Taxation Law Flashcards

Question

Week 5 Discuss income from business Vs realisation of capital asset In regards to scope of business, discuss narrow vs broad.

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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

Answer 6

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)

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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).

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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)

Answer 19

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

Answer 20

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.

Answer 21

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

Answer 22

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)

Answer 23

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

Answer 24

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.

Answer 25

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.

Answer 26

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.

Answer 27

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.

Answer 28

'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: 1. 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 2. W Nevill and Co - deduction for amount paid to managing director to retire because payment made to increase efficiency of company.

Answer 29

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

Answer 30

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.

Answer 31

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.

Answer 32

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.

Answer 33

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.

Answer 34

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.

Answer 35

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)

Answer 36

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

Answer 37

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

Answer 38

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

Answer 39

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

Answer 40

▪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)

Answer 41

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)

Answer 42

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

Answer 43

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?

Answer 44

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

Answer 45

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'

Answer 46

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.

Answer 47

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) 1. Employee - cash (includes back pay) 2. Sole practice - cash (however, if dealing with trading stock then accruals is most appropriate) - Cardens case: Medical practitioner in sole practice 3. Sole practice with secretary - cash - Firstenberg case: Solicitor in sole practice who employed a secretary 4. 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 5. Large partnership - accruals - Henderon case (key principal = professional WIP): Large accountancy partnership (19 partners, employed 295 staff including 150 accountants). 6. 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 7. Rental income = cash as no business operation. Unless in the business of renal property

Answer 48

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.

Answer 49

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

Answer 50

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)

Answer 51

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

Answer 52

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'

Answer 53

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

Answer 54

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

Answer 55

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

Answer 56

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

Answer 57

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

Answer 58

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)

Answer 59

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

Answer 60

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'

Answer 61

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

Answer 62

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

Answer 63

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 ``` 2. 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)

Answer 64

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)

Answer 65

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