Burman, 2010.Pg.42.)
References
Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed. Brookings Institution Press.
Burnheim, E. and Bobbin, P., 2017. Record keeping tax tips.Equity, 31(9), p.12
Cachia, F., 2017. Aggressive Tax Planning: An Analysis from an EU Perspective. EC Tax Review, 26(5), pp.257-273
Cheng, A. and Yong, S., 2013. New Zealand and capital gains tax: A tax experts’ perspective
Christians, A., 2014. Avoidance, evasion, and taxpayer morality. Wash. UJL & Pol’y, 44, p.39.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia
Freedman, J. and Crawford, C., 2010. Small business taxation.
Goewey, S., 2014. Taxing the Gold: The Tax Treatment of Olympians. Seton Hall J. Sports & Ent. L., 24, p.179.
Hayward, R. ed., 2014. Valuation: principles into practice. Taylor & Francis.
Keen, M., Klemm, A. and Perry, V., 2010. Tax and the Crisis.Fiscal Studies, 31(1), pp.43-79.
Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster
Martins, P., 2018. TD 2017/20. Taxation in Australia, 52(10), p.562.
Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.
Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge
Osofsky, L., 2012. Some Realism About Responsive Tax Administration. Tax L. Rev., 66, p.121.
Philander, K.S., 2013. A normative analysis of gambling tax policy. UNLV Gaming Research & Review Journal, 17(2), p.2.
Sikka, P., 2012. The tax avoidance industry. Radical Statistics,107, pp.15-30.
Slemrod, J., 2009. Lessons for tax policy in the Great Recession. National Tax Journal, pp.387-397.
Tretola, J., 2013. Turning gambling silver into tax gold?.Revenue Law Journal, 23(1), p.5.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation law. CCH Australia.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
