The Analysis of Taxation v Dixon and Scott v Federal Commissioner for Taxation Cases - Essay Example

? TAXATION LAW MODULE This paper explains why the payment to the taxpayer in FCT v Dixon (1952) 86 CLR 540 was assessable income but the payment in Scott v FCT (1966) 117 CLR 514 was not. It also explains the tax position of an individual respective of the given scenario. Furthermore, it provides cases and other sources of law or information that may apply while taking the given situation in consideration. Keywords: Assessable income, tax position PART A The 2 cases concerned in the current situation are Federal Commissioner for Taxation v Dixon and Scott v Federal Commissioner for Taxation. The main issue that arises is the income tax being payable in one case and exempted in the other. Why Dixon’s income is assessable income but Scott’s income decided to be a gift. Tax payer Scott was employed as a clerk by a firm, which was a shipment agency. His annual salary being 250 pounds and declared taxable by the taxation commissioner. This taxpayer respondent, Dixon, enlisted himself in the armed forces hence ceasing his employment with the former employer. The employer of the respondent came up with a policy that of compensating their employees by paying the difference between the pay in the respondents’ income currently being their employee and while being a staff member of the armed forces (Woellner, Vella & Burns, 1993). . The respondent tax payer, after serving the armed forces joined his firm again in January 1946. An assessable income is the amount of money one makes within any given year that is subject to income tax. It is the sum of the money one has made from his job or by selling his property or any sort of investment or liquidation involved in ones total revenue held. In this particular case the tax commissioner was leading the case in terms of section 25 of the income tax assessment act 1936. 104 pounds were included in the tax payers’ assessable income in terms of section 25 (Woellner & CCH Australia Limited, 1987). Section 25 of the act gives an explanation of what constitutes to the tax payers total tax payable by him for any given year. It particularly uses the word ‘assessable income’ which is the profit arising by the tax payers total property income or by selling of any of the property previously owned by him for the purpose of earning profit or income. The main difference between Dixon’s case and Scott’s case is the payable tax to be held with effect of 2 different sections of the act. Section 25 constitutes tax payment through means of assessable income whereas s 26e is tax to be paid on any type of income earned through means of a reward.in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward. In Scott v Federal Commissioner for Taxation the tax payer is a solicitor who had known her client, a widow for quite some time now. She regularly visited the tax payer who dealt her with regard to being a solicitor but had been involved in constituting business together for some time now. Mrs. Freestone the client now trusted the tax payer who was make representations on her behalf to all legal matters related to a land called green acres which was under a restriction from the local government. Mrs. Free stone while making several attempts in lifting these bans was unsuccessful and decided to allow her solicitor deal with this matter who was later successful in lifting the restriction. Later, part of the green acres plot was sold in which the solicitor had played an important role. Later Mrs. Freestone had already decided to give out some of her estate and her money as a reward to people. Out of which 10,000 was to be paid to the tax payer as a reward. The main argument that led to the case in Scott v FCT was that 10000 pounds paid by Mrs. Free stone was either a reward to her solicitor, the tax payer or a fee rendered to him in terms of the services provided by him. It was established and proved later that this was a mere reward in return of his kindness and friendship towards her client Mrs. Freestone. The commissioner however argued that this was a part of the tax payers’ assessable income and constituted to be tax payable. Hence as we see, the main difference between both the cases is the law according to what the tax payers incomes are being determined to be taxable. The relevant statutory provisions are Section 25 and section 26 e taken into consideration. The first case related to the above mentioned cases is Louisson v. Commissioner of Taxes 1942. The relevant statutory provisions that the case evolved around were contained in s. 79(1)(b) and (h) of the Land and Income Tax Act 1923-1939. The section provided that the assessable income of any person should be deemed to include all sums received or receivable by way of emolument of any kind in respect of or in relation to the employment or service of the taxpayer: (h) income derived from any other source whatsoever. His Honor then proceeds to consider whether the receipt constituted "income" within the meaning of section 79(1). This question also answered in the negative. He treats the sum of 453 pounds as having been received in a lump sum, and it is clear, I think, that this forms the whole basis of his decision. He says: "Income has a meaning that is well established by the cases as something which usually involves periodical payments" (CCH Australia Limited & Monash University, 1998). . He concedes that a payment of a single sum may constitute income, but thinks that the payment in this case, despite the method of its computation, does not. The way it seems to me is that the appellant’s receipts in Federal Commissioner of Taxation v Dixon from his employer should be regarded of character that of income. The payments being in a regular periodical manner, determined to be of importance in like cases as to whether specific receipts hold character of income or capital in relation to the recipient. However these matters are not to be taken to be decisive. Similar cases include Seymour v. Reed, and Atkinson v. Federal Commissioner of Taxation. However the fact that is to be taken seriously and to concentrate upon is that the actual effect and meaning of the payment to the appellant is to increase the earnings of the respondent. The aim was to reduce the difference between both, the present rate of wage and what they should expect to receive later. It holds the nature that of substitution to the equivalent of the wage rather being enlisted. Hence being a part of the total income. (Sydney.edu.au, 2013) Perhaps the closest parallel among many cases cited is to be found in Commissioner of Taxes v Phillips. Phillips was managing director of a company under a contract for a term of years. That company entered into an agreement with another company which bought about the obligation of Phillips retirement. The company came up with a method of compensating Phillips by making advance payments to him as he would have kept receiving had he been working. The payments in that case were made in pursuance of a binding contract, whereas the payments in the present case were voluntary. But the nature of the payments was the same in both cases. PART B Division 3 of the Income Tax Assessment Act of 1936 is concerned with tax deductions. If no negative limbs apply an amount is deductible in 2 situations. It is deductible to the extent it was incurred in carrying on a business to gain assessable income or deductible to the extent that they were incurred in gaining assessable income (Barkoczy, 2010). . In order to understand the above statement and how assessable income is derived and what constitutes to deductions, we will have to understand the definition of income and assessable income. Income is the income amount one incurs for his benefit or ones use. It is a periodical payment, benefit we receive as allowance in return or a single job done over a short period of time or even a gift in return or our services (Woellner, 2008). . Income amount constitutes to the following: Personal earnings including work performed by us that involves wages and salaries, bonuses, penalty rates, over time and commission, Legal tenders or cash, Valuable considerations which further include the goods we receive, the services or benefit we earn in exchange for some item, action or promise. In short, we may conclude that assessable income is simply the income which is used to work out what rate of payment one receives (Mason, 2010). Examples include any gross income from earnings which include supplementary benefits, net income from any businesses including a farm, rental property, boarders and lodgers, and income from fixed products like annuities, superannuation pensions, and allocated products (Australia & O'Neill, 2013). . Also included is deemed income from financial investments, and superannuation funds if one has reached age of pension. Any employment income salary sacrificed into superannuation and family trust distributions of dividends from private company shares is also assessable income. Finally, any losses from property rental and income from sources outside Australia including pensions are also assessable income (Humanservices.gov.au, 2013). A loss or expense can be deducted from assessable income as long as it is a loss or expense that resulting from gaining or producing assessable income or if it is a loss or expense necessarily incurred in carrying on a business for the same (Australia, 2012). Nigel pays council rates, interest on the house mortgage, repairs and maintenance, electricity and telephone expenses in connection with the house. He believes he should be able to claim tax deductions for all these costs together with depreciation on the room and equipment. According to the statutory act, Interest Tax Assessment Act, deductions are available, but not in situation that of Nigel. According to division 3, expenditure for repairs to premises is deductible to the extent that the premises were used for producing assessable income such as rent. Nigel was using his home as a work place to constituting it to be a source of gaining assessable income. The repairs made by Nigel constitute to him getting a deduction. A common case related to deductions for repairs is Lurcott v Wakely. Nigel also seeks deduction for the depreciation of his property. Amounts equal to the decline in value of a depreciating asset held during the year are deductible, to the extent it was used for a taxable purpose. Depreciating asset (s 40-30) Held = owner / lease / hired (s 40-40) Depreciating Assets: Any that has an effective life, it will decline in value over time. Examples include electronic equipment or furniture (computers / office furniture etc) NOT land or trading stock REFERENCES Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Australia. (2012). Australian income tax legislation 2012. North Ryde, N.S.W: CCH Australia. Australia., & O'Neill, D. (2013). Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013. Canberra: Commonwealth of Australia. Barkoczy, S. (2010). Core tax legislation & study guide 2010. Sydney, N.S.W: CCH Australia. CCH Australia Limited., & Monash University. (1998). Journal of Australian taxation. North Ryde, N.S.W: CCH Australia [and] Monash University, Faculty of Business and Economics, Dept. of Business Law and Taxation. Humanservices.gov.au (2013). Income. [online] Retrieved from: http://www.humanservices.gov.au/customer/enablers/income [Accessed: 25 Sep 2013]. Mason, T. J. (2010). Income tax law: Principles and applications. Frenchs Forest, N.S.W: Pearson Australia. Sydney.edu.au (2013). LEC - Subject Pages - Taxation - Useful Links. [online] Retrieved from: http://sydney.edu.au/lec/subjects/taxation/links.htm [Accessed: 25 Sep 2013] Woellner, R. H. (2008). 2008 Australian taxation law. North Ryde, N.S.W: CCH Australia. Woellner, R. H., & CCH Australia Limited. (1987). Australian taxation law. North Ryde, N.S.W: CCH Australia. Woellner, R. H., Vella, T. J., & Burns, L. (1993). Australian taxation law. North Ryde, N.S.W: CCH Australia.Bottom of Form Bottom of Form Bottom of Form Read More