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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 31
Imposing a tax on unrealised capital gains would not be convenient because the taxpayer
might not have the money to pay the tax (as they haven’t sold the asset)
14.
What if you receive a salary of $100,000 per year and live in a house that you rent for $25,000 per year?
o
Under Simons’ definion, income is $100,000 – $25,000 in consumpon + $75,000 increase in net wealth
15.
What if you receive a salary of $100,000 and your uncle lets you live rent-free in a house that he owns (and that has a
rental value of $25,000 per year)?
o
Under Simons’ definion, income is $125,000 – $25,000 in consumpon of the house + $100,000 increase in
net wealth
16.
What if you inherit $2 million?
o
Under Simons’ definion, this is all income for the same reasons as a salary – you either spend or save it
The same can be said for inter vivos giſts
Simons’ raonale for taxing inheritance is that the beneficiary has a greater ability to pay tax
o
Under the ITA, this is not income
This is because death dues (tax on inheritances) have been abolished – the reason for having giſt
taxes was because otherwise people giſt all their assets before they die to avoid the death
(inheritance) tax
17.
What if you buy a house for $1 million and rent it out for $25,000 per year? Assume the value of the house remains the
same
o
Under both the ITA and Simons’ definion, income is $25,000 for the same reasons as a salary – you either
spend or save it
18.
What if you buy a house for $1 million and live in it for a year? You pay for the house out of your inheritance (assume it
has been taxed last year); the value of the house remains the same; the rental value of the house is $25,000 per year
o
Buying a house is swapping one asset (money) for another (house, which does not disappear so it is not
consumed), so there is no consumpon or change in net wealth (as value of house remains the same) there
o
Under Simons’ definion, you have consumed the use of the house for $25,000, so this is income
This is referred to as the taxaon of
consumer durables
– it applies not to just houses but also other
capital assets of a durable kind like art collecons, etc.
The reason for this is because Simons’ definion’s purpose is to broaden the tax base – if we broaden
the tax base by extending the definion of income to cover things like realised capital gains,
inheritances and consumer durables, we can reduce the rates of tax while maintaining revenue
neutrality; this is equitable because the tax system will make people pay tax depending on their ability
to pay
19.
What if you buy a house for $1 million, using your savings of $200,000 and borrowing the other $800,000 from the
bank? The rental value of the house is $25,000 per year and your interest payments to the bank are $20,000 per year.
o
You subtract the interest payments from the rental value – therefore, under Simons’ definion, there is $5,000
in consumpon of the house
o
You don’t pay tax on both because one is paying for the other
20.
What if two people live in the house, with a rental value of $25,000?
o
Both are sll consuming $25,000 of house in total – so the income of each is $12,500
OTHER QUESTIONS
1.
Is there anything that would be covered by the definion of “income” in Part C of the Income Tax Act 2007 that would
not be covered by Henry Simons’ definion?
o
No, there is not – Simons’ definion would cover everything that is counted as income in the ITA
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