Tax Avoidance And Assesed Losses Flashcards
S20 assessed losses
Taxable income from trade is determined after deducting previous assessed loss brought forward and any current year loss from trade.
Losses from one trade may be offset against gains from another.
Must be carrying on trade and be set off against trade income.
Salary and rent is trade. Must have intention to trade and perform trade activities, there does not have to be income, but there must be a profit motive.
If to is a natural person or trust, can set of loss against non trade income.
Person may carry forward loss if not trade, company loses this right if not trade. Trade only start when implementation of plans, business begins to function.
Purchase of company with assessed loss s103(2)
Disallow assessed loss against income from change in shareholders. Only if shares or interest were acquired for purpose of using assessed loss to avoid tax.
S20A ring fencing of assessed losses from certain trades
Loss is limited to income of that trade.
Only natural persons. Only applies if assessed losses from all trading businesses of the person results in loss excluding employment.
1 Taxable at maximum marginal rate before losses from trade. If below may not be ring fenced. If drop below maximum in next year, losses of that year will be allowed but previous ring fenced losses is not.
2 Three out of five years had assessed loss or was loss from suspect trade(mainly with relatives)
3 facts and circumstances test. Loss will not be ring fenced if trade expected of deriving income (excluding capital gains) within a reasonable time unless suspect trade for which 6/10 years had losses. Consider gross income vs deductions, advertising, employees and equipment of trade, number of years losses vs years in trade, possible business plans, assets used for personal use is a bad sign.
4 6/10 Years losses, cannot use step3. In this year assessed loss will be permanently ring fenced. Thus only available to set of against losses from trade.
Sham transactions
Fictitious transaction which never occurred or lack substance, no economic significance beyond tax benefits. No real change in each parties economic position.
Substance over form. Tax is based on true intention because that is the real agreement.
S80B tax consequences of impermissible tax avoidance arrangements
Tax as if arrangement never entered into.
Many methods for example
Deem connected persons same person, reallocate income and expenses, re characterize income and expenses.
S80A impermissible tax avoidance arrangements
Only certain arrangements are impermissible. To be impermissible:
Sole and main purpose is to obtain tax benefit and,
Arrangement is abnormal, lack commercial substance or created non arms length rights and obligations. Thus not normal business transaction.
S80G presumption of purpose
Deems tax payer to have had tax avoidance purpose if arrangement actually avoids tax. Onus on tax payer to show main purpose was not to avoid tax. Look at whole arrangement
S80L defenitions
Tax includes any taxes and levies like vat estate duty, donations. Tax benefit includes any avoidance, postponement, or reduction.
Normality, a deal done without tax considerations would have been normal. Same rights and obligations if at arms length.
Arrangement. Any transaction or scheme or agreement.
S103 Avoiding tax
Agreement where any change in shareholding resulted in income or capital gain accruing to the company (diverted to the entity) mainly for purpose of using assessed loss, capital loss or assessed capital loss to avoid tax.
Purpose is important not normality.
Set off of loss will be disallowed against such income. Only income injected into the company, not its own revenue.
Only apply if shares acquired mainly for benefit. Tax payer must prove.
If normal tax of both parties who did a dividend swop is reduced, may be liable for tax as if not stopped.
