Taxation Law: Tax on Lottery, Calculation of Taxable Income, Tax Avoidance Case, and Accounting for Capital Gain, Loss and Normal Business Losses in Australia

This article discusses tax on lottery, calculation of taxable income, tax avoidance case, and accounting for capital gain, loss and normal business losses in Australia. It explains the regulations on tax declaration of income from lottery, the accrual basis for tax calculation, and the principle of tax avoidance. It also highlights the impact of tax avoidance on the Australian Tax Office and the measures taken to curb it.

TAXATION LAW
TAX ON LOTTERY, CALCULATION OF TAXABLE INCOME,TAX AVOIDANCE CASE
AND ACCOUNTING FOR CAPITAL GAIN,LOSS AND NORMAL BUSINESS LOSSES IN
AUSTRALIA.
Course:
Professor’s Name
Institution
City
Date

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Question 1;
Australian Tax Office classifies income or rather awards or prizes from gaming
draws, lottery and raffle ticket win as part of other incomes for tax purpose. This is due to the
nature in which these incomes are earned i.e. mainly based on once time event. The regulation
likewise claims for tax declaration of this income except where the income is exempted from tax
if any. However inclusion of this incomes as part of income tax return for that year ideally
depends with our often is that draw conducted and who are the sponsors of the draws.For
instance,Australia Tax Office has outlined that all prize awards or gift of any form whether as
cash or as good that is earned as a result of an activity conducted by any investment company,
building societies, banks, financial institution like credit union and business tycoons has to be
declared as part of income for tax purpose in that year of tax.
The latter award won on this bodies that are in investment is considered income
simply because there is a guarantee payment of the award and likewise the outlets awarding are
venture in business though the main sole purpose is surety of being awarded in case of a draw. It
should likewise be known that the awards to be declared are not only those which are in cash
form, not really even those discounts allowance given on goods and cash, interest free loan
awards, low interest loan issuance, goods like cars, houses and free holidays trips, tickets offered
and any other form of prize should be declared. These prizes that are in tangible goods form its
declaration is expected to be done in value form i.e. as per the cost of the item i.e. purchase
consideration of that asset.
Likewise let it be known that incase where show games are conducted and the
contestants in the arena are the same regularly clients who regularly recognized and thus receive

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appearance or game showing winning as a result of the regularly appearance i.e. on loyal
customer perspective, these appearance fees award and game showing prizes has to be declare
for tax purpose as a return simply because the regularly appearance dictates the speculation for
award.
Although all the above prizes and awards won are worth declaration of that tax as part
of income, there exist very special considerations given to ordinary lotteries. Australian Tax
Office (Blakelock and King,2017.Pg.52) has exempted all prizes, gifts and awards that are won
as a result of ordinary lotteries conducted with examples being lotto lotteries and raffle ticket.
These awards on ordinary lotteries are exempted from tax since the participants are never aware
of outcome in any case they play in draw whose outcome is unknown since it is based on
probabilities or chances.
It is from this exemption of ordinary lottery prizes that we factor in this case of Set
For Life. In a nutshell the party that is involved in conduction of this Set For Life lottery draw is
Lottery Commission which in actual sense is deemed as an ordinary lottery firm hence by virtual
of this ordinarily aspect automatically any awards or prizes earned from any draw conducted by
this ordinary lottery commission of ‘’Set For Life icon’’ has to be exempted from tax declaration
without fail. It is therefore very certain that the $50000 prize that will be payable for the next
20years to the person winning the Set For Life lottery draw will enjoy tax exemption whether as
the person himself/herself or as estate as depicted in the current regulation on this.
The $50000 prize winning as mentioned in the question in query is therefore not
subjected for tax purpose since it is classified as tax exempt in the Australian Tax Office
regulation. However if this amount of $50000 from the Set For Life lottery draw that is ordinary
is used to acquire an asset whether cumulative or as an installment, in case of disposal of that

TAXATION LAW
asset that resulted from the lottery win any gain or loss on disposal has to be declared as capital
gain or loss on the grounds that awardee was now certain that he or she would earn or gain from
that disposal.
Conclusively I wish to state that there is tax exempt on ordinary lottery awards thus
excusing the person who wins the Set For Life voucher of $50000 from being taxed no
declaration of this income as part of taxable in his or her income with reasons well known on the
ground of an ordinary lottery (Philander, 2013.Pg.2.)
Question 2;
Australian Tax Office declares that by use of accrual method all gain or losses are
expected to be allocated on the ground from which a financial arrangement was built between
entities (Tretola, 2013.Pg.4.) It is therefore clear that the allocation of gain or loss is only
applicable upon approval that the financial arrangement results to a benefit whether it is current
or future. It is likewise applicable if the entities who are involved in the financial arrangement
have a proof that in the next rest part of the business life there will be future financial benefit
resulting from it.
It is from this financial arrangement of accrual basis that we see revenue or income or
gain are recognized and earned as soon as a sale transaction is passed in the books of accounts as
an invoice hence not waiting when payment is received. Similarly to expenses whereby they are
only recognized as soon as they are incurred and not when they are paid off. Accrual basis is
mainly applicable to transaction whose sales are done on credit basis hence the need to have an
agreement that as soon as that sale as recognized in an invoice as credit sale automatically is
deemed as part of sales similarly to any expense.

TAXATION LAW
It is therefore from this accrual basis that the aspect of tax issue arises. Many will
argues that it is an unfair for a company to declare and pay tax for sales that are indeed pending
payments hence some wish to do so as soon as payment is done. Some are likewise seen to argue
that only those sales done on cash basis are the one that ought to be paid tax for , an argument
that accrual basis method came to resolve hence the tax office require payment of these tax as
soon as invoicing done since that is when is recognized (Woellner, Barkoczy, Murphy, Evans
and Pinto,2010.Pg.32.)
Going with the above definition and analysis of accrual basis for tax purpose thus
exist the need to calculate Corner Pharmacy taxable income for that year based on this method. It
is deemed on accrual basis since a big part of it is on financial arrangement between the bank and
the Pharmaceutical Benefit Scheme Body.
Analysis of items to be considered in calculation of Corners Pharmacy Taxable Income
(Freedman and Crawford, 2010.Pg.85);
$
Note 1.Cost Of Sales = Opening Stock=150000
Add
= Purchases =500000
Less
= Closing Stock =(200000)
Cost of Goods Sold =450000, ideally this is the cost incurred on the items that
were sold it is the cost of sales that indeed has to be factored in a business income calculation so
as to get the gross profit margin. It is mostly deducted from the total sales for it to get the gross

TAXATION LAW
margin. Cost of sales is likewise deemed as allowable items for tax purpose since these costs are
directly incurred to generate the Corner Pharmacy revenue.
Note 2. The sales for Corner Pharmacy are cash sales, credit card sales and PBS billing icon
sales on credit card sales we are only to consider the credit card sales of $150000 and not the
reimbursed amount simply because this is what is recognized as sales the $10000 extra
reimbursement would be of course as a result of wrong entry conducted.
Note.3.The salary and rent are fixed expense which of course are allowed for tax purpose and
indeed are used to reduce the amount of the taxable income on basis of matching concept since
they match the revenue they generate hence need to allow them.
Note.4.The items under PBS i.e. opening balance ,billing, receipts and closing balance just
shows analysis of Corner Pharmacy stock that are under PBS hence it is only the billing part that
is to be factored in as part of sales thus=25000(opening balance)+200000(billing)-30000(closing
stock)=195000(receipts received or paid amount)
NB; for purposes of reporting it is assumed that Corner Pharmacy Year End of tax occurs on
30Th June 2017.
Corner Pharmacy Ltd
Taxable Income Statement
For The Tax Year End 30Th June 2017
Revenue Sales; $
Sales from Credit Card (note2) 150000
Sales on Cash (note2) 300000
Sales on PBS (note4) billing option 200000
Total Sales Revenue 650000

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Less
Cost Of Sales (Note1) (450000)
Gross Profit 200000
Less
Other Allowable Deductions;
Rent (Note3) (50000)
Salary (Note3) (60000) (110000)
Corners Pharmacy Taxable Income 90000
Corners Pharmacy Income is therefore $90000 dollars that has to be declared as income for tax
purpose. i.e. together with other income if owned by an individual and if it is a company by itself
the amount has to be declared by the company as taxable income for tax purposes as calculated
as per Australian Tax Office regulation on taxable income declaration.
Question 3;
In this context we are expected to outline the principle that resulted from the case law
of Inland Revenue Commission v Duke Westminster and like relate this principle with its current
application in Australia. This is possible but it is prudent to summarily discuss what entails this
case (Mumford, 2017. Pg.36.)
Duke Westminster had a gardener whom he used to pay him substantial amount of
salary from his post tax income that he used to earn. Upon realizing that he has an alternative
way of minimizing or rather reducing this tax burden, Duke decided to stop paying his gardener
the salary and instead opted to get into an agreeable covenant that stated that he would pay the
gardener a similar and very equivalent amount at the end of every specified period within that
year of tax (Cachia, 2017.Pg.45.)

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According to Inland Revenue Tax Office regulation at this time of Duke Case, the law
allowed Duke to claim this equivalent amount he was to pay the gardener as an allowable
expense for tax purpose hence reducing the tax liability burden and surtax in totality
(Likhovski,2006.Pg.45.) This indeed did not sound legally friendly to Inland Revenue
Commission for tax purpose hence opted to file a suit against Duke Westminster with the case
citing that Duke was evading paying tax by claiming allowable that were not within the
regulation of the tax man (Hayward, 2014.Pg.52.)
Upon hearing the case, judge Lord Tomlin ruled in favor of Duke claiming that this
arrangement had no traces of tax evasion hence ruled further by saying that every tax payer is
allowed by the law to conduct his or her own local arrangements under his works so as to free
himself from any tax attached to his venture if he legally succeeds in that arrange no body in
whatsoever means is allowed to compel him to pay the tax whether it is appreciative or not to the
Inland Commissioner or not his arrangement is legally accepted in the law (Christians,
2014.Pg.39.)
This case therefore resulted to a principle of tax avoidance which is defined as an
arrangement of financial affairs that is legal in nature that sees into it that tax burden is
minimized as per the set regulation (Ostwal and Vijayaraghavan, 2010.Pg.35.) In Australia tax
avoidance has not been fair to the tax man at all over the recent years; this is so due to
conversion of this policy to tax fraud and at some point tax evasion. Tax payers have taken
advantage of tax avoidance to a point whereby they are seen engaging themselves in tax fraud
activities hoping that they will get relieve in court on aspect of tax avoidance.

TAXATION LAW
Over the years Australian courts have seen litigation suits that involved tax payers
who have evaded tax as others fraudulently engage themselves in actions that are seen to shift tax
burden to unlawful tax bracket. This ideally has minimized revenue being collected by the tax
man in Australia hence causing deficit in countries revenue. It is through these activities of fraud
and evasion that has indeed affected Australia to a point that they were forced to introduce
agencies that would help them curb tax evasion and fraud (Dyreng, Hanlon and Maydew,
2008.Pg.80.)
Over the years tax avoidance has never been fair for Australian Tax Office since these
agencies were given full support to secure the tax man i.e. Australia Tax Office its initial position
on tax collection. Tax avoidance has affected Australia task office till 2016 when these agencies
were formed (Martins, 2018.Pg.75.) The first agency to be formed was Tax Avoidance Task
whose core purpose was to scrutinize tax related issues of multinational firms, wealthy investors,
large groups i.e. both private and public to a point where these entities a paying the right tax and
within the right period.
Tax avoidance task force had to ensure that there exist tax compliance by these
entities hence a great improvement in the integrity of Australian Tax System. This tax avoidance
agency indeed brought this into books to a point that the citizens came to appreciate the essence
of indeed complying with tax department requirement hence on revenue bases the government
was able to redeem back their tax collection capacity (Desai and Dharmapala, 2009.540.)
This achievement by Tax Avoidance Task agency that saw into it the bouncing back
of tax compliance as well as tax collection was as a result of multinational anti-avoidance
legislation and legislation on diversions of profits. It is therefore clear that the principle of tax
avoidance that resulted from IRC V Duke Westminster negatively affected Australian Tax Office

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on tax collection due to tax fraud and evasion swap advantage to a point of introduction of
agencies to curb the monster (Sikka, 2012.Pg.25.)
Question 4;
Australian Tax Office is very keen on losses that are deemed business related since
most tax payers are seen to fraud the tax man and use loss that are not related to net off other
incomes they earn (Slemrod, 2009.Pg.390.) ATO on losses is likewise very categorical that only
those business loss incurred on business related aspect is deemed ready to be carried forward. In
the context rental loss the law requires rental owners to proof that the loss is indeed i.e. genuine
by clearly indicating that indeed it deed all that was required to control the loss.
It is likewise clear that for a rental loss to be netted off one income it must proof that
there is proper connection to the operation of that firm. For instance in this case of rental loss
Joseph has to proof that he entirely controls and manage the operations of the rental such that the
loss incurred was not out of malice for operation (Isa, 2014.Pg.60.) In this case if Joseph indeed
has incurred the loss out of his efforts of ensuring the rental business property operates in a
manner that was to earn him income, since the agreement to have all the 100% portion of the loss
be incurred by Joseph he is indeed allowed by the law to net off his accountant professional
income less the loss on rental. However if he has not been taking care of the rental property thus
the cause of the loss he is barred by the regulation to claim this loss as allowable deduction.
In case of disposal of this rental property of Joseph and Jane ideally it is expected that
a capital gain or loss occurs hence the agreement ratio policy stands whereby if it is again on
disposal a capital gain has to be disclosed by Joseph at 20% the amount as addition in his
accountancy income while the 80% has to be declare by Jane as her rental income (Piketty,
2015.Pg.50.) However the agreement seems to do some tax avoidance relieve simply because

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when it comes to gain sharing and the fact that Joseph has an extra income his portion of income
is less while Jane is more similarly to what happens in cases of loss (Mellon, 2016.Pg.56)if it is a
business loss Joseph is allowed the 100% portion so as to minimize the taxable income from his
accountancy professional amount and incase of capital loss the 100% portion is seen to minimize
his capital gain (Burman, 2010.Pg.4) but of course on future basis.
.

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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
Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed.
Brookings Institution Press.
Cachia, F., 2017. Aggressive Tax Planning: An Analysis from an EU Perspective. EC Tax
Review, 26(5), pp.257-273
Christians, A., 2014. Avoidance, evasion, and taxpayer morality. Wash. UJL & Pol'y, 44, p.39.
Desai, M.A. and Dharmapala, D., 2009. Corporate tax avoidance and firm value. The review of
Economics and Statistics, 91(3), pp.537-546.
Dyreng, S.D., Hanlon, M. and Maydew, E.L., 2008. Long-run corporate tax avoidance. the
accounting review, 83(1), pp.61-82.
Freedman, J. and Crawford, C., 2010. Small business taxation.
Hayward, R. ed., 2014. Valuation: principles into practice. Taylor & Francis.
Isa, K., 2014. Tax complexities in the Malaysian corporate tax system: minimise to
maximize. International Journal of Law and Management, 56(1), pp.50-65.
Likhovski, A., 2006. Tax law and public opinion: Explaining IRC v. Duke of Westminster

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Martins, P., 2018. TD 2017/20. Taxation in Australia, 52(10), p.562.
Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.
Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge
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India Review, 22(2), pp.59-103.
Philander, K.S., 2013. A normative analysis of gambling tax policy. UNLV Gaming Research &
Review Journal, 17(2), p.2.
Piketty, T., 2015. About capital in the twenty-first century.American Economic Review, 105(5),
pp.48-53.
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.
Tretola, J., 2013. Turning gambling silver into tax gold?.Revenue Law Journal, 23(1), p.5.
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law. CCH Australia.