Taxation On Lottery Winnings: Modes Of Payment And Benefits

HA3042 Taxation Law

Modes of Winning Lottery Prizes and Taxation Benefits

The primary purpose of the paper is to evaluate the reasons for considering the money received from the lottery events like the annual payment income of the person. Furthermore, the paper will also explain the various modes of winning lottery prizes and its benefits on taxation. In other words, the article will also provide information regarding the taxable income and the multiple procedures of paying the surcharge to the income tax rate. Moreover, the paper will also discuss the principle of the Duke of Westminster versus IRC and its effect on the people of Australia.

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The money that the man received from the lottery is considered as its annual payment income, and it is a taxable amount. According to the author Martin, (2018), when a person wins money from lottery purposes then the money acquired to him by two modes; one is the yearly installment, and the other one is the lump sum. In concern to the case, here the person acquire the money by yearly installments. The person is allowed to acquire 50,000 dollars in his first installment, and the remaining money will provide to him during the time of first installment anniversary through yearly recurring service. As the person wins the huge amount of money, therefore, he will have tax benefits, and some benefits are guaranteed lottery allowance and pay-out respectively. However, apart from this two tax benefits if the person considers to acquire money by lump sum payments method then also some other tax benefits will present for him. In the words of Yang, (2018), lump sum method of payments provides benefits where a person can easily avoid long-term tax procedure, and in other words, it also permits them to impart opportunity for making high yields financial reserves such as real estates and stocks.

In the opinion of Lee, and Swenson, (2017), when a person decided to choose the long-term payment option, then some tax benefits must present for achieving the amount. In other words, the money acquired by lottery events is mainly prohibited because of Federal Tax, however, regarding yearly payments, the winners may earn some jackpot price that is mentioned in the lottery. However, the majority of the person chooses lump-sum payments method after winning lotteries because in this procedure tax benefits are more in comparison to the other one. As evaluated by Pistone, (2016), the lottery winner first thoroughly check the tax criteria and then decided to choose whether they opt for annual payment or lump-sum process. Hence, it can be said that taxes play a significant role in the people lives who like to participate in any type of lottery events. As stated by Viswanathan, (2017), each of the methods of achieving lottery amount has some benefits, one of the benefits in a lump-sum process is that the winner has to put the amount in the Federal and State Tax only on the day when they received the amount. After the taxes has cleared, then the winner is allowed to take rest of the money freely and no restrictions will occur in making high yields financial reserves such as real estate, stocks, and others.

The Principle of Duke of Westminster Versus IRC and Its Effect on Australia

On the other hand, the author Martin, and Connor, (2017) stated that the advantages of the annual payment are opposite than the lump-sum payment procedure. In case of annual payments process, the person has to provide the current tax to the Federal and State in every year when they received the winning amount. The main reason for choosing this particular method is that the amount through yearly installments provides some jackpot prizes to the lottery winner. However, the tax rate of State and Federal Government varies every year. Another reason for choosing this method by the person is that he thinks in the future the current tax rate will reduce and he can also win some jackpot prize in next years. Generally, it is seen that the person who chooses this yearly payment method always regret selecting this procedure because in the lump-sum amount the person has to pay onetime tax whereas in yearly payment option the in every year they have to pay the tax.

According to the Federal Law, the money won by an individual in a lottery event is taxable, and it is similar to the tax amount that has been given by the employees. It is mandatory for the person to give notice to the Federal tax returns about the prize amount from the lottery events. Besides this, it is important to the person for providing the amount of Federal taxes every year to the Federal Government. According to the author Tan, Braithwaite, and Reinhart, (2016), the tax refund money enhances with the enhancement of loses which is generated during the lottery events. In other words, the taxpayer has to claim the IRS authorities regarding the lower deductions of taxes in comparison to that of the standard reductions. These reductions procedures re only used when the total amount of taxes is lower than the current tax rates of State and Federal Governments.

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The taxable income of pharmacies are given below:

Details

Amount (in dollars)

Amount (dollars) per year

Percentage (%)

Taxable Income (dollars)

Cost of Sales

Credit Sales= 150000

Cash Sales= 300000

150000+300000=

450000

61

(450000*61)/100=

274500

Receipts

195000

195000

49

(195000*49)/100= 95550

Billings

200000

200000

42

(200000*42)/100= 84000

Rent

50000

(50000*12)= 600000

3

(600000*3)/100= 18000

Salaries

60000

(60000*12)= 720000

9

(720000*9)/100= 64800

Total Taxable Income

536850

GST (in %)

10%

Total Tax

(536850*10)/100= 53685

Taxable income

(536850-53685)= 483165

Figure 1: Pharmacy’s Taxable Income

From the analysis of the pharmacy’s financial data, it is clear that the pharmacy’s taxable is 483165 dollars.

A businessperson name Mr. Mohan is 40 years old and his total income in the assessment year 2017-2018 is Rs. 1,04,00,000. Is he liable for paying a surcharge? If it is the account to pay the surcharge then what will be amount and benefits he received in concerning to managerial relief?

A surcharge is defined as the extra tax that pays over the income tax amount (Borek, Frattarelli, and Hart, 2014). For the taxpayer’s surcharge rate is 10% over income tax only when the total person income exceeds the number of 1crores (Bird, and Karolyi, 2016). In this case, the person Mr. Mohan is liable to pay the surcharge amount as his income is more than one crores. In other words, managerial reliefs are given to the person those who have the income of more than one crores (Hoynes, Miller, and Simon, 2015). Both the regular tax liability and managerial relief are explained below.

  • normal tax rate of a person for the assessment year 2017-2018 is as follows:
  • No tax for the people whose income is less than Rs. 2,50,000
  • 5% tax whose income range is between Rs. 2,50,000 and Rs. 5,00,000
  • 20% tax whose income range is between Rs. 5,00,000 and Rs. 10,00,000
  • 30% tax whose income range is more than Rs. 10,00,000
  • Tax liability including managerial relief  
  • Tax applied on an income of Rs. 1 crore is Rs. 28,12,500
  • Addition surcharge amount on the income tax will 10% of the total amount of 1 crore and it is about Rs. 2,81,250
  • Tax liability in concerning managerial relief is Rs. 32,93,750

Tax Refund Money and Taxable Income of Pharmacies

The common tax liability on Rs 1 crores excluding managerial relief is Rs. 33, 03,375 while tax liability including managerial relief is Rs. 32, 93,750. Thus from this value, it is seen that the tax liability including managerial relief is lower in comparison to normal tax liability.  

A total amount of tax liability is as follows:

Tax liability in concerning to marginal relief

Rs. 32,93,750

Additional secondary and higher education cess at 1%  

Rs. 32,938

Additional education cess at 2%

Rs. 65,875

Total tax liability

Rs. 33,92,563

From the analysis, it can be said that the surcharge amount is defined as the additional tax rate that imposed over the income tax amount. For the taxpayers, this money is provided at the rate of 15% if the income of the person is more than one crores (Smith et al., 2016). In this case, the total amount exceeds than one crore and thus the person is liable for paying the surcharge amount, and he has to pay the managerial relief also.

The tax liability including the managerial relief and normal tax liability excluding the managerial relief is as follows:

  1. Normal tax liability

Tax amount on total income before imposing surcharge amount

Rs. 30,22,500

Additional Surcharge amount at 15% on the income-tax amount

4,53,375

Normal tax liability

 

Tax liability including marginal relief

The tax imposed on Rs. 1 crore

28,12,500

Additional Income  above one crore

7,00,000

Tax liability including marginal relief

35,12,500

Hence it is concluded that normal tax liability of Rs. 34,75,875 is lower than the tax liability including limited relief which is Rs. 35,12,500. Hence regular tax liability is considered as the liability before the implosion of cess.

Therefore the total tax liability is as follows:

Normal tax liability after surcharge amount of Rs. 4,53,375

Rs. 34,75,875

Additional Higher and Secondary education cess at the rate of 1%

Rs. 34,759

Additional Education cess at the rate of 2%

Rs. 69,518

Total Tax liability

Rs. 35,80,152

Tax calculation is as follows.

Audit (dollars)

Assessable income

Gross salary

100,000

An interest that comes from income in Australia

500

Rental income that comes from Australia

11,700

Dividend income of Australia

The net value of Fully franked

700

Gross value up in case of franking credits (30/70 x 700)

300

1,000

Dividend income from Foreign source (gross of WHT of AUD 200)

2,000

A net capital gain for disposal of property:

Proceeds

180,000

Gross capital gain (less cost base)

30,000

Cost base

(150,000)

CGT discount 50%  

(15,000)

15,000

Total assessable income

130,200

Allowable deductions

Interest and repairs on investment property

(5,250)

Protective clothing

(300)

Charitable contributions

(150)

Total allowable deductions

(5,700)

Total taxable income

(130,200-5,700)=124,500

Tax on taxable income

(37% x 34,500 +20,797)= 33,562

Medicare levy

(2% x 124,500)= 2,490

Foreign income tax offset

(200)

Franking credit

(300)

Total tax payable

35,552

The case of Inland Revenue Commissioners (IRC) versus Duke of Westminster is regarded as one of the significant cases of taxation law (Enste, 2018). In other words, income tax is also considered as a significant category of taxes, and it is mainly imposed on the earnings of both employed as well as the self-employed person. Besides this, income tax is also imposed on property rental or lease and dividends that accepted by a firm. A taxpayer person is liable to pay the income tax in concerning to their income earned from various sources irrespective of domicile address, individual’s citizenship, nationality or any legal establishment in Australia. The principle was established in IRC versus Duke of Westminster in concerning tax avoidance is legally accepted whereas the tax evasion is not accepted legally by the people of Australia (McGregor-Lowndes, 2016). In this case, the Duke main duty is to perform some activities like the gardener with the employed person in this country, and he explained himself as their pay servants. Some letters of Duke revealed that the remunerations of an individual employed person along with their additional sum. This has been done by the Duke of Westminster only to avoid the tax of the people in Australia.

Paying a Surcharge and Managerial Relief

In other words, deed of covenant is to perform by the Duke which is a legal document, and it possesses the responsibility of paying some amount of money of a person for a fixed period  (Pui Yee, Moorthy, and Choo Keng Soon, 2017). The time for paying this certain amount of money must be less than six years, and it is stated in this legal document. Besides this, a person gives payment to other persons may reduce their tax expense at the base rate and this help the person to pay only the net amount of money for taxation. On the other hand, if an individual avoids tax, then this deed of covenant is not followed to this individual tax rate as per the contract of employment. Thus in this situation, the Duke was unable to pay their tax neither on a monthly basis nor weekly basis because the contract of employment says that. Hence it can be said that this employment contract is helpful for the Duke to maintain a strict position in this country. The principle that was established for tax avoidance suggested that avoidance of taxes by an individual of Australia can only be allowed up to a certain extent and this is followed by the statute law, and it is legally accepted by the people (Saad, 2014). The principles of the deed of the covenant were mainly useful to decrease the liability of tax amount in concerning to the Duke of Westminster.

The principle can only work correctly if it is officially accepted by the people of Australia. To avoid tax payments, the Australian government has made proper planning of tax by following all rules and regulations. The government of Australia stated that proper guidance should be provided for each in concerning to the various fundamental consents like permissible transactions and so on (AbdulRazaq, and Adam, 2015). This procedure will thus help every individual of the country to avoid their taxes carefully. Hence, it can be said that the Australian government is trying to make a fair legal system for their people. In other words, they are also trying to give efforts on issue warnings on some schemes and services which help the people to avoid their tax. The particular thing is considered by the government after the development of tax avoidance schemes in 2004 (Kujinga, 2016). Besides this, it is essential for the accountants to keep their numbers safely so that they can efficiently assist the taxpayers with this system application. In other words, it will help the taxpayers to make a proper plan of avoiding taxes of the country.

From the taxation law, it is noticed that when a person goes through a capital loss on their investment, then they have to follow the investment schemes so that they can avoid the tax rate (Barker, 2018). In other words, it is generally noticed that the person usually take severe steps for reducing the overall amount of their tax bills that provided the tax rates as per the state and the federal government of the country (Christians, 2014). In this case, Jane and Joseph get loses on their property, and for this, both of them have provided their respective capitals so that they can easily neutralize their income balance and they will be allocated for the tax purposes. In other words, the resulting loses on their correctly usually occur due to the high-occurred gains of their capitals in concerning to their investment. Besides this, people always realize their losses during investing money within any real estate business (Datt, Nienaber, and Tran-Nam, 2017). Hence, it can be said that Jane and Joseph if decided to sell their property and invest their money in real estate business then they will be subjected to account for the huge amount of loss in their respective capitals.

Conclusion

The paper provided information regarding the primary modes by which the winning money of lottery events is considered as the annual payment income of an individual. In other words, it also describes that yearly installments help the person to achieve some jackpots prizes and thus this mode is considered as his annual payment income. Besides this, the paper concludes that taxable income can be determined by the cost of sales, rents, salaries, billings, and receipts statements. Also it also provides a view on the principle of Duke of Westminster versus IRC in concerning to the people of Australia.

References

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