Taxation Law: Understanding Ordinary Income and Tax Avoidance

This article discusses the concept of ordinary income and tax avoidance in taxation law. It covers topics such as the definition of ordinary income, tax avoidance through deeds of covenant, the Duke of Westminster case, and the sharing of income and loss from rental property. The article provides answers to questions related to these topics and is suitable for students studying taxation law.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................4
Answer to question 3:.................................................................................................................5
Answer to question 4:.................................................................................................................7
References:...............................................................................................................................11

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Answer to question 1:
Issues:
According to “s 6-5, of the ITA Act 1997”, is the yearly payment considered as the ordinary
income?
Rule:
The ordinary income and statutory income is considered under the taxable income,
although, the ordinary income is not falling under the explanation of taxation acts. The
ordinary income is defined as the earnings from the case law and is contingent on the rules
those are formed through the decisions (Mattozzi and Snowberg 2018). The taxation incomes
are responsible for managing the value of ordinary income and these values are determined
through the case laws those are made for ascertaining the principles of case law. According to
the “s 6-5 ITAA” the sum of income will be considered as taxable. Under the section of “s 6-
5, ITAA 1997”, the ordinary income is considered as taxable income (Ramsey 2015). The
ordinary income calculated for an individual is calculated according to the receipts received
for their services. So if the income is considered as to be ordinary income for the taxpayer
then this amount will be taxable, so we have to measure first if the income is falling under
ordinary income or not.
In accordance with “Scott v CT (NSW) (1935)”, the taxation commissioner stated that
income is not indicates a term of art this is comprehensive for its valuation (Ihori 2017). This
requires the submission of proper principles those are fit for the ordinary concepts and its
usages. The high court in “Scott v FC of T” highlighted that ordinary income are reliant on
the quality of the receipts.

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Severe amounts are considered as the ordinary income, specifically the salary and
wages as these incomes shows the characteristics for reappearance, uniformity and
periodicity. However, these incomes should be considered as general flow of income (Saez
and Stantcheva 2018). The functionality of the receipts must be determined by depending
upon several important factors with the quality in the recipient’s hands. In fact the payment
received in regular period of time does not fall under the category of ordinary income. The
receipt is not considered as the ordinary income until that is a real gain or cash for the
taxpayer. Both the fundamentals should be considered as the ordinary income if the payments
are held to be regular and contains the procedure of regular flow for the taxpayer.
In comparison with the lump sum payments, the periodically paid payments are
considered as the ordinary income for the taxpayer. The federal court in “Blake v FCT
(1984)” written off as regular reception of payment is considered as an income (Kennedy
2018). Similarly, in “Dixon v FCT (1952)”, stated that these payments should be in yearly
basis and character of income stream will be known as income.
Application:
The lottery commissioner arranges the instant lottery where commission delivers the
payment of $50,000 each every year for 20 years’ time. The first amount is paid to the winner
along with the winning notification and later the rest of the amount is paid in instalments
every year in a regular basis. Mentioning the verdict in “Scott v C of T (NSW) (1935)” this is
necessary to evaluate the characteristics of the annual payment to the recipient. Citing the
event of “Scott v FCT” the yearly payment of $50,000 is considered as ordinary income as
this has the characteristics of reappearance, uniformity and periodicity (Saez 2016). The
amount is paid every year of to the winner, where the condition is applied that the
outstanding amount will be paid to the nominee if the winner dies during this period of time.

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The yearly payment of $50,000 can be segregated as income as the payment is a real
benefit for the taxpayer. Knocking the event of “Blake v FCT (1984)” the yearly payment of
$50,000 fulfils both the conditions of the income to be ordinary as this meets the
characteristics of reappearance, uniformity and periodicity along with this income is coming
in a regular flow in every year (Gonzalez and Wen 2015). Hereafter, citing the occasion of
“Dixon v FCT (1952)”, the yearly payment of $50,000 is paid in regular instalments.
Therefore, this income will be considered as an ordinary income for the taxpayer.
Conclusion:
This can be concluded that the above examination of the annual payment for the
lottery will be considered as an ordinary income and this will be evaluated under the section
of “s 6-5, ITAA 1997”. So as this income is paid in regular intervals to the receiver the
receiver this bound to considered this an ordinary income.

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Answer to question 2:
Answer to question 3:
IRC v Duke of Westminster (1935)
Instances from the case of “IRC v Duke of Westminster (1935)” suggest that the duke
had executed the deed of solemn promise or in other words the deed of covalent with the
servants that included the domestic helpers and the gardeners (Fleurbaey and Maniquet
2015). The duke in the deed of covalent specified that the promise of paying the servants
some amount of money for their services. The duke sent the written letters to his gardener
and servants that stated that the duke would be paying the servants with the remuneration and

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on top of this an additional amount to the servants that are domestic helpers. The Duke tried
to claim the expenses for income tax purpose in the form of arrangement for tax avoidance.
A covenant is regarded as religious word that is regularly regarded as the promise of
indulging in the specified action of a sacred agreement amid the god and man. The deed of
covenants is regarded as the lawful document recording the responsibility of one personnel to
pay the amount to another person on the basis of no less than six years (Rothschild and
Scheuer 2014). An individual that makes the payment can apply for the income tax
deductions based on the basic rate and hence pay the net sum of tax relief. In the current case
the problem lies in whether the deed of covenant could be treated as the employment
contract.
As the matter of fact, the Duke was neither paying the gardeners any salary nor the
servants were paid any weekly wages based on their employment contract. Therefore, it can
be stated that there was no consideration towards the contract that forms the key factor in the
creation of the lawfully binding contract (Nekoei, Shourideh and Golosov 2016). In the
situation of Deed of covenant, the payment is only regarded as deductible for taxation
purpose given the payment was the annual payment to the servants and the gardeners. The
duke will only be allowed to claim deductions for the annual payment or the sum that is paid
to the servants for the services that is rendered during the particular year.
The case of the Duke suggest that the avoidance of tax can be considered allowable as
long as the process is within the established statute law (Wanless 2018). In the current case
the principle that is established in this case is the format of the deed of covalent that can
lower the liability of tax if it is approved and the taxpayer can claim only deductions for a
year of the annual payment.

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The principle obtained from the case of Duke of Westminster stated that tax
avoidance is no longer sacred. The court of law have largely implemented the purposive
interpretation of defeating the tax avoidance scheme of the artificial nature (McCluskey and
Franzsen 2017). The principles of tax avoidance to lower the tax liability by legal means has
traditionally been distinguished from the tax avoidance. The principle established in the case
of Duke stated that every taxpayer are allowed to command their affairs of taxation under the
corrective acts may be less than would have been otherwise. The tax evasion is and would
always remain the illegal practice of avoiding tax. The government and minister has publicly
criticized that the entertainers and multinational corporations that have completely inside the
law as the measure of minimizing the tax liabilities.
In recent times, Australia is working towards the tax avoidance by using the law to
obtain the tax advantage which has never been done by the parliament. The principle that is
stated in the case that an individual taxpayer is entitled inside the law to organize their affairs
as the measure of reducing their tax liability is not anymore accepted in Australian without a
question (Weinzierl 2014). The Australian federal court have challenged most of the cases
and has also won the tax avoidance cases where judgement has been given. The Australian
taxation commissioner believes that the marketed schemes of reducing the tax liability would
fail if a challenge is presented in the court. The parliament has reacted to the tax avoidance
situation by closing the perceived loopholes and have further attempted to give warning to the
tax advisors regarding their latest thinking of the tax avoidance.
Answer to question 4:
Issue:
Whether the income and loss obtained from the rental property should be shared in
accordance with the legal interest?

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Laws:
As per the “Partnership Act 1891” the definition of partnership is provided in
numerous state and territories as the relation that subsists among the partners that carry on the
business with the common objective of obtaining profit. Paragraph 3 to 5 of the “Taxation
ruling of TR 93/32” is relevant in ascertaining whether the letting of the property results in
carrying on of the business (Chambers and Moreno-Ternero 2017). The joint tenancy or
tenancy in common does not itself creates any kind of partnership as to anything that is held
or owned or does not share any profits that is made from thereof.
The sharing of the gross earnings cannot create a partnership whether the individuals
that are sharing the profits have or do not have joint tenancy or interest in the property from
which the profit is derived (Wanless 2018). Under the general law the co-owners of the rental
property are not treated as the partners under the general law based on the result that they are
not subjected to any relevant partnership laws along with the dividing of the profits and loss
that originates from the property. However, this does not signifies that the co-owners of the
rental property cannot perform the business of property renting and therefore be partners
under the terms of general law.
For the purpose of income tax law the meaning of partnership is much wider than that
stated in the general law. Denoting the explanation made in “subsection 6 (1), ITA Act
1936” partnership generally refers to the association of the persons that carries on the
business as the partners or receives the returns jointly (Stiglitz 2018).
Under the extended definition of the partnership it is not essential that the individuals
that carry on the business based on their associations to be considered as the partners for the
purpose of income tax. They are only required to be receiving the income jointly (Sterner
2017). For that reason, the co-owners of the rental property falls within the definition of the

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partnership for the purpose of income tax not because they are considered as the partners
under the general law but because they receive the profits or returns jointly.
The explanation made in “Taxation Ruling TR 93/32” the co-owners of the rented
property will be the holder of the property as the joint tenants (Revesz 2018). The partnership
agreement whether it is in writing or oral does not has any binding on the sharing of the loss
or profit derived from the property. The rental property owners should be similar in the nature
and should equally share the profits and loss.
In “FCT v McDonald” the husband and wife acquired the two rental properties as the
joint tenants. There was an agreement between them that returns from the property should be
split 75% to the wife and 25% to the husband and the husband will be responsible for all the
amount of loss (Gilley 2017). The court of law held that there was no partnership on the basis
of general law. The loss that was reported by the respondents must be shared equally. The
each of the respondents were accountable for only half of the loss. Their private arrangement
of sharing the profits and loss will be ineffective and cannot modify their respective
entitlement for the purpose of income tax.
Application:
The issue in question of Joseph and his spouse Jane is related to the division of the net
income and loss from the rental property. The husband and wife on loan purchased the rental
property under joint tenancy. Their partnership agreement of distributing returns from the
property should be split 80% to the Jane and 20% to the husband and the Joseph will be
responsible for all the amount of loss. Denoting the explanation made in “subsection 6 (1),
ITA Act 1936” their partnership does not amounted to partners under the general law rather
they would be treated as the partners in terms of the income tax purpose (Sattinger 2017). For

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that reason, Joseph and Jane being the co-owners of the rental property falls within the
definition of the partnership for the purpose of income tax not because they are considered as
the partners under the general law but because they decided to share the profits or returns
jointly.
Citing the explanation made in “Taxation Ruling TR 93/32” the co-ownership of
Joseph and Jane of the rented property will be the holder of the property as the joint tenants.
Their partnership agreement whether it is in writing or oral does not has any requisite on the
allocation of the loss or income resulting from the rental property.
Alluding to the conclusion that was made in “FCT v McDonald” there was no
partnership between Josepha and his spouse on the basis of general law (Weinzierl 2018).
The loss of $40,000 that was occurred during the previous income year from the rental
property by Joseph and his spouse must be shared equally. Joseph and Jane’s private
arrangement of sharing the profits and loss will be in vain and cannot alter their individual
right for the purpose of income tax. Their partnership reflected Joseph’s spouse contribution
in managing all the properties and provide her with the larger financial independence.
If there is the alternative event that the decision of sale of property is made by Joseph
and Jane they must account for the capital gains or the capital loss based on their legal
interest in the property. Based on the common grounds that Joseph and his spouse are
beneficially entitled to the premises as the joint tenants. Being the joint tenants, they are
entitled to equal amount of shares of rents and profits.
Conclusion:
Ultimately the analysis draws up the conclusion that Joseph and Jane are the co-
owners instead of classifying them as the partners. Their income is obtained from the joint
ownership of the property and not from the distribution of the partnership profits and loss.

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They must share the profits and loss in proportion to the legal equitable interest in the
property.

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References:
Chambers, C.P. and Moreno-Ternero, J.D., 2017. Taxation and poverty. Social Choice and
Welfare, 48(1), pp.153-175.
Fleurbaey, M. and Maniquet, F., 2015. Optimal taxation theory and principles of
fairness (No. 2015005). Université catholique de Louvain, Center for Operations Research
and Econometrics (CORE).
Gilley, B., 2017. Taxation and authoritarian resilience. Journal of Contemporary
China, 26(105), pp.452-464.
Gonzalez, F.M. and Wen, J.F., 2015. A theory of top income taxation and social
insurance. The Economic Journal, 125(587), pp.1474-1500.
Ihori, T., 2017. The Theory of Taxation. In Principles of Public Finance (pp. 205-227).
Springer, Singapore.
Kennedy, W., 2018. English Taxation, 1640-1799: An Essay on Policy and Opinion.
Routledge.
Mattozzi, A. and Snowberg, E., 2018. The right type of legislator: A theory of taxation and
representation. Journal of Public Economics, 159, pp.54-65.
McCluskey, W.J. and Franzsen, R.C., 2017. Land value taxation: An applied analysis.
Routledge.
Nekoei, A., Shourideh, A. and Golosov, M., 2016. Taxation, Sorting and Redistribution:
Theory and Evidence. In 2016 Meeting Papers (No. 1500). Society for Economic Dynamics.
Ramsey, F.P., 2015. A contribution to the theory of taxation. Economic journal, 125(583),
pp.254-268.

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Revesz, J.T., 2018. Some contributions to the theory of optimal indirect taxation.
Rothschild, C. and Scheuer, F., 2014. A theory of income taxation under multidimensional
skill heterogeneity (No. w19822). National Bureau of Economic Research.
Saez, E. and Stantcheva, S., 2018. A simpler theory of optimal capital taxation. Journal of
Public Economics, 162, pp.120-142.
Saez, E., 2016. Online Appendix for “A Simpler Theory of Capital Taxation”.
Sattinger, M., 2017. Double limit analysis of optimal personal income taxation. Oxford
Economic Papers, 70(1), pp.93-113.
Sterner, T., 2017. Environmental taxation in practice. Routledge.
Stiglitz, J.E., 2018. Pareto efficient taxation and expenditures: Pre-and re-
distribution. Journal of Public Economics.
Wanless, P.T., 2018. Taxation in Centrally Planned Economies. Routledge.
Wanless, P.T., 2018. Taxation in Centrally Planned Economies. Routledge.
Weinzierl, M., 2014. The promise of positive optimal taxation: normative diversity and a role
for equal sacrifice. Journal of Public Economics, 118, pp.128-142.
Weinzierl, M., 2018. Revisiting the Classical View of Benefit‐based Taxation. The Economic
Journal, 128(612), pp.F37-F64.

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