HA3042 Taxation Law T2 2018: Income, Avoidance, and Property Ownership

This assignment provides a detailed analysis of various aspects of taxation law. It addresses the classification of annual payments as income, referencing relevant case law such as Scott v C of T (NSW) and Dixon v FCT. Furthermore, it examines the principle established in IRC v Duke of Westminster regarding tax avoidance schemes and its modern-day implications in Australia. The assignment also delves into the division of net income or loss from rental properties among joint owners, citing Taxation Ruling TR 93/32 and the McDonald v FCT case. The document offers a comprehensive overview of these key areas within taxation law.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
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Answer to question 1:
Issues:
The issue is related to the classification of yearly payments as having the nature of
income.
Rule:
The ordinary income does not has any definition in the taxation acts. The meaning of
the ordinary income is derived from the case law and is reliant on the principles that emerges
from the decisions. The taxation legislation role is to take into the account the value of
ordinary income in the taxable income given the amount meets the criteria ascertained by the
principles of case laws (Roberts 2017). The sum would be included into the taxable income
under “s 6-5 ITAA”. An individual taxable income comprises of the receipts obtained on the
basis of ordinary meaning that is known as ordinary income.
In “Scott v C of T (NSW) (1935)” the taxation commissioner held that income does
not signifies a term of art as receipts are comprehended inside it (Desai 2013). The court in
“Scott v FCT” stated that whether or not the receipts constitutes income is reliant on the
quality in the recipient’s hands (Baldry 2017). One should denote that there are some
noteworthy standards that demands the taxpayer to consider the receipts as earnings within
the meaning of section 6-5.
Majority of the amounts are easily categorized as ordinary income particularly the
salary and wages as they display the characteristics of recurrence, regularity and periodicity.
Nevertheless, these income should be viewed as the only general characteristics of certain
flow of income. As a matter of fact that the amount received in regular instalments does not
necessarily categorize such receipts as the ordinary income (Kakwani 2017). A receipt is not
categorized as ordinary income unless the receipts is a cash or real gain for the taxpayer. The

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taxpayer must assess any earnings that is received during the year depending upon the factors
relevant in the hands of those that receives it.
Given that both the prerequisites of the income are met, gains will be held as the
ordinary income if the payments holds the adequate characteristics of regular or periodical
receipt or possess the concept of regular flow (Mills, Newberry and Trautman 2015). A gain
that holds the necessary characteristics of regularity or periodicity is more likely regarded as
ordinary earnings than those payments that are paid as lump sum. The federal court in “Blake
v FCT (1984)” characterised regular receipts of payment as an income (Lambert 2015).
Likewise, in “Dixon v FCT (1952)” held that periodical type of payments paid at least
annually in question holds the character of income stream and are regarded as income.
Application:
The lotteries commissioner performs the instant lottery where commission provides
the winner with a payment of $50,000 each every year for 20 years’ time. The first $50,000
was paid soon the notification to the winner is sent while the later the amounts are paid every
year following the first instalment. Mentioning the decision in “Scott v C of T (NSW)
(1935)” it is necessary to determine the nature of annual payment received in the hands of
recipient (Burman, Geissler and Toder 2018). Citing the event of “Scott v FCT” the annual
payment of $50,000 can be easily categorized as ordinary income. This is because the annual
payment of $50,000 involves the characteristics of recurrence, regularity and periodicity. The
payment is made every year to the winner even on the conditions that the outstanding amount
can be paid to the deceased estate if the winner dies.
The annual payment of $50,000 can be categorized as income because the payment is
a real gain for the taxpayer. Denting the event of “Blake v FCT (1984)” the annual payment
of $50,000 meets both the prerequisites of the income as the payments holds the adequate

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characteristics of regular, periodical receipt and owns the concept of regular flow (Allingham
and Sandmo 2013). Henceforth, quoting the event of “Dixon v FCT (1952)” the annual
payment of $50,000 is periodical type of payments which is paid at least annually in question.
The payment holds the character of income stream and should observed as income.
Conclusion:
Annual payment that is paid at each of the 12 months period to the taxpayer is holding
the feature of income. It is necessary to settle that the sum is an income in the hands of the
recipient.
Answer to question 2:

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Answer to question 3:
IRC v Duke of Westminster [1936]
In this case there is an event of avoidance of tax that occurred when the duke made a
false covenant. The duke recruited the gardener to pay from his after tax profits having
substantial in nature.
In the attempt of reducing the tax, the “Duke of the Westminster” stopped paying the
wage of the gardener and rather drew up a solemn promise of paying the equal sum of
amount following the end of the specified period (Fox and Campbell 2014). With respect to
the tax laws of that time, this enabled the duke in reducing the income tax liability by
claiming a deduction for the expenses. This ultimately helped the Duke in reducing his
liability for the purpose of income tax and surtax (Christiansen 2014). The department of
Inland Revenue however challenged the case by stating that arrangement was
“tantamounting” towards the evasion of taxation and ultimately took the “Duke of the
Westminster” to the court. They department of Inland Revenue eventually lost their case.
The principle stated that an individual is entitled within the legislation to organize
their affairs of taxation in a manner so that they can reduce their liability of taxation. The
government and the ministers have criticized publicly with the help of well-known
entertainers and larger multinational corporations that acted completely within the law as the
attempt of reducing their liability of taxation (Yi and Haifeng 2014). The principles
established in the case of “Duke of the Westminster” is no longer inviolable. The court of
law has increasingly implemented the purposive interpretation to defeat the tax avoidance
scheme of artificial arrangement.
The attempt of Duke in reducing his tax surtax bill will now be treated by several as
the unacceptable and morally objectionable. The judicial interpretation of this case states that

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if the legislation seems to be ambiguous the court of law might look at the record of the
parliamentary proceedings for the clear indication by the legislation promoter as its intended
meaning (Boortz and Linder 2015). As the matter of fact, the court of law has regularly
casted a sceptical view over the contrived tax avoidance scheme. The court has since then not
hesitated to scrutinise the facts to understand whether they stand up or implement the
purposive interpretation.
In the case of “Duke of the Westminster” the problem was prevalent on whether the
solemn promise or in other words the deed of covenant may be viewed or treated as the
employment contract (Perotti 2013). Furthermore, the “Duke of the Westminster” was
neither paying the gardeners and the servants a weekly wage nor did the Duke paid any
monthly salary based on the employment contract which the Duke intended to pay. Although
the principles that was established in the case of Duke was attractive for others in seeking tax
avoidance lawfully by establishing complex structures, but since then it has been weakened
by the subsequent cases where the court of law have viewed into the overall effect of the
transactions.
The “Duke of the Westminster” case provides the readers with the suggestion that tax
avoidance may be treated as the allowable until it adheres with the statute law that is
established (Mills 2018). In the case of Duke, the basic principles of the deed of covenant
was the format of the deed that can lower down the liability of the taxation.
Taking into the account the relevancy of principle that was established in the case of
Duke in the modern age of Australia the principle is not any more inviolable (Stiglitz 2015).
The government of Australian have increasingly implemented the purposive interpretation
with the objective of defeating the schemes of artificial tax avoidance. The measures of tax

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avoidance can be viewed as the measure of avoiding a person’s duty towards the general
public by simply not lending support to the government.
Presently in Australia, the taxpayers that holds the intention of mitigating tax are
walking on the thin ice. This is because there is only a thin line present between the tax
avoidance and tax evasion (Hellerstein 2013). The taxpayers presently in Australia should be
careful at the time of drafting the tax mitigation plans as the government of Australia
currently making an attempt of linking the tax avoidance and the tax evasion together.
Answer to question 4:
Issue:
The issue here will take into the consideration for the purpose of income tax, dividing
of net income or the loss made from the rental property amid the joint owners of that rental
property.
Rule:
A noteworthy explanation has been provided in “Taxation Ruling TR 93/32”
regarding the dividing of rental property net income and net loss between the joint owners
(Lambert and Pfähler 2015). An explanation has been provided under this ruling on the basis
of which the commissioner accepts dividing of rental property net profit and loss for the
purpose of taxation between the joint owners of the rental property.
A husband and wife that are holding the property of rental nature will be accountable
for income tax purpose only but are not viewed as the partners under the common law (Pfahle
2017). Where it is noticed that the joint-ownership amounts to partnership for the purpose of
income tax solely, the profits and loss obtained from the rental property is obtained from the

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joint ownership of the property and does not amounts to distributing of partnership profit and
loss.
As co-owners are not the partners under the common law they must share the rental
income in respect to the income tax purpose. Instead, any partnership settlement either oral or
writing it does not have any influence on the distribution of the rental profit net loss and net
loss (Hemming and Keen 2013). Accordingly, the income or loss obtained from the rental
property should be shared based on the legal interest of the owners particularly in those
situations where an adequate evidence is available to establish that the equitable interest is
different from the lawful interest.
As per the paragraph 9 of the “Taxation Ruling TR 93/32” the rental property joint
owners would usually hold the property as the joint owners or tenants in common.
Furthermore, paragraph 11 of the “Taxation Ruling TR 93/32” states that the feature of joint
tenants and tenants in common represents the legal interest of the tenant (Mills and Newberry
2015). Nevertheless, the legal interest ultimately ascertains between the joint owners the
dividing of net income and loss obtained from the property. These occupancies falls under the
definition of the joint owners. There is a lawful interest of legal type to share the equitable
interest between the property holders. The holders of the tenancies properties are under the
definition held as the co-owners where the allocation of the tenancies profits should equal
among both the partners.
The McDonald’s Case provides an explanation regarding the joint owners of the
rental property that falls within the definition of partnership for income tax purpose. In the
case of “McDonald v FCT”, Mr McDonald and his wife jointly owned the two units which
the couple rented out (Pfahle 2017). The agreement of sharing the net profit is based on the
ratio of 25:75. In other words, Mr McDonald would be entitled to 25% of the share whereas

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Mrs McDonald takes 75% of the share of profits. Further conditions included that Mr
McDonald would bear the 100% of the rental property loss. The court of law contented that
both Mr and Mrs McDonald cannot be treated as partners under the general law since they
were simply the joint owners and the losses must be shared on equal basis.
Applications:
The evidences noted from this case states that Joseph was the accountant while his
wife Jane a housewife borrowed a sum of money to purchase the rental property. The
agreement between Joseph and Jane included that they would be sharing the profit at a ratio
of 20:80. In other words Joseph would be sharing only 20% of the net profit and 80% of the
rental profits would be kept by Jane.
The tenancies of the rental possession that is held by the couple in the present case
represents the co-owners. They are only partners for the purpose of the taxation but cannot be
regarded as the partners as per the partnership act. As an alternative, any partnership
settlement either oral and in writing does not have any influence on the distribution of the
rental profit net loss and net loss between Joseph and Jane.
Accordingly, the income or loss obtained from the rental property should be shared
based on the legal interest of Joseph and Jane. Citing paragraph 9 of the Taxation Ruling TR
93/32 both Joseph and Jane would should be viewed as the joint owners or tenants in
common. Such kind of tenancies between Joseph and Jane are in addition classified as the co-
owner’s interest.
Citing the reference of “McDonald v FCT” the partnership between Joseph and Jane
constituted partnership under the income tax purpose and not under the general law (Mills
and Newberry 2015). The analysis clearly explains that there was no partnership between

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Joseph and Jane at the general law because they are simply the joint owners and their loss of
$40,000 must be shared in the equal basis.
As the alternative to the situation, if Joseph and Jane makes the decision of selling
rental property any capital gains or loss made from such sale should be divided in their legal
equitable interest (Pfahle 2017). It is noteworthy to denote that the personal arrangement
between Joseph and his spouse as to their distribution of net capital gains or loss, do not have
any influence for their respective entitlements for the purpose of income tax. In other words
the profits and losses should be shares on equal basis.
Conclusion:
The analysis supports the conclusion that any agreement between Joseph and Jane for
the division of income and loss in proportion apart from their equal share does not has any
impact for the purpose of income tax.

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