Capital Receipts vs Revenue Receipts

This assignment delves into the distinction between capital receipts and revenue receipts in the context of Australian taxation. It uses a scenario involving a landowner (Bill) clearing pine trees from his land to illustrate how different payment structures influence tax implications. The analysis highlights that lump-sum payments for asset disposal are treated as capital receipts, attracting capital gains tax, while recurring payments for ongoing activities are considered revenue receipts, taxed at normal rates.

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Taxation
Answer to 1
Eric has procured etc various assets like collectibles, personal use assets, in the last year and
because of appropriate information in the question, it is assumed that such assets are not held
more than a year. As a result, the indexation advantage cannot be availed by Eric owing to such
holding period and when the sale value of such assets exceed their acquisition cost, they become
liable for capital gains tax (ATO, 2017).
The reason behind the purchase of personal assets can be attributed to the fact that these facilitate
self-use and enjoyment. Furthermore, if the procurement expense of these assets is more than
$10000, then the capital gain tax shall incur on the sale of such assets. Eric has purchased a home
sound system for $12000 in the given case. In addition, collectibles have been purchased for
personal benefit as well and if their procurement expense is more than $500, then taxability of
capital gain tax must incur upon the same (ATO, 2017). Eric has purchased collectibles like
painting, an antique vase, and antique chair respectively. It can also be witnessed from the case
that he has purchased some shares in a listed company that pursues a procurement expense of
$5000. For computation of capital gain, the sales proceeds must be deducted from the
procurement cost of the assets
List of assets
acquired by Eric
Sale consideration Procurement
expense of such
assets
Net capital loss or
gain
Antique Chair $3,000 $1000 $2000 Loss
Antique Vase $3000 $2,000 $1000
Painting $1000 $9,000 $8000 Loss
Home sound system $11000 $12,000 $1000 Loss
listed company shares $20000 $5,000 $15000
Net capital gain=
$5000
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Based on the above computation, it can be seen that the losses for the year have been set-off with
the income in the same year so that net capital gain can be determined. Furthermore, it must also
be noted that the above-mentioned assets have formed part of the computation because their
acquisition cost is more than what is specified for taxability of capital gain. Overall, after
considering all such scenarios, the net capital gain comes to $5000 for Eric in the given year.
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Taxation
Answer to 2
It can be seen in the given case that Brian has been offered a loan of $1 million from his
employer at a very special rate of interest that is repayable in monthly installments. This criterion
is similar to that of a loan fringe benefit because, in this benefit, the employer attempts to offer
his employee a loan at a special rate of interest (lesser than that of the required rate of interest).
Sometimes, in such benefit, no interest is charged from the employee (Pratt & Kulsrud, 2013).
Thus, since in the given question as well, the criterion prevails, the loan offered to Brian will be
considered a loan fringe benefit. Furthermore, to compute the taxability of such benefit, such
required interest rate must be known and since the question does not specify the same, the
interest rate on April 1, 2016, shall be considered the statutory or required interest rate. On April
1 2016, the rate was 5.65% respectively.
Step (a)
The taxable amount of such benefit will be computed here without accounting for the deductible
rule. For such purpose, the loan interest (actual interest) will be deducted from the loan interest
(required or statutory interest).
Therefore, loan interest (actual interest) = $1000000 * 1% = $10,000. Similarly, the loan interest
(statutory) = $1000000 * 5.65% = $56,500
Taxable amount is equal to $56,500 - $10,000 that amounts to $46,500
Step (b)
The loan interest (required or statutory interest rate) will be computed after assuming that the
same was actually payable by Brian.
Hence, it amounts to $10,00,000 * 5.65% that gives $56,500
Step (c)
The loan amount of one million obtained by Brian has been utilized for meeting future
obligations and other income generating purposes. He has used around forty percent of such
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loan. Therefore, the amount of hypothetical tax-deductible interest expenses will amount to
$56,500 * 40% that gives $22,600 respectively.
Step (d)
In this step, the same criterion as mentioned above will be considered, except the fact that the
interest expense will not be hypothetical and instead, it will be the actual interest amount.
Therefore, it shall amount to $10,000 * 40% that gives $4000
Step (e)
The amount obtained in step (d) will be subtracted from the amount obtained in step (c). Hence,
it will amount to $18,600 ($22,600 - $4000)
Step (f)
The final amount will be computed by subtracting the amount derived in step (e) from the
amount in step (a).
Therefore, this amounts to $27,900 ($46,500 - $18,600).
Instead of monthly installments, if the interest was repayable after the expiry of the loan, then the
deemed time of such loan would be considered from the time when such interest was paid or it
became payable as a whole.
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Taxation
Answer to 3
It can be observed from the given question that an agreement has been entered into betwixt Jack
and Jill so that they can purchase a rental property with the borrowed money. Besides, based on
the agreement, both are going to serve as joint tenants of the purchased property. However, if
they decide to sell the same in the upcoming future, Jill shall obtain 90% of the profits while
Jack will attain the rest. In addition, if there is no gain from the sale of such property, the entire
amount of loss shall be borne by Jack alone (Renton, 2005).
Nevertheless, it can be seen that the loss amount of $10,000 incurred in the last year must be
borne by Jack alone and the amount can either be added to his other income (if any) or can be
carried forward in the next year. With the help of this right, Jack can easily make use of the loss
amount to determine his total income for the year. Nonetheless, if the property is sold, there may
be either a loss or income from the same.
In the case of gain, both Jack and Jill shall share the profits but in the ratio of 10:90 and Jack can
also utilize the losses incurred last year to set-off against the income accruing in the current year
so that net income can be calculated. In contrast to this, if there is a loss from the sale of such
property, Jill is under no obligation to bear the same because as per the agreement, the entire loss
must be borne by Jack alone (Sadiq et. al, 2014). However, he can carry forward the same or set-
off the same in order to ascertain his total income for the year. Therefore, on a whole, it can be
concluded that in the given case, the sharing of profits is done in the ratio of 10:90 while the
losses will be borne by Jack alone. Thus, the treatment of tax does not affect Jill in any
circumstance and Jack remains always liable to bear the entire amount of losses in his books of
accounts.
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Taxation
Answer to 4
The case of IRC v Duke of Westminster [1936] AC 1 assists in representing the principle that
every person has full right to manage his accounts and financials that can allow him to minimize
his total tax payable in a year. Besides, it is also mentioned in the case that if any person is
successful in minimizing his total tax payable by the adoption of legal ways, then even the
Commissioners of Inland Revenue does not have any right to stop them from doing so. The only
requirement that this case law necessitates is that the documents depicting the truthfulness of the
transaction must be genuine in nature and then the courts even cannot rely on some underlying
framework to contradict their doings. Nevertheless, with due course of time, the significance of
this rule has been lost because of the arrival of many other similar case studies in this regard
(Adams, 2011). As a result, the viewpoint of people in relation to the observation of accounting
and taxation affairs has become distinct in nature in the current situation.
The utmost significance of this rule in the current scenario is that it plays a key role in preventing
the organizations from influencing relevant material from the financial statements. This means
that the rule assists every organization and individuals to operate their affairs in a genuine way
(Adams, 2011). For instance, a business organization can make use of legal ways to write off its
fixed assets to their respective carrying value so that the losses and debts that are exerting
pressure over it can be avoided. In such a scenario, even if such business organization does not
have proper relevant documents in regard to the same, then also it will be sufficient to just write
off the fixed assets (Nethercott et. al, 2013). However, such business organization must not try to
engage in illegal methods to manipulate their material information from the financial statements
because this rule restricts them from doing so.
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Taxation
Answer to 5
The owner of a big piece of land accommodating hue pine trees intends to graze his sheep on
such land but the prevalence of such trees obstructs him from doing so. Bill who is the owner
wants to hire a logging company for the same so that the company can obtain as much as timber
from his land and in return, he is compensated. In the first case, it can be seen that Bill intends to
receive $1000 for every meter of timber cleared by the logging company. In this case, since a
number of receipts is not provided, the same will be regarded as a revenue receipt. As a result, it
must not attract capital gains tax (Cartwright, 2013). However, in the second case, it can be seen
that Bill intends to receive $50000 as a lump sum amount for clearance of the entire trees from
his land. This receipt is purely a capital receipt because of the following reasons:
a. The receipt is incurred only after granting of a right by Bill to clear the entire trees from
the land.
b. It is not a small payment and instead, it is lump sum in nature.
c. It is a non-recurring receipt because, after clearance of trees, they will take time to grow
once again.
Therefore, this receipt will be regarded as a capital receipt and hence, will attract capital gain tax
as well. On a whole, even though in both the cases, Bill receives some amount of money, yet
their nature is altogether distinct. Besides, the criterion of a capital receipt as mentioned above is
not visible in the first case because it was not a lump sum payment and it was recurring in nature.
In contrast to this, the second case occurs only after giving a right to the logging company and it
can be treated as a sale of an asset to a company (Nethercott et. al, 2013). Whilst the first case is
taxable at normal rates, the second case is taxable under capital gains.
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References
Adams, J. (2011). What is The Difference Between Tax Avoidance and Tax Evasion?. Accessed
September 19, 2017 from https://www.taxinsider.co.uk/680-
What_is_The_Difference_Between_Tax_Avoidance_and_Tax_Evasion.html
ATO. (2017). Capital Gain tax. Accessed September 20, 2017 from
https://www.ato.gov.au/general/capital-gains-tax/
Cartwright, M. (2013). Death to the Australia Tax?. Accessed September 19, 2017 from
https://www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/Tax-
responsibilities
Nethercott, L, Richardson, G & Devos, K. (2013). Australian Taxation Study Manual. Oxford
University Press
Pratt, J.W & Kulsrud, W.N. (2013). Federal Taxation. Penguin Publishers.
Renton N.E, (2005) Income Tax and Investment. John Wiley & Sons Australia Ltd
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan,S, Krever, R, Obst, W, & Ting, A. (2014).
Principles of Taxation Law. Sydney.
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