HI6028 Taxation Theory Assignment

This document presents a solved assignment for the course HI6028 Taxation Theory, Practice and the Law. It addresses five questions covering various aspects of Australian taxation law. Question 1 focuses on calculating net capital gains/losses, considering the rules for collectables and personal use assets. Question 2 deals with calculating the taxable value of fringe benefits, specifically loan fringe benefits, for the 2016/17 financial year. Question 3 discusses the allocation of losses between partners in a partnership. Question 4 examines the relevance of the IRC v Duke of Westminster case in contemporary Australian tax law, highlighting the evolution of anti-avoidance measures. Finally, Question 5 provides legal advice on the nature of income derived from timber removal, distinguishing between lump-sum payments and payments based on the quantity of timber removed. The assignment demonstrates a strong understanding of relevant legislation (ITAA 1997, FBTAA 1986, ITAA 1936) and case law, applying the rules to specific scenarios and reaching well-supported conclusions. The provided references indicate a thorough research approach.

HI6028 Taxation Theory, Practice and the Law
Assignment
[Pick the date]
Student id and Name

Question 1
Issue
The issue is to analyse the given information and to calculate the value of net capital gains or net
capital loss for the taxpayer Eric.
Rule
As per section 108 -10 (2) of Income Tax Assessment Act 1997, jewellery, coins, books,
painting, art work, any manuscript, or antique item would be classified as collectable. To be
exempt from CGT (Capital Gains Tax), it is essential that the purchasing date of the items must
be before September 20, 1985 or the buying price of the item must be less than $500. Further, it
is noteworthy that the loss incurred on the sale of collectable would only be compensated with
the capital gains that would result from the sale of collectable. If the taxpayer would not have
any capital gains from collectable to offset these losses, then the capital loss would be shifted to
next financial year (Gilders et. al., 2016).
As per section 108 -10 (3) of Income Tax Assessment Act 1997, the capital loss incurred from
the sale of any personal use asset would not be taken into account while calculating the net
capital gains/loss. However, if the personal use asset has acquisition cost of higher than $10,000
then only the derived capital gains would be considered else not (Sadiq et. al., 2016).
As per section 104 - 5 of Income Tax Assessment Act 1997, income derived from the sales of
shares would be taken into account for CGT liability on the part of taxpayer. Further, if the
shares are not held for more than 1 year, then the taxpayer is not liable for any discount on the
calculation of net capital loss/gains (s. 115-25, ITAA 1997) (Deutsch et. al., 2016).
Application
(1) Eric is the concerned taxpayer who purchased an antique vase, antique chair, and a
painting for a cost of $2000, $3000 and $9000 respectively. He has sold an antique vase,
antique chair, and a painting for $3000, $1000 and $1000 respectively.
It is apparent that these items are collectable and also having the acquisition cost more than
$500. Hence,
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Capital loss/ gain ¿( Total Selling Price)− ( Total Acquisition Price )
Antique Vase ¿ $ 3000 – $ 2000=$ 1,000
Antique Chair ¿ $ 1000 – $ 3000=−$ 2,000
Painting ¿ $ 1000−$ 9000=−$ 8,000
Net Capital loss/ gain from collectable = $ 1000+ (−$ 2000 ) +(−$ 8000)=−$ 9000
The negative sign in the value represents that Eric has capital loss of −$ 9000 ¿sale of
collectables.
(2) Eric has also purchased a home sound system for a cost of $12000 for her private use.
Eric has sold home sound system for $11000.
It is apparent that home sound system is an item of personal use and hence only capital gains
would be taken into account.
Capital loss/ gain ¿ ( Total Selling Price )− (Total Acquisition Price )
Home sound system=$ 11000−$ 12000=−$ 1,000
The negative sign in the value represents that Eric has capital loss of −$ 1000 ¿sale of home
sound system.
(3) He has also purchased shares in a listed company for a cost of $5,000. He has also
received proceeds of $20,000 from the sale of shares.
Capital loss/ gain ¿ ( Total Selling Price )− (Total Acquisition Price )
Shares=$ 20000−$ 5000=$ 15,000
The positive sign in the value represents that Eric has capital gains of $ 15000 ¿sale of shares.
Conclusion
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It can be said based on the above computation that Eric has capital gains of $15,000 from shares
which would be taxed in the current year as per CGT. Further, the capital loss of $9,000 incurred
due to collectables would be rolled over to the next year (to be adjusted against collectables
capital gains) while the capital loss from personal use asset would not be incorporated in the
computation of capital tax liability for Eric.
Question 2
Issue
The issue is to find the taxable value of fringe benefits for the FBT year 2016/17.
Rule
When employer has provided benefits (non-cash) to employee for personal usage then these
benefits are termed as fringe benefits as per FBTAA, 1986. The fringe benefits tax liability
would be levied on the part of the employer (Woellner, 2014). In this regards, when an employer
has provided monetary help to employee in terms of giving loan at zero rate of interest or lower
rate of interest rate as compared with the statutory interest rate announced by Reserve Bank of
Australia for the given assessment year, then there is incidence of loan fringe benefits. Further, it
is noteworthy that when the employee has utilized the loan amount for earning income, then the
interest amount paid by the employee would be tax deductible on behalf of the employer. Also,
the taxable value in loan fringe benefits would be computed by taking the interest saving from
loan fringe benefits (Nethercott, Richardson and Devos, 2016).
Application
It is apparent that employer bank has extended loan of $1 million to employee Brian at 1% per
annum interest arte that needs to be paid in monthly payments.
Provided interest rate (Annualised) = 1.0046% p.a.
RBA statutory interest rate for FY2016/17 = 5.65% p.a.
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It is apparent that Bank has provided the loan at lower interest rate and hence, FBT liability
would be applicable on the employer.
Interest saving = Amount * (Provided interest rate – RBA interest rate)
= 1 * (0.0565 – 0.010046) = $43,960
From loan amount, 40% has been used for making income and hence, loan fringe benefit = (1 –
40%) * $43960 = $26,376
GST is not valid for loan and therefore, the value of gross up factor = 1.9608 (Gilders et. al.,
2016)
Grossed up value of loan fringe benefit = loan fringe benefit amount * gross up factor =
26376*1.9608 =$51,718.06
FBT liability = 51,718.06 *0.49 = $ 25,341.85
Further, if the interest amount has been paid by Brian at the end of loan completion period, then
the value of taxable value of loan fringe benefit would be increased. This is because the
employee would be benefitted since now the same amount has to be paid after a year (CCH,
2013).
Also, the case when the Bank has asked Brian to not pay the interest on loan amount, then in
such case Brian would be able to save the whole amount because he does not need to pay any
interest. Therefore, the taxable value of loan fringe benefit would be highest and hence the
corresponding FBT liability would also increase (Barkoczy, 2015).
Conclusion
FBT payable due to loan fringe benefits amounts to $25,341.85. Additionally, this value would
increase when the interest needs to be paid at the completion of loan period. Further, the FBT
liability becomes highest when bank releases Brian from doing payment of interest on loan.
Question 3
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Issue
The issue is to comment on the allocation of losses between Jack and Jill.
Relevant law
Section1, Partnership Act 1891 highlights the key conditions that are to be satisfied for a
business arrangement to be classified as partnership. These are highlighted as follows.
 The “carrying on of the business” is essential which should not be equated with
continuity of business activity (Playfair Development Corporation Pty Ltd v Ryan (1969)
90 WN (NSW)) (Sadiq et. al., 2016).
 Also, the business must give rise to mutual rights and obligations and the business is
carried on behalf of the partners not individually but jointly. Also, in a partnership, if the
agreement highlights that a given partner has share in profit and but would not share
losses, then the same would not be upheld in court and the concerned partner would have
to share losses in the same proportion as profits (Re Ruddock (1879) 5 VLR (IP & M) 51)
(Deutsch et. al., 2016).
 Profit motive must be present in the business activities (CCH, 2013).
Application
Partnership exists between the two individuals (Jack and Jill) as joint borrowing of the money is
observed which in case of joint venture would have been done individually. Repetition of
business activity is not imperative as highlighted in the above section. Also, profit motive is
clearly present here. Also, even though partnership agreement puts all losses on Jack but he
would share only 10% while Jill would share 90% of the losses.
Conclusion
The capital losses between partners would be allocated in the same proportion as the capital
gains or profits. Thus, the capital loss or regular loss will be borne by Jack and Jill in the ratio
10:90.
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Question 4
Issue
The core concern is to outline the relevance of the decision pertaining to IRC v Duke of
Westminster [1936] AC 1 case in Australia at present.
Relevant law and Application
The key principle outlined in mentioned case pertains to the taxpayer’s rights to make relevant
arrangement for lowering the tax liability. In effect, this case legalised tax avoidance. As a result,
in ITAA 1936, no provision on anti-avoidance was present which was enabled only in 1981 due
to rampant abuse and the rise of individual income levels (Barkoczy, 2015). Gradually the scope
of these provisions has expanded on account of the wide interpretation provided by the court but
the burden of proof still lay on the Tax Commissioner (CCH, 2013). However, in 1980, the
Choice principle was outlined by the honourable court which restricted the use of tax avoidance
by exhibiting only the choices offered by the ATO rather than working creative arrangements
exploiting tax loopholes. Further, in 2006, promoter penalty system was introduced which
targeted the promoters of schemes for tax avoidance. Thus, in the recent time, a plethora od
measures have been taken to prevent abuse of the principle established (Deutsch et. al., 2016).
Conclusion
Then,, while the principle of tax avoidance still remains intact but various provisions have been
introduced in Australia so as to check the abuse of the same and impose reasonable restrictions in
this regard.
Question 5
Issue
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The issue is to offer a legal advice to Bill about the nature of income which is derived from the
two given cases.
Case 1: When he has appointed logging company to remove the timber from pine tree with an
amount of $50,000 (lump-sum).
Case 2: When he has appointed logging company to remove the timber from pine tree and pay
him $1000 for each 100 meter of timber removed.
Rule
The provisions of section 26 (f), ITAA 1936 would be taken into account in the process of
deciding the nature of income from right to fell timber operation. The amount or say royalty
amount derived from right to fell timber would amount to assessable income for the same tax
year in which the operation of timber removal has been done. The amount tends to be considered
as assessable income of taxpayer regardless of fact that taxpayer has been not involved in the
forest operation. The McCauley v The Federal Commissioner of Taxation (1944) 69 CLR 235
case highlights this (Woellner, 2014). There are two main factors that would be considered in
this regards. If taxpayer has offered another party to extract the timber for lump-sum amount
irrespective of the size of timber removed, then the income is not termed as assessable income of
taxpayer. The Stanton v The Federal Commissioner of Taxation (1955) 92 CLR 630 case is the
evident of this aspect. Further, if taxpayer has received an amount with respect to the amount of
timber removed, then it considered assessable income of taxpayer (Nethercott, Richardson and
Devos, 2016).
Application
It can be seen that taxpayer Bill is not running any forest operation and in order to make land
suitable for sheep grazing he has decided to remove the pine tree. Therefore, in case where he
has decided to appoint logging company to remove timber for $50000 irrespective of total
amount of timber removed, the proceeds received would not result in assessable income.
However, the case where, the income is received per 100 meter of timber removed, the proceeds
would amount to assessable income of Bill as per section 26 (f).
Conclusion
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The conclusion can be drawn that when Bill has received lump-sum amount ($50,000) then the
amount would not classified as assessable income. However, when he is receiving the income
($1000) per 100 meter of timber removed, then this would contribute to the assessable income of
Bill as per section 26 (f).
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References
Barkoczy, S. (2015), Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook
8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law
2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016,
4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
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