Taxation Theory Assignment - Finance, University of XYZ

This document provides a comprehensive analysis of taxation theory through the lens of several case studies and scenarios. The assignment begins by examining the tax implications of capital gains and losses on various assets, including collectables, personal use assets, and shares in a listed company, detailing the relevant sections of the ITAA 1997. It then delves into the complexities of loan fringe benefit tax, explaining how subsidized interest rates impact taxable values, and the potential deductibility of interest expenses. The assignment further explores the tax treatment of losses in a partnership agreement and the legal distinctions between tax evasion and tax avoidance. Finally, it classifies different types of income—ordinary, statutory, windfall, and capital gains—with examples to illustrate how they are treated for tax purposes. The document concludes with a discussion of how income from timber sales can be classified and taxed depending on the chosen method.

TAXATION THEORY
ANSWER – 1
Name of Item Purchase Cost Selling Price Capital Gain Capital Loss
Antique Vase $2,000 $3,000 $1,000
Antique Chair $3,000 $1,000 $2,000
Painting $9,000 $1,000 $8,000
The three items listed above are termed as Collectables under Section 118-10(1) of
ITAA, 1997. If these are valued for less than $500, they are considered as exempt items
for Capital Gain / Loss purposes. In case of a Gain / Loss for a collectable item valued
above the threshold limit of $500, the Capital Loss can only be set-off against a Capital
Gain of another collectable, (Barkoczy, 2013). However, in this case of Eric, there is a
Capital Gain on Antique Vase and as the item is valued at $2,000, the Capital Gain of
$1,000 will be taxable at the hands of Eric. However, the Losses from the Antique Chair
and the Painting can be off-set by Eric from any future gains from collectibles.
Name of Item Purchase Cost Selling Price Capital Gain Capital Loss
Home Sound
System $12,000 $11,000 $1,000
This will be termed as a Personal Use Asset under Section 118-10(3) of ITAA, 1997.
According to this statute, if the value of the Personal Use Asset is less than $10,000, all
Capital Gains / Losses shall be exempt from Capital Gains Tax. However, in this case,
the Home Sound System is valued at $12,000 and Eric incurs a Capital Loss on its sale,
(Barkoczy, 2012). Hence, Eric cannot offset this loss as this will be treated his personal
withdrawal under Section 108-20(1), which states that a loss from a personal use asset
shall be disregarded.
Name of Item Purchase Cost Selling Price Capital Gain Capital Loss
Shares in a
Listed Company $5,000 $20,000 $15,000

This is a CGT Asset as described in Section 108-5(1) of ITAA, 1997. Eric can claim a
Capital Loss on a CGT Asset as a deductible expenses from his Assessable Income.
Similarly, a Capital Gain will be added to the Assessable Income of Eric and he shall
pay tax on it. As the shares were acquired within 12 months from their disposal date,
Eric is not eligible for any discount on the Capital Gain and will be liable to pay tax on
Capital Gain of $15,000, (Barkoczy, 2011).
ANSWER – 2
A loan fringe benefit tax on the part of the employer arises when the employer provide a
loan to an employee at a subsidised rate of interest during a FBT year. A low rate of
interest is applicable when it is less than the applicable statutory rate of interest, which
is also known as “benchmark interest rate”. As on 1 April 2016, this benchmark interest
rate was 5.65%, (Alexander & Fogarty, 2009). For taxation purposes, the taxable value of
a loan fringe benefit is calculated as the difference between:
(a) the interest which would have accrued during the FBT year in case the
benchmark interest rate had been applied to the outstanding monthly balance of
the loan, and
(b) the amount of interest that actually accrued at the subsidised rate of interest.
Now, if the employee uses a part or whole of the loan to make investments in interest-
bearing instruments, then the interest payable on the loan would be wholly deductible at
the hands of the employee for income tax purposes. So, under such a deductible rule, the
taxable value of such a loan fringe benefit will be nil, regardless of whether the
employer charges a low, or even a nil, rate of interest on the loan. This happens because
the employee becomes entitled to income tax deduction on the interest charged from
him on that portion of the loan which he is using for earning an assessable income.
Whereas, this is not applicable on that interest which is charged from the employee on
that portion of the loan which he solely uses for his domestic purposes, (Alexander &
Fogarty, 2009).
ANSWER – 3

It is clear from the agreement entered between Jack and Jill that ONLY profit will be
distributed as 10% to Jack and 90% to Jill, whereas the loss will be 100% liability of
Jack. Hence, Jack will claim the amount of $10,000 as a deductible amount under
section 8-1 of the ITAA, 1997 from his Assessable Income for the year. Under the
provisions of Joint Tenants, the law is clear that both the partners shall be eligible to
claim all Capital Gains / Losses in EQUAL proportions, (Cch, 2012).
ANSWER – 4
The principle established by the case of IRC v Duke of Westminster (1936) stated that
tax evasion happens when taxpayers deliberately start misrepresenting or concealing the
true state of their affairs to the taxation authorities in order to reduce their tax payments,
whereas tax avoidance is considered as acceptable and legal. Unsurprisingly, this
principle is still relevant in Australia and most other developed as well as developing
economies, (Cch, 2012). The Australian authorities state that more than a sixth of tax
loss is due to tax evasion and a further one sixth is caused by tax avoidance, whereas the
balance is just uncollected taxes. Taxation authorities in Australia still do not like
taxpayers’ trying tax avoidance although such actions are viewed as actions taken by
taxpayer for taking advantage of a tax relief in a legal manner, (Barkoczy, 2013).
ANSWER – 5
Income can be classified either as –
(A) Ordinary Income
Ordinary Income includes incomes earned by personal exertion, carrying on a business
or income from properties, as is defined under sections 6-5(1) to (4) of ITAA, 1997.
(B) Statutory Income
All incomes not covered under ordinary income are termed as Statutory Incomes, as is
defined under sections 6-10(1) to (5) of ITAA, 1997.
(C) Windfall Income
Winnings from lotteries and inheritances are examples of Windfall Incomes and these
are also covered under sections 6-10(1) to (5) of ITAA, 1997.
(D) Capital Gains

All profits derived from sale of assets are termed as Capital Gains, as is defined under
sections 104-10(4) of ITAA, 1997, (Barkoczy, 2013).
In case Bill wants to avail the first option, it will be assumed for taxation purposes that
he is carrying on a business and the income which he derives from the sale of the timber
will be considered his “Ordinary Income” and added to his Assessable Income under
section 6-1(1) of ITAA, 1997. However, in case Bill goes for the second option, then
the timber would be considered as a “Capital Asset” as it is part of the land owned by
Bill. Thus, the lump sum payment of $50,000 which Bill receives shall be considered as
Capital Gain, (Barkoczy, 2012). Although this will also be added to his Assessable
Income under section 6-1(1), Bill can avail the 50% Discount under the Discount
Method on the Gross Capital Gain which he makes.
LIST OF REFERENCES
Alexander, Dr. R. and Fogarty, H. J. (2009) Australian Master Family Law Guide, (3rd ed.)
Sydney, NSW: CCH Australia Limited.
Barkoczy, S. (2011) Core Tax Legislation and Study Guide (16th ed.) North Ryde, NSW: CCH
Australia Limited.
Barkoczy, S. (2012) Australian Tax Case book (10th ed.) North Ryde, NSW: CCH Australia
Limited.
Barkoczy, S. (2013) Foundations of Taxation Law (5th ed.) North Ryde, NSW: CCH Australia
Limited.
Cch, (2012) Australian Master Tax Guide. Sydney, NSW: CCH Australia Limited.