Principles of Taxation Cases Law †Free Samples to Students

Question: Discuss about the Principles of Taxation Cases Law. Answer: Introduction: Over the past twelve months, few assets had been procured by Eric and since the tenure is not mentioned, it can be presumed that Eric has held such assets for lesser than twelve months. Moreover, in association to capital gain, the same arises when the sale value of an asset exceeds its expense base. In the given case, since the tenure is less than twelve months, indexation benefit will not prevail (Fullerton et. al, 2017). Such assets are procured for own benefits or use and capital gain tax does not incur on the sale of such assets if their acquisition expenses are not more than $10000. In the given case, Eric had procured a home sound system as his personal use asset for $12000. Such assets are bought for enjoyment or for self-interest motives and capital gain tax does not arise on sale of such assets if their acquisition cost is not more than $500. In the given scenario, Eric had three collectible assets namely painting ($9000), antique chair ($3000), and antique vase ($2000) respectively. Eric had also procured $5000 shares in a listed company that must also be considered in the zone of computation of capital gain. For computation of capital gain tax in the given case, the following formula must be taken into consideration: Capital gain= Capital Proceeds less the base cost of assets. Details Base cost of the asset Assets capital proceeds Net Capital Gain/Loss Home Sound System 12,000 11000 (1000) Painting 9,000 1000 (8000) Antique Vase 2,000 3000 1000 Antique Chair 3,000 1000 (2000) Listed companys shares 5,000 20000 15000 Total Net capital gain= 5000 Assets procured for personal use are bought for more than $10000 and thus, they are considered for computation of capital gain. Assets procured by Eric as collectibles are bought for more than $500 and therefore, they are taken into account for computation of capital gain. In order to compute net capital gain or loss, set-off of capital losses has been done with the capital gains for the year (Taylor Burton, 2016). Brian has obtained a loan amount of $1 million from his employer for a period of three years at an interest rate of one percent that is payable monthly through installment basis. It must be noted that such loan comes under the purview of loan fringe benefit because the rate of interest allowed to Brian is lesser than the statutory or prevailing interest rates (Nethercott et. al, 2013). Besides, an employer has offered such loan to his employee that fulfills the criterion of a loan fringe benefit. In order to compute the taxability of such benefit, the statutory interest rate must also be taken into account. Therefore, it can be witnessed that the statutory interest rate prevailing on the date of procuring the loan was 5.65% that must be taken into account for computing taxability of loan fringe benefit. Firstly, computation of the taxable value of such loan fringe benefit must be done and for such purpose, the interest on the loan based on the actual rate of interest must be subtracted from the statutory rate of interest (Villios, 2016). Interest on loan based on actual interest rate= $1000000* 1% that is $10,000 Interest on loan based on statutory interest rate=$1000000*5.65% that is $56,500 Thus, taxable value is equal to $56,500 - $10,000 that is $46,500 Secondly, computation of interest on the loan must be done at the statutory interest rates by presuming that Brian has paid such amount in reality. Therefore, interest on loan based on the statutory interest rate = $1000000* 5.65 % that is $56,500 Thirdly, it can be witnessed that Brian has utilized forty percent of the acquired funds for catering his future obligations and income generating motives. Therefore, the amount of tax-deductible interest cost (imaginary) can be computed as under: $56,500 * 40% = $22,600 Fourthly, the amount of tax-deductible interest cost (actual) can be computed as under: $10,000*40%= $4000 Fifthly, the actual amount of tax-deductible interest must be subtracted from the imaginary interest amount that shall come as under: $22,600 - $4000 = $18,600 Lastly, the computation of final taxable amount must be done by subtracting the amount in the fifth step from the amount in the first step $46,500 - $18,600 = $27,900 Nevertheless, if such interest was payable after the period of the loan instead of monthly installments, then the deemed tenure of such loan would be considered from the tenure when the interest becomes payable. Moreover, if Brian is freed by the bank for repaying such loan interest, then the computations must be done in the same way as previously mentioned. The only difference will be that the actual interest rate will be considered nil. Jack and Jill had come to an agreement wherein they will procure funds in order to acquire a rented property. In relation to the agreement, both of them will serve as joint tenants and Jack will be entitled to ten percent of the profits in contrast to ninety percent of profits to his wife (Jill). Further, when there will be losses, Jack will be fully entitled to bear the same. In the case, it can be seen that a loss of $10000 incurred in the last year and based on the agreement, the same shall be borne by Jack. Besides, such loss must be added with other incomes of Jack (if any) so that his total income and tax can be minimized. Further, Jack is also allowed to carry forward such loss if there is nil income. If Jack and Jill decide to sell such property, there may arise two feasible situations wherein either loss or gain can happen. In case if there is a gain, the same must be apportioned betwixt Jack and Jill in their respective share of profit ratio. The loss of $10000 can be set-off by Jack in contrast to the gains deriving out from sale of the property. Similarly, if there is a loss arriving out from the sale of property, the same shall be entitled to Jack alone, and it can either be carried forward or setoff with his other incomes. Therefore, on a whole, the outcome is that Jack is able to set off the losses of past year in the present year if gains can be derived from the sale of the property (Fullerton et. al, 2017). However, if by selling the property, any income does not accrue to Jack, the entire loss must be borne by him based on the agreement. Therefore, Jack cannot be influenced by the tax treatment in any manner even while the loss has been borne by him. It has been provided in the case of IRC v Duke of Westminster [1936] AC 1 that every individual has a right to supervise their accounts in such a way so that their total income can be decreased to the maximum. However, the same must be done in a legal and moral manner so that the individual does not encounter criminal proceedings in future. Moreover, if legal concerns are taken into consideration while decreasing the total income, then not even the superior authorities of Inland Revenue can force the individual to enhance his amount of payable tax. In relation to this case, it must be noted that such rule can be applied only if an individual makes use of legal and moral means to decrease his income (Sadiq et.al, 2016). Besides, if the individual can show authenticated documents, then the court has no interference in such matter, as they cannot rely on underlying substances to provide their judgement. This means that the previously mentioned case has the following concerns incorporated within it: Every individual has a right to supervise their accounts in such a way so that they can decrease their tax payable to the authorities. If the individual does not undertake manipulation or immoral steps, then additional tax cannot be implemented upon the individual. If the transactions are genuine in nature and the individual has authenticated documents to prove the same, then no authority can question the validity of the transactions based on underlying substances (Sadiq et.al, 2016). Nevertheless, with the passage of time, new case law have come into light that resulted in the loss of importance of this case law. As a result, the viewpoint of observing accounts has become different in the present scenario. In the current phase, such given case law holds true because now businesses are being restricted in a way that they cannot manipulate the transactions (Kenny et. al, 2017). Besides, the rule also offers them a responsibility to undertake their businesses in a genuine way. For instance, when a business is in a situation wherein it is incapable of repaying its debt obligations, it has the right to alter its balance sheet amounts by writing off the fixed assets to their respective carrying amounts. Further, even if the businesses are incapable of bringing forward authenticated documents to prove the same, the only requirement to justify the same will be to write off the assets. However, if the businesses take advantage of such situation by fraudulently harming the ir stakeholders, the law restricts them from doing so (Sadiq et. al, 2014). On a whole, it can be concluded that any transaction prevailing in a business that has been undertaken with legal means cannot be questioned upon. Bill is the owner of a big land containing big pine trees and he intends to make use of the land for grazing sheep. However, for doing this, the entire area of pine trees have to be cut off. Besides, he will obtain $1000 for every thousand meters of timber in doing such thing. The question here is that whether a tax on receipts must incur or not upon Bill because the net figure of receipts out of clearing timber is not known (Pratt Kulsrud, 2013). Nevertheless, this can be considered as a revenue receipt and therefore, no capital gain tax must incur upon the same. If Bill attains $50000 as a lump sum payment in order to provide a right to the logging company to clear as many timbers from his land, then the same must be regarded as a capital receipt as it is non-recurring in nature, is of a lump sum nature, and occurs due to selling ones right. Thus, in this scenario, the same receipt must be regarded as a capital receipt (Kenny et. al, 2017). After evaluating both the cases, it can be seen that in the first scenario, the receipt is small but is recurring in nature, thereby attracting normal rates of tax. However, in the second scenario, a right is being offered to the company to clear the timber against a lump sum payment of $50000. Therefore, this receipt is big and non-recurring in nature, thereby attracting capital gain tax (Kobestky, 2005). References Fullerton, I.G, Deutsch, R, Friezer, M.L, Hanley,P Snape, T 2017, The Australian Tax Handbook Tax Return Edition 2017, Thomson Reuters: Australia Kenny, P, Blissenden, M, Villios, S 2017, Australian Tax 2017, Thomson Reuters: Australia Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press Nethercott, L, Richardson, G., Devos,K. 2013, Australian Taxation Study Manual, Sydney. Pratt, J. W Kulsrud, W N 2013, Federal Taxation, Oxford university press. Sadiq, K, Coleman, C, Hanegbi, R., Jogarajan,S, Krever, R.,Obst, W., Ting, A 2014, Principles of Taxation Law, Sydney. Sadiq,K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever,R, Obst, W, Teoh, J Ting, A.K 2017, Principles of taxation law 2017, Pyrmont, NSW : Thomson Reuters, Australia Limited Taylor, G Burton, W 2016, Understanding Taxation Law 2016, Oxford university press Villios, K.B 2016, Australian Tax 206, Thomson Reuter