Taxation Law Problem Questions And Solutions

Question 1

In this present case, Eric opts obtaining and asset disposal by which he is fully liable towards the paying of tax on the net capital gain. Consequently, the main concern of this question lies upon the calculation of net gain or loss assessable amount by considering all the transactions occurred.

Generally, this gain or loss is the difference between the purchase price and the selling price in case if these are bought and sold during the same year. The holding period of an asset is a crucial factor in determining the tax payable on the capital gains from the disposal of assets.  Under the taxation provisions of Australia of capital gain; if the asset is held for less than 12 months, then the calculation of assessable amount will be completed by considering other method that is easy to use (Burkhauser, Hahn and Wilkins, 2015). In this method, asset’s purchase price will be subtracted from the amount of sale, and further, the taxable amount will be calculated. The taxpayer is required to pay on the net capital gain is the Capital gains tax (CGT). This tax is included in the total income tax payable by an individual. If there is any capital loss arising when the asset is disposed of, the same is reduced from the capital gain made in the same financial year.

In accordance with facts of the case, the described other method will only be applicable if the holding period does not exceed 12 months. Eric’s assessable amount will be calculated by the other method done below:

Conclusion

By the assessable calculation amount for capital gain for Eric is $5 000.00.

The brain has a job in bank as an executive, and he was given a 3-year loan of a total amount of $1m provided at an interest rate of 1% per annum (payment will be made on monthly instalment basis) as a fraction of his total salary package. On the date 1 April 2016, the specified loan was handed to Brain in which 40 percent of the loan was used for the purpose of generating profits.  In addition to, the bill met all the terms of the borrowed finance on his obligations of interest payments. Hence, the problem with this case is all about the calculation of taxable amount by using FBT provisions in Australia by taking all cited situation into consideration.

Non-monetary benefits are the benefits on which fringe benefits have to be paid, and these are offered by the employer to their working employee. In respect of the loan, FBT is to be paid on interest been charged on a range of amount by the employer further the general interest has to be calculated through statutory rates (Hemmelgarn and Teichmann, 2014). The rate is calculated as 5.65% for the year 2016.

Question 2

The assessable amount for Brian by applying provisions of fringe benefits tax is as follows:

Note 1: The amount of interest as per statutory interest rate=$1,000,000*5.65%

Note 2: The amount of interest payable by Brain=$1,000,000*1%

Note 3: The taxable value of loan fringe benefit= $56,500.00-$10,000.00

Conclusion

• Taxability if interest amount is paid in instalment: The calculated assessable amount of fringe benefit’s loan is $46,500.00.
• Taxability if interest amount paid together: The assessable amount of fringe benefit’s loan is calculated as $46,500.00, but it will not affect in case the interest is payable on the basis of monthly instalments or in lump-sum.
• Taxability if Brian gets exempted from payment of interest by the bank: The assessable amount of fringe benefit’s loan is calculated as $56,500.00 in this specified case brain is obliged to pay no interest, after that the total statutory interest will be assessable value.

The 40% of the loan amount used for income generating purposes will not may any impact of computation of tax. The payment of interest does not seem to have any impact on the calculation of fringe benefits tax.

Jack is an architect by profession and his spouse Jill being a housewife decided to be joint tenants and took a loan in order to purchase rental premises. Jack agreed on the profit percentage that 10% of the total profits and his wife Jill agreed the remaining 90% of the total profits from the premises for the specified deed.by stating in the deed that Jack is entitled to the total loss (100%) in case the premises incurred loss. However, they bear a loss of $10,000 last year. Therefore, this issue concerns the impact caused by a loss in the calculation of assessable amount and tax implications in a situation where if the cited premise is sold by the parties.

The tax provision applicable for the purpose would be TR 93/32 which deals with the distribution of net profit and loss among co-owners. The co-owners of the rental property are not to be considered as partners as per the law unless the partnership is for the purpose of carrying on some business (Winer, Profeta and Hettich, 2013). If they are considered as a partner merely for taxation charges, this would be irrelevant since it is an unreal partnership and not according to the provisions for partnership. This form of unreal partnership would entail many other implications and not just share of profit and loss. In partnership, any event of loss does not mean the loss of their interest. Hence, their mutual interest in their rented place is retained even after the loss.

The agreement formed by Jack and Jill is summarised as follows:

Although, they both Jack and Jill are not running the business operations on a regular basis so for this reason, the terms specified in the deed will not be applied for the calculation of taxation purposes.

Conclusion

The loss incurred in the last year will be payable in the ratio of 1:1 because they are not carrying the business on the ordinary course due to which deed terms will not apply for the calculation of taxation purposes.

Question 3

Same provisions will be appropriate for tax implications regarding in situation where if the cited premise is sold by the parties.

In the case of IRC and Duke of Westminster, Duke executed an agreement regarding their associates which include house helpers, gardener and other servants. According to the agreement, Duke was liable to pay additional money as a reward for the additional work done. Affidavit regarding the same was submitted which declared that Duke would have to pay extra wages to all the servants if they provide additional services apart from work already set for them.  In spite of an official written agreement, Duke did not pay any additional amount to the workers for receiving a benefit in tax liability which came to him as a result of the affidavit created. The workers did not receive any additional sum.   

The tax laws of the time allowed the Duke for claiming a deduction in tax for reducing his taxable income; thereby his income tax and surtax liability was reduced. Lord Tomlin, handling the case said in this regard that every individual is entitled to make possible legal adjustments in his tax affairs in a way so as to reduce his liability than it would have been otherwise. If the person successfully accomplishes the same then, he cannot be forced to pay more tax; though this task is unappreciative.  

This case was handled by Lord Wilberforce who concluded that this specific case is ruling restrained court by assessing the actual transaction made so as to maintain the nature of the transaction (Pearce and Pinto, 2015). Thus, it was stated that the legal nature of transaction should be considered and in case there are several transactions held then also the similar method will be taken into account.

Conclusion

This principle is often known as the Westminster principle. This case was the most famous case which was at the heart of the tax evasion and avoidance. It was understood by later decisions that allow individuals and corporations can structure their financial arrangements in a way that minimizes their tax liability. The structure must be within the law of four corners of the black letter. This principle can be viewed as a contrast to the modern Ramsay Principle. This law states that it is the work of the court to analyze the legal nature of any transaction carried on for the purpose of tax evasion. This is opposite to the Westminster’s case in which the transaction was carried out for the sole purpose of avoiding legitimate tax liability. Thus, the Ramsay Principle emerged in response to increasing practice of self-cancelling transactions.

Question 4

This case shows the concern of considering the premises receipt and the attached tax in it. Bill (landowner) the land full of pine trees, received an offer to utilize the whole land for cattle feed. However, the company asked bill and offered him a deal of $1,000 for each 100 metres of the land’s timber. Further another deal bill received was that the company would pay him a lump sum amount of $50,000 for granting the right to cut off all the timber (as per the requirement) from the land. Bill faced the problem of whether to make payment of tax on the land against the income generated in both cited cases.

According to the rule of taxation as per the TR 95/, the taxpayer having a land for the purpose of disposing of timber, however, tree planting decision was meant for sale. As per the subsection 36(1), income generated from disposing of timber in the where the taxpayer is not carrying on the business of forest on a regular basis (Brody and et al., 2014). Further, Subsection 36(1) stated that planting of trees on leased land gives an overall possession of leased assets.

Owner holding a forest operation business must cut off the standing timber, the specified case stated revealed against cutting the standing timber. The applied section for this case is subsection 25(1) as the income is generated from carrying the business on a regular basis. The cited situation will be applied in this particular issue during the occurrence of disposal (TD 96/35 CGT: time of disposal of a grant of a right to cut and remove timber from the grantor’s land, 2017). It also states that if income is generated by providing the right to another individual for extraction of timber than such income will be taxable.  

Conclusion

Nonetheless, subsection 36(1) and 25(1) of TR 95/6, will be taken into account for this cited case and Bill has to make tax payment in both cases, section 36(1)  will apply if he has obtained the amount of $1000 as income and  subsection 25(1) will applicable if the payment is made in full. 

References

Brody, E., Breen, O.B., McGregor-Lowndes, M. and Turnour, M., 2014. 5 An Unrelated Income Tax for Australia?. Performance Management in Nonprofit Organizations: Global Perspectives, 17, p.87.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Hemmelgarn, T. and Teichmann, D., 2014. Tax reforms and the Capital structure of banks. International Tax and Public Finance, 21(4), pp.645-693.

Pearce, P. and Pinto, D., 2015. An evaluation of the case for a congestion tax in Australia. The Tax Specialist, 18(4), pp.146-153.

Winer, S.L., Profeta, P. and Hettich, W., 2013. The political economy of taxation. Oxford University Press.

Tax Evasion, Avoidance or Mitigation: That is the question! 2012. [Online]. Available through < https://www.myersfletcher.com/resources/item/tax-evasion-avoidance-or-mitigation-that-is-the-question.html>. [Accessed on 26^th September 2017].

TD 96/35 CGT: time of disposal of a grant of a right to cut and remove timber from the grantor’s land. 2017. [Online]. Available through < https://www.iknow.cch.com.au/document/atagUio567791sl17289954/time-of-disposal-of-a-grant-of-a-right-to-cut-and-remove-timber-from-the-grantor-s-land>. [Accessed on 26^th September 2017].

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