Taxation Law Flashcards

1
Q

Week 2

What is the difference between direct and indirect tax?

Why do we have taxes? (3 reason)

A

Direct Tax = economic burden of the tax is borne by the person who pays the tax e.g. Income tax

Indirect Tax = person who pays the tax is able to pass on the economic burden of the tax to a 3rd party e.g. GST

Why we have tax = Taxes serve three functions.

1) Raise revenue for providing social and merit goods
2) Raise revenue to support those for whom a free market would otherwise not provide
3) Influence social outcomes

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2
Q

Week 2

What are Tax expenditures and the two types of Tax expenditures?

What is a direct payment? and what is the negative of tax expenditures in relation to direct payments?

A

Tax expenditures = Tax expenditures are special provisions of the tax code such as exclusions, deductions, deferrals, credits, and tax rates that benefit specific activities or groups of taxpayers

Positive Tax Expenditure = Afford the targeted party a positive outcome

Negative Tax expenditure = impose a higher cost on specified groups e.g. higher excise duties on certain cigarettes

Direct payments = use tax revenue to make an actual payment to another party. Tax expenditure is less transparent and has less accountability than direct payments.

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3
Q

Week 2

What are the features of a good tax system? (7)

A

Fairness/equity
Simplicity
Certainty = should be able to predict with certainty four factors = who will actually bear the tax burden, amount of tax liability, extent of evasion/avoidance, & amount of government tax revenue
Efficiency - administrative/compliance costs should be minimised (administrative efficiency)
Neutrality = impact of tax should not unintentionally influence individual or business choices (e.g. choosing one type of beverage over another)
Flexibility = tax structure/rates should be easily
adjustable, any changes should have a speedy
impact on revenue
Evidence = taxpayers should have full
information/know about/be aware of their tax
liabilities

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4
Q

Week 2

What is Horizontal and Vertical equity?

What are the sources of tax law?

A

Firstly, note that there is not one or the other, both exist simultaneously.

Horizontal equity = if income is to be the measure of ability to pay tax, those with the same income should in fact pay the same tax

Vertical equity = means that a higher income recipient pays more tax than a lower income recipient e.g. progressive tax rates.

Sources = Legislation, Case law, ATO rulings.

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5
Q

Week 2

What is the constitutional basis of taxation in Australia?

A

S51 (ii) = commonwealth has power to make laws “with respect to taxation”
S90 = commonwealth has exclusive power to impose customs and excise duties
S51 (ii) = expressly prohibits taxation laws that discriminate between states or parts of states
S55 = requires that laws ‘imposing taxation shall deal only with the imposition of taxation’ and laws imposing taxation… shall deal with one subject of taxation only’

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6
Q

Week 3
Outline the jurisdictional rules for Residents vs Foreign Residents in relation to:

  1. Income assessment
  2. Medicare levy and medicare levy surcharge
  3. Tax offsets
  4. Applicable tax rates
  5. CGT

Elaborate on the different rates which apply to Residents and foreign residents

A
  1. Residents = assessed on their ordinary income (6 - 5) and statutory income (6 - 10) from ALL sources + medicare levy and medicare levy surcharge + all Tax offsets + standard tax rates + pay CGT
  2. Foreign Residents = assessed on their ordinary income and statutory income from Australian sources + no medicare levy + minimum tax offsets + different tax rates apply to foreign residents + Pay CGT for taxable Australian property only.

Tax rates elaborated:
Resident individual tax rates = are applied to residents. Even if a person is a resident for only 1 day of the year then these are the rates that apply.
Foreign Resident Individual Rates = are applied to non-resident taxpayers. however, if they are a resident for even just 1 day then the ‘Resident Individual Tax Rate’ applies.

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7
Q

Week 3
What defines, in the eyes of the ATO, an Australian Resident? (individual and company)

What are the relevant tests for determining residency for individuals vs companies?

What are the relevant Taxation rulings for each test (where appropriate)?

A

Resident individual = a person who resides in Australia and includes a person:

  1. Whose domicile is in Australia
  2. Resides in Australia more than half the year (intermittently) = 183 days = unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia
  3. Who is a member of a superannuation scheme OR an eligible employee for the purposes of the superannuation act OR the spouse or child of a person covered by sub-subparagraph (A) or (B);

Tests:

1) Residence according to ordinary concepts test = TR 98/17
2) Domicile test = TR IT 2650
3) 183 day test
4) Superannuation test

Resident company = a company INCORPORATED in Australia, or carries on business in Australia with either central management and control in Australia or its voting power controlled by shareholders who are Australian residents.

Tests:

1) Incorporation test
2) Central management and control test = TR 2018/5
3) Control of voting power test

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8
Q

Week 3
For a Foreign resident it is obviously important to determine the source of income (Aus income taxed, foreign income not taxed by Aus).

How do we determine the source for the following

  1. Services
  2. Business income
  3. Rental income
  4. Interest
  5. Dividends
  6. Royalties
A
  1. Services = place where service occurs
  2. where the business is transacted (e.g. sale of goods = where goods are sold)
  3. Rental income = Fixed property is where property is located AND movable property is where lease agreement entered into and goods taken
  4. Interest = place where contract for loan was made and where money was advanced
  5. place where company derived its profits
  6. Royalties = company who pays the royalties will withhold tax if the company is an Australian resident operating at a permanent establishment outside Australia OR a foreign resident operating a permanent establishment in Australia
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9
Q

Week 3
What is a permanent establishment?

What is a temporary resident?

A

Permanent establishment = place at or through which a person carries on any business = where substantial equipment/machinery is installed OR where person is engaged in a construction project OR where goods are manufactured/assembled/processed/packed/distributed)

Temporary resident = treated similar to non-residents = holds a temp visa, is not an Australian resident under Social Security Act 1991, AND does not have an Australian resident spouse

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10
Q

Week 3

Which two acts are we concerned with for income tax? What is important to consider for the two acts?

A

Income Tax Assessment Act 1997 and Income Tax Assessment Act 1936 (ITAA97 ITAA36)

Consider = the acts operate concurrently, and where 1997 has rewritten provisions of 1936, it is simply to express the ideas in a simpler form. Where different wording is used for simplicity sake the ideas expressed are to be those of 1936.

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11
Q
Week 3
Formula to calculate:
Taxable income
Basic Income Tax liability
Income tax payable/refundable

How do we calculate the Tax-Free threshold for individuals who are residents for only part of the year?

How do we calculate a tax loss and when can it be used?

A

Taxable Income = Assessable income - deductions

Basic Income Tax liability = Taxable income* tax rate

Income tax payable/refundable = Basic income tax liability - tax offsets - credits + levies/charges

Part Tax free threshold = $13,464 + ($4736 * number of resident months/12) (Note: resident months = from start of residency not from start of employment)

Tax loss:

1: Calculate taxable income. If a negative figure is produced then proceed
2: Calculate Deductions - Assessable Income - Net Exempt Income. This will equal the value of the tax loss to carry forward in later periods.
3: In next period the tax loss must first be applied to any net exempt income. The remainder may be applied as a deduction to assessable income.
4: If the taxpayer does not exhaust the full tax loss then it may be carried forward in concurrent periods.

Net Exempt Income’ of a Resident taxpayer = the amount by which the taxpayer’s exempt income from all sources exceeds the total of the losses and outgoings (other than capital losses and outgoings) incurred in deriving that exempt income and any taxes payable outside Australia on that exempt income

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12
Q

Week 3
What is the difference in applied tax rates for individuals and companies?

Which is preferable and why, a deduction or an offset?

Can a tax loss result from an offset? Can an offset be carried forward? In what order should offsets be applied?

How do we apply franking credits to our calculations in determining Tax payable? (keep in mind this is different for a business vs an individual)

A
Individuals = progressive tax to promote vertical equity
Companies = 1) Flat rate applied (30%) or 2) for a base rate entity we utilise the base rate (27.5%)

Offset vs deduction = offset always preferable because deduction is applied in relation to the tax rate whereas the entire offset will always be applied.

Tax loss from offset = Not usually, because can only reduce tax liability to zero. (some can be transferred to spouse)

Tax offset carried forward = Most no, however some can be (refundable tax offsets, franking credit offset, private health insurance offset). The ones that can be are applied at different rates.

Order of application of offsets = in order that gives taxpayer the greatest benefit (s63 - 10 ITAA97)

Applying franking credits = Franking credits are added (yes added, not subtracted) to assessable income in full as well as dividends and then the tax rate is applied to determine BITL. Then subsequently it depends on:

1: Individuals = the franking credit then serves as an offset and as such is subtracted as with any offset in determining Net Income Tax Payable.
2: Companies = the franking credit is non-refundable and as such no further calculation is required i.e. do not subtract it as an offset.

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13
Q
Week 3
What are the following tax offsets?
Franking credit offset
Low income tax offset
Low and middle income tax offset
Foreign income tax offset
Dependant tax offset
Private health insurance tax offset
Zone tax offset
Seniors and pensioners tax offset
A

Franking credit offset = an offset to prevent double taxation of dividends for individuals

Low income tax offset = residents with income lower than $66,667 = max of $446 = reduce $450 by 1.5 cents for every dollar over $37,000

Low and middle income tax offset = on top of low income offset = for earners under $125,333

Foreign income tax offset = offset for taxpayer who paid foreign tax on income and still has to pay Aus tax = limited to the amount of Aus income tax that would have been payable

Dependant tax offset = available to taxpayers maintaining certain classes of dependants who are genuinely unable to work due to carer obligation or disability

Private health insurance tax offset =

Zone tax offset = for people living in certain zones (remote areas) = Zone A (more harshly affected) and Zone B = higher offset available for Zone A

Seniors and pensioners tax offset = Low income aged individuals who receive specified kinds of social security pensions, such as the ‘age pension’ may be entitled to a non-refundable ‘seniors and pensioners tax offset‘ (may be transferred to spouse)

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14
Q

Week 3
How does the medicare levy work?
How does the medicare levy surcharge work?

A

Medicare levy = Resident individuals liable to pay medicare levy at rate of 2% of taxable income (subject to income threshold) = 2% * taxable income

Medicare levy surcharge = not liable if taxpayer has complying private health insurance = applies if income exceeds the relevant ‘Income for Surcharge Purposes’ threshold = taxable income + reportable fringe benefits + reportable superannuation contributions + total net investment losses (yes we actually ADD this amount) - any applicable superannuation offset = applied at rate of 1%, 1.25% or 1.5% as appropriate.

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15
Q

Week 3

What does economic incidence and legal incidence refer to?

A

Economic incidence = who bears the burden of the tax

Legal incidence = who is obligated to pay the tax.

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16
Q

Week 3

Does ‘permanent’ in relation to permanent place of abode mean everlasting/forever?

A

No it does not, permanency needs to be assessed objectively each year.

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17
Q

Week 4
What is ordinary income?

What are two differing concepts of income (different to the tax law concept)?

What are the reconciliation rules under s 6-25 and what is the end result?

A

Ordinary income s6-5 = involves things that are ordinarily (according to ordinary concepts) thought of as income (salary, wages, etc.) = NO MEANINGFUL DESCRIPTION provided in the act, therefore we must rely on case law to determine Ordinary income.

Tax law concept different to economic concept (consumption + savings), because under judicial concept unrealised gains are traditionally not considered income. Also different to accounting concept (accrual basis of accounting)

Reconciliation rules = Where an amount may be included in the taxpayers assessable income as either ordinary or statutory income, use the statutory income provision (there are exceptions e.g. where the legislation tells you to do otherwise)

End result of reconciliation rule = No double taxation

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18
Q

Week 4
What is the Doctrine of constructive receipt?
- Provide an example
- What is the point of the doctrine?

A

Doctrine of constructive receipt s6-5(4) = Applies to both statutory and ordinary income = you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct

Example = you tell employer to pay half your salary to spouse. As soon as employer has done that the amount has been dealt with under your direction and henceforth applying the doctrine of constructive receipt you have received the full amount of the salary

Point of doctrine = prevents people from escaping taxation by directing payments to third parties

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19
Q

Week 4
The characterisation process for ordinary income describes what?

What do the Parsons propositions refer to?

summarise the 11 characterisations (relating to personal income) under the parsons propositions and provide relevant cases

A

Characterisation process = applies the characteristics of ordinary income to determine the character of income as ordinary = No single element is necessarily determinative = factors considered in unison

Parsons propositions = one way of summarising the characteristics of ordinary income

For something to be ordinary income:

  1. Must ‘come in’ to taxpayer, must be cash or convertible into cash and Illegality/immorality is irrelevant (e.g. burglars must pay tax lol)
    - Cooke and Sherden case: Value of free overseas holidays (non-transferable and could not be converted into money) provided to retailers as part of sales incentive scheme was not ordinary income. HOWEVER, legislative response (s21A ITAA36 and s23L(2)) ‘non cash benefits’ may be treated as if they are convertible into cash
  2. Must be ‘derived’
    Tennant v Smith (1892 AC 150) = free accommodation provided to employee was not viewed as ordinary income “a person is charged tax on what enters his pocket, not on what saves his pocket”
    Cooke and Sherden (80 ATC 4140) = free overseas holiday awarded as part of sales scheme not viewed as ordinary income because was non-transferable and hence not convertible to cash
    No 275 v MNR (1955) income from prostitution considered assessable income
  3. Income must be judged in circumstances of deriving taxpayer, without regard to character if income had been derived by another person.
    Federal Coke v FCT = Federal Coke was subsidiary of Bellambi. Fed Coke provided coke to Bellambi to sell to Le Nickel. Le Nickel couldnt accept all coke so was forced to pay compensation to Fed Coke. This was not viewed as assessable income, was viewed as a gift, since Federal Coke was not a party to the transaction. NOTE: Doctrine constructive receipt was not applied here, ruling would be different if it was
  4. Must be a gain
    Hochstrasser v Mayes = Employer compensated employee for any loss on sale of house (so employee could reallocate quickly). Compensation was not viewed as a gain as it only allowed the employee to break even.
  5. Taxpayer must be beneficially entitled to amount = right at law to benefits attached to amount
    Countess of Bective v FCT = Countess received amounts under trust for benefit of daughter = ruled as non-assessable income because no beneficial entitlement for Countess
    Zobory v CT = employee earned interest on money stolen from employer. Interest earnings ruled not as ordinary income because no beneficial entitlement
  6. Income must ‘come in’ from outside source = no gain if derived from oneself (principle of mutuality)
    The Bohemians Club v FCT = subscription fees paid to club and then back to members was viewed as non-assessable income
  7. No gain if derived by taxpayer as contribution capital
    Foley v Fletcher = Instalment payments of purchase price of capital asset (land) viewed not as ordinary income
  8. Mere gift is not income
    - Hayes v FCT: accountant received
    shares in company from former boss/business owner,
    court held it was a gift, NOT income from personal
    exertion
    - Scott v FCT = Husband of Wife died. Wife continued using services of husbands lawyer. Wife paid 10,000 pounds to lawyer at some time down the road. Court held amount as a gift because wife and lawyer had long friendship and the amount was out of proportion to the services rendered (and lawyer never asked for amount)
  9. Windfall gain is not income = gambling/lottery not income = reasoning is that if winnings are taxable then expenditure must be tax deductible (in america winnings are taxed and deductions are disallowed)
  10. Capital gains are not ordinary income (income = fruit, capital = tree)
    - Sun Newspaper Ltd and Associated Newspaper Ltd v FCT: Return generated from the exploitation/use of capital asset or ordinary operation of the business is generally income. However, gain from realisation/loss/destruction of capital asset not income
  11. Recurrence, regularity, and periodicity and reasonable reliance on receiving amount are character of ordinary income
    Keily v FCT = pensioner received regular and recurring payments. Pensioner relied on payments. Payments viewed as ordinary income
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20
Q

Week 4
Are unrealised gains always treated as not being income? what is the relevance of debt defeasance? What is the relevance of foreign currency gain?

Is an allowance considered assessable income? Contrast with a reimbursement.

A

In short unrealised gains are not income.

1) Debt defeasance: However a gain on discharge of liabilities may be income. For example where debt defeasance occurs (paying the PV of a debt to a third party to assume the debt obligation or can be done legally to transfer the obligation). Here there is an unrealised gain for the one paying the PV. More specifically there is a gain on the discharge of liabilities. In FCT v Unilever Australia Securities this type of gain was viewed as income
2) Foreign currency gains are assessable income

Allowance = assessable income 
Reimbursement = non-assessable income as no gain = used to reimburse for an expense (break even)
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21
Q

Week 4
What are four relevant sources of income not viewed as income from personal exertion?

What facts must exist for an amount/benefit received to be classified as income from personal exertion?

Is employment relationship / business necessary for determining income from personal exertion?

What are the sources of income from personal exertion (provide relevant cases)?

Are payments from relinquishing/restricting/giving up valuable rights ordinary income?

A

Interest, Rents, Dividends, Non-share dividends

Note for interest = not from personal exertion unless taxpayer principal business consists of lending of money or if the interest received is in respect of debt for goods/services supplied by taxpayer

Income from personal exertion = 1) Must be sufficient nexus between amount/benefit received, and personal exertion AND amount/benefit received is a reward/product of personal exertion.

Employment relationship / business = not necessary

Sources of income from personal exertion

1) Reward for services
- Brent v FCT = Wife of train robber sold right to publish life story. Wife required to make herself available for series of interviews. Wife argued payment as capital gain. Court held payment as income from personal exertion, not as capital gain.

2) Remuneration from employment
- Dean v FCT: Retention payments made in consideration of key employees agreeing to remain
employed for 12 mths following takeover were held to be income

3) Voluntary payments incidental to income-earning activities (e.g. Tips)
- Calvert V Wainwright = Tips received by taxi driver held as ordinary income
- FCT v Dixon = Employer paid any shortfall in wages for employees enlisted to fight in WWII. Commisioner assessed supplementary payment as income (focused on regularity and reliance)
- FCT v Harris: Taxpayer received periodic but unpredictable/unsolicited lump sums from former employer as supplement to pension where payments were unrelated to length/quality of service. The payments were not income.

4) Prizes incidental to income-earning activities (MAKE SURE TO ASSESS if incidental to income earning activities, if not it may be mere prize = not income)
- Kelly v FC of T 85 ATC 4283 = footballer received award from Channel 7. Amount was income as the award was incidental to footballers work and exercise of skill
- CT v Stone = Stone worked as a policewoman. She was also a professional javelin thrower. Prizes received were treated as ordinary income (non-cash business benefits)
- non-cash business benefit as prize = s21
5) Allowances, gratuities, compensation benefits, bonuses and premiums directly or indirectly incidental to any employment or services rendered

Payments from relinquishing, etc. = not ordinary income = capital gains
- Higgs v Olivier = Olivier received payment to not act in any other film for 18 months. Payment was ruled as not income from personal exertion = Rules as capital income = Olivier gave up valuable (capital) rights

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22
Q

Week 1
Assessable income comprises which types of income?

What is not included in assessable income (provide sections + examples)

Are scholarships assessable income?

A

Assessable income = Ordinary income (6 - 5) and statutory income (6 - 10)

Not included in assessable income:

  1. Exempt income = Income on which you do not pay tax = disability support pension
  2. non-assessable, non-exempt income = income you don’t pay tax on, but someone does = fringe benefits (for fringe benefits the employer pays tax)
  3. other amounts that are not taxable (prizes, etc)

Scholarship = yes if part-time and no if full-time (exempt income)

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23
Q

Week 5
From the definition for carrying on a business, what is a key take away?

What are the badges of business for determining if the taxpayer is carrying on a business and where do these badges come from?

A

Key take away = operating as an employee does not equal carrying on a business

Badges of business = derived from case law = must consider all, non are determinative, however profit making purpose pretty much indicates business ongoing.

1: Profit-making purpose (most important) (even if making a loss) = consider objective facts to determine if profit-making purpose
- Californian Copper Syndicate Ltd v Harris = CCS acquired land to mine copper. They had insufficient funds to mine the copper. They bought the land with intention to sell it at a profit at later date (this was their intention). They sold for a profit at later date. Court found the gain was ‘income from business’ because CCS was in the game of speculation for profit (buy and sell land for profit).

2: Systematic/organised = activities are carried on in a commercial or business like manner (employing staff, using a business system, having special business premises, etc.)
- Thomas v FCT 72 ATC 4094 = Thomas planted 30 avocado trees and 75 macadamia trees. He was found to be carrying on a business of primary production, despite some failures (such as frosts where he lost fruit).

3: Size/scale = could be large or small, still amounting to a business
- FCT v Walker 85 ATC 4179 = Walker was real estate agent. He was found to be carrying on goat breading business. Started with just 1 goat. Was still found to be carrying on a business. Point being even small scale equates to business.
- Rutledge v IRC (1992) 14 TC 490 = Rutledge was on business trip to Germany. He opportunistically purchased 1 million toilet paper rolls at a discount. Sold all to one person back in England. Made 10,000 pounds in profit. Court held profits as derived from adventure in the nature of trade = income from business.

4: Frequency = one of or recurring, still amounts to business
- FCT v Whitfords Beach (discussed on another card)

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24
Q

Week 5

What are the steps in analysing tax for business

A

Step 1: Determine if carrying on business

Step 2: Determine if amount in question comes as a result of the business being carried on

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25
Q

Week 5
Discuss income from business Vs realisation of capital asset

In regards to scope of business, discuss narrow vs broad.

A

Income from business = ordinary income
Sale of capital asset = capital gain

Must distinguish between the two because its not always clear. For example, in Californian copper case the sale of land was considered income from business

To do this you must consider the ‘scope of the business’.
Narrow scope = likely realisation of capital asset
Broad scope = likely income from business

In Californian copper case the scope of business was very broad. They were in the business of speculation (buying and selling). Therefore, easy to derive profit as income from business.

  • Western Gold Mines Ltd v CT = WGM was in business of gold mining. They disposed of a capital asset (a gold mine lease). Court found that because they were in narrow scope of business (mining gold) the sale of the asset fell outside their scope of business. Therefore, rules as realisation of capital asset.
  • Scottish Australian Mining Co Ltd v FCT = SAM carried on coal mining business for many decades from land site. Eventually coal ran out. They decided to sell the land. To achieve greater revenue they built up the land (roads, etc.). Then they sold it for a profit = capital income
  • FCT v Whitfords Beach = Taxpayer was company formed by 3 fisherman. They acquired land many years ago for fishing operations. Land value increased over time. Eventually company was approached by land developers. instead of developers buying land from company, they bought shares in the company. This resulted in change in control. Following change in control they developed the land and sold at a profit. Court argued that company ventured into land development business upon change in control. Sale of land was held as income from business.
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26
Q

Week 5
- Business income special circumstances -

Discuss income from business vs realisation of capital asset in regards to:

1) Banking/Insurance/Investment companies.
2) Lease incentive payments
3) Intellectual Property and ‘know-how’

A

1) These companies are very often in the business of selling off assets to generate liquidity. Therefore profit from sale of asset is usually held as income from business = it is within the scope of their business to sell assets for liquidity purposes.

2) Lease incentive payments (payment received from landlord as inducement to move firms business premises)
- FCT v Cooling = Firm of solicitors received lease incentive payment. It was held as income from business because Solicitors often operate from leased premises.

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27
Q

Week 5

In relation to assessing business income for tax purposes what is an ‘Extraordinary transaction’?

A

Extraordinary transaction = a transaction outside the normal course of carrying on a business = usually a capital gain, however may still be income from business as per the Myer case below.

  • FCT v The Myer Emporium Ltd = Taxpayer carried on retailing and property development business and also acted as finance company to others within group. In order to obtain funding it entered into series of transactions unlike anything it did before. Firstly, loaned $80 million to subsidiary. Secondly, it assigned right to receive interest on the loan to Citicorp in exchange for $45 million. Court held $45 million as ordinary income along two lines of reasoning (called strands)
    1st strand) Extraordinary transaction with profit making purpose at time of entering transaction = ordinary income
    2nd strand) Similar to compensation principle (amount takes on form of whatever it is replacing (compensating for)) - $45million replaced future interest receivable. Therefore took the form of the interest receivable. Because interest is ordinary income for a business, the lump sum was ruled as ordinary income too.
  • Westfield Ltd v FCT = Taxpayer in business of designing, constructing, leasing, and managing shopping centres. Taxpayer acquired land to develop a shopping centre. Instead sold the land at a profit.Court ruled 1st strand of Myer did not apply, because way profit was made was different from way originally intended to make profit. Therefore was a capital gain.
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28
Q

Week 5

How do we determine if a contract is a capital asset?

What is the compensation principle?

A

To determine contract as capital asset = Must consider importance of contract. If important then considered capital asset.

Compensation principle = applies to amounts received as compensation payments = compensation payments takes same character (e.g. income or capital) as amount which it replaces = ask the question ‘What is the amount replacing/substituting/compensation for?’

  • California Oil Products = taxpayer distributed oil products. It had exclusive agency contract for the supply of oil. Contract was cancelled. They went out of business. They received compensation for cancellation of the contract. Compensation replaced the lost contract. Because the contract was a capital asset the consideration took capital form too.
  • Allied Mills Industries Pty Ltd = Taxpayer conducted large food manufacturing and distribution business. taxpayer was contracted by Arnotts biscuits as sole distributor of biscuits. Arnotts decided to takeover distribution. Arnotts paid taxpayer lump sum to cancel contract. Court found contract was not fundamental to the taxpayer business as a whole. Therefore, was not a capital asset and so compensation was not capital in nature and was derived as ordinary income.
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29
Q

Week 5

What is a non-cash business benefit?

Discuss the issue and resolve of non-cash business benefits

What about a non-cash business benefit that does not exceed $300?

A

non-cash business benefit = property or services provided wholly or partly in respect of a business relationship

Issue = traditionally not ordinary income if not convertible to cash. Therefore, can exploit system by using non-cash business benefits in place of full payments.

Resolve = s21A was introduced and states that non-cash business benefit not convertible to cash may be treated as if it were convertible to cash and valued at arms length value (reduced by any contribution made by recipient). However the amount must already be considered income before applying s21A (s21A does NOT deem the benefit to be income, unless it already was)

Note: Arms length value = amount reasonably expected to be paid to obtain benefit from provider.

Amount less than $300 (after reduction from contribution) = exempt income

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30
Q

Week 5

What is Income from property?

Discuss interest, rent, royalties, and dividends

A

Income from property = all income not being income from personal exertion = interest, rent, annuities, royalties, dividends

Interest = Ordinary income = must be distinguished from ‘Premiums’ as evident in case below. Premiums are capital in nature
- Lomax v Peter Dixon = Money lent to borrower in Finland prior to Russian invasion. Premium was payable on top of interest to ensure against risk of lender never getting money back (due to instability of the time)

Rent = price paid for right to use another person’s property (land, building, equipment, etc.) = ordinary income = must be distinguished from rent premiums which are capital in nature

Royalty = payment for the use of another person’s property, generally where the payment is tied to the amount of use = typically ordinary income, however may not be

  • McCauley v FCT = Taxpayer was farmer who owned land with trees. Timber mill approached farmer and wanted to cut down trees on his land. Agreement reached where 3 shillings paid for every 100 super feet of timber actually cut. Therefore, amount received depended on use of farmers trees and henceforth court concluded payment as royalty.
  • Stanton v FCT = Taxpayer was farmer who owned land with trees. Timber mill approached farmer and they entered into agreement. Payment was 17,500 pounds for 500,000 super feet of pine timber and 2,500,00 super feet of hard timber. Therefore, amount received in exchange for goods. Court concluded payment NOT as royalty.

Dividends = included in assessable income as ordinary income under s44(1)

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31
Q

Week 5

What is an annuity?

What does tax treatment for an annuity depend on?

How do we calculate assessable income for an annuity?

How do we distinguish an annuity from instalments of a purchase price of a capital asset or a capital sum together with interest?

A

Annuity = a specified amount paid at specified intervals for a fixed or contingent period = income from property = ordinary income

Tax treatment = depends on whether or not annuity has been purchased.
Purchased annuity = where lump sum has been paid in return for income stream (e.g. paying insurance company 100,000 for 10,000 each year for remainder of life.

Calculation = use the below formula to work out the deduction you can make against the amount received per annum. The remaining amount will be the assessable amount.
(A(B-C)) / D
A = proportion of annuity taxpayer is entitled to in the year (if whole amount then use a 1)
B = purchase price
C = any capital amount payable on termination of annuity
D = number of years payable (or life expectancy)

If not purchased = entire amount is assessable

Distinguishing an annuity = legal form approach: ask can a ‘Fixed Gross sum” (a definite price) be identified? if yes, then not annuity

  • (Annuity) Egerton-warburton = Taxpayer was farmer who entered into agreement to sell land to two sons. In agreement sons agreed to pay farmer 12,00 pounds per year for rest of life then 1,000 per year to widow if husband died. No fixed gross sum can be determined because it is impossible to know how long farmer will live. Therefore, court concluded amounts received as annuity.
  • (Annuity) Moneymen Pty Ltd vs FCT = Taxpayer sold dairy farm and as part of sales arrangement also transferred valuable milk supply contract in exchange for amount dependant upon amount of milk actually supplied each month. No fixed gross sum can be determined because impossible to know amount of milk supply each month. Therefore, court concluded amounts received as annuity.
  • (Not Annuity) Foley v Fletcher = Vendor sold block of land in return for number of instalments of purchase price of capital asset, payable over period of 30 years. Simple multiplication reveals fixed gross sum. Therefore, was not an annuity.
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32
Q

Week 4 and 5

Outline s15-2, ITAA97

Why is it less important these days?

What is the effect of s15-2(3)

A

s15-2, ITAA97 = includes in the assessable income of the taxpayer, the value to the taxpayer of any allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer in respect of or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. = applies to both cash and non-cash benefits

lesser importance = because Fringe Benefits Tax Regime is predominantly applied instead

s15-2(3) = excludes application of s15-2 to ordinary income, dividends, fringe benefits.

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33
Q

Week 6
Why are capital gains taxed?

What is the relevant section of ITAA97 for the CGT provisions?

What is the effect of the Ralph Review?

What is the importance of Sep 20th 1985?

A

The is because the Asprey committee, in 1970, recommended that Capital gains represent additional ability to pay and so it would be inequitable for them not to be brought to tax. Therefore, CGT was introduced in 1985 and further refined in ITAA97. Policy rationale = broaden tax base, vertical equity, horizontal equity, efficiency

Relevant section = 3-1 and 3-3

Ralph review = A reform to CGT which provides a generous discount for assets held more than 12 months.

Sep 20th 1985 = Gains or losses relating to assets acquired prior to, and on this date are ignored.

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34
Q

Week 6
Is CGT a separate tax to assessable income?

How do we calculate Net Capital Gain?

A

CGT as separate tax = No, it is not. This is because s102-5, ITAA97 includes net capital gain in assessable income for the year as statutory income.

Calculating Net Capital Gain:
Step 1: Identify CGT events as per s104-5 and determine losses and gains as per s102-22. Then subtract losses from gains

Step 2: Apply balance of all prior years unapplied net capital losses. Determine net capital loss as per s102-10. These losses are applied in order of occurrence as per s102-15

Step 3: Apply CGT discount if appropriate (held asset 12 months or more). 50% for individuals and trusts (none for companies, foreign residents, temporary residents), 33.33% for complying super funds. Gain must be made after 11:45am on 21 september 1999 for discount to apply

Step 4: Apply small business concessions, where appropriate

Step 5: The deduced value of any remaining capital gain is the taxpayers net capital gain for the year and is included as assessable income under s102-5

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35
Q

Week 6
How do we calculate a capital gain?

How do we calculate cost base?

How do we calculate a capital loss?

What is reduced cost base?

A

Capital gain = capital proceeds (s116-20) - cost base

Cost base = purchase price + incidental costs + ownership costs + capital expenditure to increase/preserve asset value + capital expenditure to establish preserve of defend title or right to asset

Incidental costs (non-deductible only)= acquisition/disposal costs = stamp duty, advertising, legal fees, commissions.

Ownership costs (non-deductible only) = interest costs of borrowings to purchase, council rates, land tax, insurance costs, repairs
- DO NOT INCLUDE OWNERSHIP COSTS IN COST BASE FOR RENTAL PROPERTY (because they are offset against rental income), EXCEPT FOR INITIAL REPAIR COSTS WHICH ARE STILL INCLUDED (Maintenance repairs are not included)

Capital loss = where capital proceeds are less than Reduced Cost base

Reduced cost base = Cost base less costs of ownership

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36
Q

Week 6

How do we determine a capital event?

A

We must use s104-5

CGT event A1 (does not apply if continue to be beneficial owner): s104-10
Relation: Disposal of asset
Timing: When disposal contract entered or, if none, when ownership ceases.
Capital gain = Capital proceeds - cost base
Capital loss = reduced cost base - capital proceeds

CGT event B1: s104-5
Relation: Use and enjoyment before title passes
Timing: When use passes
Capital gain = Capital proceeds - cost base
Capital loss = reduced cost base less capital proceeds

CGT event C1: s104-20
Relation: Loss or destruction of CGT asset
Timing: when compensation first received or, if none, when loss discovered or destruction occurred.
Capital gain = Capital proceeds - cost base
Capital loss = reduced cost base - capital proceeds

CGT event C2: s104-25
Relation: Cancellation, surrender and similar endings of an intangible CGT asset (e.g. shares, units in a trust)
Timing: When contract ending asset entered into or, if none, when asset ends
Capital gain = Capital proceeds from ending - cost base
Capital loss = reduced cost base - capital proceeds

CGT event C3: s104-30
Relation: End of option to acquire shares
Timing: When option ends
Capital gain = capital proceeds from granting option less expenditure in granting it
Capital Loss = expenditure in granting option less capital proceeds

CGT event D1 (no discount allowed, because what asset? asset held all of life technically?): s104-35
Relation: creating contractual or other rights (think about the Olivier case)
Timing: When contract is entered into or right is created
Capital gain = Capital proceeds creating right - incidental costs of creating right
Capital loss = reduced cost base - capital proceeds

37
Q

Week 6

What are examples of a CGT asset?

A

CGT assets:

  • Land and buildings
  • Shares in a company and units in a trust
  • Options
  • Debts owed to you
  • A right to enforce a contractual obligation
  • Foreign currency

Judicial concept:

(1) A CGT asset is:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
(2) To avoid doubt, these are CGT assets :
(a) part of, or an interest in, an asset referred to in subsection (1);
(b) goodwill or an interest in it;
(c) an interest in an asset of a partnership;
(d) an interest in a partnership that is not covered by paragraph (c).

38
Q

Week 6
What are ‘Collectables’?
How does CGT differ for Collectables?

A

Collectables = things like artwork, paintings, antiques, , drawings, postage stamps, medallions, first day covers, coins, rare books or folios, etc. use for personal/associates use or enjoyment = s108-10(2) for full list

Special rules:
s108-10(1) Capital losses from collectables only used to offset capital gains from collectables
s108-1(4) Essentially above, but applied to carrying forward of capital loss from collectables
s118-10(1),(2) May disregard Cg or CL from collectable acquired for less or equal to $500
s108-15 must be disposed of in set for above exemption to apply. If not disposed in set then no exemption.
s108-17 Costs of ownership not included in cost base

39
Q

Week 6
What are ‘Personal use assets’?

How does CGT differ for Collectables?

A

Personal use assets = Not a collectable. Asset used or kept mainly for personal/associates personal use/enjoyment (Boats, Tvs, etc.).

Special rules:
s108-20(1) Disregard CL
S118-10(3) Disregard CG for assets acquired at $10,000 or less
s108-25 Above exemption not applied to items of a set not disposed of as a set
s108-30 Cost of ownership not included in cost base

40
Q

Week 6
Which assets are exempt from CGT?
Which loss-denying transactions are exempt from CGT?

What are Anti-overlap provisions?

A

Exempt assets:

  • Cars, motorcyles & similar vehicles s118-5(a)
  • Decorations awarded for bravery s118-5(b)
  • Asset used solely to produce exempt income s118-12(1),(2)

Loss-denying transactions:

  • Compensation for damages for wrong or injury s118-37(1)
  • Gambling, games or competition prizes s118-37(1)(c)
  • Other transactions eg, subdivision into strata units s118-42, marriage breakdown settlement s118-75

Anti-overlap provisions = avoids double taxation = General overlap provisions s118-20 reduces capital gain where an amount is included in assessable or exempt income by a non-CGT provision

41
Q

Week 6

What is the Market Value Substitution rule?

A

MV substitution Rule: s116-30, s112-20 = can substitute market value for element 1 of cost base given certain circumstances:

  1. taxpayer receives no capital proceeds, or
  2. part or all of capital proceeds cannot be valued
  3. Non arms-length transaction where capital proceeds are more or less than market value
42
Q

Week 7
Fringe Benefits are taxed under a separate regime to income, there is separate legislation involved.

Why was s15-2 replaced in large part by the FBT regime? In other words what was the issue with s15-2 of ITAA97?

FBTAA86: What are some of the key features?

When would the employee have an individual “Reportable Fringe Benefits Amount”?

A

Issue with s15-2 = The statement defining additional inclusions of assessable income states that value is determinable upon “value to you”. This introduces a ‘subjective’ element. The Cooke and Sherden and Tennant v Smith cases highlight this issue. It may also be difficult to establish connection to ‘employment of or services rendered by you’

FBTAA86: Note: s66 of FBTAA86 imposes obligation to tax
- Taxpayer = Employer, not employee = 1) This increases efficiency because there are less employers than there are employees (lower administrative costs). 2) It has been found that this results in greater compliance.

  • Tax period is 1 April - 31 March

Individual Reportable Fringe Benefits Amount = if the sum of the following is more than $2000

  • Individual fringe benefits amount
  • Individual quasi-fringe benefits amount (quasi-fringe benefits are exempt fringe benefits for employees of a government body, church , etc. whose activities include caring for elderly or disadvantaged s58, s57A)
43
Q

Week 7

What is a Fringe Benefit? How is this different to a non-cash business benefit?

Is a Fringe Benefit included in an employees assessable income?

What are the three exclusions of Fringe Benefits definition?

A

FB = Benefit provided during year of tax in respect of any year to employee/associate by employer/associate/arranger/person participating in or facilitating the provision or receipt of the benefit in respect of the employment of the employee (s136) = includes a reimbursement for educational purposes (as long as employer/employee relationship)

Different to non-cash business benefit = because a fringe benefit is in respect of employment e.g. a boss gives employee a laptop, a nncb is in respect of a business relationship e.g. a customer pays with a laptop.

For a loan: Consider the interest and repayment. If interest is below market then the benefit will be what is saved on interest. However the principal amount is not a benefit because it is repaid.

Current employee = means a person who receives, or is entitled to receive, salary or wages

Current employer = means a person… who pays, or is liable to pay, salary or wages

Fringe benefit included in assessable income = no it is not it will be included as NANE or exempt income.

1) s23L(1) = a fringe benefit will be NANE of the taxpayer (only applies if employer is liable to pay fringe benefits tax)
2) s23L(1A) = a fringe benefit will be exempt income if, by way of s136(g) FBTAA1986, it is an exempt benefit.
3) s23L(2) = a fringe benefit will be exempt income if the total amount does not exceed $300 in the year of income

Exclusions:

1) Salary/wages
2) Exempt benefits (taxi travel to/from work, provision of work-related items, and more…)
3) Superannuation contributions by employers

44
Q

Week 7
How do we calculate FBT?

Why do we do the gross-up in our calculations?

What is the Otherwise deductible rule?

A

Firstly we should note that there are specific valuation rules for each type of benefit (car benefit vs house benefit). For our purposes we will focus on Car benefits. However, calculation of FBT is as follows:

FBT = Fringe Benefits Taxable Amount x FBT rate

  • Fringe Benefits taxable Amount = Type 1 sum x 2.0802 + Type 2 sum x 1.8868 + sum of non-exempt amount
  • FBT rate = 47%

Type 1 = where employer has been subject to GST on the supply of the benefit and so is entitled to claim GST credits.

Type 2 = situations where GST was not payable on supply of benefit so no GST credit entitlement exists.

Gross-up = where we multiple by 2.0802 or 1.8868 = we do this 1) to achieve parity (the state of being equal) between additional remuneration as cash (salary/wages) and additional remuneration in the form of FB’s. 2) to consider fact that employer is entitled to claim a deduction for FBT payable and cost of providing FB’s. 3) to take into account that GST tax credits are also available to employer

Sumarry:

1: Achieve parity
2: factor in FBT deduction entitlement
3: factor in GST tax credits entitlement

Otherwise deductible rule = if the employee had acquired the benefit directly, would they have been entitled to a deduction for the expenditure? Taxable value is reduced by this notional deduction.

45
Q

Week 7
Explain the two methods for calculating the taxable amount of a Car Fringe Benefit

Where multiple methods exist, you should ideally show calculations for both methods.

A

Statutory Formula Method (s9) = ABC/D - E
A = Car base value(includes base cost of vehicle and any non-business accessories.. so could ignore the cost of a GPS if added for business purposes)
B= Statutory fraction (generally 0.2)
C = Number of private days (days parked in garage, even if not being used. Include weekends, unless car dropped back at work)
D = number of days in year
E = recipients contribution

Operating Costs Method (s10) (requires a log book if to be used) = (C x (100% - BP)) - R
C = costs (ensure you factor in number of months use, etc. AND do not include stamp duty costs because this is already a tax)
BP = business use percentage (e.g. car used 25% for business purposes)
R = Recipients contribution

46
Q

Week 7

In regards to Fringe Benefits, outline 3 areas of overlap in legislation

A

Overlap:

1) FBT takes priority over s15-2 ITAA97
2) Fringe benefits are included as Non Assessable Non Exempt income (this is for relevant calculations which involve NANE) (s23L(1) ITAA36))
3) Exempt benefits are exempt income (again, this is for relevant calculations) ((23L(1A) ITAA36)) (this is normally the one they want for the assignment)

47
Q

Week 7

What are the two types of deductions?

What is the importance of s8-10 of ITAA97?

What are the two key requirements of s8-1?

A

Deductions = General deductions (s8-1) and specific deductions (s8-5, s12-5)

s8-10 = No double deductions = where a loss/outgoing may be deductible under more than one provision, use the most appropriate provision

Key requirements:

  1. Nexus test = is there sufficient connection between the loss/outgoing and either one of the positive limbs?
  2. Make sure that none of the negative limbs apply. If any apply then no deductible loss/outgoing under s8-1
48
Q

Week 7

What are the Two Positive Limbs of s8-1?

A

Two Positive Limbs = refer to (a) and (b) of s8-1(1):

(1) = you can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

SO we apply (b) if we are carrying on a business and (a) if not.

49
Q

Week 7

What are the Four Negative Limbs of s8-1?

A

Four Negative Limbs = refer to (a), (b), (c) and (d) of s8-1(2):

(2) = However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your NANE; or
(d) a provision of this Act prevents you from deducting it.

50
Q

Week 7

Provide some example of Deductible Business Expenses.

A

Deductible Business Expenses = Wages, cost of providing FB’s, FBT, Interest, Electricity, gas, fuel, trading stock, raw materials, rates, insurance, repairs, land tax for owned premises, rent for leased premises, rent for any leased equipment, rent for any leased equipment, services such as legal;financial;accounting;tax advice.

51
Q

Week 7:

For the definition of a deduction what is a loss or outgoing?

A

Loss = taxpayer’s financial resources have been diminished

  • (Stolen money) Charles Moore and Co (WA) Pty Ltd (1956) 95 CLR: Old fashioned department store. Employees would carry cash across road each day to deposit in bank. One day cash was stolen. Court ruled stolen money as a loss.
  • (write-off bad debts) AGC (advances) Ltd v FCT: taxpayer had restructured its business as a result of a scheme of arrangement and had subsequently been taken over by another company. Deductions were allowed for losses incurred in relation to bad debts arising from its previous business activities. A loss constituted by the writing off of a bad debt is incurred at the time when the debt is written off (which may occur after the taxpayer has ceased to carry on as a going concern the business in which the debt was created). Look at’whether the occasion of the loss/outgoing could be found in the carrying on of the taxpayers business’ for the purpose of producing assessable income.

Outgoings (an expense) = usually involves some form of payment, outlay or expenditure, or the taxpayer is committed to spend money e.g. has received an invoice.

52
Q

Week 7

Under s8-1(1)(a) how do we determine the nature of fact for ‘in gaining or producing’?

A

‘in gaining or producing’ = in the course of gaining or producing = several test can be used to determine nexus:

  1. Incidental and relevant test
    - Ronpibon Tin NL v FCT: ‘it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none is produced, would be expected to produce assessable income.
  2. Essential character test: What is the essential nature or character of the particular expense = it must an income producing expense
    - Lunney v FCT: expense of travel to work ruled as non-deductible. Was not essential.
    Relevant cases:
  3. Herald and Weekly times - newspaper allowed deductions for costs incurred in defending/settling action brought against it for alleged defamation of an article = Unavoidable incident of publishing a newspaper
  4. W Nevill and Co - deduction for amount paid to managing director to retire because payment made to increase efficiency of company.
53
Q

Week 7
Are Pre-commencement loss/outgoings classified as deductible under s8-1? How about s40-880?

How does Interest expense differ?

What about expenses incurred in getting new employment (relates to 1st limb)? What about expenses to get new clients (relates to 2nd limb)?

A

Pre-commencement loss/outgoing = loss/outgoing preliminary to the commencement of an income producing/business activity = not incurred ‘in the course of’ and are therefore not deductible

  • Softwood Pulp and Paper case: incurred feasibility study and other costs to determine whether or not to establish a new paper production mill. Commissioner held costs as NOT deductible because preliminary to commencement of income producing activity / business
  • Goodman Fielder Wattie case - company was collaborating in a research project re development of monoclonal antibodies. Commissioner denied deductions for initial R and D because of provisional kind only, taxpayer not yet committed to project.

s40-880 = provides deduction over 5 year period for ‘Black hole’ capital expenditure (expenditure to establish/restructure/cease business, raise capital, liquidate company, defend takeover)
- Rule of last resort: applies to relevant business capital expenditure that is not deductible under s8-1, where depreciation regime does not apply, CGT regime does not apply, lack of deduction cant be due to a specific provision denying deduction

Interest expense = is deductible prior to commencement under s8-1.
- Steele case: Woman borrowed money, bought land and aimed to build hotel. Ct held interest expense was deductible. Taxpayer had no plans to use land for any purpose other than gaining assessable income.

Expenses incurred in gaining new employment = are not in the course of gaining/producing assessable income and therefore not deductible
- Maddalena case: Expense incurred in trying to get contract with new club were ruled as not deductible because incurred at a point too soon.

Expenses to get new clients = yes, deductible

54
Q

Week 7

Are post-cessation losses/outgoings deductible under s8-1?

A

Post-cessation losses/outgoings = may be deductible if the occasion of the loss/outgoing is found in business operations that were formerly carried on by the taxpayer for the purpose of gaining assessable income.

  • Review AGC case (on another card)
  • Placer Pacific Management Case: taxpayer sold business of selling conveyor belts. Years later expense claimed for settling customer dispute concerning faulty conveyor belt. The occasion of the outgoing was to be found in the business operations directed towards the gaining/producing of assessable income. Deduction was allowed.
  • FCT v Brown: Taxpayer and wife borrowed money for purchase of deli business. Business subsequently sold. Sales proceeds not enough to cover loan so had to continue to pay interest on loan. Commissioner allowed deduction because found occasion for the interest payments was found in the loan entered into by the partnership in carrying on its business for the purpose of producing assessable income.

How about if the loan is refinanced??
- Jones 2002 ATC 413: Loan to acquire trucking business equipment. Husband died. Business ceased. Interest on loan still payable. She refinanced the loan. Commissioner held refinancing did not break nexus between the interest outgoings and business. Therefore deductions were allowed.

55
Q

Week 7

In s8-1(1) what does ‘to the extent’ refer to?

A

To the extent = in some circumstances loss/outgoing may need to be apportioned, i.e. only partly deductible

  • Ronpibon Tin NL v FCT: Company had to close business of mining in Siam and Malaya during WWII. Administrative expenses and directors fees had to be paid. Commissioner said need to determine what proportion of the expenses were incurred in gaining assessable income,
  • Ure v FCT (very interesting case): Taxpayer borrowed money at 12.5%pa. He on-lent the funds to associates (wife and a family company) at lower rate of 1%. Ct found it was unrealistic that the funding had been borrowed at 12.5% for the purpose of achieving a 1% return. Therefore the proportion of outgoing relevant to an income earning activity was determined as being the proportion of the interest expense taxpayer incurred up to the amount of interest earned from the 1%.
  • Fletcher (1991) 173 CLR 1: Taxpayer borrowed sum for period upto 15 yrs to purchase annuity. Arrangement was structured so that first 5 yrs taxpayer would pay interest exceeding annuity income (substantial losses), then last 5 yrs annuity income would exceed interest outgoings (substantial net income). Therefore, could terminate scheme early. Ct said deductibility depends on whether the overall arrangement was expected to be terminated before substantial amounts of assessable income began to be derived in the final years.
56
Q

Week 7
Under the second positive limb of s8-1(1) are costs incurred in defending a business allowable deductions?

Under the second positive limb does necessarily incurred mean that the expense needs to be necessary (essential)?

A

Costs incurred in defending a business: Yes, as long as expenditure is appropriate and adapted for the ends of the business carried on for purpose of earning assessable income.

  • Snowden and Willson case: Ct allowed deductions for costs incurred in defending company before a royal commission investigating business practices, and in placing newspaper advertisements telling its side of the story to the public.

Necessary (essential) = does not have to be. Necessary simply means that the expenses are appropriate and adapted for the ends of the business carried on for purpose of earning assessable income.
- Magna Alloys and Research case: Ct allowed deductions for legal expenses incurred in defending director/agents against charges that they had received secret commissions.

57
Q

Week 7

As per the first of the four negative limbs of s8-1. How do we deduce if an outgoing/loss is capital expenditure?

A

Distinguishing capital expenditure = We use the Business Entity test (leading test in Aus law) = there is a distinction between capital expenditure and revenue expenditure as follows:

1) Capital expenditure: an expense that relates to the taxpayers income-producing structure
2) Revenue expenditure: an expense that relates to the taxpayers income-producing process

To determine structure vs process we look at several factors:

1) Character of advantage sought = Lasting (capital) or Temporary (revenue) benefit?
2) manner in which benefit is to be used, relied upon or enjoyed = Constant (capital) or Short-term (revenue)?
3) Means adopted to obtain thing in question = Periodic payments (paying over and over again) (Revenue) or Final payment (Capital)? (this factor is less useful in the context of modern financing practices)

  • Sun Newspapers case: taxpayer paid rival newspaper 86,500 pounds by instalments in consideration of rival selling interest in newspaper it published and promising not to produce a rival newspaper for 3yrs within 300 mile radius. Ct ruled payment as capital in nature because they strengthened and preserved the taxpayers business organisation.
58
Q

Week 8
Are travel expenses to and from work deductible?

How about travel expenses in the course of work??

How about travel expenses between different lines of work (unrelated places of work)? (e.g. nurse finishes shit and goes to work as police officer after)

A

Travel to and from work = non-deductible = classified as a private loss/outgoing = s8-1 (2)(b) prevents private expenses from being deductible
- Lunney v FCT: discussed on another card

Travel expense in the course of work = deductible (travelling salesman, self-employed builder travelling to give quotes)

  • FCT v Wiener: teacher employed by education department and required to teach between 5 different schools in the week. Court found taxpayers employment was inherently itinerant (person who travels from place to place) and that she was travelling in the performance of her duties from the moment she left home to the moment she returned. Ct allowed deductions for travel between schools and also travel between home and the first and last school she attended each day.
  • FCT v Collings: taxpayer was a computer consultant who generally worked in her employer’s offices. She was required to be ‘on call’ after work hours to deal with queries from her home, however if she couldn’t resolve the query from home, she was required to go into the office to deal with it. 45% deduction allowed as claimed for the travel expenses as she commenced working at home and therefore the travel expenses were incurred in the course of gaining/producing assessable income.
  • FCT v Vogt – taxpayer was a professional musician required to transport large musical instrument between home and work (public transport unsuitable). Travel expense was deductible as it was attributable to transportation of the musical instrument

Travel expenses between places of work = yes deductible under s25-100 ITAA97 = allows deductions for the cost of travel between workplaces. Travel must be DIRECTLY BETWEEN TWO PLACES where income producing activities are carried on, and NEITHER PLACE IS TAXPAYERS HOME.
FCT v Payne: s25-100 was introduced as a legislative response to this case. In this case the taxpayer was denied deduction for travelling between a deer farm business (which was his home) and the airport. The court held travel between unrelated places of work to be not deductible under s8-1. The legislative response mentioned above now allows this, as long as one of the places IS NOT PLACE OF HOME.

59
Q

Week 8
Are childcare expenses deductible?

How about expenses for moving location for a job? (domestic expenses)

How about clothing expenses?

A

Childcare expenses = non-deductible = s8-1 (2)(b)
- Lodge v FCT: deductions for childcare expenses to have child minded so she could attend work ruled as non-deductible, neither relevant nor incidental to the activities by which the taxpayer gained her assessable income

Moving expenses for work = non-deductible = s8-1(2)(b)
- Fullerton v FCT: expenses for moving with family to a new home in another city because job was relocated were not deductible as they related to a domestic or family arrangement.

Clothing expenses = non-deductible (however exceptions apply) = s8-1(2)(b)

EXCEPTIONS:

  1. Protective clothing = deductible
    - Morris v FCT: taxpayer engaged in outdoor occupations and was allowed deductions for the cost of sun protective items eg, sun hats, sunglasses, sunscreens.
  2. Compulsory uniforms (distinctively identifies someone as working for a particular employer) (if non-compulsory then will only be deductible if registered under the register in Div 34)
    - Mansfield v FCT = a flight attendant was allowed a deduction for stockings and shoes which were required to be worn as part of a compulsory and distinctive uniform, the wearing of which was strictly enforced by the airline
  3. Occupation-specific clothing (clothing which identifies someone as belonging to a specific profession or occupation - nurses uniform)
60
Q

Week 8
Are self-education expenses deductible?

For an outgoing to be deductible is it necessary that a taxpayer be able to show a likelihood of increased income?

A

Self education expenses as deductible = TR 98/9 = yes, they are generally deductible where incurred to maintain/increase a taxpayer’s skills in an occupation in which the taxpayer is currently engaged, especially where the expenditure enhances taxpayer’s prospects of promotion/earning greater income

  • FCT v Finn: Taxpayer was architect and was allowed deductions for expenses incurred in travelling overseas for nearly one year to study architecture. He made voluminous notes, photographs, sketches, reports during his trip. Court held tour as incidental and relevant to employment. His advancement was more certain as a result of the trip, he had motives of career advancement and higher pay, and devoted all of his time to increasing his knowledge. Part of his trip was at the request of his employer.
  • FCT v Highfield: dentist who carried on general practice was allowed deductions for expenditure including course fees, travel and accommodation expenses relating to undertaking a Master of Science in Periodontics degree in London, that would enable him to perform more periodontic work in his general practice and allow him to specialise and to charge higher fees for his services. Court found that the expenditure was necessarily incurred in carrying on his business because the purpose in undertaking the degree was to use the knowledge he obtained in the advancement of his practice.
  • FCT v Studdert: court allowed deductions to a flight engineer for the cost of undertaking flying lessons that would improve his performance in his current job and increase prospects for promotion.

Examples:
- cost of registration, travel to and accommodation at professional conferences
- cost of course fees for undertaking tertiary course
- cost of study-related materials eg calculators, textbooks, stationery (note: does not include
capital expenditure such as purchasing a computer)

NOT DEDUCTIBLE IF = expenses relate to occupation individual is not currently engaged in or if for endeavouring for an occupational switch.

Show likelihood of increased income = not necessary

61
Q

Week 8
Are expenses incurred in gaining ‘rebatable benefits’ (youth allowance, etc.) deductible?

Are HELP loan repayments deductible?

A

Expenses incurred in gaining rebatable benefits = non-deductible = s26-19 which was a legislative response to the Anstis case where a taxpayer was allowed deduction for expenses on the basis that they were incurred in the course of establishing or retaining her statutory right to payment of the youth allowance

HELP loan repayments = non-deductible = s26-20 ITAA97

62
Q

Week 8
What are ‘occupancy’ and ‘running’ expenses in relation to home office expenses?

Are home office expenses deductible?

How do we distinguish between a place of business and a place used for convenience?

How do we calculate the proportionate nature of expenses ruled as approriately deductible?

A

Occupancy expenses = rent, interest on mortgage, council rates, insurance premiums
Running expenses = heating/cooling, lighting, depreciation

Home office expenses as deductible = TR 93/30:

1) where home office is a ‘place of business’ a relevant proportion of both kinds of expenses may be deducted
- Swinford v FCT – a self-employed scriptwriter was entitled to deductions for a portion of the rent paid in relation to her flat, where she dedicated a separate room in the flat for use as her study. She wrote her scripts in this room and did not have separate business premises.

2) where home office is simply used for convenience/ ‘in connection with taxpayers income-earning activities, but does not have the character of a place of business’ only a relevant proportion of the running expenses may be deducted (because of this, taxpayers are generally entitled to deductions for work related proportion of heating and electricity costs as well as depreciation costs of items such as desks, bookshelves used at home for work purposes)
- Handley v FCT: barrister who had home study where he worked 20 hrs per week was denied deductions for interest paid on his home loan as well as rates and insurance premiums relating to the premises. Barrister also maintained his own chambers/office in town.
- FCT v Forsyth – barrister who paid rent to the trustee of his family trust which owned the family home, was denied deductions for the rent that related to his home study. Court looked at the fact that he only used the study for convenience not through compulsion, and on this basis considered that the rent was not incidental or relevant to gaining/producing his assessable income. Barrister also maintained his own chambers/office in town.

Distinguish place of business V place of convenience TR 03/30:

  1. Is area clearly identifiable as place of business? if yes, then more likely to be base of income producing activities
  2. is area readily suitable or adaptable for private use? if yes, then more likely to be place of convenience (kitchen is readily adaptable for private use, a study is not)
  3. Is area used exclusively for income producing activities and/or client meetings? if yes, then more likely to be base of income producing activities

Calculate proportion as = percentage of square footage of office space relevant total square footage of house

63
Q

Week 8

What is the purpose of s8-5 specific deductions?

A

Purpose of 28-5:

  1. Confirm the operation of s8-1
  2. Extend the operation of s8-1
  3. Deny deductions otherwise available under s8-1
  4. Impose additional requirements regarding s8-1
64
Q

Week 8
List further examples of specific deductions and the related sections. This is just as an easy ctrl+f search in case something comes up in the exam.

A

▪Managing tax affairs s25-5

▪Payments for membership of trade/business/professional association s25-55

▪Borrowing expenses (incurred in setting up a loan) s25-25

▪Expenses incurred in preparing/registering/stamping a lease of property or an
assignment/surrender of a lease of property, where the property is used for income producing purposes s25-20

▪Retirement allowance paid to employee/former employee or dependant of employee/former
employee s25-50

▪Charitable donations s30-15

▪Carry forward Losses s36-15 (individuals etc), s36-17 (companies)

65
Q

Week 8
Would loss resulting from theft be deductible? (loss from employee stealing)

What about an amount received as a recoupment for a loss, would this be assessable income?

A

Loss resulting from theft = S25-45 = can deduct a loss in respect of money if:

(a) you discover the loss in the income year; and
(b) loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent (other than an individual employee you employ solely for private purposes); and
(c) money was included in your assessable income for the income year; or for an earlier income year

Amount received as recoupment = included in assessable income (subdivision 20-A)

66
Q

Week 8

Are Bad Debts tax deductible as per a specific provision?

A

By Debts we mean money that a taxpayer is entitled to receive, not to pay.

Bad Debts are tax deductible under s25-35 if the following criteria are satisfied:

  1. Debt must exist at the time it is written off
    - Point v FCT: taxpayer entered scheme of arrangement with debtor which formally released the debtor from obligation to repay the debt. Debt was subsequently ‘written off’ in taxpayers books. High court held that once the debt had been released under the scheme arrangement, it was extinguished and ceased to exist, and there was nothing to be written off, so taxpayer could not claim a deduction
  2. Debt must be bad (not just doubtful) (reasonably regarded as irrecoverable)
  3. Debt must have been: previously brought to account in the taxpayers assessable income (regarded as income), or in respect of money lent in ordinary course of business of money-lending
  4. Debt must be written off during the year it went bad
67
Q

Week 8
What are repairs?

Are repairs deductible as per a specific provision?
How about capital expenditures?
How about initial repairs?
How about entire replacement?

A

Repairs = restoring an asset to its previous condition without changing its essential character/function. The aim is to make good the deterioration through wear and tear.
- Rhodesia Railways case = Taxpayer replaced worn out railway track with new parts, this was due to wear and tear. Court ruled as genuine repair.

Repairs = deductible under s25-10 IF:
(1) relate to premises or a depreciating asset that is held or used solely for the purpose of producing assessable income

If property is held or used only partly for this purpose then:
(2) you can deduct so much of the expenditure as is reasonable in the circumstances

However,

(3) you cannot deduct capital expenditure under this section = Capital expenditure is classified by improvement = involves making an item functionally better than it originally was.
- Western Suburbs Cinemas case: taxpayer denied deductions for cost of replacing existing dilapidated ceiling with new and improved fibro ceiling. Was ruled as an improvement and not a repair.

Initial repairs = not deductible under s25-10 = a repair to remedy defects which existed at the time the property was acquired, where the defect did not arise from the operations of the taxpayer = can be viewed as capital expenditure. for example, in the below case it is more or less arguable that the building was not capable of operating and then the initial repairs IMPROVED it so that it was capable of operating.
- W Thomas and Co Pty Ltd v FCT: Taxpayer was denied deduction of costs of repairing a roof, guttering, wall, basement floor and wooden floor and painting a building in the year of income it was acquired.

Entire replacement = not deductible = viewed as capital expenditure = is it separately identifiable as a principal item of equipment? AND is it capable of independent function?

68
Q

Week 8
What are some relevant examples of provisions denying/restricting deductions? (fourth negative limb of s8-1 = denying provisions)

A

Penalties/Fines = s26-5 = not deductible

Bribes = s26-53

Leave payments = s26-10

Rebatable benefits = s26-19

Non commercial business losses = Div 35

Political contributions & gifts = s26-2

Superannuation guarantee charge = s26-95

Reimbursed expenditure = s51 AH

Private contribution for fringe benefits = s51AJ

Car parking expenses = s51AGA

Car expenses = s51AF

Non-deductible non-cash business benefits = s51AK

HECS/Student assistance = s26-20

Self-education expenses = 282A

Tax avoidance schemes = Pt IVA

GST input tax credits s27-5
Entertainment expenses Div 32 (note s32-20 deduction may be re-instated if provided by way of
fringe benefit)

Relative’s travel s26-30

Leisure facility s26-50

Boats s26-47

Luxury cars s40-230 (depreciation cap)

Recreational club memberships s26-45

Indictable offences s26-54

69
Q

Week 8
What deductions are allowable under the Uniform capital allowances regime?

What deductions are not?

What depreciation methods must we use?
What is the central difference between the methods? what about the central similarity?

What about if the cost of an asset is

A

Uniform capital allowances = depreciation of plant and equipment = Div 40:
40-25(1) = can deduct an amount equal to the ‘decline in value’ for an income year of a ‘depreciating asset’ that it ‘held’ during the year
“holder” = concept of economic ownership
“plant” - includes ‘articles, machinery, tools and rolling stock (s45-40)
HOWEVER
40-25(2) Deduction reduced where asset’s decline in value attributable to its use for a purpose other than a taxable purpose = if used 30% for private use then depreciation expense reduced by 30%…

Depreciating asset = an asset that has a limited effective life and can reasonably be expected to decline in value over time.

Examples of non depreciating assets:

  • Land
  • trading stock
  • Intangible assets (except intellectual property, in-house software) purchased goodwill = not a depreciating asset

Depreciation methods: can use a mix of methods across assets, however can never change method once specified for a particular asset: remember to multiply result from calculation by the percentage the asset is used for business

  1. Diminishing value method (s40-72)
    - (post 9 may 2006 assets) = base value x (days held/365) x (200%/effective life)
    - (pre 10 may 2006 assets) = base value x (days held/365) x (150%/effective life)
  2. Prime cost method (40-75) =
    - Asset cost x (days held/365) x (100%/effective life)

Similarities between methods = both depreciate the same amount (full amount) over asset life
Difference between methods = Prime cost has consistent depreciation amount each year. under diminishing value method the depreciation expense lessens each period.

Term clarification:
cost = amount that the taxpayer is taken to have paid to acquire the assets (includes acquisition costs eg, customs duty, delivery and installation costs). Any other costs incurred after acquisition which contribute to bringing the asset to its present condition/location can also be included (2nd element of cost).

Base value = opening adjustable value plus any 2nd element costs incurred in the current year s40-70(1)

Opening adjustable value = cost of the asset less declining value in previous years (essentially just carrying amount). s40-85

If the cost of an asset is less than $300 = immediately deductible s40-80(2), however disregard for a ‘set of assets’

70
Q

Week 8
What deductions are allowable Capital Works Allowances regime?

What depreciation method is used?

A

Capital work allowances = Capital works refers to the depreciation of the structure of the building, usually objects that are irremovable (floors, paint, driveways, garages) = Div43

Depreciation method = Residential properties built after the 15th September 1987 are eligible to claim capital works deductions over a 40-year period which will be depreciated as a straight line at 2.5% per annum. When construction costs are unknown, a qualified specialist such as a Quantity Surveyor will be responsible for estimating the building.

71
Q

Week 9
When is income included in assessable income for ordinary vs statutory income?

How do we determine when income is derived for ordinary income?

What is the appropriate basis, Cash Vs Accruals? What is the relevant TR? What are the relevant factors?

Consider the following situations in regards to case law:

  1. Employee
  2. Sole practice
  3. Sole practice with secretary
  4. Sole practice with a few employees
  5. Large partnership
  6. Large practice with associated service companies
  7. Rental income
A

Ordinary vs statutory income = When derived for ordinary income and for statutory income the provision will specify.

Determining when derived = we apply ordinary commercial and business principles. This means we use the cash or accruals basis

Cash Vs Accruals = Determine the method that is calculated to give a substantially correct
reflex of the taxpayer’s true income (Carden’s Case)

Relevant TR = 98/1

Relevant factors from TR 98

  1. Size of the business (small = cash, large = accruals)
  2. How much of the taxpayers profit is attributable to its employees (significant contribution = accruals)
  3. Is dealing in trading stock an important part of the business (if yes = accruals)
  4. Cash or credit sales (if credit = accruals)
  5. How much of the taxpayers profit is attributable to exploitation of capital assets (if significant = accruals)
  6. Reliance on circulating capital or consumables (if significant = accruals)
  7. Employee - cash (includes back pay)
  8. Sole practice - cash (however, if dealing with trading stock then accruals is most appropriate)
    - Cardens case: Medical practitioner in sole practice
  9. Sole practice with secretary - cash
    - Firstenberg case: Solicitor in sole practice who employed a secretary
  10. Sole practice with a few employees - cash
    - Dunn case: Chartered accountant in sole practice, 3 employees none of whom were qualified accountants. Dunn took responsibility for all work, work billed when it was completed
  11. Large partnership - accruals
    - Henderon case (key principal = professional WIP): Large accountancy partnership (19 partners, employed 295 staff including 150 accountants).
  12. Large practice with associated service companies - accruals
    - Barrat case: Large pathology practice, employed many staff and operated through associated service companies that owned diagnostic equipment and employed technicians
  13. Rental income = cash as no business operation. Unless in the business of renal property
72
Q

Week 9
Under the accruals basis when is income derived?
Consider the following:

  1. Professional WIP
  2. Regulated company, conditions precedent unsatisfied
  3. Amount in genuine dispute regarding a bill
  4. Credit terms used for sale
  5. Advanced receipts are received
A
  1. Profesional WIP = No income derived until work completed and invoice issued (if work completed and no invoice issued then income not derived yet)
    - Henderon case: Professional accountants had been working on matters not yet completed as at 30 june. Therefore a large amount of professional work in progress. It was found that no income has been derived until work is completed and an invoice issued to client.
  2. Regulated company, conditions precedent unsatisfied = income not derived until conditions precedent are satisfied
    - AGL 83 ATC 4800: Regulated gas company had supplied gas that was as yet unbilled as at 30 june. Not yet billed as conditions precedent to billing customer had not been satisfied (the gas metres had not yet been read). It was ruled that conditions precedent must be satisfied.
  3. Amount in genuine dispute regarding a bill = no income derived until dispute settled
    - BHP Billiton Petroleum Ltd 2002 ATC 5169: A genuine dispute concerning a bill was in motion. The court found no income is recognised as derived until the dispute is resolved
  4. Credit terms used for sale
    - J Rowe and Sons Pty Ltd (1971) 124 CLR 421: taxpayer sold household goods on credit terms (instalment basis) for periods of upto 5 years. Court held full amount derived at time of sale (pretty much just simple application of accruals)
  5. Advanced receipts are received = no derivation until service rendered
    - Arthur Murray (1965) 114 CLR 314: Taxpayer carried on a business of providing dance lessons. Advance receipts for entire course of dance lessons across the term were received. The taxpayer would refund amounts for any lessons not actually attended. Taxpayer placed advanced receipts into suspense account and only drew on amounts when lessons were provided. It was ruled that no income was derived until the service was rendered.
73
Q

Week 9

When is a loss/outgoing incurred? What is the relevant TR?

A

When = When the taxpayer has completely subjected himself to the loss/outgoing (Fc of T v James Flood Pty. Ltd) = there must be a presently existing liability (Nilsen Development Laboratories Pty Ltd & Ors v. FC of T 81 ATC 4031)

Relevant TR = 97/7

74
Q

Week 9
How does Net profit/loss accounting differ in its recognition of income?

When do we use this type of income accounting?

A

Net profit/loss accounting = Differs in that instead of recognising gross proceeds as income we recognise the net profit from a transaction as income

Use of net profit/loss acounting = we use this method in special circumstances:

  1. Isolated business venture (Whitford’s beach)
  2. Isolated transactions within an existing business (Myer emporium)
  3. banking/insurance/investment companies where realisation is an ordinary incident of business of investing for profit (London Australia Investment)
75
Q

Week 9
Which special provisions deal with trading stock?

Can we depreciate trading stock?

What is trading stock?

Is the cost of purchasing trading stock deductible?

What type of income are proceeds from the sale of trading stock?

A

Tradings stock = Div 70 ITAA97

Depreciate trading stock = No, s40-30(1)(b)

Trading stock = anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and live stock

Cost of trading stock = deductible = s8-1(1)(b)

Sale of trading stock proceeds = assessable income = s6-5 income according to ordinary concepts

76
Q

Week 9
How do we account for a value adjustment to trading stock?

When is trading stock considered ‘on hand’? Is it on hand if in transit?

A

We must determine the change in value between Opening Stock Value and Closing Stock Value:

if CSV > OSV = assessable income s70-35(2)

if OSV > CSV = allowable deduction = s70-35(3)

Determine CSV as per choice of: 1) Cost, 2) market selling value, 3) replacement value

Tradings tock ‘on hand’ = taxpayer must have power to dispose of it (Farnsworth (1949) 78 CLR 504) = clearly on hand if in store or warehouse

In transit = Yes
- All States Frozen Foods 89 ATC 5135 = Good were on ship, in transit to taxpayer. Although tax payer had no physical possession it was found that the taxpayer had power to dispose of the goods therefore the goods were considered as being ‘on hand’

77
Q

Week 9
What is a small business entity?

Which three ways can the annual turnover test be satisfied?

What is aggregated turnover?

What are the aggregated turnover threshold values?

Why would an entity want to be a SBE?

A

SBE = if it carries on a business during the year and satisfies the aggregated annual turnover test

Satisfy the annual turnover test: Either of these 3 ways

  1. Aggregate turnover for the previous year was less than the specified threshold
  2. Aggregate turnover for current year is likely to be less than the specified threshold, or
  3. Aggregated turnover for the current year (worked out at end of current year) is actually less than specified threshold

Aggregated turnover = combined annual turnover of the entity, its connected entities and its affiliates

  • connected entity = where one entity controls another , is controlled by another, or is under common control (control must be greater than 40%)
  • affiliate = an entity or individual or company that acts, or could reasonable be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity

Aggregated Turnover Threshold = Depends on what we are determining SBE in relation to.

  • Normally = $10 million
  • For purpose of lower corporate tax rate (27.5%) = $50 million (however, to be eligible for the rate another criteria exists: passive income must not be or exceed 80% of assessable income (passive income royalties, rent, net capital gain, etc.))
  • For purpose of unincorporated small business income tax offset = $5 million
  • For purpose of CGT concessions = $2 million
78
Q

Week 10
In regards to tax law what is a partnership?

Does the tax law definition apply generally?

is a partnership a separate legal entity?

What is the relevant division?

A

Tax law partnership = 2 or more persons in receipt of ordinary income or statutory income jointly
- FCT v Mc Donald 87 ATC 4541: information on another slide

General application = no, it would not apply generally. A very different definition is given generally to a partnership
- General law partnership = 2 or more persons carrying on a business with a view to profit

Separate legal entity = No, it is not

Division = Div 5 part 3

79
Q

Week 10

Is a partnership liable to pay tax?

When do partners derive income?

Partner salary - is this deductible to a partnership?

A

Partnership liable to pay tax = No, however must file a tax return = s91 ITAA36 states “ a partnership shall furnish a return of the income of the partnership, but shall not be liable to pay tax thereon

Derive income = derived when share of income ascertained (known)
- Rose v FCT: relevant share of income is automatically derived by partner regardless of distribution and regardless of withdrawal

Partner salary = no this is not deductible, because not a separate legal entity. Therefore, no employment relationship exists

80
Q

Week 10

The Flow through model allows us to ascertain the reportable net income/loss of partnership participants. Outline the steps of the model

A

Flow through model:
Step 1: identify partnership
- General law partnership
- Tax law partnership

Step 2: Calculate net income/loss of partnership as assessable income - deductions

Step 3: Allocate to partners = this share will become part of the partners own assessable income (or for a partnership loss will become part of the partners deductions)

  1. General law partnership = allocate as per partnership agreement
  2. Tax law partnership = allocate on the basis of property ownership
    - FCT v Mc Donald 87 ATC 4541: husband and wife jointly owned rental/investment property. Partnership agreement entered into and arranged in such a way so as to allocate all losses to husband (for tax advantage purposes). Court found was not a general law partnership (not carrying on a business). Therefore, ruled that profits/losses were to be split by ownership interest (50/50 for this case) as it was a tax law partnership
81
Q

Week 11

Is a trust a separate legal entity?

What is a trust?

How may a trust be created?

Who is a trustee?

A

Legal entity = no

Trust = a relationship where a trustee holds legal title of trust property for the benefit of the beneficiaries

Creation = 1) Inter-vivos settlement (whilst living) OR 2) Operation of law (unintentionally) 3) Testamentary disposition (from carrying out somebody’s will)

Trustee = must be a person with legal capacity (individual or company), however cannot be sole beneficiary. BUT there is a way around this because a sole beneficiary can be a sole shareholder in a corporate trustee
- includes general law trustees. administrators, executors, receivers, and anyone acting in fiduciary capacity

82
Q

Week 11

What is a fixed trust?

What is a discretionary trust?

A

Fixed trust (for example a unit trust) = beneficiaries’ entitlements are fixed/predetermined by terms of the trust instrument eg, unit trust (just like shares in a company)

Discretionary trust (for example a family trust) = trustee has absolute discretion/power to distribute to beneficiaries (no entitlements until trustee has exercised its discretion)

83
Q

Week 11

Outline the steps in the flow-through model for tax treatment of trusts

A

Step 1: Identify trust

  • Unit trust
  • Discretionary trust

Step 2: Determine ‘trust law’ income and beneficiary entitlements as a percentage
- Here we can forget about tax law because the income is determined upon accounting principles and the trust instrument = tax law is not relevant

Step 3: Calculate
- Net income of trust estate = assessable income - deductions (s95 ITAA36)

Step 4: Allocate

  • Fixed trust (unit trust) = % units held
  • Discretionary trust = % beneficiary entitlements
  • Proportionate approach (Bamford case) = simply apply beneficiary entitlement percentage from Step 2 to the net income amount as well
84
Q

Week 11

For Step 4 of the flow through model regarding trusts, how do we determine the applicable tax rate?

What do we do about unallocated income?

A

Here we must determine the type of beneficiary

  1. Beneficiary under legal disability e.g. minor/bankrupt/insane = s98 = trustee will be required to pay income tax on behalf of the beneficiary at the rate of tax that the beneficiary would have paid
    - Minor = trustee assessed at minor rates (highest possible rate) unless testamentary trust
    - Insane = trustee assessed at marginal rates
  2. Resident with no legal disability = s97 = assessed at marginal rate
  3. Foreign resident - trustee assessed at foreign resident rates (exclude foreign source income) (s98)

Unallocated income = trustee assessed (s99A) highest rate unless testamentary trust = avoid by:

  1. Allocating all (duh), or
  2. Including default vesting clause = ‘in the event that unallocated income exists at end of year, allocate on the proportions blah blah blah’
85
Q

Week 11

A beneficiary is taxed on the amount presently entitled too.

What does this mean?

What is the problem with the definition? What is the solution?

When must amount be determined by?

A

Aamount ‘presently entitled’ too = definition derived from FCT v Bamford, Harmer v FCT = where a present legal right to demand and receive payment of the income, or to have the payment applied for their benefit exists = does not matter if funds are available or exact amount unknown

Problem = what about if beneficiary has a legal disability which prevents them from calling for distribution?

Solution = ascertain if the beneficiary would have the right to obtain payment if they were not under disability = if yes, then presently entitled
- Solution stems from Taylor v FCT

Determine by = end of income year

86
Q

Week 11

Is a company a taxable unit?

Which section applies to companies

Who is a company?

How does the taxation of a company differ to an individual?

How does a company pay tax?

A

Company as taxable unit = yes (s4-1 income tax is payable by each individual and company)

Section = s995-1 ITAA97

Definition of company = a body corporate or any other unincorporated association or body of persons and excludes a partnership = includes certain types of non-profit recreational clubs and associations AS WELL as corporate tax entities (s960-115) such as corporate limited partnerships, corporate unit trusts, public trading trusts

Taxation differences from individual:

  1. Company’s income year is previous financial year
  2. Flat rate of tax on taxable income
  3. Special rules regarding tax losses (to avoid creation of a market for tax loss companies)

How companies pay tax = quarterly instalments re income for that quarter = deductions not allowed in calculating income for quarter

87
Q

Week 11

Why is the dividend imputation system necessary?

How does the dividend imputation system provide a remedy to the issue?

In regards to the dividend imputation system what are the obligations of the company?

What is the maximum franking credit?

A

Dividend imputation system = because companies are taxed on assessable income. However, dividends are also taxed. Therefore, the dividend amount is essentially taxed twice.

Remedy = provide franking tax offsets (which are like credits for the tax that has already been paid by the company)

Company obligations:
1. Must maintain a Franking account
1. tax paid - Cr
2. refund - Dr
3 PAYG instalment  - Cr
4. FC of dividend paid - Dr
5 FC of dividend rev - Cr
  1. Must frank to benchmark % within a franking period (s203-25)

Maximum franking credit = s202-60 = Amount of distribution x (1/applicable corporate gross up rate)
For this just remember:
- Tax rate of 30% = Amount of frankable distribution x (1/(70/30))
- Tax rate of 27.5 = Amount of frankable distribution x (1/(72.5/27.5))
(Note: amount of distribution = dividend amount * franking percentage)

Benchmark % (s203-35) = Franking % for first distribution in franking period

  • where Franking % (s203-35) = Franking credit attached / maximum franking credit
  • franking period for private company is income year (s203-45) and for public company is 6 months period (s203-40)
88
Q

Week 11

What are the consequences where a company breaches the benchmark franking rule?

A

if frank to greater % = overfranking tax (s203-50(1) and s203-50(2)(b)) (not creditable, therefore only debit amount at benchmark %)

if frank to lesser % = franking debit (s203-50(2) and s203-50(2)(b))

in extraordinary circumstances the commissioner may permit departure from benchmark rule (s203-55)

89
Q

Week 11

How do we determine the tax payable by a shareholder regarding a franked dividend (Gross-up and credit mechanism)?

A
  1. Determine dividend which is included in assessable income (s44(1)(a))
  2. Add gross-up for franking credit which is included in assessable income (s207-20(1))
  3. Equates to assessable income
  4. Apply marginal tax rate of individual
  5. Subtract franking credit which is afforded as a tax offset (s207-20(2))
  6. Remaining amount is the net tax payable