Timber Revenue and Tax Implications

This assignment delves into the taxation of income derived from timber removal on private land. It analyzes a case study where an individual allows a logging company to harvest timber, emphasizing that such revenue is considered part of 'forest operation' and thus subject to tax assessments. The document concludes by highlighting the importance of understanding these rules for individuals engaging in similar transactions.

Taxation Theory, Practice & Law

TABLE OF CONTENTS
Question 1........................................................................................................................................1
Introduction.................................................................................................................................1
Critical analyses..........................................................................................................................1
Supporting evidence....................................................................................................................1
Conclusion...................................................................................................................................2
Question 2........................................................................................................................................2
Introduction.................................................................................................................................2
Critical analyses..........................................................................................................................2
Supportive evidence....................................................................................................................3
Conclusion...................................................................................................................................3
Question 3........................................................................................................................................4
Introduction.................................................................................................................................4
Critical analyses..........................................................................................................................4
Supporting evidence....................................................................................................................4
Conclusion...................................................................................................................................5
Question 4........................................................................................................................................5
Introduction.................................................................................................................................5
Supporting evidence....................................................................................................................5
Conclusion...................................................................................................................................6
Question 5........................................................................................................................................6
Introduction.................................................................................................................................6
Critical analyses..........................................................................................................................6
Supporting evidence....................................................................................................................6
Conclusion...................................................................................................................................7
REFERENCES................................................................................................................................8

Question 1
Introduction
Capital gain or loss is assessed on the sale of a capital asset. This amount is taxable under
law but a taxpayer can also deduct any capital loss from previous capital gain. Below is the case
of Eric who bought some antiques and other items including shares (Kholdy and Sohrabian,
2011). When he sold these assets, he faced loss on some item but other gave him significant
amount of profit.
Critical analyses
Antiques are always considered as capital assets because their value is high and they last
for more than one year. In order to determine loss or profit on sale of these item one need to
subtract capital loss from the gain which they have earned from selling capital assets.
Particulars Purchase amount Sale amount Profit/loss
Painting 9000 1000 -8000
Antique chair 3000 1000 -2000
Shares 5000 20000 15000
Antique base 2000 3000 1000
Home sound system 12000 11000 -1000
Total (Profits) 5000
By analysing above figure, it can be said that Eric faced loss on painting, antique chair
and home sound system but because of shares and antique base he earned capital gain of $5000.
Antiques are considered as the part of capital assets and other expensive items are included in
this list.
Supporting evidence
Taxation of chargeable act 1992 states that if a person gains any amount on sale of capital
assets than net profit will be taxable according to the appropriate norms. The net gain should be
reported at the time of filing return because it will get cover under CGT (Ahangar, 2011). There
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are some rules which can provide benefit to Eric, if he has any capital loss of past years or
current year then he can subtract this amount from capital gain. This Provisions of investors
guide clearly states that a person can deduct capital loss from the profit earned on sale of any
capital assets. Most of the personal assets are not taxable under CGT but unique or expensive
item are included in this list.
Conclusion
From above scenario, it is concluded that a person has to pay tax on capital gain. He can
reduce the amount of taxable income by deducting capital loss form net capital profit in order to
decrease taxable amount.
Question 2
Introduction
An employer provides lot of benefit to their employees besides their normal salary
package. These perquisites and allowances are included in their income at the time of assessing
taxable amount. Fringe benefit are perfect example of this case. Some of these advantages are
exempted from tax it certain provision, mentioned in law, are followed (Rana and Haltiwanger,
2011). Employers of Brian gave him a loan of $ 1 million at 1% per annum. He used some
amount of borrowed money for producing extra income.
Critical analyses
Brian's employer is providing him loan at 1% p.a. which is less than the benchmark rate
that is present in fringe benefit tax policy. 5.65% is statutory rate in this case since there is a
difference of 4.65%, he will be liable for tax. Following is the calculation of tax:
Steps Actions Results
1 Taxable amount on fringe
benefit i.e. loan given to the
Brian
Calcualtion of actual rate of
interset:
Interest rate according to
$1,000,000*1%=$10,000.
$1,000,000*5.65%=$56,500.
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regulations is:
Henceforth, the fringe benifits
will be:
$56500-$10000=$46,500.
2 Taxable amount on fringe
benefits in case it is given
without charging any interest.
$1,000,000*5.65%=$56,500.
3 In case Brian pay interest
according to the standard rate
then he will be eligible for
$22600 amount of deduction.
$56,500*40%=$22600
4 In this case, the amount that
can be deducted from taxable
amount is $4000
$10,000*40%=$4000
5 By subtracting step 4 from step
3, that taxable amount can be
assessed.
$22600-$4000=$18600
In case of monthly instalment, the total amount of interest will be divided by 12. Monthly
EMI will not make any impact on the amount payable as tax. In third scenario, if employer do
not charge any amount as interest than fringe benefit will be:
$1,000,000*5.65%=$56,500
$56,500*40%=$22600
$22600 is the amount of net fringe benefit.
Supportive evidence
According to FBT policy, taxable amount will be the difference between notional amount
of interest and the actual rate which is applicable on the loan money (Shortt and Warren, 2012).
Their are various benefits which are exempted in FBT policy like accidental benefits.
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Conclusion
Fringe benefits are additional advantages which are given to employees by employer. In
above case $18600 is the amount which will be chargeable for tax. There are various types of
fringe benefits like companies provide car to their employees. If employer will not charge any
amount as interest than figure of fringe benefit will be $22600.
Question 3
Introduction
Jack and Jill borrowed some money in order to purchase rental property. They signed an
agreement where 10% of the profit will be given to Jack and Jill will get 90% of the total
income. In case of loss, Jack will bear 100% of loss. Last year, they faced a loss of $10,000 and
they can think about selling this property which can result in capital gain or loss.
Critical analyses
In above case, Jack can claim deduction for the amount which he has spent on
maintenance cost. If Jill use this benefit in at the time of paying tax then his wife Jill cannot file
same expenditure for deduction. Jack can carry forward the amount of depreciation on property
and expenses on borrowing for specific number of years (Phillips, 2012). But amount like
interest on loan is generally claimed in the same financial years in order to reduce sum of
payable tax. Jack cannot claim expenses like water charges which they have not paid, other
expenditure like advertising cost, stamp duty etc. is also included in this list. GST is not
applicable on residential rental property. The loss they faced on rental income i.e. $10,000 is not
entitled for deduction (Taxation. 2017). In case they want to sell their property and earned some
capital gain then Jack has to pay capital gain tax on the profit earned from sale.
This is a case of clubbing and they made an agreement for saving tax but in this scenario,
this contract will not help from saving tax. If they face any loss at the time of selling their
property then they can deduct this amount from capital gain which they earned in present year or
it is a carry forwarded amount. They can also carry forward their present capital loss for
upcoming years and deduct it if they get any capital gain in forthcoming time.
Supporting evidence
According to the information provided on website of Australian Taxation Office, a
person will not get deduction on the amount which they have not paid like electricity bill
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(DiPasquale, 2011). In case of capital loss, Jack can deduct amount of loss from capital gain over
a period of time. In income tax act, it is clearly stated that capital gain earned by a dependent will
be clubbed in the income of the person whom he/she is dependent.
Conclusion
From the above case, it can be concluded that by making an agreement, where 90% of the
rental income will go to housewife, a person cannot save tax on capital gain.
Question 4
Introduction
Every individual wants to save the amount of payable tax because they consider it as an
extra burden on their income. Structure of income tax is very complicated for accountants to find
various ways by which they can reduce the amount of taxable income (Guenther, 2014). IRC vs.
Duke of Westminster 1936, is one of the most popular case relating to this issue. It was used by
lawyers for avoiding tax but with time its importance is going down because of various other
decisions given by court where people were found guilty for using complex structure of taxation
in order to pay less amount of tax.
Critical analyses
In IRC vs. Duke of Westminster [1936], Duke appointed a gardener and made a deal with
him where he will pay wages to gardener in a way where Duke took deduction in taxable
income. It also provided him great assistance in reducing the liability relating to income tax.
Basically, Duke find a flaw in taxation system which was very complex. IRC filed a case against
him and where they raise the issue that Duke is trying the reduce his liability regarding paying
tax. The judge gave order in favour of Royal family of Westminster, he said that if a person can
find a legal way of paying less amount of tax than IRC cannot force them to pay more tax.
Duke employed gardener but he was not actually paying him salary on weekly or
monthly basis which is significant in employment contract (Blaylock, Shevlin and Wilson,
2011). With time, avoiding tax is getting more difficult because in various judgements, court
found that taxpayers were using law to take wrong benefits. They also found that even provisions
written in acts can be inappropriate so the decision will be based on a particular case.
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Supporting evidence
Cited case in one of the most popular lawsuit in field of avoidance of tax. The judgement
of Lord Tomlin was shocking for many people because they believed that if there is flaw in law
then government cannot force a person to pay more tax. According to Ramsay principle, if
someone is taking artificial steps which do not have any commercial purpose besides saving tax
then they have to pay tax on the whole transaction.
Conclusion
At the end, it can be concluded that if someone find a legal way to avoid tax then it is not
a crime, but in present era, saving tax is getting more difficult because of various judgements that
were given in last 2-3 decades.
Question 5
Introduction
It is difficult to assess to the taxable amount from sale of timber because some people
were connected it to agriculture income while other saw it as a revenue for conduction business.
After a taxation ruling most of the confusions relating to this issue can resolved. Bill own a land
which is full of palm trees. He was going use this land for grazing his sheep which is not possible
without cleaning the area. A logging company agreed to pay $1000 for 100 meters of area.
Critical analyses
The income earned by allowing someone to sale standing timber will be assessed at the
time of filing return if the purpose of deal is to earn profit. A logging company will clean the
land so Bill can use it for grazing sheep (Poore, 2013). They will pay Bill $1000 for using 100
meter of land which will not be assessed at the time of filing return. In case logging company
pay Bill $50,000 as lump sum amount than income will be assessed for this amount because in
this scenario Bill is granting permission in order to earn profit. He is allowing company to take
as much amount of timber as they want which shows that he is conducting business with them.
This will be considered as royalty earned by Bill because he himself is not cutting trees and
selling timber. This will be go in section of capital gain so the rate, by which Bill has to pay tax,
will be low compared to treatment of ordinary income.
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Supporting evidence
According to TR 95/6 selling of timber or allowing to cut timber trees and charge money
against it, is assessed at the time of calculating income of a person. In above scenario, Bill
wanted to clean the land so he can use it for grazing sheep, a logging company was paying him
$1000 for every 100 meters. In this case his intention was not to earn money so, this cannot be
considered as forest operation (Ma and Kittredge, 2011). But if he agrees to take $50,000 and
give right to logging company for removing desired amount of timber then it will be considered
as forest operation and this income will be assessed at the time of calculating tax.
Conclusion
From cited case, it can be concluded that if a person make deal and allow a company for
removing timber from a land then this income will be assessed according to rule because it will
be termed as forest operation.
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REFERENCES
Books and Journals
Ahangar, R.G., 2011. The relationship between intellectual capital and financial performance:
An empirical investigation in an Iranian company. African journal of business
management. 5(1). p.88.
Blaylock, B., Shevlin, T. and Wilson, R.J., 2011. Tax avoidance, large positive temporary book-
tax differences, and earnings persistence. The Accounting Review. 87(1). pp.91-120.
DiPasquale, D., 2011. Rental housing: Current market conditions and the role of federal policy.
Cityscape. pp.57-70.
Guenther, D.A., 2014. Measuring corporate tax avoidance: Effective tax rates and book-tax
differences. Browser Download This Paper.
Kholdy, S. and Sohrabian, A., 2011. Capital gain expectations and efficiency in the real estate
markets. Journal of Business & Economics Research (JBER). 6(4).
Ma, Z. and Kittredge, D.B., 2011. How family forest owners consider timber harvesting, land
sale, and conservation easement decisions: Insights from Massachusetts, USA.
International Journal of Forestry Research. 2011.
Phillips, Y., 2012. Landlords versus tenants: Information asymmetry and mismatched
preferences for home energy efficiency. Energy Policy. 45. pp.112-121.
Poore, D., 2013. No timber without trees: sustainability in the tropical forest. Routledge.
Rana, N.A. and Haltiwanger, R.S., 2011. Fringe benefits: functional and structural impacts of O-
glycosylation on the extracellular domain of Notch receptors. Current opinion in
structural biology. 21(5). pp.583-589.
Shortt, H. and Warren, S., 2012. Fringe benefits: Valuing the visual in narratives of hairdressers’
identities at work. Visual Studies. 27(1). pp.18-34.
Online
Taxation. 2017, [Online]. Available Through:
<https://www.charteredaccountantsanz.com/become-a-member/course-descriptions/
chartered-accountant/taxation>. [Accessed On 18th September 2017].
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