Taxation Theory, Practice, and Law Assignment

This assignment addresses several key aspects of taxation law. Question 1 delves into the calculation of net capital gains and losses, considering special rules for collectables and personal-use assets. Question 2 examines fringe benefits tax, specifically focusing on the calculation of the taxable value of a loan fringe benefit. Question 3 explores the tax implications of joint tenancy, outlining how gains and losses are divided among joint tenants. Question 4 discusses the landmark case of Inland Revenue Commissioner v. Duke of Westminster, exploring the principles of tax avoidance and their relevance in Australia. Finally, Question 5 analyzes the tax treatment of timber sales and royalties under Taxation Ruling 95/6. The assignment demonstrates a comprehensive understanding of various taxation concepts and their practical application.

Taxation Law 1
TAXATION THEORY, PRACTICE, AND LAW ASSIGNMENT
Student’s Name
Course Title
Professor’s Name
Name of University
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Date

Taxation Law 2
TAXATION THEORY, PRACTICE, AND LAW ASSIGNMENT
Question 1
Net capital gains and net capital losses are as a result of the capital gain tax legislation. When
a tax payer disposes of a capital asset, they usually realise either a capital loss or capital gain.
When preparing annual tax returns, the tax payer must report the capital gains and capital losses.
The capital gains tax forms part of the tax payer’s income tax (Austrian Taxation Office, 2017a).
Losses arising from the disposal of capital assets cannot be offset by the income tax; this can
only be offset by the capital gains. The computations of capital gains or capital losses are done
upon the disposal of capital assets such as real estate, share and related investments, collectables
and personal use assets. Net capital gains and Net capital losses can be calculated as follows
Net Capital Gain = Gains from disposal of Capital Assets during the fiscal year - Losses from
the disposal of Capital Assets realised in the current or prior periods -
Any allowable discounts
Net Capital Loss = Gains from disposal of Capital Assets during the fiscal year - Losses from
the disposal of Capital Assets realised in the current or prior periods -
Any allowable discounts
When computing capital gains and capital losses there are special rules. For collectables
(these are items meant for the comfort and personal use of the taxpayer. Collectables include
items such as antiques, jewellery, paintings, and photographs) whose value is less than or equal
to $500 upon disposal any capital gains or capital losses are disregarded (Australian Taxation
Office, 2017a). Capital losses on collectables can only be offset by capital gains from
collectables. Similarly for personal assets (for example electric items, household fittings and
furniture, and boats) whose values are less than or equal to $10,000 the capital gains loss or
capital gain realised upon disposal are not taken into consideration. The net capital gain and
capital loss are computed as follows

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Total Acquisition Costs of Collectables = $2,000 + $ 3,000 + $ 9,000 = $ 14,000
Total Disposal Value of Collectables = $ 3,000 + $ 1, 000 + $1,000 = $ 5,000
Disposal Costs less Acquisition Costs of Collectables = $ 5,000 - $ 14, 000 = - $ 9,000
Disposal Value Less Acquisition Cost Personal Use Item = $ 11,000 - $ 12,000 = - $ 1,000
Disposal Value Less Acquisition Cost of Shares= $ 20,000 - $ 5,000 = $ 15,000
A net loss of $9,000 is realised on the sale of collectables. The personal use item had a value
greater than $ 10,001 therefore the resulting loss of $1,000 is applied to the gain of $ 15,000. The
net capital gain is $ 14,000.
Question 2
The loan given by the bank to Brian is what is commonly referred to as a fringe benefit.
A fringe benefit is defined as a means of paying for the performance of services by the employer
to the employee (Internal Revenue Services, n.d.). The award of the fringe benefit can be
extended to non-employees such as independent contractors, the members of the board of
directors of the company, future employees, and retired employees. There are different types of
fringe benefits including unemployment insurance, life insurance, loans, health insurance,
disability payments, retirement schemes, travelling concessions for former employees, free
meals, accommodation, recreation allowances (Human Resource Management, 2017).
According to the criteria set out by the Australian Taxation Office, the loan provided to Brian
is not simply just a loan but a loan fringe benefits because it is given at a rate that is less than the
benchmark rate determined by the monetary authorities (the Reserve bank of Australia)
[Australian Taxation Office, 2017b]. The benchmark interest rate in Australia as at 1 April 2016
was 5.65%. The taxable value of the loan fringe benefit is computed as the difference between
the benchmark interest less the actual interest rate. When computation of the taxable value, the

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deductible rule provided by the Fringe Benefits Tax Assessment Act of 1986. s.19(1)(b) is taken
into consideration. The deductible arises because Brian used 40% of the funds for income
generation purposes.
Value of Taxable Loan Fringe Benefits = (Value of loan x Benchmark Rate) –
(Value of loan x Actual interest rate)
= (5.65% x $ 1, 000, 000) – (1% x $ 1,000, 000)
= $ 56,500 - $ 10,000
= $ 46,500
Interest Rate Deductible = 40% (5.65% x $ 1,000, 000) –
40% (1% x $ 1,000, 000)
= $22, 600 - $ 4,000
=$ 18,600
Taxable Value = $ 46,500 - $ 18, 600
= $ 27,900
Interest Payable at the End of the Loan Period
In situations where the employee is allowed to pay the interest on the loan less frequently
than every six months, the loan is treated as having been separately loaned at the end of six
months (Australian Taxation Office, 2017b).
Taxable Value of Loan Fringe Benefit at Interest-Free Rate
The taxable value of the debt waiver fringe benefit is the value of the amount that was
waived. In the case of Brain this is the amount of the interest waived on the loan.
Interest waived = 1% x 3x $ 1,000,000 = $ 30,000

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Question 3
In legal parlance, the term joint tenancy refers to a unique form of property ownership
whereby two or more individuals have ownership of the same property (Farlex, n.d.). In the
arrangement, the persons who are joint tenants have equal ownership in the given property, and
equal right to retain or dispose of the property. The joint tenancy agreement creates the right of
survivorship which stipulates that when one tenant dies, the dead tenants’ rights in the property
are transferred to the surviving member. The joint tenancy has four main features namely (i)
Each tenant has an undivided interest in the entire property, the share of each tenant is equal with
no tenant being able to have a larger share than the others; (ii) The property of the persons in the
joint tenancy are fixed for the same period of time; (iii) The joint tenants have only one title; and
(iv) the individual joint tenants have similar rights.
For the purposes of computing tax obligations, the legislation maintains where two or more
persons own a property as joint tenants, then the net loss or gain is divided amongst them in line
with their legal interest in the property (Australian Taxation Office, 2017c). Any arrangement by
the joint tenants to divide the income and expenses in proportions that are not equal has no effect
for tax purposes. Therefore, Jack and Jill will divided the net loss between them in an equal ratio.
For the purposes of capital gains tax, the joint tenants are taken to have common equal shares
and rights in the property. Therefore, each of the joint tenants has an equal share in the capital
gain or capital loss upon disposal of the property (Australian Taxation Office, 2017d). When
Jack and Jill sell the property, the capital loss will be shared equally between them.
Question 4

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In the case of the Inland Revenue Commissioner v. Duke of Westminster [1935] it was
established that the Duke of Westminster executed deed with people in his employment that
included his gardener in which he made a covenant to pay the employees a given weekly sum for
a period of seven years or during the lives of the parties in the covenant. The amount to be paid
was equivalent to the wages that the employees were receiving. Under the tax provisions that
prevailed at that time, the arrangement made by the Duke of Westminster enabled him to reduce
his tax burden.
The issue raised by the Inland Revenue Commissioner (IRC) was that the amount paid under
the deed during the period of time when the employees were in the service of the Duke amounted
to remunerations for services rendered thus they were not allowable deductibles in the liability
for surtax. The IRC maintained that the arrangement by the Duke was meant to avoid the full tax
obligations.
The court found in favour of the Duke of Westminster stating that the taxpayer has the
right to take actions or make provisions to reduce their tax liability in line with the given laws
that prevail at the time. This case established the principle of tax avoidance that is every
individual is entitled to arrange their affairs so as to reduce their tax liability as long as their
actions are in line with the law (Murphy, 2012).
Relevance of IRC v. Duke of Westminster [1935]
The ruling by the court is attractive for individuals hoping to reduce their tax burden by
formulating complex transactions and contracts. However, over the years, the courts have
weakened the principles of tax avoidance, limiting the legal methods available to avoid taxes. In
their rulings, the courts have established what is known as the Ramsay principle. This principle
states that where a transaction does not make sense without the tax benefit, the proper approach

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is to tax the entire transaction (W T Ramsay Ltd v Inland Revenue Commissioners [1981]).
Additionally, subsequent amendments to the tax legislation in Australia have been geared at
reducing tax avoidance and increasing the revenue collected. Allowing taxpayers to pay lower
rates would essentially lower the governments revenue which would reduce the quality and
quantity of services offered to the citizens. The principles established in the IRC v. Duke of
Westminster [1935] are relevant in Australia. However, the taxation authorities are taking
measures to reduce the degree of applicability.
Question 5
The Australian Taxation Office has established Taxation Ruling 95/6 (TR 95/6). This ruling
sets out the degree to which receipts realised from the sale of timber can be treated as assessable
income, irrespective of whether or not the taxpayer’s key business is related to the forestry
industry (Australian Taxation Office, 2017e). Section 22 of the ruling indicates that the receipts
realised on the disposal of trees owned by the taxpayer irrespective of whether or not the
taxpayer is in the forestry business is assessable income in the year in which the sale occurred.
The taxable value depends on the market value prevailing on the day of disposal or where there
is no sufficient evidence of the market value, the value which the Commissioner deems
reasonable (paragraph 36 (8) (a)). Therefore, Bill would be assessed on the sale of timber to the
logging company.
A royalty is defined as income derived from the use of the taxpayers’ property
(University of Richmond, 2017). The payment of royalties is related to the use of a valuable
right. By granting the logging company the right to cut down the tree, the income earned will be
considered as a royalty. According to TR 95/6 royalties obtained by the taxpayer by giving the

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right to fell trees on land owned by the taxpayer are considered assessable income of the
taxpayer.
References

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Australian Taxation Office (2017a). Capital gains tax. Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ (Accessed 11 September 2017).
Australian Taxation Office (2017b). Chapter 8 - Loan and debt waiver fringe benefits. Available
at https://www.ato.gov.au/law/view/document?DocID=SAV/FBTGEMP/00009&PiT
=99991231235958/? page=3#8_3_What_is_a_loan_fringe_benefit_ (Accessed 11 September
2017).
Australian Taxation Office (2017c). Co-ownership of rental property. Available at:
https://www.ato.gov.au/Forms/Rental-properties-2013-14/?page=5
Australian Taxation Office (2017d). Joint tenants. Available at:
https://www.ato.gov.au/individuals/tax-return/2017/in-detail/publications/guide-to-capital-gains-
tax-2017/?page=94 (Accessed 11 September 2017).
Australian Taxation Office. (2017e). TR 95/6. Income tax: primary production and forestry.
Available at https://www.ato.gov.au/law/view/document?docid=txr/tr956/nat/ato/00001
Farlex (n.d.) Joint Tenancy. Available at:
http://legal-dictionary.thefreedictionary.com/joint+tenancy (Accessed 11 September 2017).
Fringe Benefits Tax Assessment Act of 1986. s.19(1)(b).Sydney: Australian Government
Publishing Services.
Internal Revenue Services. Fringe Benefits. Available at:
https://www.irs.gov/publications/p15b/ar02.html#en_US_2017_publink1000193623 (Accessed
11 September 2017).
IRC v. Duke of Westminster [1935] All ER 259 (H.L.) London: HMSO
Human Resource Management. (2017). Types of fringe benefits. Citeman, 12 January. Available
at: https://www.citeman.com/1359-types-of-fringe-benefits.html. (Accessed 11 September 2017).
Murphy, R. (2012). The duke of Westminster is dead: Long live the Duke of Westminster. Tax
Research UK, 10 August. Available at: http://www.taxresearch.org.uk/Blog/2012/08/10/the-
duke-of-westminster-is-dead-long-live-the-duke-of-westminster/ (Accessible 11 September
2017).
W T Ramsay Ltd v Inland Revenue Commissioners [1981] HL 12. London: HMSO