Taxation: Accounting for Capital Gain or Loss, Taxable Income, Tax Avoidance

This article discusses taxation and covers topics such as accounting for capital gain or loss, taxable income, and tax avoidance. It includes a case study and provides an overview of Australian tax regulations. The article also delves into the Inland Revenue Commissioner versus Duke Westminster case and explains how Joseph and Jane's joint venture on rental interest is treated as a partnership joint venture. The article is suitable for students studying taxation and related subjects.

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ACCOUNTING FOR CAPITAL GAIN OR LOSS, TAXABLE INCOME, TAX AVOIDANCE
CASE STUDY AND OVERAL AUSTRALIAN TAX REGULATION IN PLACE
Course:
Professor’s Name
Institution
City
Date

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Question 1;
Australian Tax Office on prizes and awards defines prizes and awards to be anything won
as a result of game prize or lottery done by local companies and institution. These awards are
expected to be declared for tax purposes in the income depending with the form in which they
occurred for the draw. The law of probability further defines this as a game of no regret since the
outcome is based on chances of the results.
Gamblers upon winning the draw are therefore awarded gifts that are seen to appear in the
form of the fixed amount of cash or the information of tangible and intangible goods and services
respectively with examples being cars for physical assets and trips for services offered.
A lottery or raffle ticket game is deemed to be a means of generating revenue through the
use of sellable tickets and rewarding the numbers that are randomly drawn. It is therefore
essential to differentiate these types of prizes and awards mainly because they have their income
accounted differently for tax purposes Perez and Humphreys (2011.Pg 560.) For instance,
Australian Tax Office is very precise on how lottery and raffle ticket award is to be treated for
tax purpose and how other rewards and prizes that are not in the form of the lottery are to be
accounted ted.
Australian Tax Office on lottery and raffle is seen to categorically dictate that all awards or
prizes resulting from ordinary lotteries with the excellent example being the lotto must not be
declared for tax purpose. Hence no individual winner or awardee is expected to report this gift or
win in his or her income for tax purpose since it is as a result of an ordinary act that was based on
an outcome of chance.
As this reward on lottery and raffle is exempted for tax purpose by the tax man, any
contest that is done in a show on consistency basis its win is required to be declared by the law

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since the prize is won on consistent and regularly means thus not by chance but by an aspect of
practice and frequent trials. At some point appeared in the contest is deemed payable whether
you win or not hence the need for the victims to declare the tax on these prizes. Likewise, it is
believed that if a title or a gift awarded on lottery basis is being disposed or sold therefore there
exist the need to declare that capital gain resulting from that sale.
For instance if it is a vehicle that had been awarded on a lottery stand at the cost of
$10000, and then the assigned person disposes the asset at either at $12000 or $8000 either of the
two outcomes has to be considered as follows; at $12000 there is a capital gain on sale of lottery
gift of $2000 that has to be declared as part of the income of the winner. Similarly to this, it is
expected that in case of a capital loss of $2000 that results from disposal of the lottery asset has
to be declared and carried forward for tax purpose set off on the future capital gain.
Similarly to any other ordinary lottery treatment for tax purpose, I wish to say that ‘’Set
for Life’’ is a regular lottery whose winner is seen to luckily scratch a card and wins $ an annual
award of $50000 for 20 years thus the Australian Tax Office on lottery qualifies this income
resulting from the Set For Life lottery to be free from tax as it is deemed to be an ordinary lottery
club.
Therefore this income earned of $50000 is not required by the law to be declared since it
is generated from an ordinary Set For Life lottery club whose participants got into it with the
mindset of winning depends with the outcome chances of the venture. It is hence so clear that
whether the winner is alive or not he/she nor the estate or trusty is required to declare this income
for tax purposes.
However if the winner or the estate of this $50000 on every anniversary decides to venture and
invest this money into either a fund scheme or a business that generates interest or profit that is

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thought to be gain or loss, Australian Tax Office deals with this as though it is a reasonable
investment for a tax resident citizen hence requires a Set For Life winner who ventures and
capitalize the winning amount to concisely declare all the gain or loss incurred in the venture for
tax purpose.
Australian Tax Office on lottery thus allows Set for Life winning prize of $50000 not to be
declared any amount for tax purpose across his/her tenure of receiving the amount just because it
falls under the ordinary, raffle or category of lottery gaming that is exempted from tax as long as
the prize awarded is not ventured elsewhere.
Question 2;
Australian Tax Office on accrual terms of the operation of a venture is that which expects
a substantial income and expenses be reported as soon as they are incurred or earned whether the
payment is made or not, i.e., regardless of when the amount is to be made. In the real sense, this
income or expense is deemed reportable as soon as an invoice is raised and n expense account is
debited with the ideal relevant cost incurred Pinto (2017. Pg.17.)
Corners Pharmacy business because it is operated on accrual basis it is thus believed that
as soon as an invoice is raised as credit sales equivalent revenue should be reported for purposes
of tax as both credit sales and cash sales if any Torgler(2008.Pg 31.) The tax man, therefore,
expects the declaration of the taxable income in the context and likewise self-assessed tax
payable if any. This method of accounting for accruals ideally is seen to favor the taxman since
in one way or the other the taxpayer has to pay for sales made whether money is received or not.
Preferably, this, if not managed well by the taxpayer equivalent issues relati0ng to cash flows, is
experienced.

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Corners Pharmacy taxable business income is going to be calculated similarly to any
other income though it is expected by the regulation to have this income calculated and declared
as soon as it is promised of course within that year of tax. The calculation of taxable income is as
follows;
Corners Pharmacy
Statement of Taxable Income on Accrual Basis
Sales Revenue; $ $
Credit Card Sales 300000
Cash Sales 150000
Pharmaceutical Benefit Scheme Billing 200000
Total Revenue 650000
Less Cost of Sales
Opening Balance Stock 150000
Purchases 500000
Closing Balance (200000) 450000
Gross Margin/Profit 200000
Less Other Expenses;
Rent 50000
Salaries 60000 110000
Taxable Income/Profit 90000
Annexes notes to the Corner Pharmacy Taxable Income;

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1. Taxable income for Corner Pharmacy ideally will be the profit generated from sales made
subject to the expenses they match.
2. Pharmaceutical Benefits Scheme Sales Analysis shows the stocks analysis of part of goods
held for sale at the discount rate by Australian government Medicare necessity concerns. It is
believed that the amount billed is that portion of the stocks that have been sold under PBS terms
thus forming part of the sales.
Opening Balance $25000
Billing $200000(this is the amount invoiced the PBS scheme
Closing Balance ($30000)
Expected Sales Receipts $195000
3. Cost of goods sold generally has to form part of the statement since it is indeed the indirect
cost incurred on products that have been sold and it is calculated by adding up the opening stock
and purchases made then reducing it with the closing stock hence the difference is the cost of
what has been sold.
4. The sales on the hand involve credit and cash plus now the inclusion of the pharmaceutical
benefits scheme. It is a credit item on the income statement that follows in our case the accrual
tax method of accounts.
5. In every operation there lacks no room for expenses hence in Corner Pharmacy the activities
main fixed cost is the employees’ salaries, and rent that indeed is inevitable therefore cannot be
foregone.
Generally, Corner Pharmacy Ltd is now tasked by the law to declare this taxable income of
90000 as an item of tax during its year of tax as registered in the books of accounts.

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Question 3;
This case of Inland Revenue Commissioner versus Duke Westminster in summary form
entails the aspect of tax avoidance whereby the court ruled against the Ireland Revenue
Commissioner on the basis that legally local arrangement of shifting tax by the taxpayer is highly
recognized in the eyes of the law Sikka (2012.Pg 29.)
Ideally, Duke, in this case, made the local arrangement with his gardener that instead of
paying his employee wage from the post-tax income that he earned he opted to do it on a later
date that both mutually came to the consensus. The only thing that changed is on when payments
were to be made nothing else since the payment amount terms remained the same.
This local arrangement brought Duke to a point which he can claim this employee
payment as an allowable tax deduction during that year of tax, something that the tax man did
not agree with thus calling for a suit against Duke with the case of tax evasion plan. As the
matter went to the court, Lord Tomlin heard the case and gave his ruling that if a tax man is in a
position to make arrangement within the law and standing orders of the land without injuring the
state operation, Likhovski (2006.Pg 7) the law shields the services and the act of that individual
free from any exploitation and extra charges that may be imposed on the tax income of that
individual.
This act of legally reducing tax burden without infringing the state rights is what is termed
as tax avoidance. Tax avoidance in Australia and across the globe has been used as a legal tool
and means of minimizing tax burden. However, this is only possible if it is done in the
appropriate legal way as enshrined in the law of the land Dungey, Yanotti and Wright
(2018.Pg.51.)

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In Australia, most taxpayers have used this means of tax relief extensively to a point
where others have missed it by shifting tax to products and period which they are not recognized
in the tax regulation. Likewise, it came to the notice of commissioners of domestic tax and inland
tax too that there has been the abuse of tax avoidance to the extent of even evading legitimate tax
burden that is expected to be paid Blakelock and King (2017.Pg 18.)
Consequent suits were done to hilariously stop this act of tax avoidance though it was in
vain; Australian Tax Office had no better option other than introduction of anti-agency
authorities whose tasks were to ensure any tax avoidance issue is dealt with it appropriately
without fear or compromise McClure, Ross, Roman Lanis, and Brett Govender(2017.Pg.21.)
Upon realizing that the tax office was losing a lot of money that was initially coming from
large multinational companies and enterprises as a result of this unscrupulous complex modified
means of avoiding tax, the office was left with no option but introduce Australian Multi Tax
Avoidance Agency that was to see into it that all is well when it comes to correct tax declaration
amount and payment by the taxpayers Mumford (2017.Pg 28.)
This agency together with Australian Tax Avoidance Taskforce worked professionally,
careful and with due diligence to analyze, investigate and find out whether all tax declaration is
made accordingly without shifting any gain or profit to a later date or even to another tax burden.
They achieved this by first creating the excellent rapport and awareness to all stakeholders
involved and more so by educating the members of the public on why there exists the need to
pay and declare correct tax Bloom (2008.Pg 246.)
Insincerity most of the taxpayers in Australia benefited from this tax avoidance
inappropriately since they were not doing it as expected by the law thus making Australian Tax
Office lose revenue in abundance but thanks to multi-tax avoidance agency and tax avoidance

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task force for rescuing the tax office from this menace Woellner, Barkoczy, Murphy, Evans and
Pinto (2010.Pg 33.)
Question 4;
Joseph and Jane joint venture on rental interest seems to be treated as a partnership joint
venture since they are seen to enjoy both profit and losses at ratios of 80:20 for-profit and 100:0
for losses. Australian Tax office refers to this form of rental business as rental property business
if it is done on the full basis by the owners or as and investment if it is partly or not adequately
managed by the investors. Since Joseph is an accountant by profession hence most of his time he
does not spend his time leading the property, on the other hand, his wife is a housewife likewise
she seems not to be involved in the operations of the venture.
This same office on YPFD and Commissioner taxation (2014) AATA 9 is seen to dictate
that a precise analysis on whether indeed there was the point of concern on operations of the
rental business for it to make the loss or was it that the loss incurred out of malice to net off
future tax burden. Australian Tax Office likewise conducts test of whether the activities Jane and
Joseph engaged themselves in were profit-making in nature, how risky is the venture, is the trade
or operations conducted on daily basis, did the profit or loss resulted from negligence or malice,
if any of the above applies Joseph is allowed to claim the $40000 loss as tax deductibility in his
accountant income and if there is no proof of the business making profit, malice for damage to
occur, no routine concern on operations definitely he is not going to claim any deduction from
the loss Saad(2014.Pg.1072.)
This is contrary to if the damage was as a result of the capital disposal of the property. Any
gain or loss on disposal of an asset, in this case, it is a rental investment automatically qualifies
for recognition as an asset or capital gain or loss for tax purpose Ellis and Naughtin2010.Pg30.)

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Therefore, in this case, Joseph is allowed to claim this $40000 capital loss on this disposal thus
can carry forward for the next future set off of any capital gain that he will earn himself if any
Martins(2018.Pg 562.)

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References;
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor,
The, 37(6), p.18
Bloom, D.H., 2008. The litigation lottery [The role of appellate courts in taxation disputes.]. Tax
Specialist, 11(4), p.246
Dungey, M., Yanotti, M.B. and Wright, D., 2018. Who, What, Where? Residential Property
Investment in Australia.
Ellis, L. and Naughtin, C., 2010. Commercial property and financial stability–An international
perspective. RBA Bulletin, June, pp.25-30
Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster
Martins, P., 2018. TD 2017/20. Taxation in Australia, 52(10), p.562.
McClure, Ross, Roman Lanis, and Brett Govendir. "Analysis of Tax Avoidance Strategies of
Top Foreign Multinationals Operating in Australia: An Expose." (2017)
Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge
Perez, L. and Humphreys, B.R., 2011. The income elasticity of lottery: New evidence from
micro data. Public Finance Review, 39(4), pp.551-570
Pinto, D., 2017. Tax simplification [Book Review]. In Australian Tax Forum (Vol. 32, No. 1, p.
247). Tax Institutes
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-
Social and Behavioral Sciences, 109, pp.1069-1075.
Sikka, P., 2012. The tax avoidance industry. Radical Statistics, 107, pp.15-30
Torgler, B., 2008. Introduction to the special issue on tax compliance and tax policy. Economic
Analysis and Policy, 38(1), p.31

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Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation
law. CCH Australia.ff