Taxation Law: Lottery Winnings, Pharmaceutical Benefit Schemes, and Tax Avoidance

Running Head: TAXATION LAW
TAXATION LAW

TAXATION LAW 2
Table of Contents
Table of Contents.............................................................................................................................2
Introduction......................................................................................................................................3
Question 1: Explain with reason if annual payment of commission is income...............................3
Question 2: Calculate the taxable income of Corner Pharmacy and explain the Pharmaceuticals
benefit schemes................................................................................................................................5
Question 3: Explaining the Principle applied in IRC v Duke of Westminster [1936] AC 1...........7
Question 4: Explain how the loss incurred by Joseph is allocated for the purpose of the tax.
Evaluate its capital gain or loss.......................................................................................................9
References......................................................................................................................................11

TAXATION LAW 3
Introduction
Taxation is the process of collecting contribution from the individual by the government. It is a
kind of charges imposed on service rendered or charging fine on breaches. The characteristics of
a tax are not linked directly with tax payment or provision of service. The case study is
emphasising the law of taxation in Australia based on the distinct scenario and determining the
rules that are applied in the significant case. In the first case, a taxation law of Income-tax
Assessment ACT of 1978 is applied to the treatment of lottery winning is determined. The
Pharmaceuticals Benefits Scheme is recognised for understanding the concept of taxable income
under the National Health Act 1953. This law is applied to income and expenditure by the
Australian Pharmacy. The issue of tax avoidance was raised in the case of IRC vs Duke of
Westminster which determined, whether the applicable principle is relevant or not.
Question 1: Explain with reason if annual payment of commission is income
Issue
A lottery commission conducted a lottery naming ‘Set for Life' and offered to pay $ 50000 each
year for consecutive 20 years to the winner who scratches three lotteries of ‘Set for Life'. The
first payment of $ 50000 is allowable when the winner is declared. A second payment is
allowable on the anniversary of initial payment. The issue arises in the instance when the
payment of the lottery would be made to the deceased estate after the death of winner. The issue
requires to be resolved if the annual payment to be paid to deceased estates accounts as income
or not.
Rule
Each of the lottery winners is taxable for such income by the Federal government. In a case when
the winner dies the tax is to be paid by the beneficiaries. As per the Rules of 2014 Registration
24 each of the lottery winnings is not taxable as sources like ordinary income1. The HM customs
does not consider the lottery prize as income and thus the amount is tax-free. According to the
Income Tax Assessment Act 1936, the beneficiary after the death of the winner receives a lump
1 classic.austlii.edu.au (2018), Legislation of commission on lottery. Available at: Retrieved on 22nd September
2018 from http://classic.austlii.edu.au/au/legis/wa/consol_reg/lcflr2014408/s24.html [Accessed on: 22nd September
2018]

TAXATION LAW 4
sum amount from a lottery winning. When the amount of lottery winning is banked then the
amount could be made taxable from source2. The beneficiary would be liable to pay tax on such
income at 40% as inheritance tax. A simple drafted agreement with a sign of beneficiaries would
save the lottery syndicates from the risk of non- payment of tax on lottery winning amount.
Analysis- the issue of lottery commission determines, whether to treat the lottery winnings as
income or not. As per the Australia Income-tax Rules, it is mentioned that cash received by a
beneficiary is a part of the estate3. The federal estate tax includes the received amount of lottery
winning amount after the death of the winner to be valued on a fair market rate. The HM
Revenue & Customs (HMRC) would tax the lottery winning amount in the scale of Inheritance
Tax (IHT). The scale of taxation is as follows
Reduction of tax by 20 % is the winner dies after gifting the amount in 3 to 4 years
Reduction of the tax rate by 40 % for year exceeding the death of 4 to 5 years after gifting
The whole matter of taxation on the winning amount depends on the assurance if the beneficiary
signed for paying the due tax as per agreement if the winner dies in 7 years4.
Conclusion- The above analysis on the treatment of lottery winning is concluded as annual
payment income of the beneficiaries if it is banked and liable for payment of tax on such amount
as Inheritance tax of 40%. It is concluded after the analysis that the beneficiaries would have to
sign an agreement before the winner dies for paying off the remaining tax after the death of
winner. The taxable rate on the lottery winning amount reduces as per the death tenure sectioned
under the rules of HM Revenue & Customs. The reduction on taxation rate is 20 % before 3 to 4
years and 40 % reduction if the deaths occur before 4 to 5 years of winning.
2 Kleven, H.J. and Schultz, E.A., 2014. Estimating taxable income responses using Danish tax reforms. American
Economic Journal: Economic Policy, 6(4), pp.271-301.
3theguardian.com (2018), Do you pay tax on lottery win. Available at:
https://www.theguardian.com/money/2012/sep/10/do-you-pay-tax-lottery-win [Accessed on: 22nd September 2018]
4 Koessler, A.K., Torgler, B., Feld, L.P. and Frey, B.S., 2016. Commitment to pay taxes: a field experiment on the
importance of promise.