Taxation Law Flashcards
Week 2
What is the difference between direct and indirect tax?
Why do we have taxes? (3 reason)
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
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?
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.
Week 2
What are the features of a good tax system? (7)
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
Week 2
What is Horizontal and Vertical equity?
What are the sources of tax law?
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.
Week 2
What is the constitutional basis of taxation in Australia?
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’
Week 3
Outline the jurisdictional rules for Residents vs Foreign Residents in relation to:
- Income assessment
- Medicare levy and medicare levy surcharge
- Tax offsets
- Applicable tax rates
- CGT
Elaborate on the different rates which apply to Residents and foreign residents
- 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
- 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.
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)?
Resident individual = a person who resides in Australia and includes a person:
- Whose domicile is in Australia
- 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
- 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
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
- Services
- Business income
- Rental income
- Interest
- Dividends
- Royalties
- Services = place where service occurs
- where the business is transacted (e.g. sale of goods = where goods are sold)
- Rental income = Fixed property is where property is located AND movable property is where lease agreement entered into and goods taken
- Interest = place where contract for loan was made and where money was advanced
- place where company derived its profits
- 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
Week 3
What is a permanent establishment?
What is a temporary resident?
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
Week 3
Which two acts are we concerned with for income tax? What is important to consider for the two acts?
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.
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?
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
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)
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.
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
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)
Week 3
How does the medicare levy work?
How does the medicare levy surcharge work?
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.
Week 3
What does economic incidence and legal incidence refer to?
Economic incidence = who bears the burden of the tax
Legal incidence = who is obligated to pay the tax.
Week 3
Does ‘permanent’ in relation to permanent place of abode mean everlasting/forever?
No it does not, permanency needs to be assessed objectively each year.
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?
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
Week 4
What is the Doctrine of constructive receipt?
- Provide an example
- What is the point of the doctrine?
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
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
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:
- 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 - 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 - 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 - 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. - 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 - 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 - 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 - 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) - 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)
- 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 - 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
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.
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)
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?
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
Week 1
Assessable income comprises which types of income?
What is not included in assessable income (provide sections + examples)
Are scholarships assessable income?
Assessable income = Ordinary income (6 - 5) and statutory income (6 - 10)
Not included in assessable income:
- Exempt income = Income on which you do not pay tax = disability support pension
- non-assessable, non-exempt income = income you don’t pay tax on, but someone does = fringe benefits (for fringe benefits the employer pays tax)
- other amounts that are not taxable (prizes, etc)
Scholarship = yes if part-time and no if full-time (exempt income)
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?
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)
Week 5
What are the steps in analysing tax for business
Step 1: Determine if carrying on business
Step 2: Determine if amount in question comes as a result of the business being carried on
Week 5
Discuss income from business Vs realisation of capital asset
In regards to scope of business, discuss narrow vs broad.
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.
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’
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.
Week 5
In relation to assessing business income for tax purposes what is an ‘Extraordinary transaction’?
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.
Week 5
How do we determine if a contract is a capital asset?
What is the compensation principle?
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.
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?
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
Week 5
What is Income from property?
Discuss interest, rent, royalties, and dividends
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)
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?
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.
Week 4 and 5
Outline s15-2, ITAA97
Why is it less important these days?
What is the effect of s15-2(3)
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.
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?
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.
Week 6
Is CGT a separate tax to assessable income?
How do we calculate Net Capital Gain?
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
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?
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
