Quirks in tax law


  • Business
  • Wednesday, 24 Nov 2010

WHEN Bumble in Charles Dickens' Oliver Twist remarked the law is an ass, little did he realise that those of us who to this day are confronted by unusual and unexpected nuances in the law, will meekly submit to it with no more than an expression of those same sentiments. This is true of all laws including tax law.

The framers of our tax law are not to be particularly faulted since in many instances tax provisions have evolved over time under policy driven changes, and quirkiness and novel situations have crept in, often unnoticed.

The concept of income is a prime example. It does not necessarily correspond to the colloquial sense of money which we earn in a year and which we can spend or save.

We have to rely on its common law meaning; typically what the courts in England have pronounced over time.

Thus when an employee buys his employer's product at a discounted staff price, has he earned income from his employer to the extent of the discount?

Some may say yes, others no. It is the sort of situation that a court in the UK had in mind when it said that, income is what goes into the pocket and not what saves the pocket.

Yet such a seemingly logical view is subject to our own courts being persuaded, if and when the issue comes up before them.

The word deemed is used a great deal in our tax legislation. It can be used to impose a fiction of income where none exists.

Thus the daughter who allows her parents to live rent-free in one of the two apartments she owns will be taxed on income deemed to have been received from her parents.

This provision has since been repealed after having been in our statute book for many years.

An existing provision requires a trader to pay tax on the non-resident's income on the basis of their close connections.

Similarly by a fiction of law, income earned abroad by a business can be charged to tax as if earned here.

Loans made interest-free between related entities may result in the lender being charged to tax on deemed interest although the law here stands somewhat weak in the absence of a clear imputing provision. Recent changes have appeared to strengthen the position.

Our tax law is now gender neutral as a married woman can now be taxed on all her income in her own right, separate from her husband.

This has not always been the case and until the law was changed, her unearned income was included in her husband's tax return.

This follows the traditional English law concept where her status is that of a feme covert, one who does not have legal rights and obligations distinct from those of her husband.

Cultural practices and history have also made their mark on taxing codes when we find that the income of a Hindu joint family (under a system of law prevailing in India) is taxed as one person and not on individual members of that family as with other taxpayers.

The UK law relating to taxing income from employment allows the employee to claim deduction for expenses of travelling in the performance of his duties including the expenses of keeping and maintaining not just a motor vehicle, but even today, a horse as well, for such travelling.

In 1696, a tax was placed on British homes based on the number of windows the home had.

Evidence of early tax avoidance can be seen by a visitor today, where many older buildings show walled-up windows.

This oddity has carried over into our times when we find China, recognising the widespread practice of gifting mooncakes during the mid-Autumn festival, introducing a tax on mooncake vouchers, seeking to collect some 30 billion yuan.

Legal residence and tax residence mean different things. One can be an illegal resident and yet be a resident for tax purposes.

Also it is possible to be tax resident in more than one country at any one time.

An individual becomes resident if he spends 182 days or more in a year in the country regardless of whether he maintains a permanent home or abode here.

The law in certain situations permit the taxpayer to stay away from the country without depriving him of his tax resident status.

Thus absences from the country on social visits of not more than 14 days are to be ignored.

What is meant by social visits is a question which has occupied our courts and it was left to our Court of Appeal to opine recently that the time spent by the taxpayer on vacation overseas is not time spent away from the country on social visits.

These samplings seek to provide some justification to the view, as reflected in this judicial comment that the income tax is not and cannot be, I suppose from the nature of things, cast upon absolutely logical terms.

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