Taxation Analysis: Capital Gains, Fringe Benefits, and Tax Avoidance

This assignment delves into various aspects of taxation, commencing with an analysis of capital gains and losses derived from the sale of assets, including antiques and shares, and the implications of the Income Tax Assessment Act 1997. The assignment then explores fringe benefits provided by employers, such as low-interest loans, and calculates the taxable amounts based on statutory interest rates. Furthermore, the analysis extends to tax avoidance strategies, examining a case where a couple attempts to minimize tax liabilities through a specific income-sharing arrangement for a rental property, and the legal precedent set by the IRC vs Duke of Westminster case. Finally, the assignment assesses the tax implications of selling timber, differentiating between agricultural income and commercial revenue. The assignment provides detailed calculations, critical analyses, and supporting evidence from relevant tax policies and acts.

Taxation

TABLE OF CONTENTS
Question 1........................................................................................................................................1
Introduction.................................................................................................................................1
Critical Analysis..........................................................................................................................1
Supporting Evidence...................................................................................................................2
Conclusion...................................................................................................................................2
Question 2........................................................................................................................................2
Introduction.................................................................................................................................2
Critical analysis...........................................................................................................................2
Supportive evidence: ..................................................................................................................4
Conclusion...................................................................................................................................4
Question 3........................................................................................................................................4
Introduction.................................................................................................................................4
Critical Evaluation......................................................................................................................4
Supportive Evidence...................................................................................................................5
Conclusion...................................................................................................................................5
Question 4........................................................................................................................................5
Introduction.................................................................................................................................5
Critical Analysis..........................................................................................................................5
Supporting Evidence...................................................................................................................5
Conclusion...................................................................................................................................6
Question 5........................................................................................................................................6
Introduction.................................................................................................................................6
Critical Analysis..........................................................................................................................6
Supporting Evidence:..................................................................................................................6
Conclusion...................................................................................................................................6
REFERENCES................................................................................................................................7

Question 1
Introduction
Capital gains and losses are calculated whenever an item is purchased, and sold. The
amount that is derived is considered to be taxable but a taxpayer can also deduct the same from
any recent capital gain. There is a case of Eric who bought few antique items and shares. Now,
he is selling them up for a certain amount and wants to know if he is gaining or losing (King and
Fullerton, 2010). As there were some items which are sold at less price while there were some
which gave higher return to him.
Critical Analysis
Antiques are the items whose price keep on growing with time. They will be more
precious than the last year and will be considered as capital assets. For analysing, loss or profit
on the sale of different items, one has to subtract capital loss from gains that were recorded when
capital assets were sold.
Particulars Amount Difference
Sale of Antique Vase 3000
Purchase -2000
1000
Sale of Antique Chair 1000
Bought @ -3000
-2000
Sale of painting 1000
Acquired -9000
-8000
Sale of Sound System 11000
Purchased @ -12000
-1000
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Sale of Shares 20000
Bought @ -5000
15000
Total
(Profit earned by selling
capital assets)
5000
As stated in the table above, it can be stated that Eric had some loss on antique, chair,
painting and home sound system. But, there was a capital gain of $5000 which he derived from
selling of shares and the antique vase (Shan, 2011). Basically, Eric had a total loss of $11000 on
the sale of three different items while he had a profit of $16000 on two different assets which
allowed him in earning $5000.
Supporting Evidence
As stated in Income Tax Assessment Act 1997, capital gain is referred to as a difference
that is there in capital proceeds and cost which is based on CGT assets. An individual has to pay
CGT if he has bought any item that can be considered to be capital assets after 20th September
1985. Also, taxation of chargeable Act 1992 describes that if any individual gains from the sale
of capital assets then whatever profits he has earned will be taxable. He has to ensure that he
states about the actual gain at the time of filing return, otherwise it will be covered in CGT.
Conclusion
As stated in the above case, a person has to pay taxes on the capital earnings. He can
deduct the amount of taxable income by subtracting gains from any previous losses. This allows
him in reducing the taxable amount which he will have to pay.
Question 2
Introduction
A company can provide different type of benefits to employee which are not included in
their salaries packages. These perks and extra allowances are enclosed in the income of person at
the time of evaluating taxable amount. The best example for this is Fringe Benefits. Also, other
examples include exemption from taxes in specified cases which are supported by laws. Brian's
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employer provided him a loan of $1 million @ of interest of 1% per annum (Hopkins, 2011).
But, he utilised some of the amount which was borrowed from his employer for generating extra
income.
Critical analysis
Employer of Brian provided him with a loan of $1 million at the interest rate of 1%
which is far less than the prevailing market rate which can be considered to be a fringe benefit
for him. The statutory rate that is prevailing at present in the market is stated to be 5.65%. the
difference between offered interest rate and statutory is 4.65%.
The calculation of tax is evaluated as:
1) The amount of taxes which are payable on taxable benefit.
 The initial interest rate is:
$1,000,000*1%=$10,000.
 According to provisions and regulations are:
$1,000,000*5.65%=$56,500.
 The total amount of Fringe benefits will be:
$56500-$10000=$46,500.
2) The taxable amount paid on different fringe benefits according to the given case the
benefits are charged without paying any type of interest rates.
$1,000,000*5.65%=$56,500.
3) If Brian is paying the interest rates according to the rates which are standard, then in this
case he is liable for $ 22600 amount will be deducted.
$56,500*40%=$22600
4) According to the case if the amount which had to be reduced from the total taxable amount
is $ 4000
$10,000*40%=$4000
5) The amount which is payable for taxes can be achieved if we subtract step 4 by step 3
$22600-$4000=$18600
In a scenario where monthly instalments are to be given, then total amount will be
divided by 12. The change in case (from annual to monthly) will not lead to change in amount
payable as a tax. In last case, if employer does not charge any amount as interest then there will
be different fringe benefit to Brian:
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$ 1,000,000*5.65% = $56,500
$56,500*40% = $ 22,600
The total Fringe benefits from this scenario will be $22,600 to be precise.
Supportive evidence:
As stated in Fringe tax policy, the taxable amount will be the primary difference between
notional amount of interest and the actual rate that is applied on borrowed money. Under this
situation, each type of loan is considered to be independent (Rosenberg and Center, 2013). There
are different other benefits under this FBT policy, like exemption of not paying tax in certain
situations.
Conclusion
It is states that, in case that fringe benefits are the one which are given by employer to
employee. There are different employment taxes that are applicable on fringe benefits as a
taxable amount. It does not matter if the company provide payment method as monthly or yearly,
the rate of interest will remain same.
Question 3
Introduction
It is stated in the case that, Jack (an architect) and his wife Jill purchased a rental property
by borrowing a certain amount of money. Both of them formed a contract which was in written
form and the income would be divided on 1:9 ratios. Jack was liable for all the loss and liabilities
while Jill would gain 90% of income in case there is profit. This arrangement was made as to
avoid burden of tax. Also, there was loss of $10,000 in previous year which makes jack liable for
it.
Critical Evaluation
As described in the case, the contract was formed to reduce the burden of tax liabilities.
At present, Jill is working as a house maker. So, whatever her earnings are will be counted in
Jack account. Both, tax liabilities and income are categorised in his account as to make process
more fluid. If there is any loss, then financial loss will be carried out to the next year (Sammut
and Webb, 2011). Once there is a capital gain then loss of past will be managed. Jill is a
housewife, so she is not supposed to pay any liabilities, her husband will do so. Basically, both
of them clubbed together and made an agreement to save tax. At the time of selling property,
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whatever income will be made will be divided on the basis of 9(Jill): 1(Jack). If there is loss,
then they can carry it forwarded to next year and adjust it with capital gains.
Supportive Evidence
As stated by Australian Taxation Office, an individual will not get deduction on any
amount which is considered to be a non-essential thing. If there is capital loss than Jack can
deduct it from the earning that he made (Halabi, Barrett and Dyt, 2010). Also, as stated by
income tax department, any earning made by dependent individual will be considered in the
account of actual earner of house.
Conclusion
As explained above, it is stated that Jill will receive 90% of rental income while Jack will get
10%. He will be liable to pay all liabilities and adjust them with gains.
Question 4
Introduction
Everyone wants to save some amount in taxes and for that people use different methods.
The case of IRC vs Duke of Westminster, 1936, is based on related point of interest. There was a
deed which was formed between duke and his gardener, where he promised to pay the gardener
full amount equal to his wage one time in a year. The duke paid this amount from his post tax
income which allowed him to claim for deductions.
Critical Analysis
In IRC vs Duke of Westminster (1936), duke formed an agreement with his Gardner
where he would pay him complete amount in one go from his post tax income and claim for
relaxation in tax. It allowed him in exploiting the loopholes which were present in the case. IRC
filed a case against him when they found what was going on (Murphy, 2012). When asked in
court why he did so, Duke stated that if there is legal way to reduce tax burden then why not use
it. The Duke appointed Gardner and he was not paying him salary as mentioned in the
employment law.
Supporting Evidence
This is one of the most famous case in the history of tax and its avoidance. The statement
made by Lord Tomlin was more shocking as he stated that if there is a legal way to save tax then
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person should use it. As per the Principle of Ramsay, if a person is taking such steps which are
artificial in nature to save tax and not for commercial purpose then he has to pay tax. This is
implied in today's scenario.
Conclusion
At that point of time it was easy to avoid tax but today it is complex and next to
impossible for individual to use such way to save tax.
Question 5
Introduction
It is very hard to assess the taxable amount from sale of timber, as people had different
views regarding it. Some of them saw it as a agriculture income while some considered it as a
revenue. Bill is the owner of a land with a palm tree plantation, he wanted to use this place for
grazing his cattle for which he has to clean the area (Daniel, Keen and McPherson, 2010). For
this purpose, a logging company agreed to pay $1000 for 100 meters of area.
Critical Analysis
There will be income for bill which will be generated when tress will be cleared by
logging company. That income will fall under tax boundaries and bill will have to pay it. The
logging company is paying Bill a hefty amount of $50000 on whose basis whole situation will be
assessed. Also, he is allowing the company to take as much log they want for a sum of money
which creates a situation where he is dealing with them commercially. This is considered to be a
capital gain for which he has to pay taxes.
Supporting Evidence:
As stated in TR 95/6 any income which is generated by cutting and selling trees will be
assessed at the time of filing income tax. In this case if bill take money against the trees from
logging company then it will be considered as a commercial act which will make him liable to
pay taxes (Woellner and et. al., 2011).. If he does not charge company anything then it will
considered as a forest act where he won’t have to pay taxes.
Conclusion
As stated in the case study, it can be said that if a person charges money against timber
then he will have to pay taxes.
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REFERENCES
Books and Journals
Daniel, P., Keen, M. and McPherson, C. eds., 2010. The taxation of petroleum and minerals:
principles, problems and practice. Routledge.
Halabi, A.K., Barrett, R. and Dyt, R., 2010. Understanding financial information used to assess
small firm performance: An Australian qualitative study. Qualitative Research in
Accounting & Management. 7(2). pp.163-179.
Hopkins, B.R., 2011. The law of tax-exempt organizations (Vol. 5). John Wiley & Sons.
King, M.A. and Fullerton, D., 2010. The taxation of income from capital: a comparative study of
the United States, the United Kingdom, Sweden and West Germany. University of
Chicago Press.
Rosenberg, J. and Center, U.B.T.P., 2013. Measuring income for distributional analysis.
Washington, DC.: Urban-Brookings Tax Policy Center. July, 25.
Sammut, C. and Webb, G.I. eds., 2011. Encyclopaedia of machine learning. Springer Science &
Business Media.
Shan, H., 2011. The effect of capital gains taxation on home sales: evidence from the Taxpayer
Relief Act of 1997. Journal of Public Economics. 95(1). pp.177-188.
Woellner, R. and et. al., 2011. Australian Taxation Law Select: legislation and commentary.
CCH Australia.
Online
Richard Murphy, 2012. The Duke of Westminster is Dead: Long Live the Duke of Westminster.
[Online]. Available through:<http://www.taxresearch.org.uk/Blog/2012/08/10/the-duke-
of-westminster-is-dead-long-live-the-duke-of-westminster/>. [Accessed on 19th
September 2017].
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