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QUESTION 1
In the given case ‘Set for life’ a lottery system introduced by the Lottery Commission in which the winner is given $50000 each year for a period of 20 years. The sum is paid annually and the Commission is liable to pay any outstanding amount to the executor of the deceased in case of death.
A per the ITAA states, territories and local governments have their own laws regulating the fundraising activities of Not for profit organisations and the organisations taxed accordingly. If the fundraising activities are carried out for carrying out lottery or raffle is taxable according to the regulations of the state, territory or local government and is exempt if such are engaged in such activities for charitable purpose.
As per the ITAA if an individual have won something as prize or prize money in a draw or lottery conducted by the bank or any society then the same is taxable as income. However if an individual wins the same in Lotteries conducted by commission or approved by the Government of Australia like Lotto the same is not taxable. However capital gain tax arises when the prizes earned in lotteries are disposed of.
If the gambling gains are taxed then the same would affect the state revenue as the state revenue generates revenue by way of taxes on prizes in gambling as the individuals will stop playing games or lotteries. However, it is difficult to estimate what sort of an impact such a tax would have on gambling practices. If the gambling gains taxed then what would be the basis and this would contradictory demand the deduction for losses and expenses incurred on such games which is not also easily determined or ascertained. The real issue is not about taxing the cost of gambling but the determination of the amount of cost and associated expenses of gambling.
The main reason for not taxing the gambling or such approved lottery gains is that such games involves a luck and there is high degree of risk involved in winning and losing as stated in the case of  Trautwein v FCT (1936) 56 CLR 196; Case K25 78 ATC 243; Evans v FCT 89 ATC 4540. For most people the game is merely a pastime and not an income generating activity. Moreover the main reason of not taxing the same are that the taxability of such transactions are very difficult to administer and if the lottery gains are taxable then the corresponding losses and expenses would become deductible which would be difficult to be complied with as most of the individuals incur losses instead of gains. Furthermore it will be difficult to prove the honesty of the individuals.
However if the gains arising on gambling would be taxable and thereupon associated losses would be deductible where the individuals main business is to carry such activities. The proceeds from such activities or the amount received would be assessable as income under section 25(1) of the Income Tax Assessment Act (ITAA) (1936). Accordingly, the taxpayer, would be entitled to claim deductions for expenses or losses incurred under section 51(1) of the ITAA. As per the judgement in case of Partridge v Mallandaine (1886) income from illegal transactions are liable to be taxed but such taxpayers are not given any deductions for any penalties for such transactions. The legality of the business would depend on the circumstances of the case involved.
Thus on the basis of the above discussion it can be concluded that the amount payable of $ 50000 annually under the lottery system ‘set for life’ for 20 years is not taxable as per the current taxation policy of Australia under the Income Tax Assessment Act for individuals. However if an individual is engaged in the business of carrying such type of activities then would definitely liable to pay the taxes on $50000 and also would be liable to get deductions for any expenses incurred in carrying out such activities.
The taxability of the Lottery Commission will be determined on the basis of the relevant state, territory or the local government. All Australian companies, including gambling operators, are required to pay corporate income tax at the rate of 30% and goods and services tax of 10 per cent on all sales. In addition, a number of additional taxes are also levied. These taxes are levied by the relevant jurisdictional licensing authority and is a good and important source of revenue for state and territory governments. The types of taxes include:
a. Direct gambling taxes on the revenues of the company.
b. Licence fees paid initially or on a periodic basis depending on the respective state or territory or...