TLAW303 Taxation Law Oz Assignment Help

TLAW303 Taxation Law Oz Assignment Help

TLAW303 Taxation Law Oz Assignment Help

Question 1

Categorization of the annual payment received from Instant Lottery payment

According to the ATO or Australian Taxation Office any payment received from an instant lottery should be categorized as other income and if the income from lottery is a kind of prize money that has been received from simple lottery then the payment of that price money will not be considered as a taxable income and in that case the individual recipient do not need to disclose the payment while return filling in Australia.

However if an individual receives the payment from winning a lottery run by the bank, building society, credit union or other investment analysis bodies then the payment would be disclosed and will be considered as a taxable income

Any payment received from the sale of an asset that the individual won via lottery prize must be declared while return filling for the purpose of taxation as such payment is considered as income from capital gain(Kamleitner, Korunka & Kirchler, 2012).

In the present case scenario, the individual is going to receive$50,000 each year for a 20yeras period where first $50000 will be paid on notification and the rest of the annual payments will be received on the anniversary date of the first payment.

At the event of the death of the winner the outstanding amounts will be paid by the Lottery commission to the deceased’s estate and the payment should be considered as a payment under insurance policy and the recipient do not need to disclose the payment as income while filling the return(Woellner et al.,2010).

Question 2

Taxable income calculation for Corner Pharmacy:

The accounting policy that has been followed by the business is based on the accrual basis of accounting. The accrual basis of accounting requires that the income and expenditure must be recognized in the period in which they have been earned and not in the period in which the actual cash transaction occurs with respect to the accounting event.

The main advantage of using the accrual basis of accounting is that the accounting process become more comprehensive in case of that business where the event of transaction and the actual event of cash receipts are happening in different periods.

The accrual basis of accounting tracks the true financial position of the business as it captures money that is owed by the business to the creditors and money that the business owes to the external debtors of the business. This accounting process is most appropriate for the chosen organization of Corner Pharmacy where the business is making a large amount of credit sales whose revenue will b received at a later period(Tiron & Mutiu, 2012).

Items

 

 

 

comment

Cash sales

 

$300,000

 

 

Credit card sales

 

$150,000

$450,000

Total sales

Credit card reimbursements

 

$160,000

$290,000

total sales net of credit card reimbursement

PBS[Pharmaceutical Benefits Scheme]:

 

 

 

 

Opening balance

 

$25,000

 

 

Closing balance

 

$30,000

 

 

Billings

 

$200,000

 

 

Receipts

 

$195,000

($10,000)

Oppugning balance+(receipts-billings)-closing balance

Stock

 

 

 

 

Opening stock

 

$150,000

 

 

Purchases

 

$500,000

 

 

Closing stock

 

$200,000

$450,000

Stock valuation(opening stock + purchase-closing stock)

Salaries

 

$60,000

 

 

Rent

 

$50,000

$110,000

sum of deductable expenses=salary +rent

 

 

 

 

 

Total taxable income

 

 

$180,000

 

The income statement of the Corner Pharmacy reveals that the business is making a cash sales of $300,000 and a credit sales of $150,000 and the sum of the credit sales & cash sales of the company delivers the total sales of $450,000.Here credit sales has been recognized following the principals of accrual basis of accounting which assumes that the revenue as already been booked or earned by the business for the amount that has been sold on credit.

The amount of Credit card reimbursements ($160,000) has been deducted as the amount is already being recognized within the credit card sales.

The sales under the PBS scheme generates a net loss of ($10,000) where the net receipt from sales has been added to the opening balance and the closing balance has been deducted from the sum.

Thus this portion is a revenue loss and will not be added or deducted from taxable income. Only the items that are being categorized as expenses are subjected to deductions as per the corporate taxation requirement of Australia(Taylor & Richardson,2012).

The valuation of stock held by the business results to an amount of $450,000 which has been calculated by adding up the opening value of stock to the purchased amount of stock and finally deducting the closing amount from the sum of opening balance and purchase value of stock as demonstrated in the above table. Thus here the final valuation of the stock held by the business has changed from its opening balance and this indicates that the businesses has made some amount of capital gains from purchase and sell of the stocks. Therefore the amount of stock value of $450,000 should be considered as capital gain will be taxed under capital gain taxation as per Australian taxation requirement.

Therefore the net tax valuation $450,000 of will not be included in business income as taxable income.

Finally the items of salary and rent are being identified by the business as expenses and are being deducted from the business income for the final calculation of the taxable income of the business (Lanis & Richardson, 2012).

Thus the final taxable income of the business is $180,000 on which h the tax liability will be considered.

Thus the basic principles that are being applied for the calculation of the taxable income of the chosen organization Corner Pharmacy following g the requirements of Australian corporate taxation policy are as follows:

The accrual basis of accounting has been followed where income and expenditure has been recognized in the period in which they has been earned

The revenue earnings from credit sales have been recognized following the accrual accounting policy.

The income from stock has not been included in the calculation of taxable income as it is a capital gain and will be subjected to capital gain taxation

The loss incurred under PBS selling scheme has not been deducted as it is a loss not expenses

Finally all the expenses are being deducted from the business income for calculating the final taxable income on which tax liability will be calculated.

Question 3

Principle established in IRC v Duke of Westminster [1936] AC 1

The Inland Revenue Commissioners (IRC) v. Duke of Westminster case of 1936 is a famous case that establishes the basic principles that differentiates between tax avoidance and tax evasion. According to the case the Duke of Westminster appointed a gardener for taking care of his garden and used to pay the gardener a substantial amount of wage to him out of his post-tax income.

Later the Duke of Westminster decided to stop paying the wage and instead he decided to pay an equal amount to the gardener and made a covenant or predefined promise with the gardener accordingly. He took thighs step as under 1936 taxation law of UK it was possible for the duke to claim the amount paid as the expense and to deduct it from his income for reducing the volume of taxable income on which tax, as well as surtax, will be calculated. Thus this action of Duke helped him to reduce the overall tax liability as well as surtax likability at that time (Sikka & Hampton, 2005).

But the then Inland Revenue Commissioner at that time was not happy with the activity of the Duke of Westminster and the Department Of Inland Revenue management Commission identified the activity of DUKE as tax evasion which is illegal and took the Duke of Westminster to court(Singh, 2012).

The case was judged by Lord Tomlin who is a famous British judge whose verdict went in favour of Duke of Westminster and Inland Revenue Commissioners (IRC) lost the case.

According to Judge Lord Tomlin every person has the right to order their affairs of expense in such a way so that the volume of taxable income and tax liability get reduced by an amount which has been appear as a higher amount otherwise. In such a situation due to systematic ordering of the expenses if a person manages to reduce his taxable income as well as tax liability then there is nothing unlawful to do so(Gravelle, 2009).

Relevancy of the principal with respect to Australia:

The principal that has been established by the above case (for the tax payers of different nations) is that there is a clear difference between Tax Avoidance and Tax Evasion. Tax Avoidance is legal and Tax Evasion is illegal as tax evasion tantamount to deliberate escape from paying tax that should be paid in an illegal way.

A Tax evasion is usually being identified as occurred where a taxpayer deliberately misrepresent or conceal the true state of their affairs from the tax authorities for reducing their tax liabilities. The tax evasion process mainly includes the events of dishonest tax reporting in the form under-declaring income, under reporting of profits or gains or overstated deduction reports.

Whereas tax Avoidance is the mere exploitation of rules for reducing reduce the tax liability that otherwise should be paid out. The most common way of exploitation of rules is to systematic arrangement and categorization of the expenses in such a way so that the overall taxable income and the tax liability, as well as surtax liability, can be reduced. But any person who is taking the advantage of exploiting the exiting Australian taxation law in a legal manner for reducing the tax liability will no way be challenged by any tax regulating body of the country(Sceales, 2015).

Thus the most important relevance of the principal with respect to Australia is that the example or citation of the case will help the general public of Australia to realize that a deliberate misrepresentation of income related facts is a criminal offence .The deliberate misrepresentation income related statements in the form of understatement of income in case of an individual or deliberate misrepresentation or cancellation of business profit in the form of understatement of business income will be considered as tax evasion and a sheer violence of the taxation rule of Australia and any company or business making such tax evasion will be challenged by the tax regulating authority. If it has been proved in court that an individual or a business has done an incident of tax evasion then financial penalty have to be paid as per the verdict of the court.

Thus the principle will generate an awareness among the general public of Australia regarding the fact that it is better to exploit the existing rule for minimizing the taxable income as much as possible through systematic arrangement of expenses and income so that the act is regarded as a n attempt of tax avoidance which is not illegal an d do not attract any financial penalty and at the same time motivate a taxpayers to pay the legal minimum tax to the authority(Feldstein,1999).

Question-4

Allocation of capital gain loss for tax purposes:

Capital gains tax (CGT) commenced on 20 September 1985 in Australia and brings capital receipts into the tax base. According to the accounting standard of 102-20 a capital gain or capital loss is considered as happen if the event really happens.

A CGT asset is an asset where from some profit or income can be generated and the income comes under the capital gain taxation net in Australia.

According to the accounting standard 108-5(1), the prosperities of any kind or legal or equitable rights that are not properties are considered as CGT asset. According to this criterion the rented property purchased here can be categorized as a CGT property.

In reference to the current scenario it can be seen that Joseph (an accountant) and his wife Jane (a housewife) has borrowed money to purchase a rental property as joint tenant. So here the CGT event of “disposal” has happened as the ownership of the rented property has been transferred to Joseph and Jane. So the loss of $40,000 that has been earned by Joseph and Jane in last year should be considered as the loss that has generated in the last year a s the event of disposal took place in the last year(Clarke, Seng & Whiting, 2011).

Here the capital loss under the event of disposal can be defined as the difference between the reduced cost base (cost of acquiring the asset – any expenditure incurred for acquiring the asset) and the proceeds from the capital.

Here the cost base is not going to be indexed as the asset has been acquired after 21st September, 1999 for the inflation. Moreover the reduced cost base of a property that has generated a loss is never being indexed.

Treatment to the capital loss:

In the given scenario though Joseph (an accountant) and his wife Jane (a housewife) has purchased the property as joint tenant and Jane is entitled to 80% profit of the proceeds to be earned from the purchased rented property. But in case of loss Joseph (an accountant) has to bear the full responsibility of the loss.

Here Joseph is not allowed to deduct the capital gain loss from his taxable income but rather he is entitled to carry forward the losses in the later income years where the capital loss can be offset or deducted from the capital gain of that year. There is no time limit regarding how long the capital loss can be carried forward.

In case of several capital losses that has been recognized in a particular year under consideration the capital losses that has been carried forward from the earlier years will be offset first from the capital gain of that year

Here the individual who has experienced a capital loss do not have the liberty to choose among the several capital losses for the purpose of deduction from the corresponding capital gain rather an individual has the liberty to choose one of the several capital gains earned for deducting the capital losses in the order they have being recognized in the current and earlier periods (Mirrlees, J & Adam, 2010).

In the present case scenario as there is no mention of the fact that the buyers of the property has earned any kind of capital gains from the earlier year in which a capital loss of $40000 has been recognized . In that case the loss will be carried forward in the earlier years so that the loss amount can be offset from the capital gains earned in earlier year.

Here no taxation will be imposed as the owner has earned a loss on CGT asset by an amount of $40,000.

Accounting of capital gain or loss at the event of sale of the purchased rented property:

Now if Joseph (an accountant) and his wife Jane (a housewife) decides to sell the property and if they manage to acquire gain from the property then the capital loss of $40,000 recognized earlier year will be deducted from the portion of the capital gain that goes to Joseph(20% of the total capital gain earned jointly) as he is solely responsible for mitigating the loss as per the nature of the contract.

Reference:

1. Clarke, M., Seng, D., & Whiting, R. H. (2011). Intellectual capital and firm performance in Australia. Journal of Intellectual Capital, 12(4), 505-530.
2. Feldstein, M. (1999). Tax avoidance and the deadweight loss of the income tax. Review of Economics and Statistics, 81(4), 674-680
3.Gravelle, J. G. (2009). Tax havens: International tax avoidance and evasion. National Tax Journal, 727-753.
4. Kamleitner, B., Korunka, C., & Kirchler, E. (2012). Tax compliance of small business owners: A review. International Journal of Entrepreneurial Behavior & Research, 18(3), 330-351.
5. Lanis, R., & Richardson, G. (2012). Corporate social responsibility and tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 31(1), 86-108.
6. Lanis, R., & Richardson, G. (2015). Is corporate social responsibility performance associated with tax avoidance?. Journal of Business Ethics, 127(2), 439-457.
7. Mirrlees, J. A., & Adam, S. (2010). Dimensions of tax design: the Mirrlees review. Oxford University Press.
8. Sceales, R. W. F. (2015). A review of the trend in the judicial interpretation, and judicial attitudes towards tax avoidance in the United Kingdom, Australia and South Africa, with reference to the" declaratory" and" choice" theories of jurisprudence (Doctoral dissertation).
9. Sikka, P., & Hampton, M. P. (2005). The role of accountancy firms in tax avoidance: Some evidence and issues. In Accounting Forum (Vol. 29, No. 3, pp. 325-343). Elsevier
10. Singh, M. (2012). Corporation as a vehicle of tax planning: Emerging scenario. Journal of Politics and Governance, 1(1), 41-54.
11. Taylor, G., & Richardson, G. (2012). International corporate tax avoidance practices: evidence from Australian firms. The International Business Journal of Accounting, 47(4), 469-496.
12. Tiron Tudor, A., & Mutiu, A. (2012). Cash versus accrual accounting in public sector.
13. Woellner, R. H., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2010). Australian taxation law. CCH Australia