Taxation: Taxable Income Calculation, Tax Avoidance Principle, Capital and Business Loss, Prizes and Awards Analysis for Tax Purpose in Australia

This article discusses taxable income calculation, tax avoidance principle, capital and business loss, prizes and awards analysis for tax purpose in Australia. It also includes a case study on Inland Revenue Commissioner V Duke Westminster and the tax principle that originated from it. The article provides a detailed analysis of the topics and their application in the Australian tax system.

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TAXABLE INCOME CALCULATION, TAX AVOIDANCE PRINCIPLE, CAPITAL AND
BUSINESS LOSS, PRIZES AND AWARDS ANALYSIS FOR TAX PURPOSE IN
AUSTRALIA
Name
Course:
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Question 1;
In every society there exist persons who try their luck in gaming draws, casinos,
lotteries, raffle tickets, betting and many other. The participants engage themselves in this
activity with the hope that they will win awards and prizes from the draw. They stake an amount
expecting return while others do not steak anything depending on the nature of the draw. These
prizes and awards are paid to inform of cash, holidays, trips, cars, gift vouchers, interest-free and
low credit facilities, discounted allowance, promotions, houses and many other forms (Goewey,
2014.Pg.79.)
The awards and prizes won are considered income since it is a benefit the
participants enjoy as a result of the draw. However, it is classified as other income since it is not
an income that is based on employment or business operation instead it is that activity whose
return on investment is based on probability. In the actual sense no one knows the outcome of the
draw it is a game of chances and trials hence no regret. Unlike in the other forms of income, this
income on gaming draws contrary different since an accounting perspective the method of
accrual basis does not apply since no one is certain of the result hence the classification other
income.
The tax office in Australia has advised that all awards and prize draws that are run
and conducted either wholly or partly by investment group, financial credit institutions, banks,
government institution agencies as well as organized building and cooperative societies must be
declared and filled for tax purposes unless there is a proof that the outcome of the award or prize
was as a result of a sponsorship of an entity that was doing so to improve the community and not
for own benefit. Prizes and awards from the high bodies are taxed mainly because the parties
conducting the draw will claim this as the allowable expense. They will claim this as an expense
primarily because the event draw may be held for marketing and advertisement purpose other

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might be to know to access customer response on products while the government and public
sector will do so obtain information and matter of public interest.
As the above prizes and awards outlined are taxed there are no those which are
exempted by the law from being taxed. The law on tax-exempt allows all prizes and awards that
are won from conduction of ordinary lottery draw with the excellent example being lotto draw
and raffle ticket be exempted from tax. Australian Tax Office on other income, therefore,
dictates that no tax return and payment declaration that should be made on any winnings done on
any ordinary lottery event (Cachia,2017.Pg.260.) It exempts this income primarily because the
player and secondly never know its winning outcome because the competition is conducted once
in a while, not on a regular basis. This therefore likewise bars the lottery commission from the
claim the payment as an allowable deduction at her end.
‘Set for Life’ is an ordinary lottery draw that is conducted by Lotteries Commission
it is mainly played by scratching three panels hence no one knows the outcome of the content of
the panel. The unknown concept of the scratching and the ordinary lottery aspect by default
makes any award or prizes that are won in this ‘Set for Life’ lottery as tax exempt. The $50000 is
therefore awarded to the winner and his estate in case of death for the next 20years without any
tax levy on it. The winner is thus allowed by tax man to enjoy the tax-free award at his pleasure
for the time span agreed in the agreement terms and condition page (Philander, 2013.Pg.2.)
Exempting ordinary lottery awards from income is a concern over the years that
have raised issues in Australia. Some are even seeing arguing that on morality grounds it is
affecting the society negatively hence the urge by some people to have it taxed (Christians,
2014.Pg.30.) However Australian Tax Office is exercising the equity and equality concept that
since the player of the draw was not aware of the outcome hence risking it will be unfair to tax
the awards that were not expected by the player, ordinary lotteries are likewise seen to be

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conducted so as to raise funds for charity and societal projects an aspect that similarly makes it
exempted from tax.
The $ 50000 prize win from the Set for Life draw is exempted from tax hence no
declaration of tax is expected at all on this over the next 20 year payment period. Although the
regulation exempts ordinary lottery award as a tax item, it has likewise ruled that if the $ 50000
grant cash is converted to an asset and disposal is done on the same, any gain or loss must be
declared as capital for tax purpose. For instance if the winner of Set for Life award converts or
uses the $ 50000 to buy a land worth $30000, and after 1 year he sells the property at $ 50000 he
is expected by the taxman to declare the $20000 as capital gain for tax purposes and in case of
loss he should report the same for future capital gain net off.
Ordinary lottery prizes and awards are therefore exempted from paying tax in
Australia if done on the piecemeal basis and not in lump sum form as depicted in Set for Life
draw as well as if conducted by an ordinary lottery commission that did so for societal aid
agenda. It should likewise be known that although the awards are tax exempted any gain or loss
on sales of an asset property acquired from lottery property is declarable for tax purpose and the
amount included as capital gain and loss respectively (Tretola, 2013.Pg.5.)
Question 2;
According to AASB 101 on the accrual basis, revenues and expenses are recorded
and accounted for as soon as they are earned without considering when the actual money is
received or paid (Woellner, Barkoczy, Murphy, Evans and Pinto, 2010.Pg.7.)For tax purposes,
accrual basis is seen to affect the tax year in which expenses are to be recognized. Accrual
method of accounting changes taxation drastically because you end up paying taxes on revenue
that indeed you have not been paid for. Assuming a credit sale of $20000 is made on December
29th, 2016, this sale will be included in the 2016 revenue for income taxes purposes though it is

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not received. This is likewise seen in expenses whereby if a business is started in Dec 28
expenses like rent has to be included in that tax year though it is not paid (Freedman and
Crawford, 2010.Pg.51.)
Corners chemist shop is a small business entity that is seen to exercise the accrual
basis on when it comes to sales conducted on Pharmaceutical Benefits Scheme and the cost of
sales, salary and rent expenses if is to be paid on a later day. Using the accrual basis method of
accounting Corners chemist revenue and expenses are going to be actualized as soon as they are
recognized in the books (Burnheim and Bobbin, 2017.Pg.32.) and not by when the amount was
received or paid. Therefore all the items while calculating taxable income have to be used since
all items though not told except sales done on the cash basis are deemed accrued.
The fact that Corners Chemist Shop is a small entity enterprise that is involved in
sales of pharmaceutical products calculation of taxable income is the calculation of its profit or
loss on income using the accrual method. Therefore the income is calculated in two parts, i.e.,
the revenue part and expenses part. The revenue part involves sales which are in cash form hence
no credit on them and they amount to $300000, then we have credit card sales which are too
actual sales but not in cash form instead it is in soft paper form which amounted to $150000 and
finally we have sales that are on accrual basis, i.e., that which are done by Pharmaceutical
Benefit Scheme whereby they are seen to purchase on behalf of Corner Sale. These sales are
presumed to be calculated using stock movement hence the billed amount of $200000 is the
amount of sales of on PBS.
Concerning credit card sales we have only factored that part of the billed amount
showing in the credit card sales and not what indeed is receipted because the $150000 is what
was recorded in the books, and hence the $160000 has extra $10000 sales which are not part of
the recorded sales thus forming part of reconciling items in the cash book and bank statements

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recordings. On matters Pharmaceutical Benefits Scheme I wish to say that we have considered
the $200000 amount simply because this is the billed amount actualized in the books as PBS
sales and not the receipted amount (Osofsky, 2012.Pg.25.)
Cost of goods sold on the other hand is the cost of the items that were sold hence
form part of allowable expenses for tax purpose. It is likewise presumed to occur as items in
accrual form. It entails the movement of stocks, i.e., the difference between what was issued and
what was left behind as closing thus Cost Of Goods Sold = Opening Stock + Purchases - Closing
Stock. It is seen to reduce revenue hence a determinant in gross profit calculation. The other
allowable expenses are rent and salary which indeed to me I term them as fixed expenses since
Corner Pharmacy can’t operate without employees who are eligible for salary payment. Rent
expense is on the hand unavoidable cost because the business stocks and operations have to be
sheltered in a safe and recognized environment hence has to be considered priority too (Martins,
P,2018.Pg.562.)
Using the above analysis explaining and discussing the application of the items used
in the calculation of Corners Taxable Income and by assuming that Corners end of the year for
tax purpose ends on 31St Dec 2017 we are therefore set to calculate the taxable income as
follows;
Corners’ Pharmacy Shop
Statement of Taxable Income
For The Tax Year Ending 31St Dec 2017
$ $
‘000’ ‘000’
Cash sales 300
Credit Card Sales 150

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Pharmaceutical Benefit Scheme Sales 200
Total Sales Revenue 650
Less Cost of Sales
Opening Stock (At cost) 150
Add Purchases 500
Less Closing Stock (At cost) (200) (450)
Gross Profit for Corners Pharmacy 200
Less Other Expense
Rent 50
Salaries 60 (110)
Corner Pharmacy Taxable Income As At 31St Dec 2017 90
The 90000 Australian Dollars is what Corners pharmacy is to declare as taxable
income in the owner’s salary if an individual resident owns it for tax purpose and if the shop is
registered as an individual legal person for tax purpose it is expected to declare the same $90000
as taxable income for small business enterprise tax concession (Deegan, 2012.Pg.21.)
Question 3;
In summary form, this case of Inland Revenue Commissioner V Duke Westminster
has to be analyzed to outline the principle of tax that emerged from the ruling. From the evidence
we see Duke organizing on how he is to reduce burden by stopping paying his gardener on the
weekly basis as he used too instead he opts to come up with a deed that termed the earnings as
annual payments being spent on a weekly basis and not wage as initially termed. This seemed a
disturbing issue to the Inland Revenue Commission hence sued Duke by defiling tax rule with
attempts of tax evasion and fraud. The court, however, looked at the matter and ignored the legal
position of the matter and instead ruled by the substance of the matter. Lord Tomlin the judge

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rule in favor of Duke by stating that the substance of the issue is that Duke's annuitant served
him for an amount that was equivalent to the former salary or wage what has changed is the
means of payment whereby they have mutually agreed to make the payment on the installment
basis.
The judge, therefore, ruled that the substance of the matter in this arrangement of
Duke and his gardener was a local and legal one that enabled him arranges his affairs hence able
to claim the expense on salary as tax deduction expense therefore reducing his liabilities and
surtax. The ruling was however never appreciated by IRC since to them it was a loss and indeed
subsequent suits were done to weaken the ruling precedence application. Everyone is thus
allowed by the law to organize his or her finance affairs legally to have his or her tax burden
reduced as depicted in this case of IRC V Duke Westminster (Likhovski, 2006.Pg.56.)
The tax principle that originated from this case is tax avoidance principle that is
defined as the legal, financial arrangement method that is used to lower tax burden. It is used by
the creation of allowable tax deductions and tax credits that are seen to the net of tax liability in a
firm or individuals income. This financial arrangement is the reference in Duke Case whereby he
decided to arrange his affair of paying wage and salary once into equal installments to be able to
claim the amount as an allowable tax deduction. Legally tax avoidance principle came into place
to relieve and enable taxpayers to legally arrange their financial affairs for tax purposes.
Tax avoidance implementation came into place in Australia although it did not work
well for Australian Tax Office. It has been a challenge for them since taxpayers have been taking
advantage of this principle and instead evade and fraud the state its portion of the tax (Mellon,
2016.Pg.33.) Most taxpayers illegally avoided tax by shifting profits while others overstated
allowable deduction and the worst of all others are seen not to declare incomes at all. This has
been a challenge over the year in Australia since there was no regulation curbing tax avoidance

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hence being hard for the tax office to compel individuals who were using tax avoidance shield as
a weapon for tax evasion and fraud (Mumford, 2017.Pg.390.)
Australian Tax Office indeed felt the pitch of tax avoidance principle since it made
them fail to collect enough revenue (Keen, Klemm and Perry,2010.Pg.50) an aspect that indeed
forces them to seek litigation that allowed them to come up with agencies whose legislation was
to curb and control tax evasion and fraud. The introduction of Tax Avoidance Task Force and
Multination Anti-Tax Avoidance Agency greatly helped Australia relieve itself from the problem
of illegal use of tax avoidance by malicious tax evaders (Slemrod, 2009.Pg.390.) These agencies
worked hard to ensure that there was full scrutiny of multi-national enterprises tax affairs and
full compliance in the correct amount of tax being declared and done at the right time without
delay.
The use of multinational anti-avoidance law to facilitate correct taxation of the
number of profits earned by entities greatly helped to curb tax avoidance. What application of the
regulation profit diversion ideally has supported the tax man equates the economic substance of
enterprise activities with the profit they declare for tax. These agencies have played a significant
role in ensuring that there is strict compliance in Australia and that taxpayers are not negatively
using tax avoidance rule to deny the tax man his share of tax hence a significant level of relief to
the tax man (Sikka,2012.Pg.5.)
Question 4;
Rental loss and gain on disposal have special treatment on tax basis depending on
what efforts led to the loss or profit. Rental property is deemed a vital asset venture whose loss is
rarely expected on its activities hence the introduction of analysis that sees into it that the loss is
genuine or not. Some conditions are to be fulfilled to be able to classify rental injuries as
allowable deductions or not. The first one is on ownership whereby the rental owners must proof

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that indeed they are owners of the property and the second one is on rental management and
operational control. The regulation is precise on this because it states that only real owners who
fully participate and due proof care of the rental property is allowed to claim the allowable
deduction for tax purpose. They consider the aspect of the due consideration of control of the
property to curb and prevent people who have another source of income from maliciously failing
to curb loss to net off their taxable income.
Jane and Joseph own the rental property jointly thus sharing profit at the ratio of
80:20 and loss at 0:100 respectively. This ration sharing indicates that the two declare incomes
for tax purpose separately and on own grounds. Joseph is an accountant by profession while Jane
is a housewife thus meaning that no one among them entirely works in the rental property
because Joseph concentrates on accountancy job and Jane on her household chores. This
indicates that the level of engagement the two are tied to this rental property is so low generally
because it is not easy to serve to master and in any case we are not told of any action the two are
taking to manage the rental property.
Considering the above analysis neither Jane nor Joseph is allowed to claim the
$40000 rental loss they incurred and more so Joseph because though they are the owners they
fail to prove that indeed they managed the operations of the rental property diligently and that the
loss was as a result of economic issue and not on human fail aspect. However, if either Joseph or
Jane showed due care interest in the venture by default Joseph would claim the $ 40000 loss as
the allowable tax deduction in his accountancy professional income.
There is, however, a big difference when the two decides to disposal the property.
Destruction of this rental property ideally is deemed capital hence any gain or loss on disposal of
the asset is deemed capital gain or loss (Chengm and Yong, 2013.Pg.13.) The regulation requires
that any capital gain is declared as taxable income and loss be carried forward for future capital

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gain net off hence if increase Jane should report 80% and Joseph adds 20% of the profit into his
accountancy salary (Hayward, 2014.Pg.44.) By applying Australian Tax Office regulation on
CGT, the 100% Joseph’s share of the $40000 capital loss incurred by the two on disposal of the
rental property is allowed to be carried forward to net off any capital gain in future (Burman,
2010.Pg.42.)

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References;
Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed.
Brookings Institution Press.
Burnheim, E. and Bobbin, P., 2017. Record keeping tax tips.Equity, 31(9), p.12
Cachia, F., 2017. Aggressive Tax Planning: An Analysis from an EU Perspective. EC Tax
Review, 26(5), pp.257-273
Cheng, A. and Yong, S., 2013. New Zealand and capital gains tax: A tax experts' perspective
Christians, A., 2014. Avoidance, evasion, and taxpayer morality. Wash. UJL & Pol'y, 44, p.39.
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Freedman, J. and Crawford, C., 2010. Small business taxation.
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Ent. L., 24, p.179.
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Sikka, P., 2012. The tax avoidance industry. Radical Statistics,107, pp.15-30.
Slemrod, J., 2009. Lessons for tax policy in the Great Recession. National Tax Journal, pp.387-
397.

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Tretola, J., 2013. Turning gambling silver into tax gold?.Revenue Law Journal, 23(1), p.5.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation
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