Taxation Questions: Capital Gains, FBT, Co-Ownership And Loss Allocation

Capital Gains Calculation

The existing situation brings forward the issue of determination of capital gains or loss that has been produced in agreement with the section 108-10 of the ITAA 1997.

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

Considering the principles of section 108-20 of the ITAA 1997 it can be bought forward that Eric has sustained loss from the sale of the home sound system. The loss amount stood at $1,000 and this will not be allowed for offset because it represented private use asset for Eric. In addition to this, section 108-10 of the ITAA 1997 defines that no collectible loss will be permitted for deductions against the sales of shares (Kenny, Blissenden and Villios 2017). Eric can only offset the collectibles against the gains that has been defined in section 108-10 of the ITAA 1997. It is observed that Eric generated gains only by selling ordinary assets with no current year capital or any kind of applicable discounts. As a result of this, the net capital gains for Eric is arrived at $15,000.

Conclusion: 

On considering the above situation it can be said that Eric will not be able to set off loss from selling of personal asset and he has produced capital gains only from the sale of ordinary assets.

The issues introduce the subject of FBT along with the ascertainment of FBT under the FBT Act 1986.

1. Taxation Ruling TR 93/6
2. FBT Act 1986

It is evident from the Taxation Ruling of TR 93/3 that there has been circumstances where Banks and other types of financial institution makes the preparation of offsetting the interest on loan account of the loan holder that is sustained by the clients (Krever 2013). The facilities are generally undertaken by the banks to set off the interest that taxpayers have pay with the loan account. The customers are not required to make the payment concerning the interest that has been incurred on the loan account. In regard to the above discussed rulings it can be stated that Brian will not be under obligation of making payment for the interest on loan and as a result of this he will also not be required to pay any income tax on such loan.

Conclusion: 

In regard to the analysis performed it can be bought forward that Brian will not be required to pay any tax given that the financial institution or in other words Bank will not be required to pay the interest that is acquired by him with the help of appropriate interest offsetting arrangement.

The existing situation introduces the issues of the Jack and Jill for determining the assessable conditions of the loss that has been suffered from the property that is rented by them.

1. FC of T v McDonald (1987)
2. Section 51 of the ITAA 1997
3. Taxation Rulings of TR 93/23

In accordance with the Taxation Rulings of TR 93/23 it defines the principles of Co-ownership of property that is rented under partnership (Moore and Corrigan et al. 2013). The ruling evidently puts forward the evidence that co-ownership of the rental property will be regarded for income tax purpose but will not be considered as partnership under the General Law. From the following situation of Jack and Jill it is noticed that the husband and wife formed a partnership to undertake the rental property with the agreement of sharing profit and loss. They agreed to share profit with Jack being entitled to 10% of profit and Jill will be getting 90% of the profit. The agreement also contained that Jack will have to bear 100% of loss from that property. In respect of the Taxation Ruling of TR 92/32 an explanation has been provided that rental property co-owners Jack and Jill will not be viewed as partners in respect of the general laws (Woellner 2013).

FBT Calculation

The agreement of partnership whether orally or in writing does not creates any effect on the allocation of profit or loss generated from such property. It can be stated that both the joint owners Jack and Jill possess the rental property in the form of “joint owner or tenants in common”. Considering the decision of the federal court in the case of FC of T v McDonald (1987) where the taxpayers were the joint owners of the two unit of property. The share profit contained an agreement where Mr McDonald was entitled to a profit of 25% whereas Mrs McDonald will be getting 75% of the profit from such rental property (Coleman and Sadiq 2013). There was also no kind of provision relating to the allocation of loss as Mr McDonald was responsible to should the entire amount of loss. It has been understood that there was no kind of partnership existed between Mr McDonald and Mrs McDonald under the concept of general law.

In relation to the evidence that has been found in the case study of Jack and Jill, an important considerations can be bought forward that loss should be apportioned equally among them and there should not be provision regarding the deductions that are allowable by the virtue of agreement (Morgan, Mortimer and Pinto 2013). It can be stated that Jack in the initial stages provided large part of the earnings to his wife and indemnified Jill, his wife against the loss from the investment. The supposition of making distribution of loss was originally made by Jack for the purpose of domestic preparation where is clearly sought to enhance the income of his wife. Therefore, it is worth mentioning that Section 51 does not provide permission for making deductions of loss by virtue of the agreement formed.

On the other hand, if both Jack and his wife undertakes the decision of selling property the cost base and the lowered cost base of the property that is rented out must be considered in the in computing the taxable income. As evident both Jack and Jill are owners of the property and the capital gains and loss should be recorded in terms of the ownership of the interest in the property.

Conclusion: 

It can be concluded that the Jack and Jill will not be considered as the joint owners under the general law and the loss that is suffered from the property that is rented out by them must be allocated equally among them.

4: IRC v Duke of Westminster (1936) has often being quoted in the event when there is tax avoidance. The above stated case introduces the principles that each and every person has been permitted to make order for their tax affairs (Milton 2013). The principles lay down that tax assignment must be made in such a manner that it is lower than it would have been. In spite of the fact that ruling is considered as the substance of that appeal for taxpayers that are seeking to avoid tax by legally establishing a complicated structure that has been weakened by the successive circumstances where courts have understood the entire impact. Considering the example of the WT Ramsay v IRC the court in the later stages have taken restrictive approach (Woellner et al. 2014). It is worth mentioning that the transaction consists of the pre-arranged false stage that fails to serve any purpose related to business rather than avoiding tax. The appropriate approach was to impose tax to the consequences of business entirely.

Loss Allocation for Tax Purposes

On implementing the principle in the modern age of Australia if an individual is successful in ordering the appropriate tax assignment so that it can attain the results of the principles defined under Commission of Inland Revenue the taxpayers would not be under compulsion of paying more amount of tax (Anderson, Dickfos and Brown 2016). It can stated that the principles allows the individuals and companies to structure their financial agreements with the objective of cutting down the tax liability in respect of the legal configuration of the act.  

The existing study is related to the issue of the taxable income that is produced by the taxpayer in relation to the primary producer under section 6 (1) of the ITAA 1997.

1. Section 6 (1) of the ITAA 1936
2. Taxation Rulings of TR 95/6
3. Subsection 36 (1)
4. Section 26 (f)
5. McCauley v FC of T (1944)

The current case study introduces the issue that Bill owns a large portion of land on which there is a several quantity of pine trees. In the early stages Bill was looking forward to use the land for sheep grazing and desired to clear the land. It was further noticed that a logging company approached Bill that offered to take timber from his land for every 100 meter by paying him with $1,000. In relation to the Taxation Ruling of TR 95/6 it states that sale of timber will be accounted as assessable income irrespective of the fact that the taxpayer was indulged in the activities of forestry (Barkoczy 2016). As it has been defined under the Subsection 6 (1) of the ITAA 1936, a person being indulged in the activities of forestry as the primary producer for the purpose of taxation it is concerned with the purpose of carrying of a business.

In respect of the subsection 6 (1) of the ITAA 1936 Bill will be treated as the primary producer based on the fact that he was indulged in the activities of the tending trees in his land that is being owned by him (Cao et al. 2015). In respect of the fact that the activities of the forest functions consisted of the cutting down the trees in a plantation even thought the taxpayers was not engaged in the activities of plantation or tending of trees. It can be defined from the above stated analysis that Bill being the holder of the land did not plant the trees but it can be asserted that the amount that he received on selling of timber would be included in the taxable income. Disposal of standing timber where the taxpayer undertakes the decision of selling the trees that was not planted or felled for sale will be included in their income as the taxable income. With regard to the principles defined under subsection 36 (1) even though the sale of timber constitutes income for the purpose of taxation, the trees is considered as the part of the business assets (Fry 2017).

If Bill is paid with a lump sum of $50,000 by simply enabling the logging company with the right of taking as much as the amount of timber it wants from his land then his receipt would be treated as “Royalties” (Russell 2016). In respect of the guidelines that has been defined under the section 26 (f) of the ITAA 1997 royalties that is received by the taxpayer from selling of timber from the land that is owned by an individual taxpayer will be treated as the taxable income for the year in which such income from felling of trees were derived (James 2016). As it has been stated in the case of McCauley v FC of T (1944) amount received in the form of payment by the grantor with the right of cutting down the trees then the amount that is receive from the felled timber would be treated as royalties under section 26 (f) (Robin 2017). Therefore, the amount derived by Bill on granting rights of removing trees represents royalties and will be treated as taxable income under section 26 (f) of the act.

Conclusion: 

In respect of the analysis conducted above it can be stated that Bill will be liable for taxation under subsection 36 (1) for the sale of timber and additionally by granting the right of removing the desired amount of timber would be treated as royalties under section 26 (1) of the ITAA 1997.

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.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.

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

Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The Appea Journal, 57(1), pp.49-63.

James, K., 2016. The Australian Taxation Office perspective on work-related travel expense deductions for academics. International Journal of Critical Accounting, 8(5-6), pp.345-362.

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

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

Moore, A. and Corrigan, A. (n.d.). Taxbook 2013.

Morgan, A., Mortimer, C. and Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

ROBIN, H., 2017. Australian Taxation Law 2017. OXFORD University Press.

Russell, T., 2016. Trust beneficiaries and exemptions from CGT: Reflections on the Oswal litigation. Taxation in Australia, 51(6), p.296.

The taxpayers’ guide 2013 & 2014. (2013). Milton, Qld.: Wrightbooks.

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

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. (n.d.). Australian taxation law 2014.

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