Taxation Problems And Solutions

Problem 1: Capital gains and losses

The problem statement introduces the issue of capital gains or losses incurred by Eric under the “ITAA 1997”. 

1. “Section 108-20 of the ITAA 1997”
2. “Section 108-10 of the ITAA 1997”

Loss generated from the sale of home sound system is observed as person use asset and no loss can be offset for person use asset under “section 108-20 of the ITAA 1997” (Barkoczy et al. 2016). Collectables loss are not allowed to set off against the ordinary gains. Eric derived collectable loss and the same is disallowed from being considered for offset under “section 108-10 of the ITAA 1997”. Eric only made gains from the sale of share so his capital gains for the year stands $15,000.

Conclusion: 

The above analysis defines that losses from collectables and personal use assets are not allowed for offset from the ordinary gains since Eric only derived gains from sale of shares.

The statement brings in the issue of Fringe Benefit Tax relating to the offset of interest payment at the end of the loan period.

1. Taxation rulings of TR 93/6
2. Fringe Benefit Tax Assessment Act 1986

As bought forward by the “taxation rulings of TR 93/6” banks and financial institutions on certain occasions makes arrangement of interest offset for loan accounts. Such arrangement enables the customers to offset the loan interest and they are simultaneously not required for paying any income tax (Coleman and Sadiq 2016). In conformity with the taxation ruling of “Taxation rulings of TR 93/6” if Brian is freed from paying interest at the end of the loan period rather than paying at monthly instalment then he will be not required to pay any form of income tax for such interest offset.

Conclusion: 

From the relevant legislation and laws no liability of tax originates for Brian on being released by bank for payment of loan interest.         

The following problem statement familiarises with the issue of determining the loss derived from the property being rented out by the co-owners.

1. “Taxation rulings of TR 93/32”
2. “F.C. of T. v McDonald(1987)”
3. “Section 51 of the ITAA 1997”

An elucidation relating to the distribution of the net income or loss incurred by the co-owners of the rental property has been defined under the “taxation ruling of TR 93/32”. The aforesaid ruling assess the assessable position of the joint owners that are engaged in the business of rental property and their activities are not accounted as execution of business activities (Harris et al. 2015). The problem statement introduces the circumstances of Jack and Jill who agreed to purchase a rental property and letting out the same as the joint owners.

The clause contained that Jack will be only getting 10% of the profit from the property whereas Jill will be getting 90% share of the profit from the property. The clause further contained an agreement that Jack will be shouldering the entire amount of loss derived from such property. The aforesaid “Taxation ruling of 93/32” puts forward that joint owners of the rental property is accounted as partnership under the purview of income tax (Kenny 2013). Nevertheless, it is disallowed from being viewed as partnership under the general law.

The ruling further defines that the joint owners are not regarded as the partners under the context of the general law with the agreement of partnership whether in writing or orally hardly has any kind of effect on the distribution of the income or loss derived from such property (Kenny, Blissenden and Villios 2017). Jack and Jill under the case study are viewed as the partners in context of the income tax and the business activities does not accounts to be partnership under the general law. The co-ownership between them are usually held as joint tenants or tenants in common.

Problem 2: Fringe benefit tax

Quoting the incidence of “F.C. of T. v McDonald (1987)” where the co-owners partnership accounted for income tax purpose but was not regarded as partnership under the general law (Keyzer, Goff and Fisher 2015). The judgement denoted that though the taxpayers constituted to be co-owners in text of the law and justice however the losses must be shared among the respondents equally. Similarly in the situation of Jack and Jill no form of deductions is allowed by virtue of the agreement with the respondents are entitled for shouldering one-half of the loss as well. Jack was indulged in two important detriments. In the initial stages Jack provided a large portion of the income to his wife Jill and covered her investment from any kind of loss. The presumption relating to the loss sharing was willingly made by Jack which wholly formed a domestic arrangement of covering the finance of his wife Jill. Therefore, section 51 disallows deductions of loss by virtue of partnership agreement.

In the second part of the problem statement, if both Jack and Jill decides to sell the property then it is imperative to determine the cost base and lowered cost of the property that must be included in the amount that was paid to acquire the property. Consequently the capital gains and loss must be shared in accordance with the interest of ownership in the rental property (Krever 2013).

Conclusion: 

The problem statement can be bought to an end by stating that the no partnership existed under the context of general law and one-half of the loss should be allocated to the respondents.

4. On denoting the event of tax avoidance, the case of “IRC v Duke of Westminster [1936]” has been quoted on numerous occasion (Sadiq 2016). Duke under this appointed a gardener and the salary that was paid to the gardener in the form of post-tax profit of Duke. With the objective of avoiding tax Duke stopped the payment of the salary of the gardener and drew up a covenant of identical sum. As the expenditure incurred was allowed for income tax deductions this ultimately reduced the tax liability of Duke. A suitable method of reducing the taxable income are used by the individual and it was understood that if a legal method is employed in reducing the taxable burden then an individual cannot be forced to pay anything more than the tax amount.

In contrary to this, the principles of WT Ramsay v. IRC was used to li9mit the practices of the tax avoidance used by the individual taxpayers (Milton 2013). The principle established that there should be commercial motive attached to the transaction. If the commercial transaction carries pre-arranged ambiguous steps that does not render any commercial purpose rather than saving tax, then the suitable approach is to levy tax on the degree of commercial transaction as the whole.

In the current age of Australia, if a person is successful in ordering tax assignment with the purpose of securing the results, the taxpayers could not be in their ingenuity be forced to pay any higher amount of tax (Woellner 2013). It is depicted from the decision that the commercial entities and the individual taxpayer are allowed to structure their financial reports for the purpose of reducing tax in a manner that the structure is inside the concept of law.

Problem 3: Rental properties and loss allocation

The primary issue of this problem statement is ascertaining the income produced from the activities of primary producer engaged in the activities of forestry.

1. Subsection 6 (1) of the ITAA 1936
2. McCauley v. The Federal Commissioner of Taxation(1944) 
3. Subsection 36(1)
4. section 26 (f)

The case study opens up by stating that Bill owned a large land that had wide amount of pine trees on it. Bill at the initial stages thought of cattle grazing. Later a logging company arrived with the offer of paying Bill a sum of $1,000 for every 100 meter of timber the logging can cut from his land. An important considerations from the taxation rulings of TR 95/6” has been denoted that puts forward the outcomes relating to income tax arising out of the operations of primary productions and forestry (Pyrmont 2014).

The previously mentioned ruling effectively puts forward that a person generating returns from the sale of timber would be viewed as assessable income from the forestry activities irrespective of the fact that the person was engaged in the functions of forestry activities (Grange, Jover and Maydew 2014). The ruling is imposed on person carrying on the forestry operations as well as on those that are not engaged in the functions of forestry operations but sells timber for earning incomes. According to the proviso of “subsection 6 (1) of the ITAA 1936” a person getting involve in the forestry operations are treated as primary producer under the purview of income tax if it is found that forestry operations becomes the portion of business functions (James 2013).

Under the context of the “subsection 6 (1) of the ITAA 1936” the definition of primary producer represents planting and cutting of timber in a cultivated area that is planted with the objective of felling or cutting down the trees in the cultivated area or a forest (Jover 2014). The evidence supported in the case study represents that Bill must be treated as primary producer for being indulgent in the functions of primary production in context of “subsection 6 (1) of the ITAA 1997” for agreeing to felling down the trees in a land that he owned.

The forestry processes also defines that an individual would be still considered to be involved in the activities of forestry operations even though the trees in the vegetation were not planted for felling them (Anderson, Dickfos and Brown 2016). In the present case study, Bill did not planted those pine trees for the purpose of felling it however the revenue derived from the felling of trees would be treated as earnings for Bill and would have income tax consequences. The reason for considering the income as taxable income is because the pine trees constituted a part of the business assets and the receipt of income from felling of such trees constituted taxable income under subsection 36(1).

On the other side of problem statement, if Bill is paid with a large amount of $50,000 by giving the right to the logging firm of cutting the timber as much as they want then such kind of amount received would be accounted as “Royalties” under “section 26 (f)”. The receipt of large sum of money represents royalties which represents that the right was granted to cut down the trees. Bill as a consequence of this will not be treated as primary producer since he did not planted the pine trees for sale. Quoting the reference of “McCauley v. F. C of T (1944)” amount received for granting the rights of removing the trees represents the right of doing so (Barkoczy 2016). Therefore, the sum of $50,000 would be treated as royalties for Bill and are subjected to income tax under section 26 (f) of the act.

Conclusion: 

As denoted from the assessment, that cutting of timber and selling the same would be treated as royalties and would be liable for tax.

Reference list:    

Anderson, C., Dickfos, J. and Brown, C., 2016. The Australian Taxation Office-what role does it play in anti-phoenix activity?. Insolvency Law Journal, 24(2), pp.127-140.

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

Barkoczy, S., Nethercott, L., Devos, K. and Richardson, G. (2016). Foundations Student Tax Pack 3 2016. South Melbourne: Oxford University Press Australia & New Zealand.

Coleman, C. and Sadiq, K. (n.d.). 2013 Principles of taxation law.

Grange, J., Jover-Ledesma, G. and Maydew, G. (n.d.). 2014 principles of business taxation.

Harris, J., Graw, S., Gilders, F., Kenny, P. and Van der Waarden, N. (n.d.). 2015 Theory and law in the regulation of business.

James, M. (n.d.). 2015 Taxation of small businesses.

Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Kenny, P., Blissenden, M. and Villios, S. (n.d.). 2017 Australian tax.

Keyzer, P., Goff, C. and Fisher, A. (n.d.). 2015 Principles of Australian constitutional law. Chatswood: LexisNexis Butterworths.

Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Milton, Qld 2013. The taxpayers’ guide. Wrightbooks.

Pyrmont, (2014). Australian Taxation Law Cases 2014. NSW: Thomson Reuters.

Sadiq, K. (2016). Principles of Taxation Law 2016. Pyrmont: Law Book Co of Australasia.

Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia.

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