Question 1: Is the annual payment income?

Issues:

Whether the annual payment received by the taxpayer will be treated as the income with respect to the ordinary sense of “S 6-5, ITAA 1997”?

The doctrine of constructive receipt stated under section 6-5 states that an individual is considered to have received the sum when it is dealt in a manner as directed by the taxpayer. The taxable income comprises of the ordinary income and statutory income. The ordinary income forms the part of the taxable income of the taxpayer under “section 6-5, ITAA 1997” (Miller and Oats 2016). There are certain amount that are not treated as the taxable income but they are included into the taxpayer’s taxable income based on the specific provision of the Act.

As per the “section 6-5, ITAA 1997” the taxable income of the taxpayer also includes the income within the meaning of the ordinary concepts which is better known as the ordinary income. The court of law in “Scott v CT (1935)” held that income should not be viewed as the term of art (James and Nobes 2016). It requires application of necessary principles in determining that the how much of the receipts should be treated as the income within the ordinary concepts and usages.

Gains generally requires the characterisation by the law court in ascertaining whether the gains has the character of income. A receipt cannot be treated as the income within the ordinary meaning unless it is cash or convertible to cash or real gain for the taxpayer (Fleurbaey and Maniquet 2018). If the taxpayer meets the criteria of both the perquisites of income then the gain will be treated as the ordinary income if the amount reflects the characteristics of regular or periodic receipts. Gains having the character of regular or periodic is most likely to be treated as the ordinary income then the gains that are paid in the form of lump sum. The court in “FCT v Blake” held that regular or periodic receipts possess the character of income.   

Similarly in “Kelly v FCT” the commissioner of taxation assessed the taxpayer based on the regularity and recurrence rule (Mau and Liebig 2016). The opinion of the court included that the gains that are one of the number and involves periodicity will be treated as the income. Evidently in the case of “FCT v Dixon” the periodic receipts are treated as income since the sum was payable periodically or at least annually.

Question 2: Determine the taxable income of Corner Pharmacy

The annual payment of lottery winning prize will be treated as income under the ordinary meaning of “S 6-5, ITAA 1997”. Denoting the explanation of commissioner in “Scott v CT (1935)” the value of $50,000 will be classified as income because the receipts is a real gain for the taxpayer and has met both the requisite of ordinary income.

Citing the event of “FCT v Blake” the annual payment of $50,000 not only constitutes a real gain for the taxpayer but also has the character of income based on the principles of recurrence or regularity of receipts (Kabinga 2015). Referring to “Kelly v FCT” the annual payment of $50,000 will be assessed based on the regularity and recurrence rule. This is because the gains are one of the number and involves periodicity therefore it will be treated as the income. Therefore, denoting the event of “FCT v Blake” the annual payment of $50,000 will be treated as income since the sum was payable periodically or at least annually.

Conclusion:

The discussion made above clearly defines that the annual payment involves recurrence and regular payment. Therefore, the sum of $50,000 will be treated as income under the ordinary concepts of “section 6-5, ITAA 1997”.

The principles that has been recognised in the circumstance of “IRC v Duke of Westminster [1936]” was based on the tax avoidance. The principles is widely regarded as the principle of Westminster (Oats, Miller and Mulligan 2017). In the case of Duke, a deed of covalent was executed by the Duke with servants, domestic helpers and gardeners which stated that they would be paid with the amount in the form of money relating to the services rendered by them. As a result the duke tried his effort in claiming deductions in his tax liability as the arrangement of avoiding tax.

The principles that was established in Duke’s case was that taxpayers as well as the companies are permitted to arrange their financial statement in such a way that they does not breach the terms of law while lowering their tax liabilities (Basu 2016). The principle that was established in Duke’s case was of apparently purposive method of not revealing the original character of the transaction that was entered with the legitimate sole purpose of tax avoidance. The principle that was established in the case of Duke has developed into the collective practice of cancelling the transaction which was entered with no legal purpose but to change the nature of profits, loss or appropriation.

Question 3: What principle was established in IRC v Duke of Westminster?

As obvious from the case of “IRC v Duke of Westminster [1936]” the pay could be treated as permissible deductions given the payment was yearly in character to the servants and gardeners (Sikka 2017). Under such circumstances that was only permitted to claim the permissible tax deductions for the yearly payment that was made for the services that was rendered by the servants and gardeners. The Duke’s case stands as the suggestion that avoiding tax is allowed until and unless it follows the recognised act (Weichenrieder 2018). The circumstances of the Duke explained that the basic principles which was established related to the deed of covalent that can assist in reducing the liability of taxation. The tax liability can be only reduced if it is permitted under the act and claims are made for only the annual payment.

The relevant principle established in the Duke case in the modern age of Australia as the principle of tax avoidance. However, the government of Australia in the recent years has made an extended work in reducing the gap of taxation (Mellon 2016). As understood from the preceding discussion the Australian government has made an effort in increasing the revenue through extensive collection of tax where the taxpayers are required to make plan for paying the less amount of tax. The principle that was established in the Duke was can be applied in the present age of Australia by stating that the tax avoidance is viewed as a person’s effort in avoiding the duty from the community.

Issues:

The issue here is based on determining whether the joint owners of the rental property are treated as the owners under the general law?

Rule:

As specified in “taxation ruling of TR 93/32” an examination of the taxpayer’s position based on joint ownership whose activities does not comprises of performing of the business. The ruling is helpful in providing explanation based on which the taxation commissioner will accept splitting of net income and net loss originating from the rental property among the joint owners for the taxation purpose (Genser and Holzmann 2016). The ruling explains that the joint owners of the property that is rented out represents the partnership relating to the income tax purpose but the joint ownership does not amount to the partnership based on the general law.

Under the “taxation ruling of TR 93/32”the joint owners of the rental property are usually not treated as the partners under the general law (Keen and Mullins 2017). The agreement relating to partnership among the joint owners regardless of whether in oral or writing does not has any impact on the share of rental property net income or net losses.

Question 4: How is tax allocation determined for joint tenants with rental property?

The term ownership expresses a form of entitlement to use the highest amount of the lawful interest on what is owned. Joint holders of the rental property will be holding the property in the form of joint owners (Bamford 2018). One of the most important aspect for joint owners and tenants in common is that they will hold the rental property in their legal interest. The lawful interest that ultimately determines dividing of net income and net profit amid the joint owners of the property.

Joint owners of the property are the joint tenants that have similar lawful interest in the property (Woellner et al. 2016). This signifies that the property holders should be sharing the net losses and profit based on 50% share with necessary requisite feature are existent for the joint owners of that property.

Referring to the general suggestion that was made, it is very appropriate to explain the owners of the property that are rented out in the McDonalds case as the joint holders in investment apart from treating as the partners in the business operations (Bankman et al. 2017). As a result of this, the rental property joint owners are not treated as the partners under the general law based on the result that they are not subjected to general law of partnership including both the profits and loss from the property.

In “FC of T v McDonald (1987)” the taxpayer and his wife both legitimately owned two units as the joint owners (Schenk 2017). The taxpayer rented out both the property. The arrangement of partnership was made in such a manner that Mr McDonald would be entitled to only 25% of the net income from the rental property while the remaining 75% of the net income would be allocated to Mrs McDonald. The arrangement of the partnership between the husband and wife was such that Mr McDonald would be bearing full amount of loss that is originating from the rental property.

The taxation commissioner contended that there was no partnership under the general law. The only relevant partnership between the husband and wife was that of the joint ownership (Murphy and Higgins 2016). Since the parties were the joint owners of the property they must share the loss and profit equally based on the outcome that the respondents should be entitled to half portion of the loss. Evidently, both the husband and wife were the joint owners of the property, their arrangement of sharing income and loss in the different percentage will be entirely unsuccessful.

The case study provides that Joseph and Jane are the joint owners of the rental property. Their arrangement included sharing of profit and loss of 20% to Joseph while 80% of the net income to Jane. The arrangement of partnership also required Joseph to shoulder the full amount of loss. A reference can be made relating to the interpretation stated in “taxation ruling of TR 93/32” that the Joseph and Jane will be treated as the joint owners for the income tax purpose but not the joint owners under the general law (Schmalbeck, Zelenak and Lawsky 2015). The agreement relating to partnership between Joseph and Jane regardless of whether in oral or writing does not has any impact on the share of rental property net income or net losses.

As Joseph and Jane are the joint holders of the rental property, they will be holding that property in their legal interest. This indicates that Joseph and Jane being the joint holders should be sharing the net losses and profit based on 50% share since necessary requisite feature of co-ownership are existent in that property (Simmons et al. 2017). Since Joseph and Jane are the joint owners of the rental property they will not be treated as the partners under the general law based on the result that they are not subjected to general law of partnership including both the profits and loss derived from the property.

Stating the occasion of “FC of T v McDonald (1987)” both Joseph and Jane would be entitled to share one half of the $50,000 loss that arise from subletting the property (Motro 2016). There was no partnership under the general law and the only relevant partnership that prevailed between the husband and wife was that of the joint ownership.  

In the alternative state of affairs, given that Joseph and Jane decides to sell the property then the capital gains or the capital loss must be shared equally. As obvious, both Joseph and Jane are the joint owners of the property, their arrangement of sharing income and loss in the different percentage will be entirely ineffectual.

Conclusion:

The discussion stated above can be concluded by stating that the partnership between Joseph and Jane is not a partnership under the general law. They must share all the losses and income equally between themselves.

References:

Bamford, D., 2018. Arguing for a New Form of Taxation: Lifetime Hourly Averaging. Journal of Applied Philosophy, 35(2), pp.280-299.

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Fleurbaey, M. and Maniquet, F., 2018. Optimal income taxation theory and principles of fairness. Journal of Economic Literature, 56(3), pp.1029-79.

Genser, B. and Holzmann, R., 2016. The taxation of internationally portable pensions: Fiscal issues and policy options.

James, S.R. and Nobes, C., 2016. Economics of Taxation: Principles, Policy and Practice. Fiscal Publications.

Kabinga, M., 2015. Established principles of taxation. Tax justice & poverty.

Keen, M. and Mullins, P., 2017. International corporate taxation and the extractive industries: principles, practice, problems. International Taxation and the Extractive Industries, New York and London: Routledge.

Mau, S. and Liebig, S., 2016. When is a Taxation System Just? Attitudes towards General Taxation Principles and towards the Justice of One’s Own Tax Burden. In Social Justice, Legitimacy and the Welfare State (pp. 115-140). Routledge.

Mellon, A.W., 2016. Taxation: the people’s business. Pickle Partners Publishing.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Motro, S., 2016. The Income Tax Map: A Bird’s-eye View of Federal Income Taxation for Law Students.

Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.

Oats, L., Miller, A. and Mulligan, E., 2017. Principles of International Taxation.

Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.

Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.

Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier.

Simmons, D.L., McMahon, M.J., Borden, B.T. and Ventry, D.J., 2017. Federal Income Taxation. Foundation Press.

Weichenrieder, A., 2018. Digitalization and taxation: Beware ad hoc measures (No. 64). SAFE Policy Letter.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.