Taxation Law Question The Lotteries Commission conducts

Taxation Law

Question: 1

The Lotteries Commission conducts an instant lottery called ‘Set for Life’ under which a winner who scratches three ‘set for life’ panels wins $50,000 each year for 20 years. The first $50,000 is payable as soon as the winner is notified, and later amounts are payable on the first anniversary of the first payment. In the event of the death of the winner, the Commission may pay any outstanding amounts to the deceased’s estate.

Is the annual payment income? Give brief reasons for your decision

Yes.

This is because one of the ways that lottery companies pay their winners is by annual installments(Brealey, 2012). as it is the case in this question. The initial payment of the winner’s amount of $50,000 has its tax charged at the rate at that time while the remaining amounts is charged at the rate at which the whole amount would have been charged if it was paid at once but the tax is divided into equal proportions. The estate of the deceased is also liable to paying taxed after the death of the winner on the amounts they receive annually.

Question: 2

Corner Pharmacy is a chemist shop. It provides no credit sales but accepts major credit cards. It sells items off the shelf and the proprietor fills prescriptions for cash and for payments made under the Pharmaceutical Benefits Scheme [PBS].

Three assistants are employed. The following financial data is provided:

Cash sales -------------------------------------- $300,000

Credit card sales--------------------------------$150,000

Credit card reimbursements ----------------$160,000

PBS:

- Opening balance --------------------------------$ 25,000

- Closing balance ----------------------------------$30,000

- Billings --------------------------------------------$200,000

- Receipts -------------------------------------------$195,000

Stock

- Opening stock--------------------------------------$150,000

- Purchases-------------------------------------------$500,000

- Closing stock ---------------------------------------$200,000

Salaries ------------------------------------------------$60,000

Rent -----------------------------------------------------$ 50,000

Requirements

On the assumptions that an accrual basis applies and the cost of sales and other outlays are allowable deductions for tax purposes, calculate the pharmacy’s taxable income.

Taxable income is the amount of money used in determination of the total amount of tax one will be charged (Chetty, 2009)

Answer- calculation on the excel sheet attached

Question: 3

What principle was established in IRC V Duke of Westminister [1936] AC 1? How relevant is that principle today in Australia? This principle states that one is able to pay lesser tax by managing his finances and his commercial affairs without being subjected to the punishment of the law of taxes(Prebble, 2010),for instance one cannot be forced to pay additional taxes for payments on employees of a given nation (Tanyanyiwan, 2014). This is relevant in Australia today because it has saved many from being liable of their actions of avoidance of taxes.

Question: 4

Joseph (accountant) and his wife (housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Joseph is entitled to 20% of the profit from the property and Jane is entitled to 80% of the profit from the property. The agreement also provided that if the property generates a loss, Joseph is entitled to 100% of the loss. Last year a loss of $40,000 arose.

Requirement

How is this loss allocated for tax purposes? If Joseph and Jane decided to sell the property, how would they be required to account for any capital gain or loss?

Because Joseph was entitled to 20% of the total gain of the property while Jane was entitled to 80%, this shows that 1:4 was the ratio of owning the property respectively (Gilbert, 2011).

Tax deductions according to the tax income tax deductions in the property share can either be claimed in the income from sale of the property or the rent from the rentals (Yinger, 2016). Because the share of ownership in this case is known, the income will be taxed individually according to the share of ownership (Shaviro, 2007). By selling the property, they will account for the capital loss in their ratios of ownership that was regally established. In this case, 1:4

References

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Chetty, R., 2009. Is the taxable income elasticity sufficient to calculate deadweight loss? The implications of evasion and avoidance. American Economic Journal: Economic Policy, 1(2), pp.31-52.
Prebble, R. and Prebble, J., 2010. Does the use of general anti-avoidance rules to combat tax avoidance breach principles of the rule of law-a comparative study. . Louis ULJ, 55, p.21.
Tanyanyiwan, V., 2014. Establishing the residency of artificial persons in cross border transactions (Doctoral dissertation, University of Cape Town).
Gilbert, R.J. and Katz, M.L., 2011. Efficient division of profits from complementary innovations. International Journal of Industrial Organization, 29(4), pp.443-454.
Yinger, J., Bloom, H.S. and Boersch-Supan, A., 2016. Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier.
Shaviro, D., 2007. Beyond the pro-consumption tax consensus. Stan. L. Rev., 60, p.745.
Chetty, R., Looney, A. and Kroft, K., 2009. Salience and taxation: Theory and evidence. American economic review, 99(4), pp.1145-77.